NETSOL TECHNOLOGIES INC 10-Q

Item 1. Financial Statements (Unaudited) NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) As of As of September 30, 2021 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 26,999,876 $ 33,705,154 Accounts receivable, net of allowance of $ 176,986 and $ 166,231 6,043,444 4,184,096 Accounts receivable - related party, net of allowance of $ 1,373,099 and $ 1,373,099 - - Revenues in excess of billings, net of allowance of $ 70,919 and $ 136,976 16,164,012 14,680,131 Revenues in excess of billings - related party, net of allowance of $ 8,163 and $ 8,163 - - Other current assets, net of allowance of $ 1,243,633 and $ 1,243,633 2,937,927 3,009,393 Total current assets 52,145,259 55,578,774 Revenues in excess of billings, net - long term 969,456 957,603 Convertible note receivable - related party, net of allowance of $ 4,250,000 and $ 4,250,000 - - Property and equipment, net 10,821,869 12,091,812 Right of use of assets - operating leases 1,197,453 1,345,869 Long term investment 2,995,104 3,155,852 Other assets 59,638 55,127 Intangible assets, net 3,183,317 3,904,656 Goodwill 9,516,568 9,516,568 Total assets $ 80,888,664 $ 86,606,261 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 6,369,870 $ 6,696,035 Current portion of loans and obligations under finance leases 10,423,215 11,366,171 Current portion of operating lease obligations 828,879 857,729 Unearned revenue 3,387,902 4,556,626 Total current liabilities 21,009,866 23,476,561 Loans and obligations under finance leases; less current maturities 396,771 699,841 Operating lease obligations; less current maturities 438,423 564,257 Total liabilities 21,845,060 24,740,659 Commitments and contingencies - Stockholders’ equity: Preferred stock, $ .01 par value; 500,000 shares authorized; - - Common stock, $ .01 par value; 14,500,000 shares authorized; 12,183,570 shares issued and 11,244,539 outstanding as of September 30, 2021 and 12,181,585 shares issued and 11,265,064 outstanding as of June 30, 2021 121,836 121,816 Additional paid-in-capital 129,030,982 129,018,826 Treasury stock (at cost, 939,031 shares and 916,521 shares as of September 30, 2021 and June 30, 2021, respectively) ( 3,920,856 ) ( 3,820,750 ) Accumulated deficit ( 38,613,313 ) ( 38,801,282 ) Other comprehensive loss ( 34,013,886 ) ( 31,868,481 ) Total NetSol stockholders’ equity 52,604,763 54,650,129 Non-controlling interest 6,438,841 7,215,473 Total stockholders’ equity 59,043,604 61,865,602 Total liabilities and stockholders’ equity $ 80,888,664 $ 86,606,261 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 3 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) 2021 2020 For the Three Months Ended September 30, 2021 2020 Net Revenues: License fees $ 10,716 $ 3,475 Subscription and support 6,230,389 5,171,863 Services 7,179,656 7,472,040 Total net revenues 13,420,761 12,647,378 Cost of revenues: Salaries and consultants 5,662,410 4,526,649 Travel 214,132 103,752 Depreciation and amortization 765,735 707,249 Other 1,335,461 928,153 Total cost of revenues 7,977,738 6,265,803 Gross profit 5,443,023 6,381,575 Operating expenses: Selling and marketing 1,619,993 1,609,604 Depreciation and amortization 214,271 221,790 General and administrative 3,973,139 3,427,636 Research and development cost 275,230 85,989 Total operating expenses 6,082,633 5,345,019 Income (loss) from operations ( 639,610 ) 1,036,556 Other income and (expenses) Loss on sale of assets ( 110,600 ) ( 21,742 ) Interest expense ( 101,013 ) ( 103,327 ) Interest income 443,133 200,821 Gain on foreign currency exchange transactions 1,284,148 296,041 Share of net loss from equity investment ( 160,965 ) ( 107,850 ) Other income 3,029 87,272 Total other income (expenses) 1,357,732 351,215 Net income before income taxes 718,122 1,387,771 Income tax provision ( 167,627 ) ( 264,294 ) Net income 550,495 1,123,477 Non-controlling interest ( 362,526 ) ( 405,923 ) Net income attributable to NetSol $ 187,969 $ 717,554 Net income per share: Net income per common share Basic $ 0.02 $ 0.06 Diluted $ 0.02 $ 0.06 Weighted average number of shares outstanding Basic 11,254,205 11,787,233 Diluted 11,254,205 11,787,233 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 4 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 2021 2020 For the Three Months Ended