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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2023

 

For the transition period from __________ to __________

 

Commission file number: 0-22773

 

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

16000 Ventura Blvd., Suite 770, Encino, CA 91436

(Address of principal executive offices) (Zip Code)

 

(818) 222-9195 / (818) 222-9197

(Issuer’s telephone/facsimile numbers, including area code)

 

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

 

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

 

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

 

Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

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

 

Yes ☐ No

 

The issuer had 12,329,919 shares issued and 11,390,888 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of February 7, 2024.

 

 

 

 
 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2023 and 2022 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2023 and 2022 5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2023 and 2022 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2023 and 2022 8
Notes to the Condensed Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
Item 4. Controls and Procedures 51
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 52
Item 1A Risk Factors 52
Item 2. Unregistered Sales of Equity and Use of Proceeds 52
Item 3. Defaults Upon Senior Securities 52
Item 4. Mine Safety Disclosures 52
Item 5. Other Information 52
Item 6. Exhibits 52

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

   As of   As of 
   December 31, 2023   June 30, 2023 
ASSETS          
Current assets:          
Cash and cash equivalents  $15,659,516   $15,533,254 
Accounts receivable, net of allowance of $421,288 and $420,354   5,975,716    11,714,422 
Revenues in excess of billings, net of allowance of $137,406 and $1,380,141   16,299,287    12,377,677 
Other current assets   2,142,487    1,978,514 
Total current assets   40,077,006    41,603,867 
Revenues in excess of billings, net - long term   734,397    - 
Property and equipment, net   5,665,699    6,161,186 
Right of use assets - operating leases   1,659,622    1,151,575 
Other assets   32,338    32,327 
Intangible assets, net   -    127,931 
Goodwill   9,302,524    9,302,524 
Total assets  $57,471,586   $58,379,410 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,713,920   $6,552,181 
Current portion of loans and obligations under finance leases   5,982,466    5,779,510 
Current portion of operating lease obligations   689,770    505,237 
Unearned revenue   4,426,008    7,932,306 
Total current liabilities   17,812,164    20,769,234 
Loans and obligations under finance leases; less current maturities   99,527    176,229 
Operating lease obligations; less current maturities   1,022,361    652,194 
Total liabilities   18,934,052    21,597,657 
           
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 12,329,919 shares issued and 11,390,888 outstanding as of December 31, 2023; 12,284,887 shares issued and 11,345,856 outstanding as of June 30, 2023   123,301    122,850 
Additional paid-in-capital   128,587,384    128,476,048 
Treasury stock (at cost, 939,031 shares as of December 31, 2023 and June 30, 2023)   (3,920,856)   (3,920,856)
Accumulated deficit   (44,456,980)   (44,896,186)
Other comprehensive loss   (45,870,309)   (45,975,156)
Total NetSol stockholders’ equity   34,462,540    33,806,700 
Non-controlling interest   4,074,994    2,975,053 
Total stockholders’ equity   38,537,534    36,781,753 
Total liabilities and stockholders’ equity  $57,471,586   $58,379,410 

 

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

 

Page 3

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

   2023   2022   2023   2022 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2023   2022   2023   2022 
Net Revenues:                    
License fees  $2,990,453   $15,884   $4,270,902   $265,844 
Subscription and support   6,827,781    6,502,669    13,340,024    12,519,503 
Services   5,419,707    5,871,805    11,869,196    12,311,130 
Total net revenues   15,237,941    12,390,358    29,480,122    25,096,477 
                     
Cost of revenues   8,062,204    9,247,895    16,142,368    17,702,017 
Gross profit   7,175,737    3,142,463    13,337,754    7,394,460 
                     
Operating expenses:                    
Selling, general and administrative   5,807,494    5,716,073    11,240,463    11,394,634 
Research and development cost   341,411    472,904    719,830    942,531 
Total operating expenses   6,148,905    6,188,977    11,960,293    12,337,165 
                     
Income (loss) from operations   1,026,832    (3,046,514)   1,377,461    (4,942,705)
                     
