NETSOL TECHNOLOGIES INC 10-Q

Item 1. Financial Statements (Unaudited) NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) As of As of March 31, 2024 June 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 12,338,642 $ 15,533,254 Accounts receivable, net of allowance of $ 414,745 and $ 420,354 15,826,210 11,714,422 Revenues in excess of billings, net of allowance of $ 116,023 and $ 1,380,141 15,659,806 12,377,677 Other current assets 2,398,403 1,978,514 Total current assets 46,223,061 41,603,867 Revenues in excess of billings, net - long term 752,582 - Property and equipment, net 5,505,609 6,161,186 Right of use assets - operating leases 1,490,669 1,151,575 Other assets 32,341 32,327 Intangible assets, net - 127,931 Goodwill 9,302,524 9,302,524 Total assets $ 63,306,786 $ 58,379,410 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 6,707,937 $ 6,552,181 Current portion of loans and obligations under finance leases 6,047,511 5,779,510 Current portion of operating lease obligations 635,168 505,237 Unearned revenue 9,503,548 7,932,306 Total current liabilities 22,894,164 20,769,234 Loans and obligations under finance leases; less current maturities 130,381 176,229 Operating lease obligations; less current maturities 837,756 652,194 Total liabilities 23,862,301 21,597,657 Stockholders’ equity: Preferred stock, $ .01 par value; 500,000 shares authorized; - - Common stock, $ .01 par value; 14,500,000 shares authorized; 12,344,271 shares issued and 11,405,240 outstanding as of March 31, 2024, 12,284,887 shares issued and 11,345,856 outstanding as of June 30, 2023 123,445 122,850 Additional paid-in-capital 128,736,328 128,476,048 Treasury stock (at cost, 939,031 shares as of March 31, 2024 and June 30, 2023) ( 3,920,856 ) ( 3,920,856 ) Accumulated deficit ( 44,129,431 ) ( 44,896,186 ) Other comprehensive loss ( 45,505,920 ) ( 45,975,156 ) Total NetSol stockholders’ equity 35,303,566 33,806,700 Non-controlling interest 4,140,919 2,975,053 Total stockholders’ equity 39,444,485 36,781,753 Total liabilities and stockholders’ equity $ 63,306,786 $ 58,379,410 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) 2024 2023 2024 2023 For the Three Months For the Nine Months Ended March 31, Ended March 31, 2024 2023 2024 2023 Net Revenues: License fees $ 558,340 $ 1,982,985 $ 4,829,242 $ 2,248,829 Subscription and support 7,140,358 6,656,082 20,480,382 19,175,585 Services 7,765,818 4,867,322 19,635,014 17,178,452 Total net revenues 15,464,516 13,506,389 44,944,638 38,602,866 Cost of revenues 7,989,696 8,801,360 24,132,064 26,503,377 Gross profit 7,474,820 4,705,029 20,812,574 12,099,489 Operating expenses: Selling, general and administrative 5,811,335 5,333,202 17,051,798 16,727,836 Research and development cost 345,582 302,262 1,065,412 1,244,793 Total operating expenses 6,156,917 5,635,464 18,117,210 17,972,629 Income (loss) from operations 1,317,903 ( 930,435 ) 2,695,364 ( 5,873,140 ) Other income and (expenses) Interest expense ( 289,677 ) ( 188,137 ) ( 856,016 ) ( 512,110 ) Interest income 376,466 263,794 1,259,464 1,005,557 Gain (loss) on foreign currency exchange transactions ( 963,887 ) 5,385,591 ( 1,112,757 ) 7,358,519 Share of net loss from equity investment - 2,377 - 7,510 Other income (expense) 21,634 ( 62,941 ) 22,210 57,383 Total other income (expenses) ( 855,464 ) 5,400,684 ( 687,099 ) 7,916,859 Net income before income taxes 462,439 4,470,249 2,008,265 2,043,719 Income tax provision ( 146,569 ) ( 227,718 ) ( 418,517 ) ( 641,122 ) Net income 315,870 4,242,531 1,589,748 1,402,597 Non-controlling interest 11,679 ( 1,697,908 ) ( 822,993 ) ( 1,571,629 ) Net income (loss) attributable to NetSol $ 327,549 $ 2,544,623 # $ 766,755 $ ( 169,032 ) Net income (loss) per share: Net income (loss) per common share Basic $ 0.03 $ 0.23 $ 0.07 $ ( 0.01 ) Diluted $ 0.03 $ 0.23 $ 0.07 $ ( 0.01 ) Weighted average number of shares outstanding Basic 11,390,888 11,283,954 11,369,778 11,270,466 Diluted 11,430,493 11,283,954 11,409,383 11,270,466 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) 2024 2023 2024 2023 For the Three Months For the Nine Months Ended March 31, Ended March 31, 2024 2023 2024 2023 Net income (loss) $ 327,549 $ 2,544,623 $ 766,755 $ ( 169,032 ) Other comprehensive income (loss): Translation adjustment 441,993 ( 7,628,982 ) 812,109 ( 11,428,326 ) Translation adjustment attributable to non-controlling interest ( 77,604 ) 2,447,328 ( 342,873 ) 3,598,417 Net translation adjustment 364,389 ( 5,181,654 ) 469,236 ( 7,829,909 ) Comprehensive income (loss) attributable to NetSol $ 691,938 $ ( 2,637,031 ) $ 1,235,991 $ ( 7,998,941 ) 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 March 31, 2024 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 December 31, 2023 12,329,919 $ 123,301 $ 128,587,384 $ ( 3,920,856 ) $ ( 44,456,980 ) $ ( 45,870,309 ) $ 4,074,994 $ 38,537,534 Common stock issued for: Services 14,352 144 39,606 - - - - 39,750 Fair value of options issued - - 101,424 - - - - 101,424 Fair value of subsidiary options issued - - 7,914 - - - - 7,914 Fair value of subsidiary options issued - - 7,914 - - - - 7,914 Foreign currency translation adjustment - - - - - 364,389 77,604 441,993 Net income (loss) for the year - - - - 327,549 - ( 11,679 ) 315,870 Balance at March 31, 2024 12,344,271 $ 123,445 $ 128,736,328 $ ( 3,920,856 ) $ ( 44,129,431 ) $ ( 45,505,920 ) $ 