Item
1. Financial Statements (Unaudited)
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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:
A
statement of the changes in equity for the three months ended September 30, 2022 is provided below:
| |
| | |
| | |
| | |
| | |
| | |
Other | | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
| | |
Compre- | | |
Non | | |
Total | |
| |
Common Stock | | |
Paid-in | | |
Treasury | | |
Accumulated | | |
hensive | | |
Controlling | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Shares | | |
Deficit | | |
Loss | | |
Interest | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at June 30, 2022 | |
| 12,196,570 | | |
$ | 121,966 | | |
$ | 128,218,247 | | |
$ | (3,920,856 | ) | |
$ | (39,652,438 | ) | |
$ | (39,363,085 | ) | |
$ | 5,450,389 | | |
$ | 50,854,223 | |
Common stock issued for: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Services | |
| 12,660 | | |
| 127 | | |
| 39,623 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 39,750 | |
Adjustment in APIC for change in subsidiary shares to non-controlling interest | |
| - | | |
| - | | |
| 120,565 | | |
| - | | |
| - | | |
| - | | |
| (120,565 | ) | |
| - | |
Fair value of subsidiary options issued | |
| - | | |
| - | | |
| 42,084 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 42,084 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,918,050 | ) | |
| (1,233,469 | ) | |
| (4,151,519 | ) |
Net income (loss) for the year | |
| - | | |
| - | | |
| - | | |
| - | | |
| (620,729 | ) | |
| - | | |
| 182,758 | | |
| (437,971 | ) |
Balance at September 30, 2022 | |
| 12,209,230 | | |
$ | 122,093 | | |
$ | 128,420,519 | | |
$ | (3,920,856 | ) | |
$ | (40,273,167 | ) | |
$ | (42,281,135 | ) | |
$ | 4,279,113 | | |
$ | 46,346,567 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Equity
(Unaudited)
A
statement of the changes in equity for the three months ended December 31, 2021 is provided below:
| |
| | |
| | |
| | |
| | |
| | |
Other | | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
| | |
Compre- | | |
Non | | |
Total | |
| |
Common Stock | | |
Paid-in | | |
Treasury | | |
Accumulated | | |
hensive | | |
Controlling | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Shares | | |
Deficit | | |
Loss | | |
Interest | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at September 30, 2021 | |
| 12,183,570 | | |
$ | 121,836 | | |
$ | 129,030,982 | | |
$ | (3,920,856 | ) | |
$ | (38,613,313 | ) | |
$ | (34,013,886 | ) | |
$ | 6,438,841 | | |
$ | 59,043,604 | |
Common stock issued for: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Services | |
| 2,500 | | |
| 25 | | |
| 9,875 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 9,900 | |
Fair value of subsidiary options issued | |
| - | | |
| - | | |
| 1,164 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,164 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (921,743 | ) | |
| (545,252 | ) | |
| (1,466,995 | ) |
Net income for the year | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,406,785 | | |
| - | | |
| 1,031,763 | | |
| 2,438,548 | |
Balance at December 31, 2021 | |
| 12,186,070 | | |
$ | 121,861 | | |
$ | 129,042,021 | | |
$ | (3,920,856 | ) | |
$ | (37,206,528 | ) | |
$ | (34,935,629 | ) | |
$ | 6,925,352 | | |
$ | 60,026,221 | |
A
statement of the changes in equity for the three months ended September 30, 2021 is provided below:
| |
| | |
| | |
| | |
| | |
| | |
Other | | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
| | |
Compre- | | |
Non | | |
Total | |
| |
Common Stock | | |
Paid-in | | |
Treasury | | |
Accumulated | | |
hensive | | |
Controlling | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Shares | | |
Deficit | | |
Loss | | |
Interest | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at June 30, 2021 | |
| 12,181,585 | | |
$ | 121,816 | | |
$ | 129,018,826 | | |
$ | (3,820,750 | ) | |
$ | (38,801,282 | ) | |
$ | (31,868,481 | ) | |
$ | 7,215,473 | | |
$ | 61,865,602 | |
Beginning balance | |
| 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 | |
Net income (loss) for the year | |
| - | | |
| - | | |
| - | | |
| - | | |
| 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 | |
Ending balance | |
| 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.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
| |
For
the Six Months | |
| |
Ended
December 31, | |
| |
2022 | | |
2021 | |
SUPPLEMENTAL
DISCLOSURES: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 226,271 | | |
$ | 238,569 | |
Taxes | |
$ | 395,710 | | |
$ | 390,307 | |
| |
| | | |
| | |
NON-CASH
INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Shares
issued to vendor for services received | |
$ | - | | |
$ | 9,900 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The
Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking,
and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in
exchange for fees from customers.
The
consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The
year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of America.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year
ended June 30, 2022. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the
interim periods are not indicative of annual results.
The
accompanying consolidated financial statements include the accounts of the Company as follows:
Wholly
owned Subsidiaries
NetSol
Technologies Americas, Inc. (“NTA”)
NetSol
Connect (Private), Ltd. (“Connect”)
NetSol
Technologies Australia Pty Ltd. (“Australia”)
NetSol
Technologies Europe Limited (“NTE”)
NTPK
(Thailand) Co. Limited (“NTPK Thailand”)
NetSol
Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)
Tianjin
NuoJinZhiCheng Co., Ltd (“Tianjin”)
Ascent
Europe Ltd. (“AEL”)
Virtual
Lease Services Holdings Limited (“VLSH”)
Virtual
Lease Services Limited (“VLS”)
Virtual
Lease Services (Ireland) Limited (“VLSIL”)
Majority-owned
Subsidiaries
NetSol
Technologies, Ltd. (“NetSol PK”)
NetSol
Innovation (Private) Limited (“NetSol Innovation”)
NetSol
Technologies Thailand Limited (“NetSol Thai”)
Otoz,
Inc. (“Otoz”)
Otoz
(Thailand) Limited (“Otoz Thai”)
NETSOL
TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE
2 – ACCOUNTING POLICIES
Use of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life
of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating
lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results
could differ from those estimates.
Concentration
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial
instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances
at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located
in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances
maintained in China are insured for RMB 500,000 ($72,464) in each bank and in the UK for GBP 85,000 ($102,410) in each bank. The Company
maintains three bank accounts in China and nine bank accounts in the UK. As of December 31, 2022, and June 30, 2022, the Company had
uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $18,568,700 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. |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The
Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2022, were as follows:
SCHEDULE
OF FAIR VALUE OF FINANCIAL ASSETS MEASURED ON RECURRING BASIS
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total
Assets | |
Revenues
in excess of billings - long term | |
$ | - | | |
$ | - | | |
$ | 604,358 | | |
$ | 604,358 | |
Total | |
$ | - | | |
$ | - | | |
$ | 604,358 | | |
$ | 604,358 | |
The Company’s
financial assets that were measured at fair value on a recurring basis as of June 30, 2022, were as follows:
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total
Assets | |
Revenues
in excess of billings - long term | |
$ | - | | |
$ | - | | |
$ | 853,601 | | |
$ | 853,601 | |
Total | |
$ | - | | |
$ | - | | |
$ | 853,601 | | |
$ | 853,601 | |
The reconciliation
from June 30, 2022 to December 31, 2022 is as follows:
SCHEDULE
OF FAIR VALUE OF FINANCIAL INSTRUMENTS RECONCILIATION
| |
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 | |
| - | | |
| 18,657 | | |
| 18,657 | |
Transfers
to short term | |
| (268,116 | ) | |
| - | | |
| (268,116 | ) |
Effect
of Translation Adjustment | |
| (90 | ) | |
| 306 | | |
| 216 | |
Balance
at December 31, 2022 | |
$ | 613,734 | | |
$ | (9,376 | ) | |
$ | 604,358 | |
Management
analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from
Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value
at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value
of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall
fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option
derivatives are valued using the Black-Scholes model.
Recent
Accounting Standards:
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized
in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer
had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within
those years, with early adoption permitted. The Company does not expect the standard to have a material effect on its consolidated financial
statements.
All other newly
issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE
3 – REVENUE RECOGNITION
The
Company determines revenue recognition through the following steps:
● |
Identification
of the contract, or contracts, with a customer; |
● |
Identification
of the performance obligations in the contract; |
● |
Determination
of the transaction price; |
● |
Allocation
of the transaction price to the performance obligations in the contract; and |
● |
Recognition
of revenue when, or as, the Company satisfies a performance obligation. |
The
Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent
(net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other
taxes collected from customers and remitted to government authorities.
The Company has
two primary revenue streams: core revenue and non-core revenue.
Core
Revenue
The
Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and
consulting services, and (3) subscription and support, which includes post contract support, of its enterprise software solutions for
the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises
licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers
who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model,
the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right
to take possession of the software.
Non-Core Revenue
The
Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet
services.
Performance
Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under
Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance
obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The
Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or
licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase
post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically
post contract support renewals, subscription renewals and services engagements.
For
contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”)
for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance
obligation using its best estimate for the SSP.
Software Licenses
Transfer
of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment
terms tend to vary by region, but its standard payment terms are within 30 days of invoice.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Subscription
Subscription
revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available
to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance
in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Post
Contract Support
Revenue
from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the
maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software
product updates and patches released during the term of the support period on a when-and-if available basis. The Company’s customers
purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew
their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional
Services
Revenue
from professional services is typically comprised of implementation, development, data migration, training or other consulting services.
Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation
to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes
revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services
are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies
judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external
factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement
changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are
typically due 30 days after invoice.