Other income and (expenses)                    
Interest expense   (290,322)   (202,363)   (566,339)   (323,973)
Interest income   468,280    309,906    882,998    741,763 
Gain (loss) on foreign currency exchange transactions   (14,617)   657,223    (148,870)   1,972,928 
Share of net loss from equity investment   -    5,133    -    5,133 
Other income (expense)   (57,305)   94,708    576    120,324 
Total other income (expenses)   106,036    864,607    168,365    2,516,175 
                     
Net income (loss) before income taxes   1,132,868    (2,181,907)   1,545,826    (2,426,530)
Income tax provision   (150,053)   (220,056)   (271,948)   (413,404)
Net income (loss)   982,815    (2,401,963)   1,273,878    (2,839,934)
Non-controlling interest   (574,499)   309,037    (834,672)   126,279 
Net income (loss) attributable to NetSol  $408,316   $(2,092,926)  $439,206   $(2,713,655)
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $0.04   $(0.19)  $0.04   $(0.24)
Diluted  $0.04   $(0.19)  $0.04   $(0.24)
                     
Weighted average number of shares outstanding                    
Basic   11,372,819    11,270,199    11,359,338    11,263,869 
Diluted   11,372,819    11,270,199    11,359,338    11,263,869 

 

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

 

Page 4

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   2023   2022   2023   2022 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2023   2022   2023   2022 
Net income (loss)  $408,316   $(2,092,926)  $439,206   $(2,713,655)
Other comprehensive income (loss):                    
Translation adjustment   840,165    352,175    370,116    (3,799,344)
Translation adjustment attributable to non-controlling interest   (298,772)   (82,380)   (265,269)   1,151,089 
Net translation adjustment   541,393    269,795    104,847    (2,648,255)
Comprehensive income (loss) attributable to NetSol  $949,709   $(1,823,131)  $544,053   $(5,361,910)

 

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

 

Page 5

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

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

 

   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
   Common Stock   Additional
Paid-in
   Treasury   Accumulated   Other
Comprehensive
   Non
Controlling
   Total
Stockholders’
 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at September 30, 2023   12,311,850   $123,120   $128,536,132   $(3,920,856)  $(44,865,296)  $(46,411,702)  $3,201,723   $36,663,121 
Common stock issued for: Services   18,069    181    39,569    -    -    -    -    39,750 
Fair value of subsidiary options issued   -    -    11,683    -    -    -    -    11,683 
Foreign currency translation adjustment   -    -    -    -    -    541,393    298,772    840,165 
Net income (loss) for the year   -    -    -    -    408,316    -    574,499    982,815 
Balance at December 31, 2023   12,329,919   $123,301   $128,587,384   $(3,920,856)  $(44,456,980)  $(45,870,309)  $4,074,994   $38,537,534 

 

A statement of the changes in equity for the three months ended September 30, 2023 is provided below:

 

   Common Stock   Additional
Paid-in
   Treasury   Accumulated   Other
Comprehensive
   Non
Controlling
   Total
Stockholders’
 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at June 30, 2023   12,284,887   $122,850   $128,476,048   $(3,920,856)  $(44,896,186)  $(45,975,156)  $2,975,053   $36,781,753 
Common stock issued for: Services   26,963    270    48,530    -    -    -    -    48,800 
Fair value of subsidiary options issued   -    -    11,554    -    -    -    -    11,554 
Foreign currency translation adjustment   -    -    -    -    -    (436,546)   (33,503)   (470,049)
Net income (loss) for the year   -    -    -    -    30,890    -    260,173    291,063 
Balance at September 30, 2023   12,311,850   $123,120   $128,536,132   $(3,920,856)  $(44,865,296)  $(46,411,702)  $3,201,723   $36,663,121 

 

Page 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 2022 is provided below:

 

   Common Stock   Additional
Paid-in
   Treasury   Accumulated   Other
Comprehensive
   Non
Controlling
   Total
Stockholders’
 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at September 30, 2022   12,209,230   $122,093   $128,420,519   $(3,920,856)  $(40,273,167)  $(42,281,135)  $4,279,113   $46,346,567 
Common stock issued for: Services   13,755    138    39,612    -    -    -    -    39,750 
Fair value of subsidiary options issued   -    -    24,583    -    -    -    -    24,583 
Foreign currency translation adjustment   -    -    -    -    -    269,795    82,380    352,175 
Net income (loss) for the year   -    -    -    -    (2,092,926)   -    (309,037)   (2,401,963)
Balance at December 31, 2022   12,222,985   $122,231   $128,484,714   $(3,920,856)  $(42,366,093)  $(42,011,340)  $4,052,456   $44,361,112 

