Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The
Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking,
and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in
exchange for fees from customers.
The
consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The
year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of America.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year
ended June 30, 2022. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the
interim periods are not indicative of annual results.
The
accompanying consolidated financial statements include the accounts of the Company as follows:
Wholly
owned Subsidiaries
NetSol
Technologies Americas, Inc. (“NTA”)
NetSol
Connect (Private), Ltd. (“Connect”)
NetSol
Technologies Australia Pty Ltd. (“Australia”)
NetSol
Technologies Europe Limited (“NTE”)
NTPK
(Thailand) Co. Limited (“NTPK Thailand”)
NetSol
Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)
Tianjin
NuoJinZhiCheng Co., Ltd (“Tianjin”)
Ascent
Europe Ltd. (“AEL”)
Virtual
Lease Services Holdings Limited (“VLSH”)
Virtual
Lease Services Limited (“VLS”)
Virtual
Lease Services (Ireland) Limited (“VLSIL”)
Majority-owned
Subsidiaries
NetSol
Technologies, Ltd. (“NetSol PK”)
NetSol
Innovation (Private) Limited (“NetSol Innovation”)
NetSol
Technologies Thailand Limited (“NetSol Thai”)
OTOZ,
Inc. (“OTOZ”)
OTOZ
(Thailand) Limited (“OTOZ Thai”)
NOTE
2 – ACCOUNTING POLICIES
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life
of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating
lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results
could differ from those estimates.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Concentration
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial
instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances
at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located
in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances
maintained in China are insured for RMB 500,000 ($70,323) in each bank and in the UK for GBP 85,000 ($94,444) in each bank. The Company
maintains three bank accounts in China and nine bank accounts in the UK. As of September 30, 2022, and June 30, 2022, the Company had
uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $18,393,548 and $22,758,963,
respectively. The Company has not experienced any losses in such accounts.
The
Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy.
The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated
with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Fair
Value of Financial Instruments
The
Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and
Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively
short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based
on current interest rates for instruments with similar characteristics.
The
three levels of valuation hierarchy are defined as follows:
Level
1: |
Valuations
consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. |
|
|
Level
2: |
Valuations
rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
|
|
Level
3: |
Valuations
are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement
and are less observable and thus have the lowest priority. |
The
Company’s financial assets that were measured at fair value on a recurring basis as of September 30, 2022, were as follows:
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 | |
$ | - | | |
$ | - | | |
$ | 714,458 | | |
$ | 714,458 | |
Total | |
$ | - | | |
$ | - | | |
$ | 714,458 | | |
$ | 714,458 | |
The
Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2022, were as follows:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total Assets | |
Revenues in excess of billings - long term | |
$ | - | | |
$ | - | | |
$ | 853,601 | | |
$ | 853,601 | |
Total | |
$ | - | | |
$ | - | | |
$ | 853,601 | | |
$ | 853,601 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
The
reconciliation from June 30, 2022 to September 30, 2022 is as follows:
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 | |
| - | | |
| 9,369 | | |
| 9,369 | |
Transfers to short term | |
| (93,245 | ) | |
| - | | |
| (93,245 | ) |
Effect of Translation Adjustment | |
| (55,581 | ) | |
| 314 | | |
| (55,267 | ) |
Balance at September 30, 2022 | |
$ | 733,114 | | |
$ | (18,656 | ) | |
$ | 714,458 | |
Management
analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from
Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value
at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value
of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall
fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option
derivatives are valued using the Black-Scholes model.
Recent
Accounting Standards:
In
August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt
instruments and convertible preferred stock and results in fewer instruments with embedded conversion features being separately recognized
from the host contract as compared with current standards. Those instruments that do not have a separately recognized embedded conversion
feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense
on a periodic basis. Additionally, the ASU amends the calculation of the share dilution impact related to a conversion feature and eliminates
the treasury method as an option. For instruments that do not have a component mandatorily settled in cash, the change will likely result
in a higher amount of share dilution in the calculation of earnings per share. This ASU is effective for fiscal years (and interim periods
within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of fiscal 2023. The adoption
of ASU No. 2020-06 did not have a material impact on the Company’s financial condition, results of operations or disclosures.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized
in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer
had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within
those years, with early adoption permitted. The Company does not expect the standard to have a material effect on its consolidated financial
statements.
All
other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
NOTE
3 – REVENUE RECOGNITION
The
Company determines revenue recognition through the following steps:
● |
Identification
of the contract, or contracts, with a customer; |
● |
Identification
of the performance obligations in the contract; |
● |
Determination
of the transaction price; |
● |
Allocation
of the transaction price to the performance obligations in the contract; and |
● |
Recognition
of revenue when, or as, the Company satisfies a performance obligation. |
The
Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent
(net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other
taxes collected from customers and remitted to government authorities.
