NETSOL TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and nine months ended March 31, 2022. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 2021, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Our website is located at www.netsoltech.com , and our investor relations website is located at http://ir.netsoltech.com . The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website and on social media platforms linked to our corporate website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http:// netsoltech.com/about-us . The content of our websites is not intended to be incorporated by reference into this or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. Forward-Looking Information This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s business ultimately is built. The Company does not intend to update these forward-looking statements. Business Overview NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions. Our primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications, under the brand name NFS Ascent ® for leading businesses in the global finance and leasing space. With constant innovation being a major part of NETSOL’s DNA, we have enabled NFS Ascent ® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing model rather than the traditional licensing model. NETSOL’s clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 manufacturers, financial institutions, global vehicle manufacturers and enterprise technology providers, all of which are serviced by NETSOL’s strategically placed support and delivery locations around the globe. Page 34 Founded in 1997, NetSol is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations: ● North America Los Angeles Area ● Europe London Metropolitan area and Horsham in the UK ● Asia Pacific Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney NETSOL believes that our strong technology solutions offer our customers a return on their investment and allows us to thrive in a hyper competitive and mature global marketplace. Our solutions are bolstered by our people. NETSOL believes that people are the drivers of success; therefore, we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for NETSOL and a unique value for its customers. NETSOL continues to underpin its proven and effective business model which is a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers. Our primary offerings include the following: NFS Ascent ® NFS Ascent ® , the Company’s next generation platform, offers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s ® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent ® platform, is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios. NFS Ascent ® , with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment. NFS Ascent ® has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. Our premier, next generation solution NFS Ascent ® is now also available on the cloud via SaaS/subscription-based pricing. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent ® is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees. NFS Digital NFS Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape along with our valuable experience enables us to define sound digital transformation strategies and compliment them with smart digital solutions so our customers always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent ® ) to effectively augment and enhance our customer’s ecosystem. NFS Digital includes Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, Mobile Collector and Mobile Field Investigator. Otoz Otoz Digital Auto Retail Otoz provides a white-labelled SaaS platform to OEMs, auto-captives, dealers and start-ups that helps them launch short and long-term on-demand mobility models (car-share and car subscription) and digital retail in minimum time. Our white-label, turn-key platform helps dealers to make the move into digital era by offering an end-to-end car buying experience completely online. Digital auto-retail is not a one-size-fits-all. Otoz provides a flexible, configurable and scalable turn-key platform that helps define, launch and scale a variety of retail products (finance, lease, buy, etc.). Otoz platform empowers dealers to compete in digital era by addressing a range of customer segments with varied needs. Page 35 Otoz Ecosystem The Otoz powerful Application Program Interface (API) based architecture allows OEMs, auto-captives and dealerships to integrate with a plethora of providers to offer an end-to-end Omni-channel digital car finance and lease experience. Out-of-the-box APIs by Otoz help dealers and auto-captives connect with ecosystem partners which are crucial for running their auto retail business. It includes, finance and insurance products, trade-in tools, fraud checks, CRM system, websites (Tier 1 – Tier 3), marketing