 

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

 

   Common Stock   Additional
Paid-in
   Treasury   Accumulated   Other
Comprehensive
   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 

 

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

 

Page 7

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   2023   2022 
   For the Six Months 
   Ended December 31, 
   2023   2022 
Cash flows from operating activities:          
Net income (loss)  $1,273,878   $(2,839,934)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   959,949    1,736,503 
Provision for bad debts   29,191    (67,176)
Share of net (gain) loss from investment under equity method   -    (5,133)
Gain on sale of assets   (98)   (28,344)
Stock based compensation   111,787    146,167 
Changes in operating assets and liabilities:          
Accounts receivable   5,722,791    3,772,091 
Revenues in excess of billing   (4,239,762)   (702,812)
Other current assets   329,171    (529,579)
Accounts payable and accrued expenses   72,501    904,731 
Unearned revenue   (3,654,724)   (696,971)
Net cash provided by operating activities   604,684    1,689,543 
           
Cash flows from investing activities:          
Purchases of property and equipment   (570,584)   (1,252,325)
Sales of property and equipment   1,248    70,283 
Net cash used in investing activities   (569,336)   (1,182,042)
           
Cash flows from financing activities:          
Proceeds from bank loans   135,123      
Payments on finance lease obligations and loans - net   (162,482)   (537,180)
Net cash used in financing activities   (27,359)   (537,180)
Effect of exchange rate changes   118,273    (2,987,396)
Net increase (decrease) in cash and cash equivalents   126,262    (3,017,075)
Cash and cash equivalents at beginning of the period   15,533,254    23,963,797 
Cash and cash equivalents at end of period  $15,659,516   $20,946,722 

 

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

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

   For the Six Months 
   Ended December 31, 
   2023   2022 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $670,330   $226,271 
Taxes  $342,643   $395,710 

 

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

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

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

 

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

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2023. 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”)

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

Tianjin NuoJinZhiCheng Co., Ltd (“Tianjin”)

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)

Virtual Lease Services Limited (“VLS”)

Virtual Lease Services (Ireland) Limited (“VLSIL”)

 

Majority-owned Subsidiaries

 

NetSol Technologies, Ltd. (“NetSol PK”)

NetSol Innovation (Private) Limited (“NetSol Innovation”)

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

NetSol Technologies Thailand Limited (“NetSol Thai”)

Otoz, Inc. (“Otoz”)

Otoz (Thailand) Limited (“Otoz Thai”)

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 2 – ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances maintained in China are insured for RMB 500,000 ($70,621) in each bank and in the UK for GBP 85,000 ($107,595) in each bank. The Company maintains three bank accounts in China and nine bank accounts in the UK. As of December 31, 2023, and June 30, 2023, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $14,517,520 and $13,524,518, 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 long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

 

The three levels of valuation hierarchy are defined as follows:

 

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

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

The Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2023, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $     -   $    -   $734,397   $734,397 
Total  $-   $-   $734,397   $734,397 

 

The Company did not have any financial assets that were measured at fair value on a recurring basis at June 30, 2023.

 

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

 

  

Revenues in

excess of

billings - long term

  

Fair value

discount

   Total 
Balance at June 30, 2023  $-   $-   $- 
Additions   827,853    (103,958)   723,895 
Amortization during the period   -    18,464    18,464 
Effect of Translation Adjustment   (7,968)   6    (7,962)
Balance at December 31, 2023  $819,885   $(85,488)  $734,397 

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model.

 

Recent Accounting Standards:

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, and was adopted by the Company on July 1, 2023. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

 

In August 2023, the FASB issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. ASU 2023-05 provides decision-useful information to a joint venture’s investors and reduces diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). ASU 2023-05 is effective prospectively for all joint ventures with a formation date on or after January 1, 2025, and early adoption is permitted. The Company does not expect the standard to have a material effect on its consolidated financial statements.