BPO and Internet
Services
Revenue
from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a
percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly
in advance to the customers and revenue is recognized ratably overtime on a monthly basis.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Disaggregated
Revenue
The
Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s
disaggregated revenue by category is as follows:
SCHEDULE
OF DISAGGREGATED REVENUE BY CATEGORY
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For the Three Months | | |
For the Six Months | |
| |
Ended December 31, | | |
Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Core: | |
| | | |
| | | |
| | | |
| | |
License | |
$ | 15,884 | | |
$ | 1,955,331 | | |
$ | 265,844 | | |
$ | 1,966,047 | |
Subscription and support | |
| 6,502,669 | | |
| 9,374,869 | | |
| 12,519,503 | | |
| 15,605,258 | |
Services | |
| 4,818,461 | | |
| 2,867,515 | | |
| 10,239,827 | | |
| 8,723,794 | |
Total core revenue, net | |
| 11,337,014 | | |
| 14,197,715 | | |
| 23,025,174 | | |
| 26,295,099 | |
| |
| | | |
| | | |
| | | |
| | |
Non-Core: | |
| | | |
| | | |
| | | |
| | |
Services | |
| 1,053,344 | | |
| 1,275,247 | | |
| 2,071,303 | | |
| 2,598,624 | |
Total non-core revenue, net | |
| 1,053,344 | | |
| 1,275,247 | | |
| 2,071,303 | | |
| 2,598,624 | |
| |
| | | |
| | | |
| | | |
| | |
Total net revenue | |
$ | 12,390,358 | | |
$ | 15,472,962 | | |
$ | 25,096,477 | | |
$ | 28,893,723 | |
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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Revenue
is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate
performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred
or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects.
A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and
testing requirement changes.
If
a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement,
such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment
to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single
arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation
of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
If
a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity
will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the
Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price
only when it is probable that a significant reversal in the amount of revenue recognized will not occur.
Contract Balances
The
timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables,
contract assets (revenues in excess of billings), or contract liabilities (unearned revenue) on the Company’s Consolidated Balance
Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the
right to consideration. The Company records unearned revenue when the Company has received or has the right to receive consideration
but has not yet transferred goods or services to the customer.
The
revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion
of a milestone.
The
Company’s revenues in excess of billings and unearned revenue are as follows:
SCHEDULE
OF REVENUES IN EXCESS OF BILLINGS AND DEFERRED REVENUE
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Revenues in excess of billings | |
$ | 15,389,951 | | |
$ | 15,425,377 | |
| |
| | | |
| | |
Unearned revenue | |
$ | 4,048,768 | | |
$ | 4,901,562 | |
During
the three and six months ended December 31, 2022, the Company recognized revenue of $675,857 and $2,784,572 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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Revenue
allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied,
or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.
Contracted but unsatisfied performance obligations were approximately $36,000,000
as of December 31, 2022, of which the Company estimates to recognize
approximately $14,500,000
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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE
4 – EARNINGS PER SHARE
Basic
earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method. During the three and six months ended December 31, 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, NetSol Thai and Otoz Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing and Tianjin
use the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTA and Otoz, use the U.S. dollar
as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results
are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated
other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $42,011,340 and $39,363,085
as of December 31, 2022 and June 30, 2022, 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. During the three and six months ended December 31, 2021, comprehensive
income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $(921,743)
and $(3,067,148), respectively.
NOTE 6 –
MAJOR CUSTOMERS
During
the six months ended December 31, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”)
were $7,069,884, and $2,314,744, respectively representing 28.2% and 9.2%, respectively of revenues. During the six months ended December
31, 2021, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $11,421,688 and $1,531,588,
respectively representing 39.5% and 5.3%, respectively of revenues. The revenue from these customers is shown in the Asia – Pacific
segment.
Accounts
receivable from DFS and BMW at December 31, 2022, were $357,164 and $360,703, respectively. Accounts receivable at June 30, 2022, were
$2,005,463 and $2,498,645, respectively. Revenues in excess of billings at December 31, 2022 were $3,535,799 and $2,252,994 for DFS and
BMW, respectively. Revenues in excess of billings at June 30, 2022, were $365,863 and $2,199,381 for DFS and BMW, respectively.
NOTE
7 – 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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The
following table summarizes the convertible notes receivable from WRLD3D.
SCHEDULE OF CONVERTIBLE NOTES
| |
| | |
| | |
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 December 31, 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:
SCHEDULE OF OTHER CURRENT ASSETS
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Prepaid Expenses | |
$ | 1,634,444 | | |
$ | 1,389,370 | |
Advance Income Tax | |
| 240,223 | | |
| 202,783 | |
Employee Advances | |
| 109,972 | | |
| 87,627 | |
Security Deposits | |
| 234,638 | | |
| 236,909 | |
Other Receivables | |
| 52,470 | | |
| 21,581 | |
Other Assets | |
| 476,773 | | |
| 285,091 | |
Due From Related Party | |
| 1,243,633 | | |
| 1,243,633 | |
Total | |
| 3,992,153 | | |
| 3,466,994 | |
Less allowance for doubtful account | |
| (1,243,633 | ) | |
| (1,243,633 | ) |
Net Balance | |
$ | 2,748,520 | | |
$ | 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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 9 –
REVENUES IN EXCESS OF BILLINGS – LONG TERM
Revenues in excess
of billings, net consisted of the following:
SCHEDULE OF REVENUE IN EXCESS OF BILLING
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Revenues in excess of billings - long term | |
$ | 613,734 | | |
$ | 881,940 | |
Present value discount | |
| (9,376 | ) | |
| (28,339 | ) |
Net Balance | |
$ | 604,358 | | |
$ | 853,601 | |
Pursuant
to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable
after one year. During the three and six months ended December 31, 2022, the Company accreted $9,288 and $18,657, respectively. During
the three and six months ended December 31, 2021, the Company accreted $9,539 and $19,041, respectively, which was recorded in interest
income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65% to 6.25%.
NOTE 10 -
PROPERTY AND EQUIPMENT
Property and
equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Office Furniture and Equipment | |
$ | 2,905,429 | | |
$ | 3,021,586 | |
Computer Equipment | |
| 11,712,255 | | |
| 11,388,856 | |
Assets Under Capital Leases | |
| 59,033 | | |
| 305,081 | |
Building | |
| 4,387,210 | | |
| 4,818,650 | |
Land | |
| 1,122,819 | | |
| 1,237,965 | |
Autos | |
| 2,500,251 | | |
| 2,503,990 | |
Improvements | |
| 228,291 | | |
| 175,560 | |
Subtotal | |
| 22,915,288 | | |
| 23,451,688 | |
Accumulated Depreciation | |
| (14,195,631 | ) | |
| (14,069,064 | ) |
Property and Equipment, Net | |
$ | 8,719,657 | | |
$ | 9,382,624 | |
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. For the three and six months ended December 31, 2021, depreciation
expense was $527,463 and $1,067,185, respectively. Of these amounts, $314,599 and $640,050, respectively, are reflected in cost of revenues.
Following is
a summary of fixed assets held under finance leases as of December 31, 2022 and June 30, 2022:
SUMMARY OF FIXED ASSETS HELD UNDER CAPITAL LEASES
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Vehicles | |
$ | 59,033 | | |
$ | 305,081 | |
Total | |
| 59,033 | | |
| 305,081 | |
Less: Accumulated Depreciation - Net | |
| (16,117 | ) | |
| (145,658 | ) |
Fixed assets held under
finance leases, Total | |
$ | 42,916 | | |
$ | 159,423 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Finance lease
term and discount rate were as follows:
SCHEDULE OF FINANCE LEASE TERM
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Weighted average remaining lease term - Finance leases | |
| 1.66 Years | | |
| 2.39 Years | |
| |
| | | |
| | |
Weighted average discount rate - Finance leases | |
| 16.5 | % | |
| 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.
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.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Supplemental
balance sheet information related to leases was as follows:
SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASE
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Assets | |
| | | |
| | |
Operating lease assets, net | |
$ | 1,246,778 | | |
$ | 969,163 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current | |
| | | |
| | |
Operating | |
$ | 499,455 | | |
$ | 548,678 | |
Operating, Current | |
$ | 499,455 | | |
$ | 548,678 | |
Non-current | |
| | | |
| | |
Operating | |
| 789,621 | | |
| 447,260 | |
Operating, Current | |
| 789,621 | | |
| 447,260 | |
Total Lease Liabilities | |
$ | 1,289,076 | | |
$ | 995,938 | |
The components
of lease cost were as follows:
SCHEDULE OF COMPONENTS OF LEASE COST
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For the Three Months | | |
For the Six Months | |
| |
Ended December 31, | | |
Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Amortization of finance lease assets | |
$ | 3,099 | | |
$ | 21,895 | | |
$ | 5,995 | | |
$ | 42,928 | |
Interest on finance lease obligation | |
| 1,552 | | |
| 3,212 | | |
| 3,359 | | |
| 8,148 | |
Operating lease cost | |
| 113,079 | | |
| 97,827 | | |
| 231,601 | | |
| 380,778 | |
Short term lease cost | |
| 37,986 | | |
| 38,781 | | |
| 104,622 | | |
| 38,781 | |
Sub lease income | |
| (7,786 | ) | |
| (8,950 | ) | |
| (15,598 | ) | |
| (18,105 | ) |
Total lease cost | |
$ | 147,930 | | |
$ | 152,765 | | |
$ | 329,979 | | |
$ | 452,530 | |
Lease term and
discount rate were as follows:
SCHEDULE OF LEASE TERM AND DISCOUNT RATE
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Weighted average remaining lease term - Operating leases | |
| 3.31 Years | | |
| 3.34 Years | |
| |
| | | |
| | |
Weighted average discount rate - Operating leases | |
| 3.6 | % | |
| 4.2 | % |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Supplemental
disclosures of cash flow information related to leases were as follows:
SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION RELATED TO LEASES
| |
| 1 | | |
| 2 | |
| |
For the Six Months | |
| |
Ended December 31 | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Operating cash flows related to operating leases | |
$ | 236,311 | | |
$ | 369,175 | |
| |
| | | |
| | |
Operating cash flows related to finance leases | |
$ | 3,358 | | |
$ | 3,531 | |
| |
| | | |
| | |
Financing cash flows related finance leases | |
$ | 16,230 | | |
$ | 54,844 | |
Maturities of
operating lease liabilities were as follows as of December 31, 2022:
SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES
| |
Amount | |
Within year 1 | |
$ | 534,010 | |
Within year 2 | |
| 373,602 | |
Within year 3 | |
| 324,306 | |
Within year 4 | |
| 120,543 | |
Within year 5 | |
| 583 | |
Thereafter | |
| 874 | |
Total Lease Payments | |
| 1,353,918 | |
Less: Imputed interest | |
| (64,842 | ) |
Present Value of lease liabilities | |
| 1,289,076 | |
Less: Current portion | |
| (499,455 | ) |
Non-Current portion | |
$ | 789,621 | |
The
Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease
agreements provide for a fixed base rent and are currently on a month-by-month basis. All leases are considered operating leases. There
are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2022, the Company
received lease income of $7,786 and $15,598, respectively. For the three and six months ended December 31, 2021, the Company received
lease income of $8,950 and $18,105, respectively.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 12 –
LONG TERM INVESTMENT
Drivemate
– Related Party
The
Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate
Agreement”) whereby the Company purchased an equity interest of 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 December 31, 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 income of $5,133 for the three and six months ended December 31,
2022, and the Company recorded its share of net income of $4,666 and net loss of $58,905 for the three and six months ended December
31, 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 for the three and six months ended December 31, 2022,
and the Company recorded its share of net loss of $84,484 and $181,878 for the three and six months ended December 31, 2021, respectively.