toolkit, inventory feeds, Know Your Customers (KYC), payment processors, vehicle delivery providers etc. In addition, Otoz is equipped with smart lead generation and product analytics capabilities. It empowers dealers with the capability to convert qualified leads and never lose contact with customers. The product analytics capability allows us to improve the customer journey by addressing friction points, herein improving customer experience and conversions – a win-win scenario for dealers and customers. Otoz Platform A fully digital, white label platform for lease, finance, and cash transactions that delivers a frictionless customer experience. Otoz platform consists of two components the Dealer Tool and the Customer Application (APP) of a Dealer Tool which provides for a myriad of services including account creation, order management work queue, user roles and rights, tax configurator, customer KYC reports, vehicle delivery scheduling, payment gateways and inventory management, finance and insurance products feed and prioritization, dealer fee management and ecosystem APIs. The Customer App permits the dealer to work with the customer to get a vehicle via cash, finance or lease, manage vehicle delivery and pick-up scheduling, buy finance and insurance products, buy accessories, paperless license checks, personalized pricing, vehicle options, trade-in valuation, credit application and decision, paperless contracts and e-signing, digital payments and a deal builder. Other Products The Company continues to support its North America and European legacy systems including LeasePak and LeaseSoft. Highlights Listed below are a few of NetSol’s highlights for the quarter ended March 31, 2022: ● We generated approximately $1,300,000 by successfully implementing change requests from various customers across multiple regions. ● We successfully delivered our cloud enabled Ascent front end (POS/CAP) to a leading commercial finance company in Australia at subscription-based pricing. This implementation has generated revenues of approximately $200,000. ● We signed a contract with a notable Swedish bank to implement NFS Ascent in Sweden, Norway, Denmark and Finland. This contract is in the discovery phase. ● We onboarded another 5 dealers of a leading German Auto Manufacturer in US on its digital retailing solution. ● We started the implementation process for NFS Ascent Retail in Taiwan related to the DFS contract. Page 36 Management has identified the following material trends affecting NetSol. Positive trends: ● NFS Ascent ® SaaS offering is gaining traction in mid-size auto captives and financial institutions in North American and European markets and is consistent with our transformation strategy as market size has expanded globally. ● Mobility and digital transformation is the new norm showing acceleration in every sector particularly in auto and banking. ● COVID-19 has created new dynamics for businesses and corporations with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, have positively impacted our financials. ● Since September 2021, we have over 40% of employees working from the office in all of our global locations. ● The work environment created by COVID-19 led our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors in an effort to anticipate customer needs. ● In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms. ● Growing opportunities and dynamics of shared car ownership either through ride hailing or car sharing encourage the use of our innovation and development tools. ● Otoz platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe. ● Improved stability in US and Pakistan relationship boosting confidence and trade relations. ● The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors. ● China’s auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience. Page 37 Negative trends: ● With Russia’s invasion of Ukraine, the global economy could pose possible barriers to trade and cross border investment which could lead to lower incomes, inflated prices for goods and services, and reduced investment opportunities and returns across the world. ● The global stock markets have continued to decline since the beginning of the year bringing fears of a global recession. ● The degree to which the COVID-19 pandemic impacts our future business globally, results of operations and financial condition will depend on future developments, which are uncertain, including but not limited to the duration, spread and severity of the pandemic, the availability, adoption and efficacy of vaccines, government responses and other actions to mitigate the spread of and to treat COVID-19, and when and to what extent normal business, economic and social activity and conditions resume. ● We are unable to predict the extent to which the pandemic impacts our