The
Company has two primary revenue streams: core revenue and non-core revenue.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Core
Revenue
The
Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and
consulting services, and (3) subscription and support, which includes post contract support, of its enterprise software solutions for
the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises
licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers
who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model,
the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right
to take possession of the software.
Non-Core
Revenue
The
Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet
services.
Performance
Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under
Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance
obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The
Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or
licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase
post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically
post contract support renewals, subscription renewals and services engagements.
For
contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”)
for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance
obligation using its best estimate for the SSP.
Software
Licenses
Transfer
of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment
terms tend to vary by region, but its standard payment terms are within 30 days of invoice.
Subscription
Subscription
revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available
to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance
in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Post
Contract Support
Revenue
from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the
maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software
product updates and patches released during the term of the support period on a when-and-if available basis. The Company’s customers
purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew
their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional
Services
Revenue
from professional services is typically comprised of implementation, development, data migration, training or other consulting services.
Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation
to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes
revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services
are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies
judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external
factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement
changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are
typically due 30 days after invoice.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
BPO
and Internet Services
Revenue
from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a
percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly
in advance to the customers and revenue is recognized ratably overtime on a monthly basis.
Disaggregated
Revenue
The
Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The
Company’s disaggregated revenue by category is as follows:
SCHEDULE OF DISAGGREGATED REVENUE BY CATEGORY
| |
| 1 | | |
| 2 | |
| |
For the Three Months | |
| |
Ended September 30, | |
| |
2022 | | |
2021 | |
Core: | |
| | | |
| | |
License | |
$ | 249,960 | | |
$ | 10,716 | |
Subscription and support | |
| 6,016,834 | | |
| 6,230,389 | |
Services | |
| 5,421,366 | | |
| 5,856,279 | |
Total core revenue, net | |
| 11,688,160 | | |
| 12,097,384 | |
| |
| | | |
| | |
Non-Core: | |
| | | |
| | |
Services | |
| 1,017,959 | | |
| 1,323,377 | |
Total non-core revenue, net | |
| 1,017,959 | | |
| 1,323,377 | |
| |
| | | |
| | |
Total net revenue | |
$ | 12,706,119 | | |
$ | 13,420,761 | |
Significant
Judgments
Due
to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements
may be dependent on contract-specific terms and may vary in some instances.
Judgment
is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone
basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly
observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information
that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including
its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic
conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
The
most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s
software license, and the (2) the method of recognizing revenue for installation/customization, and other services.
The
stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting
prices to customers. Although the Company has no history of selling its software separately from post contract support and other services,
the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing
those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s
software, since the Company can observe instances where a customer had a particular component of the Company’s software that was
essentially priced separate from other goods and services that the Company delivered to that customer.
The
Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that
the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured
as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization
work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Revenue
is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate
performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred
or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects.
A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and
testing requirement changes.
If
a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement,
such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment
to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single
arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation
of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
If
a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity
will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the
Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price
only when it is probable that a significant reversal in the amount of revenue recognized will not occur.
Contract
Balances
The
timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables,
contract assets (revenues in excess of billings), or contract liabilities (unearned revenue) on the Company’s Consolidated Balance
Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the
right to consideration. The Company records unearned revenue when the Company has received or has the right to receive consideration
but has not yet transferred goods or services to the customer.
The
revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion
of a milestone.
The
Company’s revenues in excess of billings and unearned revenue are as follows:
SCHEDULE OF REVENUES IN EXCESS OF BILLINGS AND DEFERRED REVENUE
| |
| 1 | | |
| 2 | |
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | | |
| | |
Revenues in excess of billings | |
$ | 14,061,982 | | |
$ | 15,425,377 | |
| |
| | | |
| | |
Unearned revenue | |
$ | 3,982,198 | | |
$ | 4,901,562 | |
During
the three months ended September 30, 2022, the Company recognized revenue of $2,108,715 that was included in the unearned revenue balance
at the beginning of the period. All other activity in unearned revenue is due to the timing of invoicing in relation to the timing of
revenue recognition.
Revenue
allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied,
or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.
Contracted but unsatisfied performance obligations were approximately $38,252,000 as of September 30, 2022, of which the Company estimates
to recognize approximately $15,400,000 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual
revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors
that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not
entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing,
the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing
terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to
facilitate financing arrangements.
Unearned
Revenue
The
Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due
at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods
are included in accounts receivable and unearned revenue.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Practical
Expedients and Exemptions
There
are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s
disclosures. The Company has applied the following practical expedients:
●
|
The
Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the
transfer of the promised items to the customer. |
●
|
The
Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one
year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the
Consolidated Statement of Operations. |
●
|
The
Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue
at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements). |
Costs
to Obtain a Contract
The
Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company
incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise
enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to
as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to
perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts.
NOTE
4 – EARNINGS PER SHARE
Basic
earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method. During the three months ended September 30, 2022 and 2021, there
were no outstanding dilutive instruments.