The following
table reflects the above investments at December 31, 2022.
SCHEDULE OF LONG TERM INVESTMENT
| |
Drivemate | | |
WRLD3D | | |
Total | |
Gross investment | |
$ | 1,800,000 | | |
$ | 3,888,889 | | |
$ | 5,688,889 | |
Cumulative net loss on investment | |
| (735,499 | ) | |
| (3,238,647 | ) | |
| (3,974,146 | ) |
Cumulative other comprehensive income (loss) | |
| - | | |
| (650,242 | ) | |
| (650,242 | ) |
Net investment | |
$ | 1,064,501 | | |
$ | - | | |
$ | 1,064,501 | |
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 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 13 -
INTANGIBLE ASSETS
Intangible assets
consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Product Licenses - Cost | |
$ | 47,244,997 | | |
$ | 47,244,997 | |
Effect of Translation Adjustment | |
| (21,549,533 | ) | |
| (19,914,206 | ) |
Accumulated Amortization | |
| (24,894,425 | ) | |
| (25,743,121 | ) |
Net Balance | |
$ | 801,039 | | |
$ | 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 $801,039 will be amortized
over one year. Amortization expense for the three and six months ended December 31, 2022, was $322,672 and $645,492, respectively. Amortization
expense for the three and six months ended December 31, 2021was $414,269 and $854,553, respectively.
NOTE 14 -
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
As
of | | |
As
of | |
| |
December
31, 2022 | | |
June
30, 2022 | |
| |
| | |
| |
Accounts Payable | |
$ | 942,689 | | |
$ | 1,175,527 | |
Accrued Liabilities | |
| 4,114,952 | | |
| 3,507,415 | |
Accrued Payroll | |
| 1,454,886 | | |
| 1,397,605 | |
Accrued Payroll Taxes | |
| 147,837 | | |
| 153,416 | |
Taxes Payable | |
| 418,315 | | |
| 328,755 | |
Other
Payable | |
| 344,569 | | |
| 250,823 | |
Total | |
$ | 7,423,248 | | |
$ | 6,813,541 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 15 –
DEBTS
Notes payable
and finance leases consisted of the following:
SCHEDULE OF COMPONENTS OF NOTES PAYABLE AND CAPITAL LEASES
| |
| | |
As of December 31, 2022 | |
| |
| | |
| | |
Current | | |
Long-Term | |
Name | |
| | |
Total | | |
Maturities | | |
Maturities | |
| |
| | |
| | |
| | |
| |
D&O Insurance | |
| (1 | ) | |
$ | 127,599 | | |
$ | 127,599 | | |
$ | - | |
Bank Overdraft Facility | |
| (2 | ) | |
| - | | |
| - | | |
| - | |
Term Finance Facility | |
| (3 | ) | |
| - | | |
| - | | |
| - | |
Loan Payable Bank - Export Refinance | |
| (4 | ) | |
| 2,208,285 | | |
| 2,208,285 | | |
| - | |
Loan Payable Bank - Running Finance | |
| (5 | ) | |
| - | | |
| - | | |
| - | |
Loan Payable Bank - Export Refinance II | |
| (6 | ) | |
| 1,678,297 | | |
| 1,678,297 | | |
| - | |
Loan Payable Bank - Export Refinance III | |
| (7 | ) | |
| 3,091,600 | | |
| 3,091,600 | | |
| - | |
Sale and Leaseback Financing | |
| (8 | ) | |
| 463,011 | | |
| 172,983 | | |
| 290,028 | |
Term Finance Facility | |
| (9 | ) | |
| 21,908 | | |
| 18,682 | | |
| 3,226 | |
Insurance Financing | |
| (10 | ) | |
| 54,405 | | |
| 54,405 | | |
| - | |
| |
| | | |
| 7,645,105 | | |
| 7,351,851 | | |
| 293,254 | |
Subsidiary Finance Leases | |
| (11 | ) | |
| 48,590 | | |
| 34,899 | | |
| 13,691 | |
| |
| | | |
$ | 7,693,695 | | |
$ | 7,386,750 | | |
$ | 306,945 | |
| |
| | |
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 December 31, 2022 and June 30, 2022. |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
(2) | | The Company’s subsidiary,
NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately
$361,446. The annual interest rate was 5.5% as of December 31, 2022. The total outstanding balance as of December 31, 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 December 31, 2022, NTE was in
compliance with this covenant. |
(3) | | The Company’s subsidiary,
NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation
during the COVID-19 pandemic. This is a term loan payable in three years. The availed facility amount was Rs. nil or $nil, at December
31, 2022. 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 December 31, 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 $2,208,285 at December 31, 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 December 31, 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 $236,728, at December 31, 2022. The balance outstanding at December 31, 2022 and June 30, 2022 was Rs. Nil. The interest
rate for the loan was 19.0% and 14.0% at December 31, 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 December 31, 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 $1,678,297 and Rs. 380,000,000 or $1,850,409 at December 31,
2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at December 31, 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 December 31, 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 $3,974,914 and Rs. 900,000,000 or $4,382,548, at December
31, 2022 and June 30, 2022, respectively. NetSol PK used Rs. 700,000,000 or $3,091,600 and Rs. 700,000,000 or $3,408,648, at December
31, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at December 31, 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
December 31, 2022, NetSol PK used Rs. 104,834,901 or $463,011 of which $290,028 was shown as long term and $172,983 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 December 31, 2022, and June 30, 2022. |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
(9) | | In March 2019, the Company’s
subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $83,794, for a period of 5 years with monthly payments
of £1,349, or $1,625. As of December 31, 2022, the subsidiary has used this facility up to $21,907, of which $3,226 was shown as
long-term and $18,681 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 December 31, 2022 and June 30, 2022. |
(10) | | The Company’s subsidiary,
VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $54,405 and $96,781 was recorded
in current maturities, at December 31, 2022 and June 30, 2022, respectively. The interest rate on this financing ranged from 9.7% to
12.7% as of December 31, 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 and six months ended December
31, 2022 and 2021. |
Following are
the aggregate minimum future lease payments under finance leases as of December 31, 2022:
SCHEDULE OF AGGREGATE MINIMUM FUTURE LEASE PAYMENTS UNDER CAPITAL LEASES
| |
| |
| |
Amount | |
Minimum Lease Payments | |
| | |
Within year 1 | |
$ | 39,033 | |
Within year 2 | |
| 14,514 | |
Total Minimum Lease Payments | |
| 53,547 | |
Interest Expense relating to future periods | |
| (4,957 | ) |
Present Value of minimum lease payments | |
| 48,590 | |
Less: Current portion | |
| (34,899 | ) |
Current portion of loans and obligations under finance leases | |
| | |
Non-Current portion | |
$ | 13,691 | |
Loans and obligations under finance leases; less current maturities | |
| | |
Following are
the aggregate future long term debt payments as of December 31, 2022
SCHEDULE OF AGGREGATE FUTURE LONG TERM DEBT PAYMENTS
| |
Amount | |
Loan Payments | |
| | |
Within year 1 | |
$ | 191,664 | |
Within year 2 | |
| 188,283 | |
Within year 3 | |
| 104,972 | |
Total Loan Payments | |
| 484,919 | |
Less: Current portion | |
| (191,665 | ) |
Non-Current portion | |
$ | 293,254 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 16
- STOCKHOLDERS’ EQUITY
During
the three and six months ended December 31, 2022, the Company issued 13,755 and 26,415 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.