customers and other partners and their financial conditions, but adverse effects on these parties could also adversely affect us. ● Most OEMs and auto sectors are experiencing a major slowdown due to lockdowns, health concerns and component part supply chain issues. ● The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus. ● Due to travel restrictions caused by COVID-19, and with the recent resurgence in China, it has been difficult to conduct face to face meetings for global clients and new prospects removing the personal connection essential to some decision making. ● The COVID-19 pandemic has adversely affected live industry conferences and events, such as those held by the Equipment Leasing and Finance Association (ELFA), reducing leads and market exposure. ● Working from the office continues to pose its own risk of virus spread until it ameliorated. ● Political actions, including trade protection and national security policies of the U.S. and Chinese governments, such as tariffs or bans could in the future limit or prevent companies from transacting business with China and aggravate the global business environment. Page 38 CHANGES IN FINANCIAL CONDITION Quarter Ended March 31, 2022 Compared to the Quarter Ended March 31, 2021 The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2022 and 2021 as a percentage of revenues. For the Three Months Ended March 31, 2022 % 2021 % Net Revenues: License fees $ 1,620,827 10.9 % $ 2,120,963 15.4 % Subscription and support 6,554,540 44.3 % 5,674,776 41.2 % Services 6,634,459 44.8 % 5,988,257 43.4 % Total net revenues 14,809,826 100.0 % 13,783,996 100.0 % Cost of revenues: Salaries and consultants 6,756,898 45.6 % 5,372,302 39.0 % Travel 256,730 1.7 % 151,075 1.1 % Depreciation and amortization 741,587 5.0 % 759,768 5.5 % Other 1,220,041 8.2 % 1,075,403 7.8 % Total cost of revenues 8,975,256 60.6 % 7,358,548 53.4 % Gross profit 5,834,570 39.4 % 6,425,448 46.6 % Operating expenses: Selling and marketing 2,074,873 14.0 % 1,595,967 11.6 % Depreciation and amortization 206,346 1.4 % 272,075 2.0 % General and administrative 3,841,655 25.9 % 3,860,509 28.0 % Research and development cost 251,001 1.7 % 234,678 1.7 % Total operating expenses 6,373,875 43.0 % 5,963,229 43.3 % Income (loss) from operations (539,305 ) -3.6 % 462,219 3.4 % Other income and (expenses) Gain (loss) on sale of assets 8,770 0.1 % (53,012 ) -0.4 % Interest expense (85,916 ) -0.6 % (98,656 ) -0.7 % Interest income 364,161 2.5 % 231,979 1.7 % Gain (loss) on foreign currency exchange transactions 499,516 3.4 % (1,825,349 ) -13.2 % Share of net loss from equity investment (76,798 ) -0.5 % (80,953 ) -0.6 % Other income (30,296 ) -0.2 % 521,758 3.8 % Total other income (expenses) 679,437 4.6 % (1,304,233 ) -9.5 % Net income (loss) before income taxes 140,132 0.9 % (842,014 ) -6.1 % Income tax provision (157,604 ) -1.1 % (133,156 ) -1.0 % Net loss (17,472 ) -0.1 % (975,170 ) -7.1 % Non-controlling interest (260,998 ) -1.8 % 351,939 2.6 % Net loss attributable to NetSol $ (278,470 ) -1.9 % $ (623,231 ) -4.5 % Page 39 A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 19 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency. Favorable Favorable (Unfavorable) (Unfavorable) Change Total Favorable For the Three Months Change in due to (Unfavorable) Ended March 31, Constant Currency Change as 2022 % 2021 % Currency Fluctuation Reported Net Revenues: $ 14,809,826 100.0 % $ 13,783,996 100.0 % $ 2,039,787 $ (1,013,957 ) $ 1,025,830 Cost of revenues: 8,975,256 60.6 % 7,358,548 53.4 % (2,417,114 ) 800,406 (1,616,708 ) Gross profit 5,834,570 39.4 % 6,425,448 46.6 % (377,327 ) (213,551 ) (590,878 ) Operating expenses: 6,373,875 43.0 % 5,963,229 43.3 % (808,935 ) 398,289 (410,646 ) Income (loss) from operations $ (539,305 ) -3.6 % $ 462,219 3.4 % $ (1,186,262 ) $ 184,738 $ (1,001,524 ) Net revenues for the quarter ended March 31, 2022 and 2021 are broken out among the segments as follows: 2022 2021 Revenue % Revenue % North America $ 1,113,820 7.5 % $ 1,008,011 7.3 % Europe 2,088,918 14.1 % 2,748,945 19.9 % Asia-Pacific 11,607,088 78.4 % 10,027,040 72.7 % Total $ 14,809,826 100.0 % $ 13,783,996 100.0 % Revenues License fees License fees for the three months ended March 31, 2022 were $1,620,827 compared to $2,120,963 for the three months ended March 31, 2021 reflecting a decrease of $500,136 with a change in constant currency of $312,062. During the three months ended March 31, 2022, we recognized approximately $1,117,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product ® for their new business segment in the South African market and $465,000 from the DFS contract. During the three months ended March 31, 2021, we recognized approximately $2,100,000 related to a license agreement with an existing tier one finance company in Thailand for our CAP and CMS solutions. Page 40 Subscription and support Subscription and support fees for the three months ended March 31, 2022 were $6,554,540 compared to $5,674,776 for the three months ended March 31, 2021 reflecting an increase of $879,764 with a change in constant currency of $1,330,584. The major increase is related to the revised ceiling amount for post contract support due to the software customizations related to the DFS contract. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent ® . Services Services income for the three months ended March 31, 2022 was $6,634,459 compared to $5,988,257 for the three months ended March 31, 2021 reflecting an increase of $646,202 with an increase in constant currency of $1,021,265. The increase is primarily due to services provided to customers during the implementation phase. Gross Profit The gross profit was $5,834,570, for the three months ended March 31, 2022 as compared with $6,425,448 for the three months ended March 31, 2021. This is a decrease of $590,878 with a change in constant currency of $377,327. The gross profit percentage for the three months ended March 31, 2022 also decreased to 39.4% from 46.6% for the three months ended March 31, 2021. The cost of sales was $8,975,256 for the three months ended March 31, 2022 compared to $7,358,548 for the three months ended March 31, 2021 for an increase of $1,616,708 and on a constant currency basis an increase of $2,417,114. As a percentage of sales, cost of sales increased from 53.4% for the three months ended March 31, 2021 to 60.6% for the three months ended March 31, 2022. Salaries and consultant fees increased by $1,384,596 from $5,372,302 for the three months ended March 31, 2021 to $6,756,898 for the three months ended March 31, 2022 and on a constant currency basis increased by $1,977,061. The increase is due to increases in salaries that had been decreased as part of our cost savings measure due to the COVID-19 pandemic last year, annual salary raises, and new hirings. As a percentage of sales, salaries and consultant expense increased from 39.0% for the three months ended March 31, 2021 to 45.6% for the three months ended March 31, 2022. Travel expense was $256,730 for the three months ended March 31, 2022 compared to $151,075 for the three months ended March 31, 2021 for an increase of $105,655 with an increase in constant currency of $127,526. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions. Depreciation and amortization expense decreased to $741,587 compared to $759,768 for the three months ended March 31, 2021 or a decrease of $18,181 and on a constant currency basis an increase of $69,770. Other cost increased to $1,220,041 for the three months ended March 31, 2022 compared to $1,075,403 for the three months ended March 31, 2021 or an increase of $144,638 and on a constant currency basis an increase of $242,757. The increase is mainly due to increase in repair and maintenance cost and computer cost. Operating Expenses Operating expenses were $6,373,875 for the three months ended March 31, 2022 compared to $5,963,229, for the three months ended March 31, 2021 for an increase of 6.9% or $410,646 and on a constant currency basis an increase of 13.8% or $808,935. As a percentage of sales, it decreased from 43.3% to 43.0%. The increase in operating expenses was primarily due to increases in selling expenses, and research and development costs off set by decrease in general and administrative expenses. Selling expenses were $2,074,873 for the three months ended March 31, 2022 compared to $1,595,967, for the three months ended March 31, 2021 for an increase of $478,906 and on a constant currency basis an increase of $635,079. Page 41 General and administrative expenses were $3,841,655 for the three months ended March 31, 2022 compared to $3,860,509 at March 31, 2021 or a decrease of $18,854 or 0.5% and on a constant currency basis an increase of $178,602 or 4.6%. During the three months ended March 31, 2022, salaries decreased by approximately $116,198 and increased $17,034 on a constant currency basis, and other general and administrative expenses increased approximately $97,344 or $161,568 on a constant currency basis. Research and development cost was $251,001 for the three months ended March 31, 2022 compared to $234,678, for the three months ended March 31, 2021 for an increase of $16,323 and on a constant currency basis an increase of $45,325. Income/Loss from Operations Loss from operations was $539,305 for the three months ended March 31, 2022 compared to income from operations of $462,219 for the three months ended March 31, 2021. This represents a decrease of $1,001,524 with a decrease of $1,186,262 on a constant currency basis for the three months ended March 31, 2022 compared with the three months ended March 31, 