NOTE
5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY
The
accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan
Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing and Tianjin use the
Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, use the U.S. dollar as the functional
currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated
at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive
loss in the stockholders’ equity section of the consolidated balance sheet were $42,281,135 and $39,363,085 as of September 30,
2022 and June 30, 2022, respectively. During the three months ended September 30, 2022 and 2021, comprehensive income (loss) in the consolidated
statements of comprehensive income (loss) included a translation loss attributable to NetSol of $2,918,050 and $2,145,405, respectively.
NOTE
6 – MAJOR CUSTOMERS
During
the three months ended September 30, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”)
were $3,591,807 and $1,469,147, respectively representing 28.3% and 11.6%, respectively of revenues. During the three months ended September
30, 2021, revenues from DFS and BMW were $3,542,284 and $891,679, respectively representing 26.4% and 6.6%, respectively of revenues.
The revenue from these customers is shown in the Asia – Pacific segment.
Accounts
receivable from DFS and BMW at September 30, 2022, were $600,925 and $132,392, respectively. Accounts receivable at June 30, 2022, were
$2,005,463 and $2,498,645, respectively. Revenues in excess of billings at September 30, 2022 were $1,804,728 and $2,533,172 for DFS
and BMW, respectively. Revenues in excess of billings at June 30, 2022, were $365,863 and $2,199,381 for DFS and BMW, respectively.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
NOTE
7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY
The
Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from
5% to 10% with various maturity dates. The convertible notes have conversion features which allow the Company to convert the notes into
shares of WRLD3D stock upon the occurrence of certain events. The Company has a security interest in all of WRLD3D’s personal property,
inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts and the proceeds thereof.
The
following table summarizes the convertible notes receivable from WRLD3D.
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 September 30, 2022 and June 30, 2022, which is included in “Other current assets”.
As of July 1, 2020, the Company stopped accruing interest.
NOTE
8 - OTHER CURRENT ASSETS
Other
current assets consisted of the following:
SCHEDULE OF OTHER CURRENT ASSETS
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Prepaid Expenses | |
$ | 1,356,902 | | |
$ | 1,389,370 | |
Advance Income Tax | |
| 199,320 | | |
| 202,783 | |
Employee Advances | |
| 90,550 | | |
| 87,627 | |
Security Deposits | |
| 331,301 | | |
| 236,909 | |
Other Receivables | |
| 61,614 | | |
| 21,581 | |
Other Assets | |
| 440,728 | | |
| 285,091 | |
Due From Related Party | |
| 1,243,633 | | |
| 1,243,633 | |
Total | |
| 3,724,048 | | |
| 3,466,994 | |
Less allowance for doubtful account | |
| (1,243,633 | ) | |
| (1,243,633 | ) |
Net Balance | |
$ | 2,480,415 | | |
$ | 2,223,361 | |
Due
from related party is the amount receivable from WRLD3D for which the Company has provided an allowance for credit loss for the full amount,
leaving a net balance of $0.
NOTE
9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM
Revenues
in excess of billings, net consisted of the following:
SCHEDULE OF REVENUE IN EXCESS OF BILLING
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Revenues in excess of billings - long term | |
$ | 733,114 | | |
$ | 881,940 | |
Present value discount | |
| (18,656 | ) | |
| (28,339 | ) |
Net Balance | |
$ | 714,458 | | |
$ | 853,601 | |
Pursuant
to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable
after one year. During the three months ended September 30, 2022 and 2021, the Company accreted $9,369 and $9,502, respectively, which
was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65%
to 6.25%.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
NOTE
10 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Office Furniture and Equipment | |
$ | 2,792,403 | | |
$ | 3,021,586 | |
Computer Equipment | |
| 11,147,529 | | |
| 11,388,856 | |
Assets Under Capital Leases | |
| 58,616 | | |
| 305,081 | |
Building | |
| 4,357,506 | | |
| 4,818,650 | |
Land | |
| 1,114,891 | | |
| 1,237,965 | |
Autos | |
| 2,411,407 | | |
| 2,503,990 | |
Improvements | |
| 215,538 | | |
| 175,560 | |
Subtotal | |
| 22,097,890 | | |
| 23,451,688 | |
Accumulated Depreciation | |
| (13,247,239 | ) | |
| (14,069,064 | ) |
Property and Equipment, Net | |
$ | 8,850,651 | | |
$ | 9,382,624 | |
For
the three months ended September 30, 2022 and 2021, depreciation expense totaled $522,183 and $539,722, respectively. Of these amounts,
$331,229 and $325,451, respectively, are reflected in cost of revenues.