 

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

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 3 – REVENUE RECOGNITION

 

The Company determines revenue recognition through the following steps:

 

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

 

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

 

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

 

Core Revenue

 

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

 

Non-Core Revenue

 

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

 

Performance Obligations

 

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

 

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

 

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

 

Software Licenses

 

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

 

Page 13

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

Subscription

 

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

 

Post Contract Support

 

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

 

Professional Services

 

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

 

BPO and Internet Services

 

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

 

Disaggregated Revenue

 

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

 

Page 14

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

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

 

   2023   2022   2023   2022 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2023   2022   2023   2022 
Core:                
License  $2,990,453   $15,884   $4,270,902   $265,844 
Subscription and support   6,827,781    6,502,669    13,340,024    12,519,503 
Services   4,114,077    4,818,461    9,088,631    10,239,827 
Total core revenue, net   13,932,311    11,337,014    26,699,557    23,025,174 
                     
Non-Core:                    
Services   1,305,630    1,053,344    2,780,565    2,071,303 
Total non-core revenue, net   1,305,630    1,053,344    2,780,565    2,071,303 
                     
Total net revenue  $15,237,941   $12,390,358   $29,480,122   $25,096,477 

 

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.

 

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.

 

Page 15

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

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

 

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

 

Contract Balances

 

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

 

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

 

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

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Revenues in excess of billings  $17,033,684   $12,377,677 
           
Unearned revenue  $4,426,008   $7,932,306 

 

The Company’s unearned revenue reconciliation is as follows:

 

  

Unearned

Revenue

 
     
Balance at June 30, 2023  $7,932,306 
Invoiced   7,323,061 
Revenue Recognized   (10,944,715)
Adjustments   115,356 
Balance at December 31, 2023  $4,426,008 

 

During the three and six months ended December 31, 2023, the Company recognized revenue of $2,248,000 and $6,454,000 that was included in the unearned revenue balance at the beginning of the period. All other activity in unearned revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Page 16

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $32,816,000 as of December 31, 2023, of which the Company estimates to recognize approximately $18,471,000 in revenue over the next 12 months and the remainder over an estimated 3 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Unearned Revenue

 

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

 

Practical Expedients and Exemptions

 

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

 

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

 

Costs to Obtain a Contract

 

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

 

NOTE 4 – EARNINGS PER SHARE

 

Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. During the three and six months ended December 31, 2023 and 2022, there were no outstanding dilutive instruments.

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY

 

The following table represents the functional currencies of the Company and its subsidiaries:

 

The Company and Subsidiaries   Functional Currency
     
NetSol Technologies, Inc.   USD
NTA   USD
Otoz   USD
NTE   British Pound
AEL   British Pound
VLSH   British Pound
VLS   British Pound
VLSIL   Euro
NetSol PK   Pakistan Rupee
Connect   Pakistan Rupee
NetSol Innovation   Pakistan Rupee
NetSol Thai   Thai Bhat
Otoz Thai   Thai Bhat
Australia   Australian Dollar
Namecet   AED
NetSol Beijing   Chinese Yuan
Tianjin   Chinese Yuan

 

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 $45,870,309 and $45,975,156 as of December 31, 2023 and June 30, 2023, respectively. During the three and six months ended December 31, 2023, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $541,393 and $104,847, respectively. During the three and six months ended December 31, 2022, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a $269,795 translation gain attributable to NetSol and a $(2,648,255) translation loss attributable to NetSol, respectively.

 

NOTE 6 – MAJOR CUSTOMERS

 

During the three and six months ended December 31, 2023, revenues from Daimler Financial Services (“DFS”) were $3,945,061 and $7,632,692, representing 25.9% of revenues. During the three and six months ended December 31, 2022, revenues from Daimler Financial Services (“DFS”) were $3,478,077 and $7,069,884, representing 28.1% and 39.5% of revenues. The revenues from DFS are shown in the Asia – Pacific segment.

 

Accounts receivable from DFS at December 31, 2023 and June 30, 2023, were $1,014,503 and $4,368,881, respectively. Revenues in excess of billings at December 31, 2023 and June 30, 2023, were $2,497,783 and $1,961,750, respectively.