September 30, 2021 2020 Net income $ 187,969 $ 717,554 Other comprehensive income (loss): Translation adjustment ( 3,284,396 ) 1,094,724 Translation adjustment attributable to non-controlling interest 1,138,991 ( 219,908 ) Net translation adjustment ( 2,145,405 ) 874,816 Comprehensive income (loss) attributable to NetSol $ ( 1,957,436 ) $ 1,592,370 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 5 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) A statement of the changes in equity for the three months ended September 30, 2021 is provided below: Shares Amount Capital Shares Deficit Loss Interest Equity 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 Cumulative effect adjustment (1) Subsidiary common stock issued for: -Services - - 167 - - - ( 167 ) - Common stock issued for: Services 1,985 20 11,989 - - - - 12,009 Purchase of treasury shares - - - ( 100,106 ) - - - ( 100,106 ) Foreign currency translation adjustment - - - - - ( 2,145,405 ) ( 1,138,991 ) ( 3,284,396 ) Net income - - - - 187,969 - 362,526 550,495 Balance at September 30, 2021 12,183,570 $ 121,836 $ 129,030,982 $ ( 3,920,856 ) $ ( 38,613,313 ) $ ( 34,013,886 ) $ 6,438,841 $ 59,043,604 A statement of the changes in equity for the three months ended September 30, 2020 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, 2020 12,122,149 $ 121,222 $ 128,677,754 $ ( 1,455,969 ) $ ( 34,269,817 ) $ ( 34,085,047 ) $ 6,488,900 $ 65,477,043 Cumulative effect adjustment (1) - - - - ( 6,309,722 ) - ( 474,578 ) ( 6,784,300 ) Subsidiary common stock issued for: -Services - - - - - - 378 378 Common stock issued for: Services 14,896 149 86,864 - - - - 87,013 Purchase of treasury shares - - - ( 464,676 ) - - - ( 464,676 ) Foreign currency translation adjustment - - - - - 874,816 219,908 1,094,724 Net income - - - - 717,554 - 405,923 1,123,477 Balance at September 30, 2020 12,137,045 $ 121,371 $ 128,764,618 $ ( 1,920,645 ) $ ( 39,861,985 ) $ ( 33,210,231 ) $ 6,640,531 $ 60,533,659 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 6 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) 2021 2020 For the Three Months Ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 550,495 $ 1,123,477 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 980,006 929,039 Provision for bad debts ( 45,274 ) ( 258,160 ) Share of net loss from investment under equity method 160,965 107,850 Loss on sale of assets 110,600 21,742 Stock based compensation 3,003 90,995 Changes in operating assets and liabilities: Accounts receivable ( 2,034,434 ) 3,823,299 Revenues in excess of billing ( 1,952,228 ) 394,995 Other current assets ( 35,342 ) ( 393,253 ) Accounts payable and accrued expenses ( 43,293 ) 255,239 Unearned revenue ( 1,086,151 ) ( 1,383,619 ) Net cash provided by (used in) operating activities ( 3,391,653 ) 4,711,604 Cash flows from investing activities: Purchases of property and equipment ( 216,112 ) ( 489,289 ) Sales of property and equipment 19,705 32,673 Investment in associates - ( 60,500 ) Net cash used in investing activities ( 196,407 ) ( 517,116 ) Cash flows from financing activities: Purchase of treasury stock ( 100,106 ) ( 464,676 ) Proceeds from bank loans - 697,295 Payments on finance lease obligations and loans - net ( 363,464 ) ( 143,506 ) Net cash provided by (used in) financing activities ( 463,570 ) 89,113 Effect of exchange rate changes ( 2,653,648 ) 434,934 Net increase (decrease) in cash and cash equivalents ( 6,705,278 ) 4,718,535 Cash and cash equivalents at beginning of the period 33,705,154 20,166,830 Cash and cash equivalents at end of period $ 26,999,876 $ 24,885,365 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 7 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (CONTINUED) (Unaudited) For the Three Months Ended September 30, 2021 2020 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 191,835 $ 142,430 Taxes $ 155,098 $ 141,521 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 8 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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, 2021. 