NETSOL TECHNOLOGIES INC 10-Q

Item 1. Financial Statements (Unaudited) NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) As of As of December 31, 2022 June 30, 2022 ASSETS Current assets: Cash and cash equivalents $ 20,946,722 $ 23,963,797 Accounts receivable, net of allowance of $ 163,111 and $ 166,231 4,595,675 8,669,202 Revenues in excess of billings, net of allowance of $ 49,614 and $ 136,976 14,785,593 14,571,776 Other current assets, net of allowance of $ 1,243,633 and $ 1,243,633 2,748,520 2,223,361 Total current assets 43,076,510 49,428,136 Revenues in excess of billings, net - long term 604,358 853,601 Convertible note receivable - related party, net of allowance of $ 4,250,000 and $ 4,250,000 - - Property and equipment, net 8,719,657 9,382,624 Right of use of assets - operating leases 1,246,778 969,163 Long term investment 1,064,501 1,059,368 Other assets 532 25,546 Intangible assets, net 801,039 1,587,670 Goodwill 9,302,524 9,302,524 Total assets $ 64,815,899 $ 72,608,632 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 7,423,248 $ 6,813,541 Current portion of loans and obligations under finance leases 7,386,750 8,567,145 Current portion of operating lease obligations 499,455 548,678 Unearned revenue 4,048,768 4,901,562 Total current liabilities 19,358,221 20,830,926 Loans and obligations under finance leases; less current maturities 306,945 476,223 Operating lease obligations; less current maturities 789,621 447,260 Total liabilities 20,454,787 21,754,409 Commitments and contingencies - - Stockholders’ equity: Preferred stock, $ .01 par value; 500,000 shares authorized; - - Common stock, $ .01 par value; 14,500,000 shares authorized; 12,222,985 shares issued and 11,283,954 outstanding as of December 31, 2022 and 12,196,570 shares issued and 11,257,539 outstanding as of June 30, 2022 122,231 121,966 Additional paid-in-capital 128,484,714 128,218,247 Treasury stock (at cost, 939,031 sharesand as of December 31, 2022 and June 30, 2022) ( 3,920,856 ) ( 3,920,856 ) Accumulated deficit ( 42,366,093 ) ( 39,652,438 ) Other comprehensive loss ( 42,011,340 ) ( 39,363,085 ) Total NetSol stockholders’ equity 40,308,656 45,403,834 Non-controlling interest 4,052,456 5,450,389 Total stockholders’ equity 44,361,112 50,854,223 Total liabilities and stockholders’ equity $ 64,815,899 $ 72,608,632 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) 2022 2021 2022 2021 For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Net Revenues: License fees $ 15,884 $ 1,955,331 $ 265,844 $ 1,966,047 Subscription and support 6,502,669 9,374,869 12,519,503 15,605,258 Services 5,871,805 4,142,762 12,311,130 11,322,418 Total net revenues 12,390,358 15,472,962 25,096,477 28,893,723 Cost of revenues: Salaries and consultants 6,942,171 5,661,917 13,028,906 11,324,327 Travel 635,298 282,836 1,027,643 496,968 Depreciation and amortization 693,278 728,868 1,347,327 1,494,603 Other 977,148 1,156,754 2,298,141 2,492,215 Total cost of revenues 9,247,895 7,830,375 17,702,017 15,808,113 Gross profit 3,142,463 7,642,587 7,394,460 13,085,610 Operating expenses: Selling and marketing 2,007,462 1,807,162 3,769,639 3,427,155 Depreciation and amortization 198,222 212,864 389,176 427,135 General and administrative 3,510,389 3,733,303 7,235,819 7,706,442 Research and development cost 472,904 235,390 942,531 510,620 Total operating expenses 6,188,977 5,988,719 12,337,165 12,071,352 Loss from operations ( 3,046,514 ) 1,653,868 ( 4,942,705 ) 1,014,258 Other income and (expenses) Gain (loss) on sale of assets 5,048 ( 80,125 ) 28,344 ( 190,725 ) Interest expense ( 202,363 ) ( 90,808 ) ( 323,973 ) ( 191,821 ) Interest income 309,906 316,253 741,763 759,386 Gain on foreign currency exchange transactions 657,223 901,016 1,972,928 2,185,164 Share of net loss from equity investment 5,133 ( 79,818 ) 5,133 ( 240,783 ) Other income (expense) 89,660 19,668 91,980 22,697 Total other income (expenses) 864,607 986,186 2,516,175 2,343,918 Net income (loss) before income taxes ( 2,181,907 ) 2,640,054 ( 2,426,530 ) 3,358,176 Income tax provision ( 220,056 ) ( 201,506 ) ( 413,404 ) ( 369,133 ) Net income (loss) ( 2,401,963 ) 2,438,548 ( 2,839,934 ) 2,989,043 Non-controlling interest 309,037 ( 1,031,763 ) 126,279 ( 1,394,289 ) Net income (loss) attributable to NetSol $ ( 2,092,926 ) $ 1,406,785 $ ( 2,713,655 ) $ 1,594,754 Net income (loss) per share: Net income (loss) per common share Basic $ ( 0.19 ) $ 0.13 $ ( 0.24 ) $ 0.14 Diluted $ ( 0.19 ) $ 0.13 $ ( 0.24 ) $ 0.14 Weighted average number of shares outstanding Basic 11,270,199 11,244,539 11,263,869 11,249,372 Diluted 11,270,199 11,244,539 11,263,869 11,249,372 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) 2022 2021 2022 2021 For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Net income (loss) $ ( 2,092,926 ) $ 1,406,785 $ ( 2,713,655 ) $ 1,594,754 Other comprehensive income (loss): Translation adjustment 352,175 ( 1,466,995 ) ( 3,799,344 ) ( 4,751,391 ) Translation adjustment attributable to non-controlling interest ( 82,380 ) 545,252 1,151,089 1,684,243 Net translation adjustment 269,795 ( 921,743 ) ( 2,648,255 ) ( 3,067,148 ) Comprehensive income (loss) attributable to NetSol $ ( 1,823,131 ) $ 485,042 $ ( 5,361,910 ) $ ( 1,472,394 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 5 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) A statement of the changes in equity for the three months ended December 31, 2022 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 