Following
is a summary of fixed assets held under finance leases as of September 30, 2022 and June 30, 2022:
SUMMARY OF FIXED ASSETS HELD UNDER CAPITAL LEASES
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
Vehicles | |
$ | 58,616 | | |
$ | 305,081 | |
Total | |
| 58,616 | | |
| 305,081 | |
Less: Accumulated Depreciation - Net | |
| (13,073 | ) | |
| (145,658 | ) |
Fixed assets held under
finance leases, Total | |
$ | 45,543 | | |
$ | 159,423 | |
Finance
lease term and discount rate were as follows:
SCHEDULE OF FINANCE LEASE TERM
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Weighted average remaining lease term - Finance leases | |
| 2.55 Years | | |
| 2.39
Years | |
| |
| | | |
| | |
Weighted average discount rate - Finance leases | |
| 16.0 | % | |
| 12.5 | % |
NOTE
11 - LEASES
The
Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified
as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from
one year to 10 years.
The
Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange
for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These
leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12
months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities
represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized
at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included
as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable
for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental
borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease
term to obtain an asset of similar value.
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
The
Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The
Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the
carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.
The
Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset
and lease liability accounts.
Lease
expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable
payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result
in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted
based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual
value guarantees or restrictive covenants.
Supplemental
balance sheet information related to leases was as follows:
SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASE
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
Assets | |
| | | |
| | |
Operating lease assets, net | |
$ | 1,336,742 | | |
$ | 969,163 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current | |
| | | |
| | |
Operating | |
$ | 531,021 | | |
$ | 548,678 | |
Operating, Current | |
$ | 531,021 | | |
$ | 548,678 | |
Non-current | |
| | | |
| | |
Operating | |
| 836,891 | | |
| 447,260 | |
Operating, Non-current | |
| 836,891 | | |
| 447,260 | |
Total Lease Liabilities | |
$ | 1,367,912 | | |
$ | 995,938 | |
The
components of lease cost were as follows:
SCHEDULE OF COMPONENTS OF LEASE COST
| |
| 1 | | |
| 2 | |
| |
For the Three Months | |
| |
Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Amortization of finance lease assets | |
$ | 2,896 | | |
$ | 21,033 | |
Interest on finance lease obligation | |
| 1,807 | | |
| 4,936 | |
Operating lease cost | |
| 118,522 | | |
| 282,951 | |
Short term lease cost | |
| 66,636 | | |
| - | |
Sub lease income | |
| (7,812 | ) | |
| (9,155 | ) |
Total lease cost | |
$ | 182,049 | | |
$ | 299,765 | |
Lease
term and discount rate were as follows:
SCHEDULE OF LEASE TERM AND DISCOUNT RATE
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Weighted average remaining lease term - Operating leases | |
| 3.32
Years | | |
| 3.34
Years | |
| |
| | | |
| | |
Weighted average discount rate - Operating leases | |
| 3.9 | % | |
| 4.2 | % |
Supplemental
disclosures of cash flow information related to leases were as follows:
SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION RELATED TO LEASES
| |
| 1 | | |
| 2 | |
| |
For the Three Months | |
| |
Ended September 30 | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Operating cash flows related to operating leases | |
$ | 122,121 | | |
$ | 272,478 | |
| |
| | | |
| | |
Operating cash flows related to finance leases | |
$ | 1,807 | | |
$ | 3,502 | |
| |
| | | |
| | |
Financing cash flows related finance leases | |
$ | 3,679 | | |
$ | 48,908 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Maturities
of operating lease liabilities were as follows as of September 30, 2022:
SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES
| |
Amount | |
Within year 1 | |
$ | 569,691 | |
Within year 2 | |
| 381,217 | |
Within year 3 | |
| 323,713 | |
Within year 4 | |
| 138,102 | |
Within year 5 | |
| 28,237 | |
Thereafter | |
| 1,013 | |
Total Lease Payments | |
| 1,441,973 | |
Less: Imputed interest | |
| (74,061 | ) |
Present Value of lease liabilities | |
| 1,367,912 | |
Less: Current portion | |
| (531,021 | ) |
Non-Current portion | |
$ | 836,891 | |
The
Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease
agreements provide for a fixed base rent and are currently on a month-by-month basis. All leases are considered operating leases. There
are no rights to purchase the premises and no residual value guarantees. For the three months ended September 30, 2022 and 2021, the
Company received lease income of $7,812 and $9,155, respectively.
NOTE
12 – LONG TERM INVESTMENT
Drivemate – Related Party
The
Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate
Agreement”) whereby the Company purchased an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company purchased
5,469 preferred shares for $1,800,000 consisting of $500,000 cash to be paid over a two-year period and $1,300,000 to be provided in
services. The Company has paid the $500,000 in cash and has provided services of $1,300,000. Pursuant to the agreement, the number of
shares to be issued is adjusted as necessary to result in an equity ownership equal to 30% of the issued and outstanding shares at the
final payment date. As of September 30, 2022, the Company has been issued 8,178 shares equal to 30% of Drivemate. Per the Drivemate Agreement,
the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since
two of the four directors are appointed by the Company and the Company owns 30% of Drivemate; therefore, the Company accounts for the
investment using the equity method of accounting.