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”) 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”) Page 9 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 ($ 77,399 ) in each bank and in UK for GBP 85,000 ($ 114,865 ) in each bank. The Company maintains two bank accounts in China and six bank accounts in the UK. As of September 30, 2021, and June 30, 2021, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $ 25,245,529 and $ 31,662,035 , respectively. The Company has not experienced any losses in such accounts. The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Fair Value of Financial Instruments The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics. The three levels of valuation hierarchy are defined as follows: Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. Page 10 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) The Company’s financial assets that were measured at fair value on a recurring basis as of September 30, 2021, 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 $ - $ - $ 969,456 $ 969,456 Total $ - $ - $ 969,456 $ 969,456 The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2021, were as follows: Level 1 Level 2 Level 3 Total Assets Revenues in excess of billing - long term $ - $ - $ 957,603 $ 957,603 Total $ - $ - $ 957,603 $ 957,603 The reconciliation from June 30, 2021 to September 30, 2021 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, 2021 $ 1,024,382 $ ( 66,779 ) $ 957,603 Amortization during the period - 9,502 9,502 Effect of Translation Adjustment 2,452 ( 101 ) 2,351 Balance at September 30, 2021 $ 1,026,834 $ ( 57,378 ) $ 969,456 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: Accounting Standards Recently Issued but Not Yet Adopted by the Company: 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, with early adoption permitted beginning in the first quarter of fiscal 2022. The Company is currently assessing the impact and timing of adoption of this ASU. Page 11 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting , which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The elective amendments provide expedients to contract modification, affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The guidance can be applied immediately through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect a material impact to its financial condition, results of operations or disclosures based on the current debt portfolio and capital structure. 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. 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. Page 12 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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. BPO and Internet Services Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis. Page 13 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 For the Three Months Ended September 30, 2021 2020 Core: License $ 10,716 $ 3,475 Subscription and support 6,230,389 5,171,863 Services 5,856,279 5,872,938 Total core revenue, net 12,097,384 11,048,276 Non-Core: Services 1,323,377 1,599,102 Total non-core revenue, net 1,323,377 1,599,102 Total net revenue $ 13,420,761 $ 12,647,378 Significant Judgments Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances. Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers. The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services. The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer. The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period. Page 14 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 (deferred 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 deferred 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 September 30, 2021 June 30, 2021 Revenues in excess of billings $ 17,133,468 $ 15,637,734 Unearned revenue $ 3,387,902 $ 4,556,626 During the three months ended September 30, 2021, the Company recognized revenue of $ 1,996,511 that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition. Page 15 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 $ 44,365,579 as of September 30, 2021, of which the Company estimates to recognize approximately $ 14,599,321 in revenue over the next 12 months and the remainder over an estimated 6 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements. Unearned Revenue The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and unearned revenue. Practical Expedients and Exemptions There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients: ● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. ● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations. ● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements). Costs