September 30, 2022 12,209,230 $ 122,093 $ 128,420,519 $ ( 3,920,856 ) $ ( 40,273,167 ) $ ( 42,281,135 ) $ 4,279,113 $ 46,346,567 Common stock issued for: Services 13,755 138 39,612 - - - - 39,750 Fair value of subsidiary options issued - - 24,583 - - - - 24,583 Foreign currency translation adjustment - - - - - 269,795 82,380 352,175 Net income (loss) for the year - - - - ( 2,092,926 ) - ( 309,037 ) ( 2,401,963 ) Balance at December 31, 2022 12,222,985 $ 122,231 $ 128,484,714 $ ( 3,920,856 ) $ ( 42,366,093 ) $ ( 42,011,340 ) $ 4,052,456 $ 44,361,112 A statement of the changes in equity for the three months ended September 30, 2022 is provided below: Other Additional Compre- Non Total Common Stock Paid-in Treasury Accumulated hensive Controlling Stockholders’ Shares Amount Capital Shares Deficit Loss Interest Equity Balance at June 30, 2022 12,196,570 $ 121,966 $ 128,218,247 $ ( 3,920,856 ) $ ( 39,652,438 ) $ ( 39,363,085 ) $ 5,450,389 $ 50,854,223 Common stock issued for: Services 12,660 127 39,623 - - - - 39,750 Adjustment in APIC for change in subsidiary shares to non-controlling interest - - 120,565 - - - ( 120,565 ) - Fair value of subsidiary options issued - - 42,084 - - - - 42,084 Foreign currency translation adjustment - - - - - ( 2,918,050 ) ( 1,233,469 ) ( 4,151,519 ) Net income (loss) for the year - - - - ( 620,729 ) - 182,758 ( 437,971 ) Balance at September 30, 2022 12,209,230 $ 122,093 $ 128,420,519 $ ( 3,920,856 ) $ ( 40,273,167 ) $ ( 42,281,135 ) $ 4,279,113 $ 46,346,567 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 6 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) A statement of the changes in equity for the three months ended December 31, 2021 is provided below: Other Additional Compre- Non Total Common Stock Paid-in Treasury Accumulated hensive Controlling Stockholders’ Shares Amount Capital Shares Deficit Loss Interest Equity Balance at September 30, 2021 12,183,570 $ 121,836 $ 129,030,982 $ ( 3,920,856 ) $ ( 38,613,313 ) $ ( 34,013,886 ) $ 6,438,841 $ 59,043,604 Common stock issued for: Services 2,500 25 9,875 - - - - 9,900 Fair value of subsidiary options issued - - 1,164 - - - - 1,164 Foreign currency translation adjustment - - - - - ( 921,743 ) ( 545,252 ) ( 1,466,995 ) Net income for the year - - - - 1,406,785 - 1,031,763 2,438,548 Balance at December 31, 2021 12,186,070 $ 121,861 $ 129,042,021 $ ( 3,920,856 ) $ ( 37,206,528 ) $ ( 34,935,629 ) $ 6,925,352 $ 60,026,221 A statement of the changes in equity for the three months ended September 30, 2021 is provided below: Other Additional Compre- Non Total Common Stock Paid-in Treasury Accumulated hensive Controlling Stockholders’ Shares Amount Capital Shares Deficit Loss Interest Equity Balance at June 30, 2021 12,181,585 $ 121,816 $ 129,018,826 $ ( 3,820,750 ) $ ( 38,801,282 ) $ ( 31,868,481 ) $ 7,215,473 $ 61,865,602 Beginning balance 12,181,585 $ 121,816 $ 129,018,826 $ ( 3,820,750 ) $ ( 38,801,282 ) $ ( 31,868,481 ) $ 7,215,473 $ 61,865,602 Subsidiary common stock issued for: -Services - - 167 - - - ( 167 ) - Common stock issued for: Services 1,985 20 11,989 - - - - 12,009 Purchase of treasury shares - - - ( 100,106 ) - - - ( 100,106 ) Foreign currency translation adjustment - - - - - ( 2,145,405 ) ( 1,138,991 ) ( 3,284,396 ) Net income - - - - 187,969 - 362,526 550,495 Net income (loss) for the year - - - - 187,969 - 362,526 550,495 Balance at September 30, 2021 12,183,570 $ 121,836 $ 129,030,982 $ ( 3,920,856 ) $ ( 38,613,313 ) $ ( 34,013,886 ) $ 6,438,841 $ 59,043,604 Ending balance 12,183,570 $ 121,836 $ 129,030,982 $ ( 3,920,856 ) $ ( 38,613,313 ) $ ( 34,013,886 ) $ 6,438,841 $ 59,043,604 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 7 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) 2022 2021 For the Six Months Ended December 31, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 2,839,934 ) $ 2,989,043 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,736,503 1,921,738 Provision for bad debts ( 67,176 ) ( 33,815 ) Share of net (gain) loss from investment under equity method ( 5,133 ) 240,783 (Gain) loss on sale of assets ( 28,344 ) 190,725 Stock based compensation 146,167 28,292 Changes in operating assets and liabilities: Accounts receivable 3,772,091 ( 3,243,348 ) Revenues in excess of billing ( 702,812 ) ( 4,741,806 ) Other current assets ( 529,579 ) 304,464 Accounts payable and accrued expenses 904,731 56,539 Unearned revenue ( 696,971 ) ( 749,249 ) Net cash provided by (used in) operating activities 1,689,543 ( 3,036,634 ) Cash flows from investing activities: Purchases of property and equipment ( 1,252,325 ) ( 773,953 ) Sales of property and equipment 70,283 201,773 Net cash used in investing activities ( 1,182,042 ) ( 572,180 ) Cash flows from financing activities: Purchase of treasury stock - ( 100,106 ) Proceeds from bank loans - 188,272 Payments on finance lease obligations and loans - net ( 537,180 ) ( 715,121 ) Net cash used in financing activities ( 537,180 ) ( 626,955 ) Effect of exchange rate changes ( 2,987,396 ) ( 3,881,870 ) Net decrease in cash and cash equivalents ( 3,017,075 ) ( 8,117,639 ) Cash and cash equivalents at beginning of the period 23,963,797 33,705,154 Cash and cash equivalents at end of period $ 20,946,722 $ 25,587,515 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 8 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) For the Six Months Ended December 31, 2022 2021 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 226,271 $ 238,569 Taxes $ 395,710 $ 390,307 NON-CASH INVESTING AND FINANCING ACTIVITIES: Shares issued to vendor for services received $ - $ 9,900 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 9 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers. The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2022. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results. The accompanying consolidated financial statements include the accounts of the Company as follows: Wholly owned Subsidiaries NetSol Technologies Americas, Inc. (“NTA”) NetSol Connect (Private), Ltd. (“Connect”) NetSol Technologies Australia Pty Ltd. (“Australia”) NetSol Technologies Europe Limited (“NTE”) NTPK (Thailand) Co. Limited (“NTPK Thailand”) NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”) Tianjin NuoJinZhiCheng Co., Ltd (“Tianjin”) Ascent Europe Ltd. (“AEL”) Virtual Lease Services Holdings Limited (“VLSH”) Virtual Lease Services Limited (“VLS”) Virtual Lease Services (Ireland) Limited (“VLSIL”) Majority-owned Subsidiaries NetSol Technologies, Ltd. (“NetSol PK”) NetSol Innovation (Private) Limited (“NetSol Innovation”) NetSol Technologies Thailand Limited (“NetSol Thai”) Otoz, Inc. (“Otoz”) Otoz (Thailand) Limited (“Otoz Thai”) Page 10 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 2 – ACCOUNTING POLICIES Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates. Concentration of Credit Risk Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances maintained in China are insured for RMB 500,000 ($ 72,464 ) in each bank and in the UK for GBP 85,000 ($ 102,410 ) in each bank. The Company maintains three bank accounts in China and nine bank accounts in the UK. As of December 31, 2022, and June 30, 2022, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $ 18,568,700 and $ 22,758,963 , respectively. The Company has not experienced any losses in such accounts. The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Fair Value of Financial Instruments The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics. The three levels of valuation hierarchy are defined as follows: Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. Page 11 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) The Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2022, were as follows: SCHEDULE OF FAIR VALUE OF FINANCIAL ASSETS MEASURED ON RECURRING BASIS Level 1 Level 2 Level 3 Total Assets Revenues in excess of billings - long term $ - $ - $ 604,358 $ 604,358 Total $ - $ - $ 604,358 $ 604,358 The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2022, were as follows: Level 1 Level 2 Level 3 Total Assets Revenues in excess of billings - long term $ - $ - $ 853,601 $ 853,601 Total $ - $ - $ 853,601 $ 853,601 The reconciliation from June 30, 2022 to December 31, 2022 is as follows: SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS RECONCILIATION Revenues in excess of billings - long term Fair value discount Total Balance at June 30, 2022 $ 881,940 $ ( 28,339 ) $ 853,601 Amortization during the period - 18,657 18,657 Transfers to short term ( 268,116 ) - ( 268,116 ) Effect of Translation Adjustment ( 90 ) 306 216 Balance at December 31, 2022 $ 613,734 $ ( 9,376 ) $ 604,358 Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model. Recent Accounting Standards : In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, with early adoption permitted. The Company does not expect the standard to have a material effect on its consolidated financial statements. All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable. Page 12 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 3 – REVENUE RECOGNITION The Company determines revenue recognition through the following steps: ● Identification of the contract, or contracts, with a customer; ● Identification of the performance obligations in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligations in the contract; and ● Recognition of revenue when, or as, the Company satisfies a performance obligation. The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities. The Company has two primary revenue streams: core revenue and non-core revenue. Core Revenue The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software. Non-Core Revenue The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract. The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements. For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. Software Licenses Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice. Page 13 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Subscription Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice. Post Contract Support Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice. Professional Services Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice. BPO and Internet Services Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis. Page 14 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Disaggregated Revenue The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company’s disaggregated revenue by category is as follows: SCHEDULE OF DISAGGREGATED REVENUE BY CATEGORY 2022 2021 2022 2021 For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Core: License $ 15,884 $ 1,955,331 $ 265,844 $ 1,966,047 Subscription and support 6,502,669 9,374,869 12,519,503 15,605,258 Services 4,818,461 2,867,515 10,239,827 8,723,794 Total core revenue, net 11,337,014 14,197,715 23,025,174 26,295,099 Non-Core: Services 1,053,344 1,275,247 2,071,303 2,598,624 Total non-core revenue, net 1,053,344 1,275,247 2,071,303 2,598,624 Total net revenue $ 12,390,358 $ 15,472,962 $ 25,096,477 $ 28,893,723 Significant Judgments Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances. Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers. The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services. The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer. The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period. Page 15 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Revenue is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes. If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur. Contract Balances The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (unearned revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records unearned revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer. The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone. The Company’s revenues in excess of billings and unearned revenue are as follows: SCHEDULE OF REVENUES IN EXCESS OF BILLINGS AND DEFERRED REVENUE As of As of December 31, 2022 June 30, 2022 Revenues in excess of billings $ 15,389,951 $ 15,425,377 Unearned revenue $ 4,048,768 $ 4,901,562 During the three and six months ended December 31, 2022, the Company recognized revenue of $ 675,857 and $ 2,784,572 that was included in the unearned revenue balance at the beginning of the period. All other activity in unearned revenue is due to the timing of invoicing in relation to the timing of revenue recognition. Page 16 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $ 36,000,000 as of December 31, 2022, of which the Company estimates to recognize approximately $ 14,500,000 in revenue over the next 12 months and the remainder over an estimated 3 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements. Unearned Revenue The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and unearned revenue. Practical Expedients and Exemptions There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients: ● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. ● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations. ● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements). Costs to Obtain a Contract The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts. Page 17 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 4 – EARNINGS PER SHARE Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. During the three and six months ended December 31, 2022 and 2021, there were no outstanding dilutive instruments. NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY The accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand, NetSol Thai and Otoz Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing and Tianjin use the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTA and Otoz, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $ 42,011,340 and $ 39,363,085 as of December 31, 2022 and June 30, 2022, respectively. During the three and six months ended December 31, 2022, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a $ 269,795 translation gain attributable to NetSol and a $ ( 2,648,255 ) translation loss attributable to NetSol, respectively. During the three and six months ended December 31, 2021, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $ ( 921,743 ) and $ ( 3,067,148 ) , respectively. NOTE 6 – MAJOR CUSTOMERS During the six months ended December 31, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $ 7,069,884 , and $ 2,314,744 , respectively representing 28.2 % and 9.2 %, respectively of revenues. During the six months ended December 31, 2021, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $ 11,421,688 and $ 1,531,588 , respectively representing 39.5 % and 5.3 %, respectively of revenues. The revenue from these customers is shown in the Asia – Pacific segment. Accounts receivable from DFS and BMW at December 31, 2022, were $ 357,164 and $ 360,703 , respectively. Accounts receivable at June 30, 2022, were $ 2,005,463 and $ 2,498,645 , respectively. Revenues in excess of billings at December 31, 2022 were $ 3,535,799 and $ 2,252,994 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2022, were $ 365,863 and $ 2,199,381 for DFS and BMW, respectively. NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY The Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from 5 % to 10 % with various maturity dates. The convertible notes have conversion features which allow the Company to convert the notes into shares of WRLD3D stock upon the occurrence of certain events. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts and the proceeds thereof. Page 18 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) The following table summarizes the convertible notes receivable from WRLD3D. SCHEDULE OF CONVERTIBLE NOTES Convertible Agreement Interest Maturity Note Accrued Date Rate Date Amount Interest May 25, 2017 5 % March 2, 2018 $ 750,000 $ 110,202 February 9, 2018 10 % March 31, 2019 2,500,000 500,773 April 1, 2019 10 % March 31, 2020 600,000 57,648 August 19, 2019 10 % March 31, 2020 400,000 32,439 4,250,000 701,062 Less allowance for doubtful account ( 4,250,000 ) ( 701,062 ) Net Balance $ - $ - The Company has accrued interest of $ 701,062 at December 31, 2022 and June 30, 2022, which is included in “Other current assets”. As of July 1, 2020, the Company stopped accruing interest. NOTE 8 - OTHER CURRENT ASSETS Other current assets consisted of the following: SCHEDULE OF OTHER CURRENT ASSETS As of As of