Under
the equity method of accounting, the Company recorded its share of net loss of $nil and $63,571 for the three months ended September
30, 2022 and 2021, respectively.
WRLD3D-Related
Party
On
March 2, 2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the
initial closing and $555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D,
for $2,777,778 which was earned by providing IT and enterprise software solutions.
Under
the equity method of accounting, the Company recorded its share of net loss of $nil and $97,394 for the three months ended September
30, 2022 and 2021, respectively.
The
following table reflects the above investments at September 30, 2022.
SCHEDULE OF LONG TERM INVESTMENT
| |
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
September
30, 2022
(Unaudited)
The
following table reflects the above investments at June 30, 2022.
| |
Drivemate | | |
WRLD3D | | |
Total | |
Gross investment | |
$ | 1,800,000 | | |
$ | 3,888,889 | | |
$ | 5,688,889 | |
Cumulative net loss on investment | |
| (740,632 | ) | |
| (3,238,647 | ) | |
| (3,979,279 | ) |
Cumulative other comprehensive income (loss) | |
| - | | |
| (650,242 | ) | |
| (650,242 | ) |
Net investment | |
$ | 1,059,368 | | |
$ | - | | |
$ | 1,059,368 | |
NOTE
13 - INTANGIBLE ASSETS
Intangible
assets consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Product Licenses - Cost | |
$ | 47,244,997 | | |
$ | 47,244,997 | |
Effect of Translation Adjustment | |
| (21,828,001 | ) | |
| (19,914,206 | ) |
Accumulated Amortization | |
| (24,306,379 | ) | |
| (25,743,121 | ) |
Net Balance | |
$ | 1,110,617 | | |
$ | 1,587,670 | |
Product
Licenses
Product
licenses include internally developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product
licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $1,110,617 will be amortized
over one year. Amortization expense for the three months ended September 30, 2022 and 2021 was $322,820 and $440,284, respectively.
NOTE
14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
| |
| | |
| |
Accounts Payable | |
$ | 1,192,101 | | |
$ | 1,175,527 | |
Accrued Liabilities | |
| 3,559,319 | | |
| 3,507,415 | |
Accrued Payroll | |
| 1,462,209 | | |
| 1,397,605 | |
Accrued Payroll Taxes | |
| 143,409 | | |
| 153,416 | |
Taxes Payable | |
| 398,392 | | |
| 328,755 | |
Other Payable | |
| 274,097 | | |
| 250,823 | |
Total | |
$ | 7,029,527 | | |
$ | 6,813,541 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
NOTE
15 – DEBTS
Notes
payable and finance leases consisted of the following:
SCHEDULE OF COMPONENTS OF NOTES PAYABLE AND CAPITAL LEASES
| |
| |
As of September 30, 2022 | |
| |
| |
| | |
Current | | |
Long-Term | |
Name | |
| |
Total | | |
Maturities | | |
Maturities | |
| |
| |
| | |
| | |
| |
D&O Insurance | |
(1) | |
$ | 34,344 | | |
$ | 34,344 | | |
$ | - | |
Bank Overdraft Facility | |
(2) | |
| - | | |
| - | | |
| - | |
Term Finance Facility | |
(3) | |
| 190,425 | | |
| 190,425 | | |
| - | |
Loan Payable Bank - Export Refinance | |
(4) | |
| 2,192,694 | | |
| 2,192,694 | | |
| - | |
Loan Payable Bank - Running Finance | |
(5) | |
| - | | |
| - | | |
| - | |
Loan Payable Bank - Export Refinance II | |
(6) | |
| 1,666,447 | | |
| 1,666,447 | | |
| - | |
Loan Payable Bank - Export Refinance III | |
(7) | |
| 3,069,772 | | |
| 3,069,772 | | |
| - | |
Sale and Leaseback Financing | |
(8) | |
| 407,166 | | |
| 144,372 | | |
| 262,794 | |
Term Finance Facility | |
(9) | |
| 24,348 | | |
| 16,966 | | |
| 7,382 | |
Insurance Financing | |
(10) | |
| 79,234 | | |
| 79,234 | | |
| - | |
| |
| |
| 7,664,430 | | |
| 7,394,254 | | |
| 270,176 | |
Subsidiary Finance Leases | |
(11) | |
| 54,998 | | |
| 32,718 | | |
| 22,280 | |
| |
| |
$ | 7,719,428 | | |
$ | 7,426,972 | | |
$ | 292,456 | |
| |
| |
As of June 30, 2022 | |
| |
| |
| | |
Current | | |
Long-Term | |
Name | |
| |
Total | | |
Maturities | | |
Maturities | |
| |
| |
| | |
| | |
| |
D&O Insurance | |
(1) | |
$ | 89,552 | | |
$ | 89,552 | | |
$ | - | |
Bank Overdraft Facility | |
(2) | |
| - | | |
| - | | |
| - | |
Term Finance Facility | |
(3) | |
| 423,101 | | |
| 423,101 | | |
| - | |
Loan Payable Bank - Export Refinance | |
(4) | |
| 2,434,749 | | |
| 2,434,749 | | |
| - | |
Loan Payable Bank - Running Finance | |
(5) | |
| - | | |
| - | | |
| - | |
Loan Payable Bank - Export Refinance II | |
(6) | |
| 1,850,409 | | |
| 1,850,409 | | |
| - | |
Loan Payable Bank - Export Refinance III | |
(7) | |
| 3,408,648 | | |
| 3,408,648 | | |
| - | |
Sale and Leaseback Financing | |
(8) | |
| 619,108 | | |
| 189,226 | | |
| 429,882 | |
Term Finance Facility | |
(9) | |
| 31,204 | | |
| 18,339 | | |
| 12,865 | |
Insurance Financing | |
(10) | |
| 118,026 | | |
| 118,026 | | |
| - | |
| |
| |
| 8,974,797 | | |
| 8,532,050 | | |
| 442,747 | |
Subsidiary Finance Leases | |
(11) | |
| 68,571 | | |
| 35,095 | | |
| 33,476 | |
| |
| |
$ | 9,043,368 | | |
$ | 8,567,145 | | |
$ | 476,223 | |
(1) | The Company finances
Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability
insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities.