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 December 31, 2022 and June 30, 2022:
SUMMARY OF IDENTIFIABLE ASSETS
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Identifiable assets: | |
| | | |
| | |
Corporate headquarters | |
$ | 1,106,983 | | |
$ | 844,178 | |
North America | |
| 7,044,788 | | |
| 6,442,219 | |
Europe | |
| 8,920,116 | | |
| 8,727,530 | |
Asia - Pacific | |
| 47,744,012 | | |
| 56,594,705 | |
Consolidated | |
$ | 64,815,899 | | |
$ | 72,608,632 | |
The following
table presents a summary of investment under equity method as of December 31, 2022 and June 30, 2022:
SUMMARY OF INVESTMENT UNDER EQUITY METHOD
| |
As of | | |
As of | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Investment in associates under equity method: | |
| | | |
| | |
Corporate headquarters | |
$ | - | | |
$ | - | |
Asia - Pacific | |
| 1,064,501 | | |
| 1,059,368 | |
Consolidated | |
$ | 1,064,501 | | |
$ | 1,059,368 | |
| |
| | | |
| | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The following
table presents a summary of operating information for the three and six months ended December 31:
SUMMARY OF OPERATING INFORMATION
| |
For the Three Months | | |
For the Six Months | |
| |
Ended December 31, | | |
Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues from unaffiliated customers: | |
| | | |
| | | |
| | | |
| | |
North America | |
$ | 1,597,852 | | |
$ | 1,060,379 | | |
$ | 2,723,140 | | |
$ | 1,990,613 | |
Europe | |
| 2,845,701 | | |
| 2,122,094 | | |
| 5,093,036 | | |
| 5,394,993 | |
Asia - Pacific | |
| 7,946,805 | | |
| 12,290,489 | | |
| 17,280,301 | | |
| 21,508,117 | |
| |
| 12,390,358 | | |
| 15,472,962 | | |
| 25,096,477 | | |
| 28,893,723 | |
Revenue from affiliated customers | |
| | | |
| | | |
| | | |
| | |
Asia - Pacific | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| - | | |
| - | | |
| - | | |
| - | |
Consolidated | |
$ | 12,390,358 | | |
$ | 15,472,962 | | |
$ | 25,096,477 | | |
$ | 28,893,723 | |
| |
| | | |
| | | |
| | | |
| | |
Intercompany revenue | |
| | | |
| | | |
| | | |
| | |
Europe | |
$ | 93,236 | | |
$ | 116,479 | | |
$ | 188,961 | | |
$ | 243,677 | |
Asia - Pacific | |
| 2,545,098 | | |
| 774,364 | | |
| 4,275,051 | | |
| 3,334,464 | |
Eliminated | |
$ | 2,638,334 | | |
$ | 890,843 | | |
$ | 4,464,012 | | |
$ | 3,578,141 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) after taxes and before non-controlling interest: | |
| | | |
| | | |
| | | |
| | |
Corporate headquarters | |
$ | (696,938 | ) | |
$ | 138,089 | | |
$ | 630,262 | | |
$ | 266,633 | |
North America | |
| 105,326 | | |
| (58,915 | ) | |
| 86,379 | | |
| (127,008 | ) |
Europe | |
| (163,633 | ) | |
| (589,882 | ) | |
| (483,388 | ) | |
| (398,439 | ) |
Asia - Pacific | |
| (1,646,718 | ) | |
| 2,949,256 | | |
| (3,073,187 | ) | |
| 3,247,857 | |
Consolidated | |
$ | (2,401,963 | ) | |
$ | 2,438,548 | | |
$ | (2,839,934 | ) | |
$ | 2,989,043 | |
| |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization: | |
| | | |
| | | |
| | | |
| | |
North America | |
$ | 727 | | |
$ | 527 | | |
$ | 1,209 | | |
$ | 1,093 | |
Europe | |
| 66,431 | | |
| 100,646 | | |
| 141,602 | | |
| 199,494 | |
Asia - Pacific | |
| 824,342 | | |
| 840,559 | | |
| 1,593,692 | | |
| 1,721,151 | |
Consolidated | |
$ | 891,500 | | |
$ | 941,732 | | |
$ | 1,736,503 | | |
$ | 1,921,738 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense: | |
| | | |
| | | |
| | | |
| | |
Corporate headquarters | |
$ | 5,912 | | |
$ | 9,565 | | |
$ | 8,392 | | |
$ | 20,006 | |
North America | |
| - | | |
| - | | |
| - | | |
| - | |
Europe | |
| 2,702 | | |
| 2,488 | | |
| 6,340 | | |
| 6,284 | |
Asia - Pacific | |
| 193,749 | | |
| 78,755 | | |
| 309,241 | | |
| 165,531 | |
Consolidated | |
$ | 202,363 | | |
$ | 90,808 | | |
$ | 323,973 | | |
$ | 191,821 | |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense: | |
| | | |
| | | |
| | | |
| | |
Corporate headquarters | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (43,354 | ) |
North America | |
| - | | |
| - | | |
| - | | |
| 45,754 | |
Europe | |
| - | | |
| 9,524 | | |
| - | | |
| 9,524 | |
Asia - Pacific | |
| 220,056 | | |
| 191,982 | | |
| 413,404 | | |
| 357,209 | |
Consolidated | |
$ | 220,056 | | |
$ | 201,506 | | |
$ | 413,404 | | |
$ | 369,133 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The
following table presents a summary of capital expenditures for the six months ended December 31:
SUMMARY OF CAPITAL EXPENDITURES
| |
For the Six Months | |
| |
Ended December 31, | |
| |
2022 | | |
2021 | |
Capital expenditures: | |
| | | |
| | |
North America | |
$ | 4,880 | | |
$ | - | |
Europe | |
| - | | |
| 89,451 | |
Asia - Pacific | |
| 1,247,445 | | |
| 684,502 | |
Consolidated | |
$ | 1,252,325 | | |
$ | 773,953 | |
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:
SCHEDULE OF BALANCE OF NON-CONTROLLING INTEREST
SUBSIDIARY | |
Non-Controlling
Interest % | | |
Non-Controlling
Interest at
December 31, 2022 | |
| |
| | |
| |
NetSol PK | |
| 32.38 | % | |
$ | 4,341,047 | |
NetSol-Innovation | |
| 32.38 | % | |
| (82,773 | ) |
NetSol Thai | |
| 0.006 | % | |
| (200 | ) |
Otoz Thai | |
| 10.95 | % | |
| (46,963 | ) |
Otoz | |
| 10.94 | % | |
| (158,655 | ) |
Total | |
| | | |
$ | 4,052,456 | |
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%.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The
following schedule discloses the effect to the Company’s equity due to the changes in the Company’s ownership interest in
Otoz and Otoz Thai.
SCHEDULE OF CHANGE IN OWNERSHIP INTEREST
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For the Three Months | | |
For the Six Months | |
| |
Ended December 31, | | |
Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Net income (loss) attributable to NetSol | |
$ | (2,092,926 | ) | |
$ | 1,406,785 | | |
$ | (2,713,655 | ) | |
$ | 1,594,754 | |
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 | |
$ | (2,092,926 | ) | |
$ | 1,406,785 | | |
$ | (2,593,090 | ) | |
$ | 1,594,754 | |
NOTE
20 – INCOME TAXES
The
current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income.
The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates
available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than
the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax
rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer
software and its related services developed in Pakistan is exempt from tax through June 30, 2025; however, tax at the applicable rates
is charged to the income from revenue generated from other than core business activities.
During
the three and six months ended December 31, 2022, the Company recorded an income tax provision of $220,056 and $413,404, respectively.
During the three and six months ended December 31, 2021, the Company recorded an income tax provision of $201,506 and $369,133, respectively.
The tax is derived from non-core business activities generated from NetSol PK.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for
the three months ended December 31, 2022. The following discussion should be read in conjunction with the information included within
our Annual Report on Form 10-K for the year ended June 30, 2022, and the Condensed Consolidated Financial Statements and notes thereto
included elsewhere in this Quarterly Report on Form 10-Q.
Our
website is located at www.netsoltech.com, and our investor relations website is located at https://ir.netsoltech.com. The
following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download
free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov
that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report
on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We
webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations
website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings,
investor events, press and earnings releases, and blogs as part of our investor relations website and on social media platforms linked
to our corporate website. Investors and others can receive notifications of new information posted on our investor relations website
by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also
available on our investor relations website at https://netsoltech.com/about-us. The content of our websites is not intended to
be incorporated by reference into this or in any other report or document we file with the SEC, and any references to our websites are
intended to be inactive textual references only.
Forward-Looking
Information
This
report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management
as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”,
“believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions
as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s
current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any
of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from
those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially
and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies
which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially
reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research
and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s
business ultimately is built. The Company does not intend to update these forward-looking statements.
Business
Overview
NetSol
Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute
mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased
transactions.
Our
primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications,
under the brand name NFS Ascent® for leading businesses in the global finance and leasing space. With constant innovation
being a major part of NETSOL’s DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations
already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing
model rather than the traditional licensing model.
NETSOL’s
clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 manufacturers, financial institutions, global vehicle
manufacturers and enterprise technology providers, all of which are serviced by NETSOL’s strategically placed support and delivery
locations around the globe.
Founded
in 1997, NetSol is headquartered in Los Angeles County, California. While the Company follows a global strategy for sales and delivery
of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:
|
● |
North
America |
|
Los
Angeles Area |
|
● |
Europe |
|
London
Metropolitan area and Horsham in the UK |
|
● |
Asia
Pacific |
|
Lahore,
Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney |
NETSOL
believes that our strong technology solutions offer our customers a return on their investment and allows us to thrive in a hyper competitive
and mature global marketplace. Our solutions are bolstered by our people. NETSOL believes that people are the drivers of success; therefore,
we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing
satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage
for NETSOL and a unique value for its customers. NETSOL continues to underpin its proven and effective business model which is a combination
of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.
Our
primary offerings include the following:
NFS
Ascent®
NFS
Ascent®, the Company’s next generation platform, offers a technologically advanced solution for the auto and equipment
finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on the Company’s
collective experience with global Fortune 500 companies over the past 40 years combined with UX design concepts. The platform’s
framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and
business process environment. At the core of the NFS Ascent® platform, is a lease accounting and contract processing engine,
which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios. NFS
Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables
finance companies to process voluminous data in a hyper speed environment. NFS Ascent® has been developed using the latest
tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited
to, scalability, performance, fault tolerance and security. Our premier, next generation solution NFS Ascent® is now also
available on the cloud via SaaS/subscription-based pricing. With swift, seamless deployments and easy scalability, it is an extremely
adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent®
is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees.
NFS
Digital
NFS
Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape along with our valuable
experience enables us to define sound digital transformation strategies and compliment them with smart digital solutions so our customers
always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can
be used with or without our core, next-gen solution (NFS Ascent®) to effectively augment and enhance our customer’s
ecosystem. NFS Digital includes Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, Mobile Collector
and Mobile Field Investigator.
OTOZ
Otoz
Digital Auto Retail
Otoz
provides a white-labelled SaaS platform to OEMs, auto-captives, dealers and start-ups that helps them launch short and long-term on-demand
mobility models (car-share and car subscription) and digital retail in minimum time. Our white-label, turn-key platform helps dealers
to make the move into digital era by offering an end-to-end car buying experience completely online. Digital auto-retail is not a one-size-fits-all.
Otoz provides a flexible, configurable and scalable turn-key platform that helps define, launch and scale a variety of retail products
(finance, lease, buy, etc.). Otoz platform empowers dealers to compete in digital era by addressing a range of customer segments with
varied needs.
Otoz
Ecosystem
The
Otoz powerful Application Program Interface (API) based architecture allows OEMs, auto-captives and dealerships to integrate with a plethora
of providers to offer an end-to-end Omni-channel digital car finance and lease experience. Out-of-the-box APIs by Otoz help dealers and
auto-captives connect with ecosystem partners which are crucial for running their auto retail business. It includes, finance and insurance
products, trade-in tools, fraud checks, CRM system, websites (Tier 1 – Tier 3), marketing toolkit, inventory feeds, Know Your Customers
(KYC), payment processors, and vehicle delivery providers amongst others. In addition, Otoz is equipped with smart lead generation and
product analytics capabilities. It empowers dealers with the capability to convert qualified leads and never lose contact with customers.