2021. As a percentage of sales, loss from operations was 3.6% for the three months ended March 31, 2022 compared to income from operations of 3.4% for the three months ended March 31, 2021. Other Income and Expense Other income was $679,437 for the three months ended March 31, 2022 compared to other expense of $1,304,233 for the three months ended March 31, 2021. This represents an increase of $1,938,670 with an increase of $2,068,460 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the three months ended March 31, 2022, we recognized a gain of $499,516 in foreign currency exchange transactions compared to a loss of $1,825,349 for the three months ended March 31, 2021. During the three months ended March 31, 2022, the value of the U.S. dollar and the Euro increased 3.2% and 1.2%, respectively, compared to the PKR. During the three months ended March 31, 2021, the value of the U.S. dollar and the Euro decreased 4.5% and 8.7%, respectively, compared to the PKR. Non-controlling Interest For the three months ended March 31, 2022, the net income attributable to non-controlling interest was $260,998, compared to net loss of $351,939 for the three months ended March 31, 2021. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK. Net loss attributable to NetSol Net loss was $278,470 for the three months ended March 31, 2022 compared to a net loss of $623,231 for the three months ended March 31, 2021. This is a decrease of $344,761 with a decrease of $152,119 on a constant currency basis, compared to the prior year. For the three months ended March 31, 2022, net loss per share was $0.02 for basic and diluted shares compared to a net loss per share of $0.05 for basic and diluted shares for the three months ended March 31, 2021. Page 42 Nine Months Ended March 31, 2022 Compared to the Nine Months Ended March 31, 2021 The following table sets forth the items in our unaudited condensed consolidated statement of operations for the nine months ended March 31, 2022 and 2021 as a percentage of revenues. For the Nine Months Ended March 31, 2022 % 2021 % Net Revenues: License fees $ 3,586,874 8.2 % $ 4,710,942 11.9 % Subscription and support 22,159,798 50.7 % 16,571,441 41.9 % Services 17,956,877 41.1 % 18,270,451 46.2 % Total net revenues 43,703,549 100.0 % 39,552,834 100.0 % Cost of revenues: Salaries and consultants 18,081,225 41.4 % 15,193,613 38.4 % Travel 753,698 1.7 % 414,001 1.0 % Depreciation and amortization 2,236,190 5.1 % 2,180,766 5.5 % Other 3,712,256 8.5 % 2,915,122 7.4 % Total cost of revenues 24,783,369 56.7 % 20,703,502 52.3 % Gross profit 18,920,180 43.3 % 18,849,332 47.7 % Operating expenses: Selling and marketing 5,502,028 12.6 % 4,763,598 12.0 % Depreciation and amortization 633,481 1.4 % 715,437 1.8 % General and administrative 11,548,097 26.4 % 11,353,933 28.7 % Research and development cost 761,621 1.7 % 431,086 1.1 % Total operating expenses 18,445,227 42.2 % 17,264,054 43.6 % Income from operations 474,953 1.1 % 1,585,278 4.0 % Other income and (expenses) Gain (loss) on sale of assets (181,955 ) -0.4 % (127,285 ) -0.3 % Interest expense (277,737 ) -0.6 % (296,224 ) -0.7 % Interest income 1,123,547 2.6 % 643,654 1.6 % Gain (loss) on foreign currency exchange transactions 2,684,680 6.1 % (1,515,327 ) -3.8 % Share of net loss from equity investment (317,581 ) -0.7 % (232,488 ) -0.6 % Other income (7,599 ) 0.0 % 654,395 1.7 % Total other income (expenses) 3,023,355 6.9 % (873,275 ) -2.2 % Net income before income taxes 3,498,308 8.0 % 712,003 1.8 % Income tax provision (526,737 ) -1.2 % (642,884 ) -1.6 % Net income 2,971,571 6.8 % 69,119 0.2 % Non-controlling interest (1,655,287 ) -3.8 % (216,900 ) -0.5 % Net income (loss) attributable to NetSol $ 1,316,284 3.0 % $ (147,781 ) -0.4 % Page 43 A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 19 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency. Favorable Favorable (Unfavorable) (Unfavorable) Change Total Favorable For the Nine Months Change in due to (Unfavorable) Ended March 31, Constant Currency Change as 2022 % 2021 % Currency Fluctuation Reported Net Revenues: $ 43,703,549 100.0 % $ 39,552,834 100.0 % $ 5,511,689 $ (1,360,974 ) $ 4,150,715 Cost of revenues: 24,783,369 56.7 % 20,703,502 52.3 % (5,115,333 ) 1,035,466 (4,079,867 ) Gross profit 18,920,180 43.3 % 18,849,332 47.7 % 396,356 (325,508 ) 70,848 Operating expenses: 18,445,227 42.2 % 17,264,054 43.6 % (1,647,183 ) 466,010 (1,181,173 ) Income (loss) from operations $ 474,953 1.1 % $ 1,585,278 4.0 % $ (1,250,827 ) $ 140,502 $ (1,110,325 ) Net revenues for the nine months ended March 31, 2022 and 2021 are broken out among the segments as follows: 2022 2021 Revenue % Revenue % North America $ 3,104,433 7.1 % $ 2,837,445 7.2 % Europe 7,483,911 17.1 % 8,627,042 21.8 % Asia-Pacific 33,115,205 75.8 % 28,088,347 71.0 % Total $ 43,703,549 100.0 % $ 39,552,834 100.0 % Revenues License fees License fees for the nine months ended March 31, 2022 were $3,586,874 compared to $4,710,942 for the nine months ended March 31, 2021 reflecting a decrease of $1,124,068 with a change in constant currency of $774,842. During the nine months ended March 31, 2022, we recognized approximately $3,039,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product ® for their new business segment in the Japanese, Australian and South African markets and $465,000 from the DFS contract. During the nine months ended March 31, 2021, we recognized approximately $2,410,000 related to a new agreement with an existing tier one finance company in China to upgrade to our NFS Ascent ® Retail and Wholesale platforms and approximately $2,100,000 related to an agreement with an existing tier one finance company in Thailand. Page 44 Subscription and support Subscription and support fees for the nine months ended March 31, 2022 were $22,159,798 compared to $16,571,441 for the nine months ended March 31, 2021 reflecting an increase of $5,588,357 with a change in constant currency of $6,404,824. The major increase is related to the revised ceiling amount for post contract support due to the software customizations related to the DFS contract. The Company recorded a one-time post contract support revenue of approximately $3,480,000 using the catch-up approach during the nine months ended March 31, 2022. In addition, the Company will recognize approximately $7,931,000 of additional subscription and support revenue over the remaining four years of the contract. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent ® . Services Services income for the nine months ended March 31, 2022 was $17,956,877 compared to $18,270,451 for the nine months ended March 31, 2021 reflecting a decrease of $313,574 with a decrease in constant currency of $118,293. The decrease is not material and is due to timing of implementation services and change requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. Gross Profit The gross profit was $18,920,180, for the nine months ended March 31, 2022 as compared with $18,849,332 for the nine months ended March 31, 2021. This is an increase of $70,848 with a change in constant currency of $396,356. The gross profit percentage for the nine months ended March 31, 2022 decreased to 43.3% from 47.7% for the nine months ended March 31, 2021. The cost of sales was $24,783,369 for the nine months ended March 31, 2022 compared to $20,703,502 for the nine months ended March 31, 2021 for an increase of $4,079,867 and on a constant currency basis an increase of $5,115,333. As a percentage of sales, cost of sales increased from 52.3% for the nine months ended March 31, 2021 to 56.7% for the nine months ended March 31, 2022. Salaries and consultant fees increased by $2,887,612 from $15,193,613 for the nine months ended March 31, 2021 to $18,081,225 for the nine months ended March 31, 2022 and on a constant currency basis increased by $3,644,636. The increase is due to increases in salaries that had been decreased as part of our cost savings measure due to the COVID-19 pandemic last year, annual salary raises, and new hirings. As a percentage of sales, salaries and consultant expense increased from 38.4% for the nine months ended March 31, 2021 to 41.4% for the nine months ended March 31, 2022. Travel expense was $753,698 for the nine months ended March 31, 2022 compared to $414,001 for the nine months ended March 31, 2021 for an increase of $339,697 with an increase in constant currency of $361,876. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions. Depreciation and amortization expense increased to $2,236,190 compared to $2,180,766 for the nine months ended March 31, 2021 or an increase of $55,424 and on a constant currency basis an increase of $192,071. Other cost increased to $3,712,256 for the nine months ended March 31, 2022 compared to $2,915,122 for the nine months ended March 31, 2021 or an increase of $797,134 and on a constant currency basis an increase of $916,750. The increase is mainly due to a one time hosting cost of $302,000 and increases in repair and maintenance cost and computer cost. Operating Expenses Operating expenses were $18,445,227 for the nine months ended March 31, 2022 compared to $17,264,054, for the nine months ended March 31, 2021 for an increase of 6.8% or $1,181,173 and on a constant currency basis an increase of 9.5% or $1,647,183. As a percentage of sales, it decreased from 43.7% to 42.2%. The increase in operating expenses was primarily due to increases in selling expenses, general and administrative expenses and research and development costs. Selling expenses were $5,502,028 for the nine months ended March 31, 2022 compared to $4,763,598, for the nine