The interest rate on these financings were ranging from 5.0% to 7.0% as of September 30, 2022 and June 30, 2022. |
(2) | The Company’s
subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately
$333,333. The annual interest rate was 5.5% as of September 30, 2022. The total outstanding balance as of September 30, 2022 and June
30, 2022 was £Nil. |
| This overdraft facility
requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group
debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of September 30, 2022,
NTE was in compliance with this covenant. |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
(3) | The Company’s
subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment
situation during the COVID-19 pandemic. This is a term loan payable in three years. The availed facility amount was Rs. 43,422,699 or
$190,425, at September 30, 2022, which is shown as current. The availed facility amount is Rs. 86,887,974 or $423,101, at June 30, 2022,
which is shown as current. The interest rate for the loan was 3% at September 30, 2022 and June 30, 2022. |
(4) | The Company’s
subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving
loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $2,192,694 at September 30, 2022 and Rs. 500,000,000
or $2,434,749 at June 30, 2022. The interest rate for the loan was 10% and 3% at September 30, 2022 and June 30, 2022, respectively. |
(5) | The Company’s
subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility
amount is Rs. 53,000,000 or $235,057, at September 30, 2022. The balance outstanding at September 30, 2022 and June 30, 2022 was Rs.
Nil. The interest rate for the loan was 17.8% and 14.0% at September 30, 2022 and June 30, 2022, respectively. |
| This facility requires
NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of September 30, 2022, NetSol PK was
in compliance with this covenant. |
(6) | The Company’s
subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving
loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $1,666,447 and Rs. 380,000,000 or $1,850,409 at
September 30, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at September 30, 2022 and June 30,
2022, respectively. |
| During the tenure of the
loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage
ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of September 30, 2022, NetSol PK was
in compliance with these covenants. |
(7) | The Company’s
subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a
revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $3,946,849 and Rs. 900,000,000 or $4,382,548,
at September 30, 2022 and June 30, 2022, respectively. NetSol PK used Rs. 700,000,000 or $3,069,772 and Rs. 700,000,000 or $3,408,648,
at September 30, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at September 30, 2022 and June 30,
2022, respectively. |
(8) | The Company’s
subsidiary, NetSol PK, availed sale and leaseback financing from First Habib Modaraba secured by the transfer of the vehicles’
title. As of September 30, 2022, NetSol PK used Rs. 92,846,015 or $407,166 of which $262,794 was shown as long term and $144,372 as current.