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 7 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Prepaid Expenses  $1,300,059   $1,299,334 
Advance Income Tax   251,817    144,428 
Employee Advances   54,714    68,488 
Security Deposits   187,546    177,148 
Other Receivables   92,642    92,716 
Other Assets   255,709    196,400 
Net Balance  $2,142,487   $1,978,514 

 

NOTE 8 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Revenues in excess of billings - long term  $819,885   $- 
Present value discount   (85,488)   - 
Net Balance  $734,397   $- 

 

Pursuant to revenue recognition for contract accounting, the Company has recorded revenues in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2023, the Company accreted $12,309 and $18,464, respectively, which was recorded in interest income for that period. During the three and six months ended December 31, 2022, the Company accreted $9,288 and $18,657, respectively. The Company used the discounted cash flow method with an interest rate of 7.34% for the period ended December 31, 2023. The Company used the discounted cash flow method with interest rates ranging from 4.65% to 6.25% for the period ended December 31, 2022.

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 9 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Office Furniture and Equipment  $2,427,955   $2,678,664 
Computer Equipment   8,432,290    8,317,131 
Assets Under Capital Leases   47,793    46,554 
Building   3,586,175    3,497,913 
Land   909,031    885,474 
Autos   2,074,702    1,941,063 
Improvements   212,978    205,289 
Subtotal   17,690,924    17,572,088 
Accumulated Depreciation   (12,025,225)   (11,410,902)
Property and Equipment, Net  $5,665,699   $6,161,186 

 

For the three and six months ended December 31, 2023, depreciation expense totaled $429,163 and $833,908, respectively. Of these amounts, $264,374 and $531,316, respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2022, depreciation expense totaled $568,828 and $1,091,011, respectively. Of these amounts, $370,606 and $701,835, respectively, are reflected in cost of revenues.

 

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

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
Vehicles  $47,793   $46,554 
Total   47,793    46,554 
Less: Accumulated Depreciation - Net   (22,607)   (17,366)
Fixed assets held under capital leases, Total  $25,186   $29,188 

 

Finance lease term and discount rate were as follows:

 

   As of  As of 
   December 31, 2023  June 30, 2023 
        
Weighted average remaining lease term - Finance leases  0.84 Years  1.21 Years 
        
Weighted average discount rate - Finance leases  16.4%  16.4%

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 10 - LEASES

 

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

 

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

 

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

 

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

 

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

 

Supplemental balance sheet information related to leases was as follows:

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
Assets          
Operating lease assets, net  $1,659,622   $1,151,575 
           
Liabilities          
Current          
Operating  $689,770   $505,237 
Non-current          
Operating   1,022,361    652,194 
Total Lease Liabilities  $1,712,131   $1,157,431 

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

The components of lease cost were as follows:

 

   2023   2022   2023   2022 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2023   2022   2023   2022 
                 
Amortization of finance lease assets  $2,365   $3,099   $4,661   $5,995 
Interest on finance lease obligation   770    1,552    1,639    3,359 
Operating lease cost   98,309    113,079    205,342    231,601 
Short term lease cost   40,216    37,986    81,224    104,622 
Sub lease income   (8,199)   (7,786)   (16,605)   (15,598)
Total lease cost  $133,461   $147,930   $276,261   $329,979 

 

Lease term and discount rate were as follows:

 

   As of  As of 
   December 31, 2023  June 30, 2023 
        
Weighted average remaining lease term - Operating leases  2.41 Years  3.09 Years 
        
Weighted average discount rate - Operating leases  4.6%  4.0%

 

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

 

   2023   2022 
   For the Six Months 
   Ended December 31, 
   2023   2022 
         
Operating cash flows related to operating leases  $140,514   $236,311 
           
Operating cash flows related to finance leases  $1,638   $3,358 
           
Financing cash flows related finance leases  $16,424   $16,230 

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

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

 

   Amount 
Within year 1  $763,409 
Within year 2   565,341 
Within year 3   347,701 
Within year 4   108,548 
Within year 5   81,529 
Thereafter   236 
Total Lease Payments   1,866,764 
Less: Imputed interest   (154,633)
Present Value of lease liabilities   1,712,131 
Less: Current portion   (689,770)
Non-Current portion  $1,022,361 

 

The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and are currently on a month-by-month basis. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2023, the Company received lease income of $8,199 and $16,605, respectively. For the three and six months ended December 31, 2022, the Company received lease income of $7,786 and $15,598, respectively.