months ended March 31, 2021 for an increase of $738,430 and on a constant currency basis an increase of $949,864. Page 45 General and administrative expenses were $11,548,097 for the nine months ended March 31, 2022 compared to $11,353,933 at March 31, 2021 for an increase of $194,164 or 1.7% and on a constant currency basis an increase of $383,805 or 3.4%. During the nine months ended March 31, 2022, salaries increased by approximately $90,956 or $238,165 on a constant currency basis, and professional services increased approximately $155,897 or $151,683 on a constant currency basis and other general and administrative expenses decreased approximately $339,949 or $296,216 on a constant currency basis. Research and development cost was $761,621 for the nine months ended March 31, 2022 compared to $431,086, for the nine months ended March 31, 2021 for an increase of $330,535 and on a constant currency basis an increase of $379,867. Income from Operations Income from operations was $474,953 for the nine months ended March 31, 2022 compared to $1,585,278 for the nine months ended March 31, 2021. This represents a decrease of $1,110,325 with a decrease of $1,250,827 on a constant currency basis for the nine months ended March 31, 2022 compared with the nine months ended March 31, 2021. As a percentage of sales, income from operations was 1.1% for the nine months ended March 31, 2022 compared to income from operations of 4.0% for the nine months ended March 31, 2021. Other Income and Expense Other income was $3,023,355 for the nine months ended March 31, 2022 compared to other expense of $873,275 for the nine months ended March 31, 2021. This represents an increase of $3,896,630 with an increase of $4,046,106 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the nine months ended March 31, 2022, we recognized a gain of $2,684,680 in foreign currency exchange transactions compared to a loss of $1,515,327 for the nine months ended March 31, 2021. During the nine months ended March 31, 2022, the value of the U.S. dollar and the Euro increased 15.9% and 8.5%, respectively, compared to the PKR. During the nine months ended March 31, 2021, the value of the U.S. dollar and the Euro decreased 8.0% and 1.9%, respectively, compared to the PKR. Non-controlling Interest For the nine months ended March 31, 2022, the net income attributable to non-controlling interest was $1,655,287, compared to $216,900 for the nine months ended March 31, 2021. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK. Net Income (loss) attributable to NetSol Net income was $1,316,284 for the nine months ended March 31, 2022 compared to a net loss of $147,781 for the nine months ended March 31, 2021. This is an increase of $1,464,065 with an increase of $1,265,521 on a constant currency basis, compared to the prior year. For the nine months ended March 31, 2022, net income per share was $0.12 for basic and diluted shares compared to a net loss per share of $0.01 for basic and diluted shares for the nine months ended March 31, 2021. Page 46 Non-GAAP Financial Measures Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows: ● EBITDA is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization. ● Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense. ● Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company. The non-GAAP measures reflect adjustments based on the following items: EBITDA : We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers. Stock-based compensation expense : We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers. Non-controlling interest : We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA. Page 47 Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the three and nine months ended March 31, 2022 and 2021 are as follows: For the Three Months Ended For the Three Months Ended For the Nine Months Ended For the Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Net Income (loss) attributable to NetSol $ (278,470 ) $ (623,231 ) $ 1,316,284 $ (147,781 ) Non-controlling interest 260,998 (351,939 ) 1,655,287 216,900 Income taxes 157,604 133,156 526,737 642,884 Depreciation and amortization 947,933 1,031,843 2,869,671 2,896,203 Interest expense 85,916 98,656 277,737 296,224 Interest (income) (364,161 ) (231,979 ) (1,123,547 ) (643,654 ) EBITDA $ 809,820 $ 56,506 $ 5,522,169 $ 3,260,776 Add back: Non-cash stock-based compensation 49,933 74,169 78,225 239,333 Adjusted EBITDA, gross $ 859,753 $ 130,675 $ 5,600,394 $ 3,500,109 Less non-controlling interest (a) (500,805 ) 66,659 (2,382,721 ) (1,074,038 ) Adjusted EBITDA, net $ 358,948 $ 197,334 $ 3,217,673 $ 2,426,071 Weighted Average number of shares outstanding Basic 11,249,606 11,343,406 11,249,449 11,571,878 Diluted 11,249,606 11,343,406 11,249,449 11,571,878 Basic adjusted EBITDA $ 0.03 $ 0.02 $ 0.29 $ 0.21 Diluted adjusted EBITDA $ 0.03 $ 0.02 $ 0.29 $ 0.21 (a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows Net Income (loss) attributable to non-controlling interest $ 260,998 $ (351,939 ) $ 1,655,287 $ 216,900 Income Taxes 45,427 34,867 159,854 127,749 Depreciation and amortization 279,055 283,716 840,508 812,816 Interest expense 25,764 29,585 81,846 89,929 Interest (income) (117,417 ) (71,440 ) (362,146 ) (204,604 ) EBITDA $ 493,827 $ (75,211 ) $ 2,375,349 $ 1,042,790 Add back: Non-cash stock-based compensation 6,978 8,552 7,372 31,248 Adjusted EBITDA of non-controlling interest $ 500,805 $ (66,659 ) $ 2,382,721 $ 1,074,038 Page 48 LIQUIDITY AND CAPITAL RESOURCES Our cash position was $30,573,312 at March 31, 2022, compared to $33,705,154 at June 30, 2021. Net cash provided by operating activities was $5,525,951 for the nine months ended March 31, 2022 compared to $10,387,344 for the nine months ended March 31, 2021. At March 31, 2022, we had current assets of $55,103,247 and current liabilities of $23,595,149. We had accounts receivable of $7,054,468 at March 31, 2022 compared to $4,184,096 at June 30, 2021. We had revenues in excess of billings of $15,604,587 at March 31, 2022 compared to $15,637,734 at June 30, 2021 of which $993,862 and $957,603 is shown as long term as of March 31, 2022 and June 30, 2021, respectively. The long-term portion was discounted by $38,333 and $66,779 at March 31, 2022 and June 30, 2021, respectively, using the discounted cash flow method with interest rates ranging from 4.65% to 6.25%. During the nine months ended March 31, 2022, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings increased by $2,837,225 from $19,821,830 at June 30, 2021 to $22,659,055 at March 31, 2022. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,317,127 and $9,622,669, respectively at March 31, 2022. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,696,035 and $11,366,171, respectively at June 30, 2021. The average days sales outstanding for the nine months ended March 31, 2022 and 2021 were 133 and 183 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenues in excess of billings. Net cash used in investing activities was $1,359,605 for the nine months ended March 31, 2022, compared to $2,133,265 for the nine months ended March 31, 2021. We had purchases of property and equipment of $1,680,856 compared to $2,109,058 for the nine months ended March 31, 2021. For the nine months ended March 31, 2021, we invested $155,000, in Drivemate. Net cash used in financing activities was $833,103 for the nine months ended March 31, 2022, compared to $488,572 for the nine months ended March 31, 2021. For the nine months ended March 31, 2022, we purchased 22,510 shares of our own stock for $100,106 compared to the purchase of 603,688 shares for $2,064,800 for the same period last year. The nine months ended March 31, 2022 included the cash inflow of $312,467 from bank proceeds compared to $2,109,572 for the same period last year. During the nine months ended March 31, 2022, we had net payments for bank loans and finance leases of $1,045,464 compared to $533,344 for the nine months ended March 31, 2021. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 15 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources. We typically fund the cash requirements for our operations in the U.S. through our license, services, and subscription and support agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of March 31, 2022, we had approximately $30.6 million of cash, cash equivalents and marketable securities of which approximately $29.3 million is held by our foreign subsidiaries. As of June 30, 2021, we had approximately $33.7 million of cash, cash equivalents and marketable securities of which approximately $31.7 million was held by our foreign subsidiaries. We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise. As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations. While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital. Page 49 Financial Covenants Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($394,737) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($2,728,811) and a running finance facility of Rupees 75 million ($409,322). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($4,911,859). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol PK also has an approved export refinance facility of Rs. 380 million ($2,073,896) and a running finance facility of Rs. 120 million ($654,915) from Samba Bank Limited. During the tenure of loan, these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities. CRITICAL ACCOUNTING POLICIES Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. RECENT ACCOUNTING PRONOUNCEMENTS For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures about Market Risks. None.