As of June 30, 2022, NetSol PK used Rs. 127,140,038 or $619,108 of which $429,882 was shown as long term and $189,226 as current. The
interest rate for the loan was 9.0% to 16.0% at September 30, 2022, and June 30, 2022. |
(9) | In March 2019,
the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $77,277, for a period of 5
years with monthly payments of £1,349, or $1,499. As of September 30, 2022, the subsidiary has used this facility up to $24,348,
of which $7,382 was shown as long-term and $16,966 as current. As of June 30, 2022, the subsidiary has used this facility up to $31,204,
of which $12,865 was shown as long-term and $18,339 as current. The interest rate was 6.14% at September 30, 2022 and June 30, 2022. |
(10) | The Company’s
subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $79,234 and $96,781
was recorded in current maturities, at September 30, 2022 and June 30, 2022, respectively. The interest rate on this financing ranged
from 9.7% to 12.7% as of September 30, 2022 and June 30, 2022. |
(11) | The Company leases
various fixed assets under finance lease arrangements expiring in various years through 2025. The assets and liabilities under finance
leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured
by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended
September 30, 2022 and 2021. |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
Following
is the aggregate minimum future lease payments under finance leases as of September 30, 2022:
SCHEDULE OF AGGREGATE MINIMUM FUTURE LEASE PAYMENTS UNDER CAPITAL LEASES
| |
Amount | |
Minimum Lease Payments | |
| | |
Within year 1 | |
$ | 37,312 | |
Within year 2 | |
| 22,390 | |
Within year 3 | |
| 1,058 | |
Total Minimum Lease Payments | |
| 60,760 | |
Interest Expense relating to future periods | |
| (5,762 | ) |
Present Value of minimum lease payments | |
| 54,998 | |
Less: Current portion | |
| (32,718 | ) |
Current portion of loans and obligations under finance leases | |
| | |
Non-Current portion | |
$ | 22,280 | |
Loans and obligations under finance leases; less current maturities | |
| | |
Following
is the aggregate future long term debt payments as of September 30, 2022
SCHEDULE OF AGGREGATE FUTURE LONG TERM DEBT PAYMENTS
| |
Amount | |
Loan Payments | |
| | |
Within year 1 | |
$ | 351,765 | |
Within year 2 | |
| 164,169 | |
Within year 3 | |
| 106,005 | |
Total Loan Payments | |
| 621,939 | |
Less: Current portion | |
| (351,763 | ) |
Non-Current portion | |
$ | 270,176 | |
NOTE
16 - STOCKHOLDERS’ EQUITY
During
the three months ended September 30, 2022, the Company issued 12,660 shares of common stock for services rendered by the independent
members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $39,750.
NOTE
17 – CONTINGENCIES
From
time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including
tax assessments. The Company defends itself vigorously against any such claims. When (i) it is probable that an asset has been impaired
or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, the Company records the estimated loss.
The Company provides disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions
if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant
judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable.
The Company bases accruals on the best information available at the time, which can be highly subjective. The final outcome of these
matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
NOTE
18 – OPERATING SEGMENTS
The
Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. Our reportable segments
are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing
and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment
is required because each business unit is subject to different operational issues and strategies due to their particular regional location.
The Company accounts for intra-company sales and expenses as if the sales or expenses were to third parties and eliminates them in the
consolidation.
The
following table presents a summary of identifiable assets as of September 30, 2022 and June 30, 2022:
SUMMARY OF IDENTIFIABLE ASSETS
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
Identifiable assets: | |
| | | |
| | |
Corporate headquarters | |
$ | 1,758,935 | | |
$ | 844,178 | |
North America | |
| 6,548,741 | | |
| 6,442,219 | |
Europe | |
| 8,354,174 | | |
| 8,727,530 | |
Asia - Pacific | |
| 49,783,782 | | |
| 56,594,705 | |
Consolidated | |
$ | 66,445,632 | | |
$ | 72,608,632 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
The
following table presents a summary of investment under equity method as of September 30, 2022 and June 30, 2022:
SUMMARY OF INVESTMENT UNDER EQUITY METHOD
| |
As of | | |
As of | |
| |
September 30, 2022 | | |
June 30, 2022 | |
Investment in associates under equity method: | |
| | | |
| | |
Corporate headquarters | |
$ | - | | |
$ | - | |
Asia - Pacific | |
| 1,059,368 | | |
| 1,059,368 | |
Consolidated | |
$ | 1,059,368 | | |
$ | 1,059,368 | |
The
following table presents a summary of operating information for the three months ended September 30:
SUMMARY OF OPERATING INFORMATION
| |