 

NOTE 11 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Product Licenses - Cost  $39,395,533   $47,244,997 
Effect of Translation Adjustment   (24,427,792)   (24,756,959)
Accumulated Amortization   (14,967,741)   (22,360,107)
Net Balance  $-   $127,931 

 

Product Licenses

 

Product licenses include internally developed software cost. Product licenses are amortized on a straight-line basis over their respective lives. Amortization expense for the three and six months ended December 31, 2023, was $nil and $126,041, respectively. Amortization expense for the three and six months ended December 31, 2022, was $322,672 and $645,492, respectively.

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
  

December 31,

2023

  

June 30,

2023

 
         
Accounts Payable  $1,324,037   $1,114,915 
Accrued Liabilities   3,600,742    3,695,091 
Accrued Payroll   1,086,371    982,884 
Accrued Payroll Taxes   161,143    170,063 
Taxes Payable   121,212    195,491 
Other Payable   420,415    393,737 
Total  $6,713,920   $6,552,181 

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

NOTE 13 – DEBTS

 

Notes payable and finance leases consisted of the following:

 

     As of December 31, 2023 
         Current   Long-Term 
Name    Total   Maturities   Maturities 
               
D&O Insurance (1)  $120,533   $120,533   $- 
Bank Overdraft Facility (2)   -    -    - 
Loan Payable Bank - Export Refinance (3)   1,787,821    1,787,821    - 
Loan Payable Bank - Running Finance (4)   -    -    - 
Loan Payable Bank - Export Refinance II (5)   1,358,744    1,358,744    - 
Loan Payable Bank - Export Refinance III (6)   2,502,951    2,502,951    - 
Sale and Leaseback Financing (7)   256,921    157,394    99,527 
Term Finance Facility (8)   3,392    3,392    - 
Insurance Financing (9)   39,587    39,587    - 
      6,069,949    5,970,422    99,527 
Subsidiary Finance Leases (10)   12,044    12,044    - 
     $6,081,993   $5,982,466   $99,527 

 

     As of June 30, 2023 
         Current   Long-Term 
Name    Total   Maturities   Maturities 
               
D&O Insurance (1)  $89,823   $89,823   $- 
Bank Overdraft Facility (2)   -    -    - 
Loan Payable Bank - Export Refinance (3)   1,741,493    1,741,493    - 
Loan Payable Bank - Running Finance (4)   -    -    - 
Loan Payable Bank - Export Refinance II (5)   1,323,535    1,323,535    - 
Loan Payable Bank - Export Refinance III (6)   2,438,089    2,438,089    - 
Sale and Leaseback Financing (7)   321,113    148,264    172,849 
Term Finance Facility (8)   13,356    13,356    - 
Insurance Financing (9)   -    -    - 
      5,927,409    5,754,560    172,849 
Subsidiary Finance Leases (10)   28,330    24,950    3,380 
     $5,955,739   $5,779,510   $176,229 

 

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

 

(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 $379,747. The annual interest rate was 9.5% as of December 31, 2023. The total outstanding balance as of December 31, 2023 and June 30, 2023 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 December 31, 2023, NTE was in compliance with this covenant.

 

Page 25

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

(3)The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $1,787,821 at December 31, 2023 and Rs. 500,000,000 or $1,741,493 at June 30, 2023. The interest rate for the loan was 19.0% and 17.0% at December 31, 2023 and June 30, 2023, respectively.

 

(4)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 $191,654, at December 31, 2023. The balance outstanding at December 31, 2023 and June 30, 2023 was Rs. Nil. The interest rate for the loan was 23.5 and 24.9% at December 31, 2023 and June 30, 2023, respectively.

 

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

 

(5)The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $1,358,744 and Rs. 380,000,000 or $1,323,535 at December 31, 2023 and June 30, 2023, respectively. The interest rate for the loan was 19.0% and 18.0% at December 31, 2023 and June 30, 2023, 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 December 31, 2023, NetSol PK was in compliance with these covenants.

 

(6)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 $3,218,078 and Rs. 900,000,000 or $3,134,687, at December 31, 2023 and June 30, 2023, respectively. NetSol PK used Rs. 700,000,000 or $2,502,951 and Rs. 700,000,000 or $2,438,089, at December 31, 2023 and June 30, 2023, respectively. The interest rate for the loan was 19.0% and 18.0% at December 31, 2023 and June 30, 2023, respectively.