to Obtain a Contract The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts. Page 16 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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. Dilutive potential common shares include outstanding stock options and stock awards. The components of basic and diluted earnings per share were as follows: SCHEDULE OF COMPONENTS OF BASIC AND DILUTED EARNINGS PER SHARE For the three months ended September 30, 2021 Net Income Shares Per Share Basic income per share: Net income available to common shareholders $ 187,969 11,254,205 $ 0.02 Effect of dilutive securities Share grants - - - Diluted income per share $ 187,969 11,254,205 $ 0.02 For the three months ended September 30, 2020 Net Income Shares Per Share Basic income per share: Net income available to common shareholders $ 717,554 11,787,233 $ 0.06 Effect of dilutive securities Share grants - - - Diluted income per share $ 717,554 11,787,233 $ 0.06 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 uses 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 $ 34,013,886 and $ 31,868,481 as of September 30, 2021 and June 30, 2021, respectively. During the three months ended September 30, 2021 and 2020, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $ ( 2,145,405 ) and a translation gain of $ 874,816 , respectively. Page 17 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) NOTE 6 – MAJOR CUSTOMERS During the three months ended September 30, 2021, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $ 3,542,284 and $ 891,679 , respectively representing 26.4 % and 6.6 %, respectively of revenues. During the three months ended September 30, 2020 revenues from these two customers were $ 2,598,652 and $ 2,485,229 , respectively representing 20.6 % and 19.7 %, respectively of revenues. The revenue from these customers are shown in the Asia – Pacific segment. Accounts receivable from DFS and BMW at September 30, 2021, were $ 1,198,049 and $ 189,964 , respectively. Accounts receivable at June 30, 2021, were $ 462,861 and $ 35,063 , respectively. Revenues in excess of billings at September 30, 2021 were $ 2,987,736 and $ 5,158,269 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2021, were $ 2,041,750 and $ 4,453,299 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. 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, 2021 and June 30, 2021, which is included in “Other current assets”. As of July 1, 2020, the Company stopped accruing interest. Page 18 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) NOTE 8 - OTHER CURRENT ASSETS Other current assets consisted of the following: SCHEDULE OF OTHER CURRENT ASSETS As of As of September 30, 2021 June 30, 2021 Prepaid Expenses $ 1,859,691 $ 1,987,556 Advance Income Tax 366,800 344,699 Employee Advances 59,400 28,816 Security Deposits 276,693 281,464 Other Receivables 107,419 143,258 Other Assets 267,924 223,600 Due From Related Party 1,243,633 1,243,633 Total 4,181,560 4,253,026 Less allowance for doubtful account ( 1,243,633 ) ( 1,243,633 ) Net Balance $ 2,937,927 $ 3,009,393 NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM Revenues in excess of billings, net consisted of the following: SCHEDULE OF REVENUES IN EXCESS OF BILLINGS As of As of September 30, 2021 June 30, 2021 Revenues in excess of billings - long term $ 1,026,834 $ 1,024,382 Present value discount ( 57,378 ) ( 66,779 ) Net Balance $ 969,456 $ 957,603 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, 2021 and 2020, the Company accreted $ 9,502 and $ 14,060 , respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65 % to 6.25 %. Page 19 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) NOTE 10 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: SCHEDULE OF PROPERTY AND EQUIPMENT As of As of September 30, 2021 June 30, 2021 Office Furniture and Equipment $ 3,234,460 $ 3,440,501 Computer Equipment 15,266,280 18,681,991 Assets Under Capital Leases 1,019,445 1,136,128 Building 5,751,992 6,205,210 Land 1,487,065 1,608,024 Autos 1,644,324 1,770,147 Improvements 84,836 35,592 Subtotal 28,488,402 32,877,593 Accumulated Depreciation ( 17,666,533 ) ( 20,785,781 ) Property and Equipment, Net $ 10,821,869 $ 12,091,812 For the three months ended September 