December 31, 2022 June 30, 2022 Prepaid Expenses $ 1,634,444 $ 1,389,370 Advance Income Tax 240,223 202,783 Employee Advances 109,972 87,627 Security Deposits 234,638 236,909 Other Receivables 52,470 21,581 Other Assets 476,773 285,091 Due From Related Party 1,243,633 1,243,633 Total 3,992,153 3,466,994 Less allowance for doubtful account ( 1,243,633 ) ( 1,243,633 ) Net Balance $ 2,748,520 $ 2,223,361 Due from related party is the amount receivable from WRLD3D for which the Company has provided an allowance for credit loss for the full amount, leaving a net balance of $ 0 . Page 19 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM Revenues in excess of billings, net consisted of the following: SCHEDULE OF REVENUE IN EXCESS OF BILLING As of As of December 31, 2022 June 30, 2022 Revenues in excess of billings - long term $ 613,734 $ 881,940 Present value discount ( 9,376 ) ( 28,339 ) Net Balance $ 604,358 $ 853,601 Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2022, the Company accreted $ 9,288 and $ 18,657 , respectively. During the three and six months ended December 31, 2021, the Company accreted $ 9,539 and $ 19,041 , respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65 % to 6.25 %. NOTE 10 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: SCHEDULE OF PROPERTY AND EQUIPMENT As of As of December 31, 2022 June 30, 2022 Office Furniture and Equipment $ 2,905,429 $ 3,021,586 Computer Equipment 11,712,255 11,388,856 Assets Under Capital Leases 59,033 305,081 Building 4,387,210 4,818,650 Land 1,122,819 1,237,965 Autos 2,500,251 2,503,990 Improvements 228,291 175,560 Subtotal 22,915,288 23,451,688 Accumulated Depreciation ( 14,195,631 ) ( 14,069,064 ) Property and Equipment, Net $ 8,719,657 $ 9,382,624 For the three and six months ended December 31, 2022, depreciation expense totaled $ 568,828 and $ 1,091,011 , respectively. Of these amounts, $ 370,606 and $ 701,835 , respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2021, depreciation expense was $ 527,463 and $ 1,067,185 , respectively. Of these amounts, $ 314,599 and $ 640,050 , respectively, are reflected in cost of revenues. Following is a summary of fixed assets held under finance leases as of December 31, 2022 and June 30, 2022: SUMMARY OF FIXED ASSETS HELD UNDER CAPITAL LEASES As of As of December 31, 2022 June 30, 2022 Vehicles $ 59,033 $ 305,081 Total 59,033 305,081 Less: Accumulated Depreciation - Net ( 16,117 ) ( 145,658 ) Fixed assets held under finance leases, Total $ 42,916 $ 159,423 Page 20 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Finance lease term and discount rate were as follows: SCHEDULE OF FINANCE LEASE TERM As of As of December 31, 2022 June 30, 2022 Weighted average remaining lease term - Finance leases 1.66 Years 2.39 Years Weighted average discount rate - Finance leases 16.5 % 12.5 % NOTE 11 - LEASES The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years. The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts. Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants. Page 21 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Supplemental balance sheet information related to leases was as follows: SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASE As of As of December 31, 2022 June 30, 2022 Assets Operating lease assets, net $ 1,246,778 $ 969,163 Liabilities Current Operating $ 499,455 $ 548,678 Operating, Current $ 499,455 $ 548,678 Non-current Operating 789,621 447,260 Operating, Current 789,621 447,260 Total Lease Liabilities $ 1,289,076 $ 995,938 The components of lease cost were as follows: SCHEDULE OF COMPONENTS OF LEASE COST 2022 2021 2022 2021 For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Amortization of finance lease assets $ 3,099 $ 21,895 $ 5,995 $ 42,928 Interest on finance lease obligation 1,552 3,212 3,359 8,148 Operating lease cost 113,079 97,827 231,601 380,778 Short term lease cost 37,986 38,781 104,622 38,781 Sub lease income ( 7,786 ) ( 8,950 ) ( 15,598 ) ( 18,105 ) Total lease cost $ 147,930 $ 152,765 $ 329,979 $ 452,530 Lease term and discount rate were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE As of As of December 31, 2022 June 30, 2022 Weighted average remaining lease term - Operating leases 3.31 Years 3.34 Years Weighted average discount rate - Operating leases 3.6 % 4.2 % Page 22 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) Supplemental disclosures of cash flow information related to leases were as follows: SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION RELATED TO LEASES 1 2 For the Six Months Ended December 31 2022 2021 Operating cash flows related to operating leases $ 236,311 $ 369,175 Operating cash flows related to finance leases $ 3,358 $ 3,531 Financing cash flows related finance leases $ 16,230 $ 54,844 Maturities of operating lease liabilities were as follows as of December 31, 2022: SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES Amount Within year 1 $ 534,010 Within year 2 373,602 Within year 3 324,306 Within year 4 120,543 Within year 5 583 Thereafter 874 Total Lease Payments 1,353,918 Less: Imputed interest ( 64,842 ) Present Value of lease liabilities 1,289,076 Less: Current portion ( 499,455 ) Non-Current portion $ 789,621 The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and are currently on a month-by-month basis. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2022, the Company received lease income of $ 7,786 and $ 15,598 , respectively. For the three and six months ended December 31, 2021, the Company received lease income of $ 8,950 and $ 18,105 , respectively. Page 23 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 12 – LONG TERM INVESTMENT Drivemate – Related Party The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate Agreement”) whereby the Company purchased an equity interest of 30 % in Drivemate. Per the Drivemate Agreement, the Company purchased 5,469 preferred shares for $ 1,800,000 consisting of $ 500,000 cash to be paid over a two-year period and $ 1,300,000 to be provided in services. The Company has paid the $ 500,000 in cash and has provided services of $ 1,300,000 . Pursuant to the agreement, the number of shares to be issued is adjusted as necessary to result in an equity ownership equal to 30% of the issued and outstanding shares at the final payment date. As of December 31, 2022, the Company has been issued 8,178 shares equal to 30% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company owns 30% of Drivemate; therefore, the Company accounts for the investment using the equity method of accounting . Under the equity method of accounting, the Company recorded its share of net income of $ 5,133 for the three and six months ended December 31, 2022, and the Company recorded its share of net income of $ 4,666 and net loss of $ 58,905 for the three and six months ended December 31, 2021, respectively. WRLD3D-Related Party On March 2, 2017, the Company purchased a 4.9 % interest in WRLD3D, a non-public company, for $ 1,111,111 . The Company paid $ 555,556 at the initial closing and $ 555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2 % investment in WRLD3D, for $ 2,777,778 which was earned by providing IT and enterprise software solutions. Under the equity method of accounting, the Company recorded its share of net loss of $ nil for the three and six months ended December 31, 2022, and the Company recorded its share of net loss of $ 84,484 and $ 181,878 for the three and six months ended December 31, 2021, respectively. The following table reflects the above investments at December 31, 2022. SCHEDULE OF LONG TERM INVESTMENT Drivemate WRLD3D Total Gross investment $ 1,800,000 $ 3,888,889 $ 5,688,889 Cumulative net loss on investment ( 735,499 ) ( 3,238,647 ) ( 3,974,146 ) Cumulative other comprehensive income (loss) - ( 650,242 ) ( 650,242 ) Net investment $ 1,064,501 $ - $ 1,064,501 The following table reflects the above investments at June 30, 2022. Drivemate WRLD3D Total Gross investment $ 1,800,000 $ 3,888,889 $ 5,688,889 Cumulative net loss on investment ( 740,632 ) ( 3,238,647 ) ( 3,979,279 ) Cumulative other comprehensive income (loss) - ( 650,242 ) ( 650,242 ) Net investment $ 1,059,368 $ - $ 1,059,368 Page 24 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 13 - INTANGIBLE ASSETS Intangible assets consisted of the following: SCHEDULE OF INTANGIBLE ASSETS As of As of December 31, 2022 June 30, 2022 Product Licenses - Cost $ 47,244,997 $ 47,244,997 Effect of Translation Adjustment ( 21,549,533 ) ( 19,914,206 ) Accumulated Amortization ( 24,894,425 ) ( 25,743,121 ) Net Balance $ 801,039 $ 1,587,670 Product Licenses Product licenses include internally developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $ 801,039 will be amortized over one year. Amortization expense for the three and six months ended December 31, 2022, was $ 322,672 and $ 645,492 , respectively. Amortization expense for the three and six months ended December 31, 2021was $ 414,269 and $ 854,553 , respectively. NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES As of As of December 31, 2022 June 30, 2022 Accounts Payable $ 942,689 $ 1,175,527 Accrued Liabilities 4,114,952 3,507,415 Accrued Payroll 1,454,886 1,397,605 Accrued Payroll Taxes 147,837 153,416 Taxes Payable 418,315 328,755 Other Payable 344,569 250,823 Total $ 7,423,248 $ 6,813,541 Page 25 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 15 – DEBTS Notes payable and finance leases consisted of the following: SCHEDULE OF COMPONENTS OF NOTES PAYABLE AND CAPITAL LEASES As of December 31, 2022 Current Long-Term Name Total Maturities Maturities D&O Insurance (1 ) $ 127,599 $ 127,599 $ - Bank Overdraft Facility (2 ) - - - Term Finance Facility (3 ) - - - Loan Payable Bank - Export Refinance (4 ) 2,208,285 2,208,285 - Loan Payable Bank - Running Finance (5 ) - - - Loan Payable Bank - Export Refinance II (6 ) 1,678,297 1,678,297 - Loan Payable Bank - Export Refinance III (7 ) 3,091,600 3,091,600 - Sale and Leaseback Financing (8 ) 463,011 172,983 290,028 Term Finance Facility (9 ) 21,908 18,682 3,226 Insurance Financing (10 ) 54,405 54,405 - 7,645,105 7,351,851 293,254 Subsidiary Finance Leases (11 ) 48,590 34,899 13,691 $ 7,693,695 $ 7,386,750 $ 306,945 As of June 30, 2022 Current Long-Term Name Total Maturities Maturities D&O Insurance (1 ) $ 89,552 $ 89,552 $ - Bank Overdraft Facility (2 ) - - - Term Finance Facility (3 ) 423,101 423,101 - Loan Payable Bank - Export Refinance (4 ) 2,434,749 2,434,749 - Loan Payable Bank - Running Finance (5 ) - - - Loan Payable Bank - Export Refinance II (6 ) 1,850,409 1,850,409 - Loan Payable Bank - Export Refinance III (7 ) 3,408,648 3,408,648 - Sale and Leaseback Financing (8 ) 619,108 189,226 429,882 Term Finance Facility (9 ) 31,204 18,339 12,865 Insurance Financing (10 ) 118,026 118,026 - 8,974,797 8,532,050 442,747 Subsidiary Finance Leases (11 ) 68,571 35,095 33,476 $ 9,043,368 $ 8,567,145 $ 476,223 (1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 