 

(7)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 December 31, 2023, NetSol PK used Rs. 71,853,193 or $256,921 of which $99,527 was shown as long term and $157,394 as current. As of June 30, 2023, NetSol PK used Rs. 92,194,774 or $321,113 of which $172,849 was shown as long term and $148,264 as current. The interest rate for the loan was 9.0% to 16.0% at December 31, 2023, and June 30, 2023.

 

(8)In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $88,037, for a period of 5 years with monthly payments of £1,349, or $1,708. As of December 31, 2023, the subsidiary has used this facility up to $3,392, which was shown as current. As of June 30, 2023, the subsidiary has used this facility up to $13,356, which was shown as current. The interest rate was 6.14% at December 31, 2023 and June 30, 2023.

 

(9)The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $39,587 and $nil was recorded in current maturities, at December 31, 2023 and June 30, 2023, respectively. The interest rate on this financing ranged from 9.7% to 12.7% as of December 31, 2023 and June 30, 2023.

 

(10)The Company leases various fixed assets under finance lease arrangements expiring in various years through 2024. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended December 31, 2023 and 2022.

 

Page 26

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

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

 

   Amount 
Minimum Lease Payments Within year 1  $13,005 
Total Minimum Lease Payments   13,005 
Interest Expense relating to future periods   (961)
Present Value of minimum lease payments   12,044 
Less: Current portion   (12,044)
Current portion of loans and obligations under finance leases     
Non-Current portion  $- 
Loans and obligations under finance leases; less current maturities     

 

Following are the aggregate future long term debt payments as of December 31, 2023 which consists of “Sale and Leaseback Financing (7)” and “Term Finance Facility (8)”.

 

   Amount 
Loan Payments     
Within year 1  $160,788 
Within year 2   98,657 
Within year 3   868 
Total Loan Payments   260,313 
Less: Current portion   (160,786)
Non-Current portion  $99,527 

 

NOTE 14 - STOCKHOLDERS’ EQUITY

 

During the three and six months ended December 31, 2023, the Company issued 18,069 and 40,032 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $39,750 and $79,500, respectively.

 

During the three and six months ended December 31, 2023, the Company issued nil and 5,000 shares of common stock for services rendered by the employees of the company as part of their compensation. These shares were valued at the fair market value of $nil and $9,050.

 

Page 27

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

Stock Grants

 

The following table summarizes stock grants awarded as compensation:

 

  

# Number of

shares

  

Weighted

Average Grant

Date Fair

Value ($)

 
         
Unvested, June 30, 2022   -   $- 
Granted   58,317   $2.73 
Vested   (58,317)  $2.73 
Unvested, June 30, 2023   -   $- 
Granted   45,032   $1.97 
Vested   (45,032)  $1.97 
Unvested, December 31, 2023   -   $- 

 

For the three and six months ended December 31, 2023, the Company recorded compensation expense of $39,750 and $88,550, respectively. For the three and six months ended December 31, 2022, the Company recorded compensation expense of $39,750 and $79,500, respectively. The weighted average grant date fair value is determined by the Company’s closing stock price on the grant date.

 

NOTE 15– 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 December 31, 2023 and June 30, 2023:

 

   As of   As of 
   December 31, 2023   June 30, 2023 
Identifiable assets:          
Corporate headquarters  $1,059,682   $878,899 
North America   6,409,946    7,344,122 
Europe   9,301,556    8,716,656 
Asia - Pacific   40,700,402    41,439,733 
Consolidated  $57,471,586   $58,379,410 

 

Page 28

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2023

(Unaudited)

 

The following table presents a summary of revenue streams by segment for the three months ended December 31, 2023 and 2022:

 

   License fees   Subscription and support   Services   Total   License fees   Subscription and support   Services   Total 
   2023   2022 
   License fees   Subscription and support   Services   Total   License fees   Subscription and support   Services   Total 
                                 
North America  $-   $1,168,224   $296,997   $1,465,221   $14,000   $1,111,063   $472,789   $1,597,852 
Europe   4,650    874,096