30, 2021 and 2020, depreciation expense totaled $ 539,722 and $ 496,267 , respectively. Of these amounts, $ 325,451 and $ 274,477 , respectively, are reflected in cost of revenues. Following is a summary of fixed assets held under finance leases as of September 30, 2021 and June 30, 2021: SUMMARY OF FIXED ASSETS HELD UNDER FINANCE LEASES As of As of September 30, 2021 June 30, 2021 Computers and Other Equipment $ 126,088 $ 169,487 Furniture and Fixtures 55,955 57,509 Vehicles 837,402 909,132 Total 1,019,445 1,136,128 Less: Accumulated Depreciation - Net ( 581,143 ) ( 627,119 ) $ 438,302 $ 509,009 Finance lease term and discount rate were as follows: SCHEDULE OF FINANCE LEASE TERM As of As of September 30, 2021 June 30, 2021 Weighted average remaining lease term - Finance leases 1.75 Years 0.55 Years Weighted average discount rate - Finance leases 6.1 % 5.6 % Page 20 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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. Supplemental balance sheet information related to leases was as follows: SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASES As of As of September 30, 2021 June 30, 2021 Assets Operating lease assets, net $ 1,197,453 $ 1,345,869 Liabilities Current Operating $ 828,879 $ 857,729 Operating, current 828,879 857,729 Non-current Operating 438,423 564,257 Operating, non-current 438,423 564,257 Total Lease Liabilities $ 1,267,302 $ 1,421,986 Page 21 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) The components of lease cost were as follows: SCHEDULE OF COMPONENTS OF LEASE COST 2021 2020 For the Three Months Ended September 30, 2021 2020 Amortization of finance lease assets $ 21,033 $ 45,253 Interest on finance lease obligation 4,936 11,692 Operating lease cost 282,951 320,086 Short term lease cost - 16,578 Sub lease income ( 9,155 ) ( 8,624 ) Total lease cost $ 299,765 $ 384,985 Lease term and discount rate were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE As of As of September 30, 2021 June 30, 2021 Weighted average remaining lease term - Operating leases 1.6 Years 1.78 Years Weighted average discount rate - Operating leases 5.7 % 5.7 % Supplemental disclosures of cash flow information related to leases were as follows: SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION RELATED TO LEASES 2021 2020 For the Three Months Ended September 30 2021 2020 Cash flows related to lease liabilities Operating cash flows related to operating leases $ 288,623 $ 269,783 Operating cash flows from finance leases $ 3,502 $ 8,141 Financing cash flows from finance leases $ 48,908 $ 93,105 Page 22 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Maturities of operating lease liabilities were as follows as of September 30, 2021: SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES Amount Within year 1 $ 875,294 Within year 2 359,175 Within year 3 90,226 Within year 4 772 Within year 5 772 Thereafter 2,123 Total Lease Payments 1,328,362 Less: Imputed interest ( 61,060 ) Present Value of lease liabilities 1,267,302 Less: Current portion ( 828,879 ) Non-Current portion $ 438,423 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, 2021 and 2020, the Company received lease income of $ 9,155 and $ 8,624 , respectively. NOTE 12 – LONG TERM INVESTMENT Drivemate 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, 2021, 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. The Company did no t provide any services during the three months ended September 30, 2021 and 2020. Under the equity method of accounting, the Company recorded its share of net loss of $ 63,571 compared to its share of net income of $ 595 for the three months ended September 30, 2021 and 2020, 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. NetSol PK has no t provided services to WRLD3D for the three months ended September 30, 2021 and September 30, 2020. Accounts receivable and revenue in excess of billing were $ 1,373,099 and $ 8,163 at September 30, 2021, respectively. The Company has established an allowance for the full amounts of these accounts. Under the equity method of accounting, the Company recorded its share of net loss of $ 97,394 and $ 108,445 for the three months ended September 30, 2021 and 2020, respectively. Page 23 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) The following