5.0 % to 7.0 % as of December 31, 2022 and June 30, 2022. Page 26 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) (2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £ 300,000 , or approximately $ 361,446 . The annual interest rate was 5.5 % as of December 31, 2022. The total outstanding balance as of December 31, 2022 and June 30, 2022 was £ Nil . This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200 % of the facility. As of December 31, 2022, NTE was in compliance with this covenant. (3) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during the COVID-19 pandemic. This is a term loan payable in three years. The availed facility amount was Rs. nil or $ nil , at December 31, 2022. The availed facility amount is Rs. 86,887,974 or $ 423,101 , at June 30, 2022, which is shown as current. The interest rate for the loan was 3 % at December 31, 2022 and June 30, 2022. (4) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $ 2,208,285 at December 31, 2022 and Rs. 500,000,000 or $ 2,434,749 at June 30, 2022. The interest rate for the loan was 10 % and 3 % at December 31, 2022 and June 30, 2022, respectively. (5) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 53,000,000 or $ 236,728 , at December 31, 2022. The balance outstanding at December 31, 2022 and June 30, 2022 was Rs. Nil . The interest rate for the loan was 19.0 % and 14.0 % at December 31, 2022 and June 30, 2022, respectively. This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of December 31, 2022, NetSol PK was in compliance with this covenant . (6) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $ 1,678,297 and Rs. 380,000,000 or $ 1,850,409 at December 31, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10 % and 3 % at December 31, 2022 and June 30, 2022, respectively. During the tenure of the loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of December 31, 2022, NetSol PK was in compliance with these covenants. (7) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $ 3,974,914 and Rs. 900,000,000 or $ 4,382,548 , at December 31, 2022 and June 30, 2022, respectively. NetSol PK used Rs. 700,000,000 or $ 3,091,600 and Rs. 700,000,000 or $ 3,408,648 , at December 31, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10 % and 3 % at December 31, 2022 and June 30, 2022, respectively. (8) The Company’s subsidiary, NetSol PK, availed sale and leaseback financing from First Habib Modaraba secured by the transfer of the vehicles’ title. As of December 31, 2022, NetSol PK used Rs. 104,834,901 or $ 463,011 of which $ 290,028 was shown as long term and $ 172,983 as current. As of June 30, 2022, NetSol PK used Rs. 127,140,038 or $ 619,108 of which $ 429,882 was shown as long term and $ 189,226 as current. The interest rate for the loan was 9.0 % to 16.0 % at December 31, 2022, and June 30, 2022. Page 27 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) (9) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £ 69,549 , or $ 83,794 , for a period of 5 years with monthly payments of £ 1,349 , or $ 1,625 . As of December 31, 2022, the subsidiary has used this facility up to $ 21,907 , of which $ 3,226 was shown as long-term and $ 18,681 as current. As of June 30, 2022, the subsidiary has used this facility up to $ 31,204 , of which $ 12,865 was shown as long-term and $ 18,339 as current. The interest rate was 6.14 % at December 31, 2022 and June 30, 2022. (10) The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $ 54,405 and $ 96,781 was recorded in current maturities, at December 31, 2022 and June 30, 2022, respectively. The interest rate on this financing ranged from 9.7 % to 12.7 % as of December 31, 2022 and June 30, 2022. (11) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2025. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three and six months ended December 31, 2022 and 2021. Following are the aggregate minimum future lease payments under finance leases as of December 31, 2022: SCHEDULE OF AGGREGATE MINIMUM FUTURE LEASE PAYMENTS UNDER CAPITAL LEASES Amount Minimum Lease Payments Within year 1 $ 39,033 Within year 2 14,514 Total Minimum Lease Payments 53,547 Interest Expense relating to future periods ( 4,957 ) Present Value of minimum lease payments 48,590 Less: Current portion ( 34,899 ) Current portion of loans and obligations under finance leases Non-Current portion $ 13,691 Loans and obligations under finance leases; less current maturities Following are the aggregate future long term debt payments as of December 31, 2022 SCHEDULE OF AGGREGATE FUTURE LONG TERM DEBT PAYMENTS Amount Loan Payments Within year 1 $ 191,664 Within year 2 188,283 Within year 3 104,972 Total Loan Payments 484,919 Less: Current portion ( 191,665 ) Non-Current portion $ 293,254 Page 28 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) NOTE 16 - STOCKHOLDERS’ EQUITY During the three and six months ended December 31, 2022, the Company issued 13,755 and 26,415 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $ 39,750 and $ 79,500 , respectively. NOTE 17 – CONTINGENCIES From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. The Company defends itself vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, the Company records the estimated loss. The Company provides disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. The Company bases accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements. NOTE 18 – OPERATING SEGMENTS The Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location. The