The product analytics capability allows us to improve the customer journey by addressing friction points, herein improving customer experience
and conversions – a win-win scenario for dealers and customers.
Otoz
Platform
A
fully digital, white label platform for lease, finance, and cash transactions that delivers a frictionless customer experience.
Otoz
platform consists of two components the Dealer Tool and the Customer Application (APP) of a Dealer Tool which provides for a myriad of
services including account creation, order management work queue, user roles and rights, tax configurator, customer KYC reports, vehicle
delivery scheduling, payment gateways and inventory management, finance and insurance products feed and prioritization, dealer fee management
and ecosystem APIs. The Customer App permits the dealer to work with the customer to get a vehicle via cash, finance or lease, manage
vehicle delivery and pick-up scheduling, buy finance and insurance products, buy accessories, paperless license checks, personalized
pricing, vehicle options, trade-in valuation, credit application and decision, paperless contracts and e-signing, digital payments and
a deal builder.
Other
Products
The
Company continues to support its North America and European legacy systems including LeasePak and LeaseSoft.
Highlights
Listed
below are a few of NetSol’s highlights for the quarter ended December 31, 2022:
| ● | We
signed a new agreement with a tier 1 automotive company in the U.S. to implement and license
our Otoz mobility solution which will manage back-office operations for vehicle subscriptions. |
| | |
| ● | Otoz went live with its 37th dealer and now has dealers in 16 states. |
| | |
| ● | Our
sales pipeline continues to be strong with the addition of some new prospects who have registered
their interests in NFS Ascent®, digital, and legacy solutions across various regions
pushing the total pipeline size to approximately $250 million. |
| | |
| ● | We
effectively generated approximately $1.0 million by successfully implementing change requests
from various customers across multiple regions. |
| | |
| ● | The
organization successfully achieved ACE partnership status in cloud services domain by partnering
with Amazon Web Services (AWS). We anticipate that this partnership will help the business
grow its cloud services vertical over the coming periods. |
| | |
| ● | NetSol
achieved the first Go-Live milestone for the finance company of a leading Swedish bank by
effectively implementing its invoice factoring system. |
Management
has identified the following material trends affecting NetSol.
Positive
trends:
| ● | According
to S&P Global Mobility, new vehicles sales globally are expected to reach 84 million
units in 2023 for a 5.6% increase. U.S. sales volumes are expected to reach approximately
15 million units, an estimated increase of 7% from the projected 2022 levels. |
| | |
| ● | Reduction
of the U.S. inflation rate over the last few months. |
| | |
| ● | The
elimination of travel related COVID-19 testing increases opportunities to meet face to face
with current and potential customers. |
| | |
| ● | NFS
Ascent® SaaS offerings and major on-premise license offerings are gaining
traction in both mid and large size auto captives in the North American and European markets. |
| | |
| ● | The
auto and banking sectors continue momentum towards increased mobility and digital solutions
according to Forbes and Insider Intelligence 2022. |
| | |
| ● | Otoz
retail platform is showing a steady growth of interest from existing and new auto leasing
and Tier 1 companies in all of our markets. |
| | |
| ● | The
China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $65
billion investment, from the originally planned $46 billion, in Pakistan energy and infrastructure
sectors. |
| | |
| ● | China’s
auto sector remains strong which includes government year-end incentives, with customers
requesting additional services reflecting the resilience of our offerings. |
| | |
| ● | There
has been an aggressive uptick in business development activities in the US and China. |
| | |
| ● | There
is a growing interest from long-time customers in upgrading from our legacy NFS solution
to Ascent®. |
Negative
trends:
| ● | General
economic conditions in our geographic markets; geopolitical tensions, including trade wars,
tariffs and/or sanctions in geographic areas; Global pandemics, including COVID-19; and,
global conflicts or disasters that impact the global economy or one or more sectors of the
global economy. |
| ● | A
global recession fear impacts the future expansions and budgets in every country and every
sector. |
| ● | Continued
interest rate increases by the U.S. Federal Reserve Board in 2023 restricting buying power
for consumers. |
| ● | The
negative currency impact on our financial statements due to the devaluation of the Pakistan
Rupee and the British Pound Sterling in comparison to the US Dollar. |
| ● | Political,
monetary and economic challenges and higher inflation rate than other regional countries
impacting Pakistan exports. |
| ● | Inflation
and higher interest rates have greatly increased the cost of doing business, including salaries
and benefits worldwide, affecting profitability. |
| ● | War
and hostility between Russia and Ukraine continue to foster global uncertainty. |
| ● | The
decline by over 20% in 2022 of the U.S. markets including the NASDAQ index and the Russell
2000 index limiting access to capital markets. |
| ● | Working
from the office might not return to pre-pandemic levels which may affect employee collaboration
potentially lessening efficiency. |
| ● | The
Pakistan political environment will likely remain unsteady until new elections are called. |
CHANGES
IN FINANCIAL CONDITION
Quarter
Ended December 31, 2022 Compared to the Quarter Ended December 31, 2021
The
following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended December
31, 2022 and 2021 as a percentage of revenues.
| |
For the Three Months | |
| |
Ended December 31, | |
| |
2022 | | |
% | | |
2021 | | |
% | |
Net Revenues: | |
| | | |
| | | |
| | | |
| | |
License fees | |
$ | 15,884 | | |
| 0.1 | % | |
$ | 1,955,331 | | |
| 12.6 | % |
Subscription and support | |
| 6,502,669 | | |
| 52.5 | % | |
| 9,374,869 | | |
| 60.6 | % |
Services | |
| 5,871,805 | | |
| 47.4 | % | |
| 4,142,762 | | |
| 26.8 | % |
Total net revenues | |
| 12,390,358 | | |
| 100.0 | % | |
| 15,472,962 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Salaries and consultants | |
| 6,942,171 | | |
| 56.0 | % | |
| 5,661,917 | | |
| 36.6 | % |
Travel | |
| 635,298 | | |
| 5.1 | % | |
| 282,836 | | |
| 1.8 | % |
Depreciation and amortization | |
| 693,278 | | |
| 5.6 | % | |
| 728,868 | | |
| 4.7 | % |
Other | |
| 977,148 | | |
| 7.9 | % | |
| 1,156,754 | | |
| 7.5 | % |
Total cost of revenues | |
| 9,247,895 | | |
| 74.6 | % | |
| 7,830,375 | | |
| 50.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,142,463 | | |
| 25.4 | % | |
| 7,642,587 | | |
| 49.4 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Selling and marketing | |
| 2,007,462 | | |
| 16.2 | % | |
| 1,807,162 | | |
| 11.7 | % |
Depreciation and amortization | |
| 198,222 | | |
| 1.6 | % | |
| 212,864 | | |
| 1.4 | % |
General and administrative | |
| 3,510,389 | | |
| 28.3 | % | |
| 3,733,303 | | |
| 24.1 | % |
Research and development cost | |
| 472,904 | | |
| 3.8 | % | |
| 235,390 | | |
| 1.5 | % |
Total operating expenses | |
| 6,188,977 | | |
| 49.9 | % | |
| 5,988,719 | | |
| 38.7 | % |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (3,046,514 | ) | |
| -24.6 | % | |
| 1,653,868 | | |
| 10.7 | % |
Other income and (expenses) | |
| | | |
| | | |
| | | |
| | |
Gain (loss) on sale of assets | |
| 5,048 | | |
| 0.0 | % | |
| (80,125 | ) | |
| -0.5 | % |
Interest expense | |
| (202,363 | ) | |
| -1.6 | % | |
| (90,808 | ) | |
| -0.6 | % |
Interest income | |
| 309,906 | | |
| 2.5 | % | |
| 316,253 | | |
| 2.0 | % |
Gain (loss) on foreign currency exchange transactions | |
| 657,223 | | |
| 5.3 | % | |
| 901,016 | | |
| 5.8 | % |
Share of net loss from equity investment | |
| 5,133 | | |
| 0.0 | % | |
| (79,818 | ) | |
| -0.5 | % |
Other income (expense) | |
| 89,660 | | |
| 0.7 | % | |
| 19,668 | | |
| 0.1 | % |
Total other income (expenses) | |
| 864,607 | | |
| 7.0 | % | |
| 986,186 | | |
| 6.4 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) before income taxes | |
| (2,181,907 | ) | |
| -17.6 | % | |
| 2,640,054 | | |
| 17.1 | % |
Income tax provision | |
| (220,056 | ) | |
| -1.8 | % | |
| (201,506 | ) | |
| -1.3 | % |
Net income (loss) | |
| (2,401,963 | ) | |
| -19.4 | % | |
| 2,438,548 | | |
| 15.8 | % |
Non-controlling interest | |
| 309,037 | | |
| 2.5 | % | |
| (1,031,763 | ) | |
| -6.7 | % |
Net income (loss) attributable to NetSol | |
$ | (2,092,926 | ) | |
| -16.9 | % | |
$ | 1,406,785 | | |
| 9.1 | % |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Net income (loss) per common share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.19 | ) | |
| | | |
$ | 0.13 | | |
| | |
Diluted | |
$ | (0.19 | ) | |
| | | |
$ | 0.13 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 11,270,199 | | |
| | | |
| 11,244,539 | | |
| | |
Diluted | |
| 11,270,199 | | |
| | | |
| 11,244,539 | | |
| | |
A
significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions
as described in Note 18 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening
of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also
increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to
foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies
other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing
to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing
how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from
one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period
results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported
currency and in constant currency.