table reflects the above investments at September 30, 2021. SCHEDULE OF LONG TERM INVESTMENT Drivemate WRLD3D Total Gross investment $ 1,800,000 $ 3,888,889 $ 5,688,889 Cumulative net loss on investment ( 98,776 ) ( 2,018,782 ) ( 2,117,558 ) Cumulative other comprehensive income (loss) - ( 576,227 ) ( 576,227 ) Net investment $ 1,701,224 $ 1,293,880 $ 2,995,104 NOTE 13 - INTANGIBLE ASSETS Intangible assets consisted of the following: SCHEDULE OF INTANGIBLE ASSETS As of As of September 30, 2021 June 30, 2021 Product Licenses - Cost $ 47,244,997 $ 47,244,997 Effect of Translation Adjustment ( 16,197,429 ) ( 14,440,001 ) Accumulated Amortization ( 27,864,251 ) ( 28,900,340 ) Net Balance $ 3,183,317 $ 3,904,656 (A) 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 $ 3,183,317 will be amortized over the next 2.0 years . Amortization expense for the three months ended September 30, 2021 and 2020 was $ 440,284 and $ 432,772 , respectively. (B) Future Amortization Estimated amortization expense of intangible assets is as follows: SUMMARY OF ESTIMATED AMORTIZATION EXPENSE OF INTANGIBLE ASSETS Period ended: September 30, 2022 $ 1,701,347 September 30, 2023 1,481,970 Net Balance $ 3,183,317 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, 2021 June 30, 2021 Accounts Payable $ 939,871 $ 1,067,937 Accrued Liabilities 4,320,310 4,512,499 Accrued Payroll & Taxes 305,340 228,028 Taxes Payable 599,011 608,121 Other Payable 205,338 279,450 Total $ 6,369,870 $ 6,696,035 Page 24 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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, 2021 Current Long-Term Name Total Maturities Maturities D&O Insurance (1) $ 26,452 $ 26,452 $ - Bank Overdraft Facility (2) - - - Term Finance Facility (3) 1,270,755 990,623 280,132 Loan Payable Bank - Export Refinance (4) 2,924,661 2,924,661 - Loan Payable Bank - Running Finance (5) - - - Loan Payable Bank - Export Refinance II (6) 2,222,742 2,222,742 - Loan Payable Bank - Running Finance II (7) - - - Loan Payable Bank - Export Refinance III (8) 4,094,525 4,094,525 - Sale and Leaseback Financing (9) 73,117 26,063 47,054 Term Finance Facility (10) 49,021 19,408 29,613 Insurance Financing (11) 45,198 45,198 - 10,706,471 10,349,672 356,799 Subsidiary Finance Leases (12) 113,515 73,543 39,972 $ 10,819,986 $ 10,423,215 $ 396,771 As of June 30, 2021 Current Long-Term Name Total Maturities Maturities D&O Insurance (1) $ 73,143 $ 73,143 $ - Bank Overdraft Facility (2) - - - Term Finance Facility (3) 1,648,818 1,090,259 558,559 Loan Payable Bank - Export Refinance (4) 3,162,555 3,162,555 - Loan Payable Bank - Running Finance (5) - - - Loan Payable Bank - Export Refinance II (6) 2,403,542 2,403,542 - Loan Payable Bank - Running Finance II (7) - - - Loan Payable Bank - Export Refinance III (8) 4,427,578 4,427,578 - Sale and Leaseback Financing (9) 85,313 28,183 57,130 Term Finance Facility (10) 55,182 19,644 35,538 Insurance Financing (11) 41,774 41,774 - 11,897,905 11,246,678 651,227 Subsidiary Finance Leases (12) 168,107 119,493 48,614 $ 12,066,012 $ 11,366,171 $ 699,841 (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, 2021 and June 30, 2021. (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 $ 405,405 . The annual interest rate was 5.12 % as of September 30, 2021. The total outstanding balance as of September 30, 2021 was £ Nil . Page 25 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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, 2021, NTE was in compliance with this covenant. (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 $ 405,405 . The annual interest rate was 5.12 % as of September 30, 2021. The total outstanding balance as of September 30, 2021 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, 2021, 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. 217,248,351 or $ 1,270,755 , at September 30, 2021, of which $ 990,623 is shown as current and the remaining $ 280,132 is shown as long term. The availed facility amount was Rs. 260,678,818 or $ 1,648,818 , at June 30, 2021, of which $ 1,090,259 is shown as current and the remaining $ 558,559 is shown as long term. The interest rate for the loan was 3 % at September 30, 2021 and June 30, 2021. (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 $ 2,924,661 at September 30, 2021 and Rs. 500,000,000 or $ 3,162,555 at June 30, 2021. The interest rate for the loan was 3 % at September 30, 2021 and June 30, 2021. (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. 