Company accounts for intra-company sales and expenses as if the sales or expenses were to third parties and eliminates them in the consolidation. The following table presents a summary of identifiable assets as of December 31, 2022 and June 30, 2022: SUMMARY OF IDENTIFIABLE ASSETS As of As of December 31, 2022 June 30, 2022 Identifiable assets: Corporate headquarters $ 1,106,983 $ 844,178 North America 7,044,788 6,442,219 Europe 8,920,116 8,727,530 Asia - Pacific 47,744,012 56,594,705 Consolidated $ 64,815,899 $ 72,608,632 The following table presents a summary of investment under equity method as of December 31, 2022 and June 30, 2022: SUMMARY OF INVESTMENT UNDER EQUITY METHOD As of As of December 31, 2022 June 30, 2022 Investment in associates under equity method: Corporate headquarters $ - $ - Asia - Pacific 1,064,501 1,059,368 Consolidated $ 1,064,501 $ 1,059,368 Page 29 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) The following table presents a summary of operating information for the three and six months ended December 31: SUMMARY OF OPERATING INFORMATION For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Revenues from unaffiliated customers: North America $ 1,597,852 $ 1,060,379 $ 2,723,140 $ 1,990,613 Europe 2,845,701 2,122,094 5,093,036 5,394,993 Asia - Pacific 7,946,805 12,290,489 17,280,301 21,508,117 12,390,358 15,472,962 25,096,477 28,893,723 Revenue from affiliated customers Asia - Pacific - - - - - - - - Consolidated $ 12,390,358 $ 15,472,962 $ 25,096,477 $ 28,893,723 Intercompany revenue Europe $ 93,236 $ 116,479 $ 188,961 $ 243,677 Asia - Pacific 2,545,098 774,364 4,275,051 3,334,464 Eliminated $ 2,638,334 $ 890,843 $ 4,464,012 $ 3,578,141 Net income (loss) after taxes and before non-controlling interest: Corporate headquarters $ ( 696,938 ) $ 138,089 $ 630,262 $ 266,633 North America 105,326 ( 58,915 ) 86,379 ( 127,008 ) Europe ( 163,633 ) ( 589,882 ) ( 483,388 ) ( 398,439 ) Asia - Pacific ( 1,646,718 ) 2,949,256 ( 3,073,187 ) 3,247,857 Consolidated $ ( 2,401,963 ) $ 2,438,548 $ ( 2,839,934 ) $ 2,989,043 Depreciation and amortization: North America $ 727 $ 527 $ 1,209 $ 1,093 Europe 66,431 100,646 141,602 199,494 Asia - Pacific 824,342 840,559 1,593,692 1,721,151 Consolidated $ 891,500 $ 941,732 $ 1,736,503 $ 1,921,738 Interest expense: Corporate headquarters $ 5,912 $ 9,565 $ 8,392 $ 20,006 North America - - - - Europe 2,702 2,488 6,340 6,284 Asia - Pacific 193,749 78,755 309,241 165,531 Consolidated $ 202,363 $ 90,808 $ 323,973 $ 191,821 Income tax expense: Corporate headquarters $ - $ - $ - $ ( 43,354 ) North America - - - 45,754 Europe - 9,524 - 9,524 Asia - Pacific 220,056 191,982 413,404 357,209 Consolidated $ 220,056 $ 201,506 $ 413,404 $ 369,133 Page 30 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) The following table presents a summary of capital expenditures for the six months ended December 31: SUMMARY OF CAPITAL EXPENDITURES For the Six Months Ended December 31, 2022 2021 Capital expenditures: North America $ 4,880 $ - Europe - 89,451 Asia - Pacific 1,247,445 684,502 Consolidated $ 1,252,325 $ 773,953 NOTE 19 – NON-CONTROLLING INTEREST IN SUBSIDIARY The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows: SCHEDULE OF BALANCE OF NON-CONTROLLING INTEREST SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at December 31, 2022 NetSol PK 32.38 % $ 4,341,047 NetSol-Innovation 32.38 % ( 82,773 ) NetSol Thai 0.006 % ( 200 ) Otoz Thai 10.95 % ( 46,963 ) Otoz 10.94 % ( 158,655 ) Total $ 4,052,456 SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at June 30, 2022 NetSol PK 32.38 % $ 5,479,905 NetSol-Innovation 32.38 % 49,146 NetSol Thai 0.006 % ( 196 ) Otoz Thai 5.60 % ( 30,768 ) Otoz 5.59 % ( 47,698 ) Total $ 5,450,389 The Company’s subsidiary, Otoz, issued 191,011 shares to one of its employees as part of their employment agreement resulting in an increase of non-controlling interest from 5.59 % to 10.94 % . The effective shareholding of the non-controlling interest for Otoz Thai increased to 10.95 % . Page 31 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements December 31, 2022 (Unaudited) The following schedule discloses the effect to the Company’s equity due to the changes in the Company’s ownership interest in Otoz and Otoz Thai. SCHEDULE OF CHANGE IN OWNERSHIP INTEREST 2022 2021 2022 2021 For the Three Months For the Six Months Ended December 31, Ended December 31, 2022 2021 2022 2021 Net income (loss) attributable to NetSol $ ( 2,092,926 ) $ 1,406,785 $ ( 2,713,655 ) $ 1,594,754 Transfer (to) from non-controlling interest Increase in paid-in capital for issuance of 191,011 shares of Otoz, Inc. common stock - - 120,565 - Net transfer (to) from non-controlling interest - - 120,565 - Change from net income (loss) attributable to NetSol and transfer (to) from non-controlling interest $ ( 2,092,926 ) $ 1,406,785 $ ( 2,593,090 ) $ 1,594,754 NOTE 20 – INCOME TAXES The current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2025; however, tax at the applicable rates is charged to the income from revenue generated from other than core business activities. During the three and six months ended December 31, 2022, the Company recorded an income tax provision of $ 220,056 and $ 413,404 , respectively. During the three and six months ended December 31, 2021, the Company recorded an income tax provision of $ 201,506 and $ 369,133 , respectively. The tax is derived from non-core business activities generated from NetSol PK. Page 32