| |
| | |
| | |
| | |
| | |
Favorable | | |
Favorable | | |
Total | |
| |
| | |
| | |
| | |
| | |
(Unfavorable) | | |
(Unfavorable) | | |
Favorable | |
| |
For the Three Months | | |
Change in | | |
Change due to | | |
(Unfavorable) | |
| |
Ended December 31, | | |
Constant | | |
Currency | | |
Change as | |
| |
2022 | | |
% | | |
2021 | | |
% | | |
Currency | | |
Fluctuation | | |
Reported | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net Revenues: | |
$ | 12,390,358 | | |
| 100.0 | % | |
$ | 15,472,962 | | |
| 100.0 | % | |
$ | (871,575 | ) | |
$ | (2,211,029 | ) | |
$ | (3,082,604 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| 9,247,895 | | |
| 74.6 | % | |
| 7,830,375 | | |
| 50.6 | % | |
| (3,496,455 | ) | |
| 2,078,935 | | |
| (1,417,520 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,142,463 | | |
| 25.4 | % | |
| 7,642,587 | | |
| 49.4 | % | |
| (4,368,030 | ) | |
| (132,094 | ) | |
| (4,500,124 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| 6,188,977 | | |
| 49.9 | % | |
| 5,988,719 | | |
| 38.7 | % | |
| (1,222,100 | ) | |
| 1,021,842 | | |
| (200,258 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
$ | (3,046,514 | ) | |
| -24.6 | % | |
$ | 1,653,868 | | |
| 10.7 | % | |
$ | (5,590,130 | ) | |
$ | 889,748 | | |
$ | (4,700,382 | ) |
Net
revenues for the three months ended December 31, 2022 and 2021 are broken out among the segments as follows:
|
|
2022 | | |
2021 |
|
|
|
Revenue | | |
% | | |
Revenue | | |
|
% |
|
|
|
| | |
| | |
| | |
|
|
|
North America |
|
$ | 1,597,852 | | |
| 12.9 | % | |
$ | 1,060,379 | | |
|
6.9 |
% |
Europe |
|
| 2,845,701 | | |
| 23.0 | % | |
| 2,122,094 | | |
|
13.7 |
% |
Asia-Pacific |
|
| 7,946,805 | | |
| 64.1 | % | |
| 12,290,489 | | |
|
79.4 |
% |
Total |
|
$ | 12,390,358 | | |
| 100.0 | % | |
$ | 15,472,962 | | |
|
100.0 |
% |
Revenues
License
fees
License
fees for the three months ended December 31, 2022 were $15,884 compared to $1,955,331 for the three months ended December 31, 2021 reflecting
a decrease of $1,939,447 with a decrease in constant currency of $1,939,167. During the three months ended December 31, 2021, we recognized
approximately $1,920,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for
their new business segment in the Japanese and Australian markets.
Subscription
and support
Subscription
and support fees for the three months ended December 31, 2022 were $6,502,669 compared to $9,374,869 for the three months ended December
31, 2021 reflecting a decrease of $2,872,200 with a decrease in constant currency of $1,717,959. The reason for the decrease in subscription
and support revenue is that in the three months ended December 31, 2021, we recorded a one-time post contract support revenue of approximately
$3,480,00 using the catch-up approach. Subscription and support fees begin once a customer has “gone live” with our product.
Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS
legacy products and NFS Ascent®.
Services
Services
income for the three months ended December 31, 2022 was $5,871,805 compared to $4,142,762 for the three months ended December 31, 2021
reflecting an increase of $1,729,043 with an increase in constant currency of $2,785,551. The increase is primarily due to services provided
for ongoing implementations plus additional change requests.
Gross
Profit
The
gross profit was $3,142.463, for the three months ended December 31, 2022 compared with $7,642,587 for the three months ended December
31, 2021. This is a decrease of $4,500,124 with a decrease in constant currency of $4,368,030. The gross profit percentage for the three
months ended December 31, 2022 also decreased to 25.4% from 49.4% for the three months ended December 31, 2021. The cost of sales was
$9,247,895 for the three months ended December 31, 2022 compared to $7,830,375 for the three months ended December 31, 2021 for an increase
of $1,417,520 and on a constant currency basis an increase of $3,496,455. As a percentage of sales, cost of sales increased from 50.6%
for the three months ended December 31, 2021 to 74.6% for the three months ended December 31, 2022.
Salaries
and consultant fees increased by $1,280,254 from $5,661,917 for the three months ended December 31, 2021 to $6,942,171 for the three
months ended December 31, 2022 and on a constant currency basis increased by $2,839,566. The increase is due to annual salary raises
and new hirings. As a percentage of sales, salaries and consultant expense increased from 36.6% for the three months ended December 31,
2021 to 56.0% for the three months ended December 31, 2022.
Travel
expense was $635,298 for the three months ended December 31, 2022 compared to $282,836 for the three months ended December 31, 2021 for
an increase of $352,462 with an increase in constant currency of $495,136. The increase in travel expense is due to the increase in travel
as countries begin lifting travel restrictions.
Depreciation
and amortization expense decreased to $693,278 compared to $728,868 for the three months ended December 31, 2021 or a decrease of $35,590
and on a constant currency basis an increase of $157,621.
Other
costs decreased to $977,148 for the three months ended December 31, 2022 compared to $1,156,754 for the three months ended December 31,
2021 or a decrease of $179,606 and on a constant currency basis an increase of $4,132.
Operating
Expenses
Operating
expenses were $6,188,977 for the three months ended December 31, 2022 compared to $5,988,719, for the three months ended December 31,
2021 for an increase of 3.3% or $200,258 and on a constant currency basis an increase of 20.4% or $1,222,100. As a percentage of sales,
it increased from 38.7% to 50.0%. The increase in operating expenses was primarily due to increases in selling expenses and research
and development costs offset by a decrease in general and administrative expenses.
Selling
expenses were $2,007,462 for the three months ended December 31, 2022 compared to $1,807,162, for the three months ended December 31,
2021 for an increase of $200,300 and on a constant currency basis an increase of $531,194.
General
and administrative expenses were $3,510,389 for the three months ended December 31, 2022 compared to $3,733,303 at December 31, 2021
or a decrease of $222,914 or 6.0% and on a constant currency basis an increase of $303,647 or 8.1%. During the three months ended December
31, 2022, salaries decreased by approximately $22,012 and increased $327,696 on a constant currency basis, and other general and administrative
expenses decreased approximately $200,902 or decreased by $24,049 on a constant currency basis.
Research
and development cost was $472,904 for the three months ended December 31, 2022 compared to $235,390, for the three months ended December
31, 2021 for an increase of $237,514 and on a constant currency basis an increase of $357,628.
Income/Loss
from Operations
Loss
from operations was $3,046,514 for the three months ended December 31, 2022 compared to income from operations of $1,653,868 for the
three months ended December 31, 2021. This represents an increase in the loss of $4,700,382 with an increase in the loss of $5,590,130
on a constant currency basis for the three months ended December 31, 2022 compared with the three months ended December 31, 2021. As
a percentage of sales, loss from operations was 24.6% for the three months ended December 31, 2022 compared to income from operations
of 10.7% for the three months ended December 31, 2021.
Other
Income and Expense
Other
income was $864,607 for the three months ended December 31, 2022 compared to $986,186 for the three months ended December 31, 2021. This
represents a decrease of $121,579 with an increase of $88,885 on a constant currency basis. The decrease is primarily due to the foreign
currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency
fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and
the Euro. During the three months ended December 31, 2022, we recognized a gain of $657,223 in foreign currency exchange transactions
compared to $901,016 for the three months ended December 31, 2021. During the three months ended December 31, 2022, the value of the
U.S. dollar decreased 0.7% and the Euro increased 8.5%, compared to the PKR. During the three months ended December 31, 2021, the value
of the U.S. dollar and the Euro increased 3.8% and 1.6%, respectively, compared to the PKR.
Non-controlling
Interest
For
the three months ended December 31, 2022, the net loss attributable to non-controlling interest was $309,037, compared to net income
of $1,031,763 for the three months ended December 31, 2021. The decrease in non-controlling interest is primarily due to the decrease
in net income of NetSol PK.
Net
loss attributable to NetSol
The
net loss was $2,092,926 for the three months ended December 31, 2022 compared to net income of $1,406,785 for the three months ended
December 31, 2021. This is a decrease of $3,499,711 with a decrease of $4,142,007 on a constant currency basis, compared to the prior
year. For the three months ended December 31, 2022, net loss per share was $0.19 for basic and diluted shares compared to net income
per share of $0.13 for basic and diluted shares for the three months ended December 31, 2021.
Six
Months Ended December 31, 2022 Compared to the Six Months Ended December 31, 2021
The
following table sets forth the items in our unaudited condensed consolidated statement of operations for the six months ended December
31, 2022 and 2021 as a percentage of revenues.