For the Three Months | |
| |
Ended September 30, | |
| |
2022 | | |
2021 | |
Revenues from unaffiliated customers: | |
| | | |
| | |
North America | |
$ | 1,125,288 | | |
$ | 930,234 | |
Europe | |
| 2,247,335 | | |
| 3,272,899 | |
Asia - Pacific | |
| 9,333,496 | | |
| 9,217,628 | |
| |
| 12,706,119 | | |
| 13,420,761 | |
Revenue from affiliated customers | |
| | | |
| | |
Asia - Pacific | |
| - | | |
| - | |
| |
| - | | |
| - | |
Consolidated | |
$ | 12,706,119 | | |
$ | 13,420,761 | |
| |
| | | |
| | |
Intercompany revenue | |
| | | |
| | |
Europe | |
$ | 95,725 | | |
$ | 127,198 | |
Asia - Pacific | |
| 1,729,953 | | |
| 2,560,100 | |
Eliminated | |
$ | 1,825,678 | | |
$ | 2,687,298 | |
| |
| | | |
| | |
Net income (loss) after taxes and before non-controlling interest: | |
| | | |
| | |
Corporate headquarters | |
$ | 1,327,200 | | |
$ | 128,544 | |
North America | |
| (18,947 | ) | |
| (68,093 | ) |
Europe | |
| (319,755 | ) | |
| 191,443 | |
Asia - Pacific | |
| (1,426,469 | ) | |
| 298,601 | |
Consolidated | |
$ | (437,971 | ) | |
$ | 550,495 | |
| |
| | | |
| | |
Depreciation and amortization: | |
| | | |
| | |
North America | |
$ | 482 | | |
$ | 566 | |
Europe | |
| 75,171 | | |
| 98,848 | |
Asia - Pacific | |
| 769,350 | | |
| 880,592 | |
Consolidated | |
$ | 845,003 | | |
$ | 980,006 | |
| |
| | | |
| | |
Interest expense: | |
| | | |
| | |
Corporate headquarters | |
$ | 2,480 | | |
$ | 10,441 | |
North America | |
| - | | |
| - | |
Europe | |
| 3,638 | | |
| 3,796 | |
Asia - Pacific | |
| 115,492 | | |
| 86,776 | |
Consolidated | |
$ | 121,610 | | |
$ | 101,013 | |
| |
| | | |
| | |
Income tax expense: | |
| | | |
| | |
Corporate headquarters | |
$ | - | | |
$ | 800 | |
North America | |
| - | | |
| 1,600 | |
Europe | |
| - | | |
| - | |
Asia - Pacific | |
| 193,348 | | |
| 165,227 | |
Consolidated | |
$ | 193,348 | | |
$ | 167,627 | |
NETSOL
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(Unaudited)
The
following table presents a summary of capital expenditures for the three months ended September 30:
SUMMARY OF CAPITAL EXPENDITURES
| |
For the Three Months | |
| |
Ended September 30, | |
| |
2022 | | |
2021 | |
Capital expenditures: | |
| | | |
| | |
North America | |
$ | 1,133 | | |
$ | - | |
Europe | |
| - | | |
| 54,380 | |
Asia - Pacific | |
| 1,346,468 | | |
| 161,732 | |
Consolidated | |
$ | 1,347,601 | | |
$ | 216,112 | |
NOTE
19 – NON-CONTROLLING INTEREST IN SUBSIDIARY
The
Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows:
SCHEDULE OF BALANCE OF NON-CONTROLLING INTEREST
SUBSIDIARY | |
Non-Controlling Interest % | | |
Non-Controlling Interest at September 30, 2022 | |
| |
| | |
| |
NetSol PK | |
| 32.38 | % | |
$ | 4,474,385 | |
NetSol-Innovation | |
| 32.38 | % | |
| (10,332 | ) |
NetSol Thai | |
| 0.006 | % | |
| (184 | ) |
OTOZ Thai | |
| 10.95 | % | |
| (19,803 | ) |
OTOZ | |
| 10.94 | % | |
| (164,953 | ) |
Total | |
| | | |
$ | 4,279,113 | |
SUBSIDIARY | |
Non-Controlling Interest % | | |
Non-Controlling Interest at June 30, 2022 | |
| |
| | |
| |
NetSol PK | |
| 32.38 | % | |
$ | 5,479,905 | |
NetSol-Innovation | |
| 32.38 | % | |
| 49,146 | |
NetSol Thai | |
| 0.006 | % | |
| (196 | ) |
OTOZ Thai | |
| 5.60 | % | |
| (30,768 | ) |
OTOZ | |
| 5.59 | % | |
| (47,698 | ) |
Total | |
| | | |
$ | 5,450,389 | |
The
Company’s subsidiary, OTOZ, issued 191,011 shares to one of its employees as part of their employment agreement resulting in an
increase of non-controlling interest from 5.59% to 10.94%. The effective shareholding of the non-controlling interest for OTOZ Thai increased
to 10.95%.
The
following schedule discloses the effect to the Company’s equity due to the changes in the Company’s ownership interest in
OTOZ and OTOZ Thai.
SCHEDULE OF CHANGE IN OWNERSHIP INTEREST
| |
| 1 | | |
| 2 | |
| |
For the Three Months | |
| |
Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Net income (loss) attributable to NetSol | |
$ | (620,729 | ) | |
$ | 187,969 | |
Transfer (to) from non-controlling interest | |
| | | |
| | |
Increase in paid-in capital for issuance of 191,011 shares of OTOZ Inc. common stock | |
| 120,565 | | |
| - | |
Net transfer (to) from non-controlling interest | |
| 120,565 | | |
| - | |
Change from net income (loss) attributable to NetSol and transfer (to) from non-controlling interest | |
$ | (500,164 | ) | |
$ | 187,969 | |
NOTE
20 – INCOME TAXES
The
current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income.
The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates
available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than
the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax
rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer
software and its related services developed in Pakistan is exempt from tax through June 30, 2025; however, tax at the applicable rates
is charged to the income from revenue generated from other than core business activities.
During
the three months ended September 30, 2022 and 2021, the Company recorded an income tax provision of $193,348 and $167,627, respectively.
The tax is derived from non-core business activities generated from Netsol PK.