75,000,000 or $ 438,699 , at September 30, 2021. The balance outstanding at September 30, 2021 and June 30, 2021 was Rs. Nil . The interest rate for the loan was 9.8 % and 9.5 % at September 30, 2021 and June 30, 2021, 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, 2021, NetSol PK was in compliance with this covenant. (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. 75,000,000 or $ 438,699 , at September 30, 2021. The balance outstanding at September 30, 2021 and June 30, 2021 was Rs. Nil . The interest rate for the loan was 9.8 % and 9.5 % at September 30, 2021 and June 30, 2021, 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, 2021, 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 $ 2,222,742 and Rs. 380,000,000 or $ 2,403,542 at September 30, 2021 and June 30, 2021, respectively. The interest rate for the loan was 3 % at September 30, 2021 and June 30, 2021. (7) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 120,000,000 or $ 701,919 and Rs. 120,000,000 or $ 759,013 , at September 30, 2021 and June 30, 2021, respectively. The interest rate for the loan was 9.3 % and 9.0 % at September 30, 2021 and June 30, 2021, respectively. The balance outstanding at September 30, 2021 and June 30, 2021 was Rs. Nil . 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, 2021, NetSol PK was in compliance with these covenants. (7) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 120,000,000 or $ 701,919 and Rs. 120,000,000 or $ 759,013 , at September 30, 2021 and June 30, 2021, respectively. The interest rate for the loan was 9.3 % and 9.0 % at September 30, 2021 and June 30, 2021, respectively. The balance outstanding at September 30, 2021 and June 30, 2021 was Rs. Nil . 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, 2021, NetSol PK was in compliance with these covenants. (8) 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. Total facility amount is Rs. 900,000,000 or $ 5,264,389 and Rs. 900,000,000 or $ 5,692,600 , at September 30, 2021 and June 30, 2021, respectively. NetSol PK used Rs. 700,000,000 or $ 4,094,525 and Rs. 700,000,000 or $ 4,427,578 , at September 30, 2021 and June 30, 2021, respectively. The interest rate for the loan was 3 % at September 30, 2021 and June 30, 2021. (9) 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 June 30, 2021, NetSol PK used Rs. 12,499,891 or $ 73,117 of which $ 47,054 was shown as long term and $ 26,063 as current. As of June 30, 2021, NetSol PK used Rs. 13,487,949 or $ 85,313 of which $ 57,130 was shown as long term and $ 28,183 as current. The interest rate for the loan was 9.0 % at September 30, 2021, and June 30, 2021. (10) In March 2020, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £ 69,549 , or $ 93,985 , for a period of 5 years with monthly payments of £ 1,349 , or $ 1,823 . As of September 30, 2021, the subsidiary has used this facility up to $ 49,021 , of which $ 29,613 was shown as long-term and $ 19,408 as current. As of June 30, 2021, the subsidiary has used this facility up to $ 55,182 , of which $ 35,538 was shown as long-term and $ 19,644 as current. The interest rate was 6.14 % at September 30, 2021 and June 30, 2021. Page 26 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) (11) The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $ 45,198 and $ 41,774 was recorded in current maturities, at September 30, 2021 and June 30, 2021, respectively. The interest rate on this financing ranged from 9.7 % to 12.7 % as of September 30, 2021 and was 9.7 % as of June 30, 2021. (12) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2024. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended September 30, 2021 and 2020. Following is the aggregate minimum future lease payments under finance leases as of September 30, 2021: SCHEDULE OF AGGREGATE FUTURE LONG TERM DEBT PAYMENTS Amount Minimum Lease Payments Within year 1 $ 77,806 Within year 2 30,102 Within year 3 11,845 Total Minimum Lease Payments 119,753 Interest Expense relating to future periods ( 6,238 ) Present Value of minimum lease payments 113,515 Less: Current portion ( 73,543 ) Non-Current portion $ 39,972 NOTE 16 - STOCKHOLDERS’ EQUITY During the three months ended September 30, 2021, the Company issued 1,985 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 $ 12,009 . During the three months ended September 30, 2021, the Company purchased 22,510 shares of its own stock for $ 100,106 pursuant to the Company’s stock repurchase plan. NOTE 17 – SHARE BASED PAYMENTS The following table summarizes stock grants awarded as compensation: SUMMARY OF UNVESTED STOCK GRANTS AWARDED AS COMPENSATION # of shares Weighted Average Grant Date Fair Value ($) Unvested, June 30, 2021 6,985 $ 5.75 Granted - $ - Vested ( 1,985 ) $ 6.05 Forfeited / Cancelled - $ - Unvested, September 30, 2021 5,000 $ 5.69 For the three months ended September 30, 2021 and 2020, the Company recorded compensation expense of $ 3,003 and $ 90,617 , respectively. The compensation expense related to the unvested stock grants as of September 30, 2021 was $ 28,450 which will be recognized during the fiscal year 2022. Page 27 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) NOTE 18 – 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 19 – 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, 2021 and June 30, 2021: SUMMARY OF IDENTIFIABLE ASSETS As of As of September 30, 2021 June 30, 2021 Identifiable assets: Corporate headquarters $ 2,089,513 $ 2,067,474 North America 5,890,236 6,073,616 Europe 10,294,197 10,363,611 Asia - Pacific 62,614,718 68,101,560 Consolidated $ 80,888,664 $ 86,606,261 The following table presents a summary of investment under equity method as of September 30, 2021 and June 30, 2021: SUMMARY OF INVESTMENT UNDER EQUITY METHOD As of As of September 30, 2021 June 30, 2021 Investment in associates under equity method: Corporate headquarters $ 367,512 $ 396,403 Asia - Pacific 2,627,592 2,759,449 Consolidated $ 2,995,104 $ 3,155,852 Page 28 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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, 2021 2020 Revenues from unaffiliated customers: North America $ 930,234 $ 812,878 Europe 3,272,899 3,151,891 Asia - Pacific 9,217,628 8,682,609 13,420,761 12,647,378 Revenue from affiliated customers Asia - Pacific - - - - Consolidated $ 13,420,761 $ 12,647,378 Intercompany revenue Europe $ 127,198 $ 139,156 Asia - Pacific 2,560,100 2,158,628 Eliminated $ 2,687,298 $ 2,297,784 Net income (loss) after taxes and before non-controlling interest: Corporate headquarters $ 128,544 $ 1,167,795 North America ( 68,093 ) ( 281,797 ) Europe 191,443 603,016 Asia - Pacific 298,601 ( 365,537 ) Consolidated $ 550,495 $ 1,123,477 Depreciation and amortization: North America $ 566 $ 1,954 Europe 98,848 108,008 Asia - Pacific 880,592 819,077 Consolidated $ 980,006 $ 929,039 Interest expense: Corporate headquarters $ 10,441 $ 6,034 North America - 1,209 Europe 3,796 2,066 Asia - Pacific 86,776 94,018 Consolidated $ 101,013 $ 103,327 Income tax expense: Corporate headquarters $ 800 $ - North America 1,600 - Europe - 111,678 Asia - Pacific 165,227 152,616 Consolidated $ 167,627 $ 264,294 Page 29 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (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, 2021 2020 Capital expenditures: North America $ - $ 1,521 Europe 54,380 57,429 Asia - Pacific 161,732 430,339 Consolidated $ 216,112 $ 489,289 NOTE 20 – 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, 2021 NetSol PK 33.88 % $ 6,333,101 NetSol-Innovation 33.88 % 130,638 NetSol Thai 0.006 % ( 174 ) OTOZ Thai 5.60 % 4,007 OTOZ 5.59 % ( 28,731 ) Total $ 6,438,841 SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at June 30, 2021 NetSol PK 33.88 % $ 7,101,883 NetSol-Innovation 33.88 % 136,611 NetSol Thai 0.006 % ( 208 ) OTOZ Thai 0.006 % ( 52 ) OTOZ 5.00 % ( 22,761 ) Total $ 7,215,473 The Company’s subsidiary, OTOZ, issued 19,633 shares to one of its employees as part of their employment agreement resulting in an increase of non-controlling interest from 5.0 % to 5.59 %. The effective shareholding of the non-controlling interest for OTOZ Thai increased to 5.6 %. Page 30 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) NOTE 21 – 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, 20120 and 2020, the Company recorded an income tax provision of $ 167,627 and $ 264,294 , respectively, resulting in an effective tax rate of 23.3 % and 19.0 %, respectively. Page 31