|
|
For the Six Months |
|
|
Ended December 31, |
|
|
2022 | | |
% | | |
2021 | | |
% | |
Net Revenues: |
|
| | | |
| | | |
| | | |
| | |
License fees |
|
$ | 265,844 | | |
| 1.1 | % | |
$ | 1,966,047 | | |
| 6.8 | % |
Subscription and support |
|
| 12,519,503 | | |
| 49.9 | % | |
| 15,605,258 | | |
| 54.0 | % |
Services |
|
| 12,311,130 | | |
| 49.1 | % | |
| 11,322,418 | | |
| 39.2 | % |
Total net revenues |
|
| 25,096,477 | | |
| 100.0 | % | |
| 28,893,723 | | |
| 100.0 | % |
|
|
| | | |
| | | |
| | | |
| | |
Cost of revenues: |
|
| | | |
| | | |
| | | |
| | |
Salaries and consultants |
|
| 13,028,906 | | |
| 51.9 | % | |
| 11,324,327 | | |
| 39.2 | % |
Travel |
|
| 1,027,643 | | |
| 4.1 | % | |
| 496,968 | | |
| 1.7 | % |
Depreciation and amortization |
|
| 1,347,327 | | |
| 5.4 | % | |
| 1,494,603 | | |
| 5.2 | % |
Other |
|
| 2,298,141 | | |
| 9.2 | % | |
| 2,492,215 | | |
| 8.6 | % |
Total cost of revenues |
|
| 17,702,017 | | |
| 70.5 | % | |
| 15,808,113 | | |
| 54.7 | % |
|
|
| | | |
| | | |
| | | |
| | |
Gross profit |
|
| 7,394,460 | | |
| 29.5 | % | |
| 13,085,610 | | |
| 45.3 | % |
Operating expenses: |
|
| | | |
| | | |
| | | |
| | |
Selling and marketing |
|
| 3,769,639 | | |
| 15.0 | % | |
| 3,427,155 | | |
| 11.9 | % |
Depreciation and amortization |
|
| 389,176 | | |
| 1.6 | % | |
| 427,135 | | |
| 1.5 | % |
General and administrative |
|
| 7,235,819 | | |
| 28.8 | % | |
| 7,706,442 | | |
| 26.7 | % |
Research and development cost |
|
| 942,531 | | |
| 3.8 | % | |
| 510,620 | | |
| 1.8 | % |
Total operating expenses |
|
| 12,337,165 | | |
| 49.2 | % | |
| 12,071,352 | | |
| 41.8 | % |
|
|
| | | |
| | | |
| | | |
| | |
Loss from operations |
|
| (4,942,705 | ) | |
| -19.7 | % | |
| 1,014,258 | | |
| 3.5 | % |
Other income and (expenses) |
|
| | | |
| | | |
| | | |
| | |
Gain (loss) on sale of assets |
|
| 28,344 | | |
| 0.1 | % | |
| (190,725 | ) | |
| -0.7 | % |
Interest expense |
|
| (323,973 | ) | |
| -1.3 | % | |
| (191,821 | ) | |
| -0.7 | % |
Interest income |
|
| 741,763 | | |
| 3.0 | % | |
| 759,386 | | |
| 2.6 | % |
Gain (loss) on foreign currency exchange transactions |
|
| 1,972,928 | | |
| 7.9 | % | |
| 2,185,164 | | |
| 7.6 | % |
Share of net loss from equity investment |
|
| 5,133 | | |
| 0.0 | % | |
| (240,783 | ) | |
| -0.8 | % |
Other income (expense) |
|
| 91,980 | | |
| 0.4 | % | |
| 22,697 | | |
| 0.1 | % |
Total other income (expenses) |
|
| 2,516,175 | | |
| 10.0 | % | |
| 2,343,918 | | |
| 8.1 | % |
|
|
| | | |
| | | |
| | | |
| | |
Net income (loss) before income taxes |
|
| (2,426,530 | ) | |
| -9.7 | % | |
| 3,358,176 | | |
| 11.6 | % |
Income tax provision |
|
| (413,404 | ) | |
| -1.6 | % | |
| (369,133 | ) | |
| -1.3 | % |
Net income (loss) |
|
| (2,839,934 | ) | |
| -11.3 | % | |
| 2,989,043 | | |
| 10.3 | % |
Non-controlling interest |
|
| 126,279 | | |
| 0.5 | % | |
| (1,394,289 | ) | |
| -4.8 | % |
Net income (loss) attributable to NetSol |
|
$ | (2,713,655 | ) | |
| -10.8 | % | |
$ | 1,594,754 | | |
| 5.5 | % |
|
|
| | | |
| | | |
| | | |
| | |
Net income (loss) per share: |
|
| | | |
| | | |
| | | |
| | |
Net income (loss) per common share |
|
| | | |
| | | |
| | | |
| | |
Basic |
|
$ | (0.24 | ) | |
| | | |
$ | 0.14 | | |
| | |
Diluted |
|
$ | (0.24 | ) | |
| | | |
$ | 0.14 | | |
| | |
|
|
| | | |
| | | |
| | | |
| | |
Weighted average number of shares outstanding |
|
| | | |
| | | |
| | | |
| | |
Basic |
|
| 11,263,869 | | |
| | | |
| 11,249,372 | | |
| | |
Diluted |
|
| 11,263,869 | | |
| | | |
| 11,249,372 | | |
| | |
A
significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions
as described in Note 18 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening
of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also
increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to
foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies
other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing
to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing
how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from
one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period
results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported
currency and in constant currency.
| |
| | |
| | |
| | |
| | |
Favorable | | |
Favorable | | |
Total | |
| |
| | |
| | |
| | |
| | |
(Unfavorable) | | |
(Unfavorable) | | |
Favorable | |
| |
For the Six Months | | |
| | |
Change in | | |
Change due to | | |
(Unfavorable) | |
| |
Ended December 31, | | |
| | |
Constant | | |
Currency | | |
Change as | |
| |
2022 | | |
% | | |
2021 | | |
% | | |
Currency | | |
Fluctuation | | |
Reported | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net Revenues: | |
$ | 25,096,477 | | |
| 100.0 | % | |
$ | 28,893,723 | | |
| 100.0 | % | |
$ | 1,227,120 | | |
$ | (5,024,366 | ) | |
$ | (3,797,246 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| 17,702,017 | | |
| 70.5 | % | |
| 15,808,113 | | |
| 54.7 | % | |
| (6,331,372 | ) | |
| 4,437,468 | | |
| (1,893,904 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 7,394,460 | | |
| 29.5 | % | |
| 13,085,610 | | |
| 45.3 | % | |
| (5,104,252 | ) | |
| (586,898 | ) | |
| (5,691,150 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| 12,337,165 | | |
| 49.2 | % | |
| 12,071,352 | | |
| 41.8 | % | |
| (2,525,894 | ) | |
| 2,260,081 | | |
| (265,813 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
$ | (4,942,705 | ) | |
| -19.7 | % | |
$ | 1,014,258 | | |
| 3.5 | % | |
$ | (7,630,146 | ) | |
$ | 1,673,183 | | |
$ | (5,956,963 | ) |
Net
revenues for the six months ended December 31, 2022 and 2021 are broken out among the segments as follows:
| |
2022 | | |
2021 | |
| |
Revenue | | |
% | | |
Revenue | | |
% | |
| |
| | |
| | |
| | |
| |
North America | |
$ | 2,723,140 | | |
| 10.9 | % | |
$ | 1,990,613 | | |
| 6.9 | % |
Europe | |
| 5,093,036 | | |
| 20.3 | % | |
| 5,394,993 | | |
| 18.7 | % |
Asia-Pacific | |
| 17,280,301 | | |
| 68.9 | % | |
| 21,508,117 | | |
| 74.4 | % |
Total | |
$ | 25,096,477 | | |
| 100.0 | % | |
$ | 28,893,723 | | |
| 100.0 | % |
Revenues
License
fees
License
fees for the six months ended December 31, 2022 were $265,844 compared to $1,966,047 for the six months ended December 31, 2021 reflecting
a decrease of $1,700,203 with a decrease in constant currency of $1,625,032. During the six months ended December 31, 2022, we recognized
approximately $188,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent®
product. During the six months ended December 31, 2021, we recognized approximately $1,920,000 related to a new agreement with DTFS for
the sale of both our legacy and Ascent product® for their new business segment in the Japanese and Australian markets.
Subscription
and support
Subscription
and support fees for the six months ended December 31, 2022 were $12,519,503 compared to $15,605,258 for the six months ended December
31, 2021 reflecting a decrease of $3,085,755 with a decrease in constant currency of $686,454. The reason for the decrease in subscription
and support revenue is that in the six months ended December 31, 2021, we recorded a one-time post contract support revenue of approximately
$3,480,000 using the catch-up approach. Subscription and support fees begin once a customer has “gone live” with our product.
Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS
legacy products and NFS Ascent®.
Services
Services
income for the six months ended December 31, 2022 was $12,311,130 compared to $11,322,418 for the six months ended December 31, 2021
reflecting an increase of $988,712 with an increase in constant currency of $3,538,606. The increase is primarily due to services provided
for ongoing implementations plus additional change requests.
Gross
Profit
The
gross profit was $7,394,460, for the six months ended December 31, 2022 compared with $13,085,610 for the six months ended December 31,
2021. This is a decrease of $5,691,150 with a decrease in constant currency of $5,104,252. The gross profit percentage for the six months
ended December 31, 2022 also decreased to 29.5% from 45.3% for the six months ended December 31, 2021. The cost of sales was $17,702,017
for the six months ended December 31, 2022 compared to $15,808,113 for the six months ended December 31, 2021 for an increase of $1,893,904
and on a constant currency basis an increase of $6,331,372. As a percentage of sales, cost of sales increased from 54.7% for the six
months ended December 31, 2021 to 70.5% for the six months ended December 31, 2022.
Salaries
and consultant fees increased by $1,704,579 from $11,324,327 for the six months ended December 31, 2021 to $13,028,906 for the six months
ended December 31, 2022 and on a constant currency basis increased by $4,910,006. The increase is due to annual salary raises and new
hirings. As a percentage of sales, salaries and consultant expense increased from 39.2% for the six months ended December 31, 2021 to
51.9% for the six months ended December 31, 2022.
Travel
expense was $1,027,643 for the six months ended December 31, 2022 compared to $496,968 for the six months ended December 31, 2021 for
an increase of $530,675 with an increase in constant currency of $787,416. The increase in travel expense is due to the increase in travel
as countries begin lifting travel restrictions.
Depreciation
and amortization expense decreased to $1,347,327 compared to $1,494,603 for the six months ended December 31, 2021 or a decrease of $147,276
and on a constant currency basis an increase of $278,982.
Other
costs decreased to $2,298,141 for the six months ended December 31, 2022 compared to $2,492,215 for the six months ended December 31,
2021 or a decrease of $194,074 and on a constant currency basis an increase of $354,968. The increase on a constant currency basis is
mainly due to increases in computer costs.
Operating
Expenses
Operating
expenses were $12,337,165 for the six months ended December 31, 2022 compared to $12,071,352, for the six months ended December 31, 2021
for an increase of 2.2% or $265,813 and on a constant currency basis an increase of 9.3% or $2,525,894. As a percentage of sales, it
increased from 41.8% to 49.2%. The increase in operating expenses was primarily due to increases in selling expenses and research and
development costs offset by a decrease in general and administrative expenses.
Selling
expenses were $3,769,639 for the six months ended December 31, 2022 compared to $3,427,155, for the six months ended December 31, 2021
for an increase of $342,484 and on a constant currency basis an increase of $1,044,521.
General
and administrative expenses were $7,235,819 for the six months ended December 31, 2022 compared to $7,706,442 at December 31, 2021 or
a decrease of $470,623 or 6.1% and on a constant currency basis an increase of $719,580 or 6.1%. During the six months ended December
31, 2022, salaries decreased by approximately $311,994 and increased $416,313 on a constant currency basis, and other general and administrative
expenses decreased approximately $158,629 and increased $303,267 on a constant currency basis.
Research
and development cost was $942,531 for the six months ended December 31, 2022 compared to $510,620, for the six months ended December
31, 2021 for an increase of $431,911 and on a constant currency basis an increase of $704,845.
Income/Loss
from Operations
Loss
from operations was $4,942,705 for the six months ended December 31, 2022 compared to income from operations of $1,014,258 for the six
months ended December 31, 2021. This represents an increase in the loss of $5,956,963 with an increase in the loss of $7,630,146 on a
constant currency basis for the six months ended December 31, 2022 compared with the six months ended December 31, 2021. As a percentage
of sales, loss from operations was 19.7% for the six months ended December 31, 2022 compared to income from operations of 3.5% for the
six months ended December 31, 2021.
Other
Income and Expense
Other
income was $2,516,175 for the six months ended December 31, 2022 compared to $2,343,918 for the six months ended December 31, 2021. This
represents an increase of $172,257 with an increase of $968,923 on a constant currency basis. The increase is due to a decrease in the
loss of sale of assets of $219,069 and on a constant currency basis $228,787, a decrease in the loss on equity investments of $245,916
and on a constant currency basis $246,374, offset by a decrease in the gain on foreign currency exchange transactions of $212,236 and
on a constant currency basis an increase in gain of $428,568.
Non-controlling
Interest
For
the six months ended December 31, 2022, the net loss attributable to non-controlling interest was $126,279, compared to net income of
$1,394,289 for the six months ended December 31, 2021. The decrease in non-controlling interest is primarily due to the decrease in net
income of NetSol PK.
Net
loss attributable to NetSol
The
net loss was $2,713,655 for the six months ended December 31, 2022 compared to net income of $1,594,754 for the six months ended December
31, 2021. This is a decrease of $4,308,409 with a decrease of $5,233,005 on a constant currency basis, compared to the prior year. For
the six months ended December 31, 2022, net loss per share was $0.24 for basic and diluted shares compared to net income per share of
$0.14 for basic and diluted shares for the six months ended December 31, 2021.
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.
Our
reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable
GAAP measures for the three and six months ended December 31, 2022 and 2021 are as follows:
| |
For the Three Months | |
|
For the Six Months | |
| |
Ended December 31, | |
|
Ended December 31, | |
| |
2022 | | |
2021 | |
|
2022 | | |
2021 | |
| |
| | |
| |
|
| | |
| |
Net Income (loss) attributable to NetSol | |
$ | (2,092,926 | ) | |
$ | 1,406,785 | |
|
$ | (2,713,655 | ) | |
$ | 1,594,754 | |
Non-controlling interest | |
| (309,037 | ) | |
| 1,031,763 | |
|
| (126,279 | ) | |
| 1,394,289 | |
Income taxes | |
| 220,056 | | |
| 201,506 | |
|
| 413,404 | | |
| 369,133 | |
Depreciation and amortization | |
| 891,500 | | |
| 941,732 | |
|
| 1,736,503 | | |
| 1,921,738 | |
Interest expense | |
| 202,363 | | |
| 90,808 | |
|
| 323,973 | | |
| 191,821 | |
Interest (income) | |
| (309,906 | ) | |
| (316,253 | ) |
|
| (741,763 | ) | |
| (759,386 | ) |
EBITDA | |
$ | (1,397,950 | ) | |
$ | 3,356,341 | |
|
$ | (1,107,817 | ) | |
$ | 4,712,349 | |
Add back: | |
| | | |
| | |
|
| | | |
| | |
Non-cash stock-based compensation | |
| 64,333 | | |
| 25,289 | |
|
| 146,167 | | |
| 28,292 | |
Adjusted EBITDA, gross | |
$ | (1,333,617 | ) | |
$ | 3,381,630 | |
|
$ | (961,650 | ) | |
$ | 4,740,641 | |
Less non-controlling interest (a) | |
| 7,363 | | |
| (1,293,037 | ) |
|
| (392,172 | ) | |
| (1,881,916 | ) |
Adjusted EBITDA, net | |
$ | (1,326,254 | ) | |
$ | 2,088,593 | |
|
$ | (1,353,822 | ) | |
$ | 2,858,725 | |
| |
| | | |
| | |
|
| | | |
| | |
Weighted Average number of shares outstanding | |
| | | |
| | |
|
| | | |
| | |
Basic | |
| 11,270,199 | | |
| 11,244,539 | |
|
| 11,263,869 | | |
| 11,249,372 | |
Diluted | |
| 11,270,199 | | |
| 11,244,539 | |
|
| 11,263,869 | | |
| 11,249,372 | |
| |
| | | |
| | |
|
| | | |
| | |
Basic adjusted EBITDA | |
$ | (0.12 | ) | |
$ | 0.19 | |
|
$ | (0.12 | ) | |
$ | 0.25 | |
Diluted adjusted EBITDA | |
$ | (0.12 | ) | |
$ | 0.19 | |
|
$ | (0.12 | ) | |
$ | 0.25 | |
| |
| | | |
| | |
|
| | | |
| | |
(a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows | |
| | | |
| | |
|
| | | |
| | |
| |
| | | |
| | |
|
| | | |
| | |
Net Income (loss) attributable to non-controlling interest | |
$ | (309,037 | ) | |
$ | 1,031,763 | |
|
$ | (126,279 | ) | |
$ | 1,394,289 | |
Income Taxes | |
| 68,406 | | |
| 61,761 | |
|
| 128,316 | | |
| 114,427 | |
Depreciation and amortization | |
| 255,584 | | |
| 273,822 | |
|
| 493,917 | | |
| 561,453 | |
Interest expense | |
| 62,736 | | |
| 26,682 | |
|
| 100,132 | | |
| 56,082 | |
Interest (income) | |
| (93,012 | ) | |
| (101,385 | ) |
|
| (225,501 | ) | |
| (244,729 | ) |
EBITDA | |
$ | (15,323 | ) | |
$ | 1,292,643 | |
|
$ | 370,585 | | |
$ | 1,881,522 | |
Add back: | |
| | | |
| | |
|
| | | |
| | |
Non-cash stock-based compensation | |
| 7,960 | | |
| 394 | |
|
| 21,587 | | |
| 394 | |
Adjusted EBITDA of non-controlling interest | |
$ | (7,363 | ) | |
$ | 1,293,037 | |
|
$ | 392,172 | | |
$ | 1,881,916 | |
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash position was $20,946,722 at December 31, 2022, compared to $23,963,797 at June 30, 2022.
Net
cash provided by operating activities was $1,689,543 for the six months ended December 31, 2022 compared to net cash used in operating
activities of $3,036,634 for the six months ended December 31, 2021. At December 31, 2022, we had current assets of $43,076,510 and current
liabilities of $19,358,221. We had accounts receivable of $4,595,675 at December 31, 2022 compared to $8,669,202 at June 30, 2022. We
had revenues in excess of billings of $15,389,951 at December 31, 2022 compared to $15,425,377 at June 30, 2022 of which $604,358 and
$853,601 is shown as long term as of December 31, 2022 and June 30, 2022, respectively. The long-term portion was discounted by $9,376
and $28,339 at December 31, 2022 and June 30, 2022, respectively, using the discounted cash flow method with interest rates ranging from
4.65% to 6.25%. During the six months ended December 31, 2022, our revenues in excess of billings were reclassified to accounts receivable
pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings
decreased by $4,108,953 from $24,094,579 at June 30, 2022 to $19,985,626 at December 31, 2022. Accounts payable and accrued expenses,
and current portions of loans and lease obligations amounted to $7,423,248 and $7,386,750, respectively at December 31, 2022. Accounts
payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,813,541 and $8,567,145, respectively
at June 30, 2022.
The
average days sales outstanding for the six months ended December 31, 2022 and 2021 were 162 and 137 days, respectively, for each period.
The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and
revenues in excess of billings.
Net
cash used in investing activities was $1,182,042 for the six months ended December 31, 2022, compared to $572,180 for the six months
ended December 31, 2021. We had purchases of property and equipment of $1,252,325 compared to $773,953 for the six months ended December
31, 2021.
Net
cash used in financing activities was $537,180 for the six months ended December 31, 2022, compared to $626,955 for the six months ended
December 31, 2021. For the six months ended December 31, 2021, we purchased 22,510 shares of our own stock for $100,106. The six months
ended December 31, 2021 included the cash inflow of $188,272 from bank proceeds. During the six months ended December 31, 2022, we had
net payments for bank loans and finance leases of $537,180 compared to $715,121 for the six months ended December 31, 2021. We are operating
in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various
financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity
dates as described in Note 15 of the financial statements. We are in compliance with the covenants of the financial arrangements and
there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective
due dates from its own sources.
We
typically fund the cash requirements for our operations in the U.S. through our license, services, and subscription and support agreements,
intercompany charges for corporate services, and through the exercise of options and warrants. As of December 31, 2022, we had approximately
$20.9 million of cash, cash equivalents and marketable securities of which approximately $18.6 million is held by our foreign subsidiaries.
As of June 30, 2022, we had approximately $24.0 million of cash, cash equivalents and marketable securities of which approximately $22.8
million was held by our foreign subsidiaries.
We
remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash
reserves internally and reduced reliance on external capital raise.
As
a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements
for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2.5 million for APAC, U.S. and Europe new
business development activities and infrastructure enhancements, which we expect to provide from current operations.
While
there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available
will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties.
However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.
Financial
Covenants
Our
UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($361,446) which requires that the aggregate amount of
invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days
old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for
export refinance from Askari Bank Limited amounting to Rupees 500 million ($2,208,285) and a running finance facility of Rupees 53 million
($236,728). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million
($3,974,914). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol
PK also has an approved export refinance facility of Rs. 380 million ($1,678,297) from Samba Bank Limited. During the tenure of loan,
these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage
ratio of 2 times, and a debt service coverage ratio of 4 times.
As
of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the
borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in
subsidiaries, they may have to repay their respective credit facilities.
CRITICAL
ACCOUNTING POLICIES
Our
condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical
accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments.
Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to
variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying
factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of
operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry.
We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate
manner. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2022.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements,
see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.