4,140,919 $ 39,444,485 A statement of the changes in equity for the three months ended December 31, 2023 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, 2023 12,311,850 $ 123,120 $ 128,536,132 $ ( 3,920,856 ) $ ( 44,865,296 ) $ ( 46,411,702 ) $ 3,201,723 $ 36,663,121 Common stock issued for: Services 18,069 181 39,569 - - - - 39,750 Fair value of subsidiary options issued - - 11,683 - - - - 11,683 Foreign currency translation adjustment - - - - - 541,393 298,772 840,165 Net income (loss) for the year - - - - 408,316 - 574,499 982,815 Balance at December 31, 2023 12,329,919 $ 123,301 $ 128,587,384 $ ( 3,920,856 ) $ ( 44,456,980 ) $ ( 45,870,309 ) $ 4,074,994 $ 38,537,534 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 September 30, 2023 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, 2023 12,284,887 $ 122,850 $ 128,476,048 $ ( 3,920,856 ) $ ( 44,896,186 ) $ ( 45,975,156 ) $ 2,975,053 $ 36,781,753 Common stock issued for: Services 26,963 270 48,530 - - - - 48,800 Fair value of subsidiary options issued - - 11,554 - - - - 11,554 Foreign currency translation adjustment - - - - - ( 436,546 ) ( 33,503 ) ( 470,049 ) Net income (loss) for the year - - - - 30,890 - 260,173 291,063 Balance at September 30, 2023 12,311,850 $ 123,120 $ 128,536,132 $ ( 3,920,856 ) $ ( 44,865,296 ) $ ( 46,411,702 ) $ 3,201,723 $ 36,663,121 A statement of the changes in equity for the three months ended March 31, 2023 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 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 Common stock issued for: Services 15,057 151 39,599 - - - - 39,750 Fair value of subsidiary options issued - - 12,642 - - - - 12,642 Foreign currency translation adjustment - - - - - ( 5,181,654 ) ( 2,447,328 ) ( 7,628,982 ) Net income (loss) for the year - - - - 2,544,623 - 1,697,908 4,242,531 Balance at March 31, 2023 12,238,042 $ 122,382 $ 128,536,955 $ ( 3,920,856 ) $ ( 39,821,470 ) $ ( 47,192,994 ) $ 3,303,036 $ 41,027,053 Page 7 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: 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 Balance 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 ) Net income (loss) - - - - ( 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 Balance 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 8 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) 2024 2023 For the Nine Months Ended March 31, 2024 2023 Cash flows from operating activities: Net income $ 1,589,748 $ 1,402,597 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,351,239 2,519,469 Provision for bad debts 9,739 7,648 Share of net (gain) loss from investment under equity method - ( 7,510 ) (Gain) loss on sale of assets ( 1,154 ) 56,494 Stock based compensation 260,875 198,559 Changes in operating assets and liabilities: Accounts receivable ( 3,922,773 ) ( 1,855,899 ) Revenues in excess of billing ( 3,904,609 ) 240,324 Other current assets ( 1,525 ) ( 621,731 ) Accounts payable and accrued expenses 77,541 1,321,289 Unearned revenue 938,242 ( 696,621 ) Net cash provided by (used in) operating activities ( 3,602,677 ) 2,564,619 Cash flows from investing activities: Purchases of property and equipment ( 948,337 ) ( 1,575,059 ) Sales of property and equipment 125,886 153,402 Net cash used in investing activities ( 822,451 ) ( 1,421,657 ) Cash flows from financing activities: Proceeds from bank loans 340,847 270,292 Payments on finance lease obligations and loans - net ( 307,235 ) ( 787,641 ) Net cash provided by (used in) financing activities 33,612 ( 517,349 ) Effect of exchange rate changes 1,196,904 ( 9,329,913 ) Net decrease in cash and cash equivalents ( 3,194,612 ) ( 8,704,300 ) Cash and cash equivalents at beginning of the period 15,533,254 23,963,797 Cash and cash equivalents at end of period $ 12,338,642 $ 15,259,497 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 9 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) For the Nine Months Ended March 31, 2024 2023 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 1,100,101 $ 378,720 Taxes $ 522,633 $ 706,658 NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets acquired under finance lease $ 122,045 $ - The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 10 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (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, 2023. 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”) 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 Ascent Middle East Computer Equipment Trading LLC (“Namecet”) NetSol Technologies Thailand Limited (“NetSol Thai”) Otoz, Inc. (“Otoz”) Otoz (Thailand) Limited (“Otoz Thai”) Page 11 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (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 ($ 69,252 ) in each bank and in the UK for GBP 85,000 ($ 107,595 ) in each bank. The Company maintains three bank accounts in China and nine bank accounts in the UK. As of March 31, 2024, and June 30, 2023, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $ 11,779,289 and $ 13,524,518 , 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 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 12 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The Company’s financial assets that were measured at fair value on a recurring basis as of March 31, 2024, 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 $ - $ - $ 752,582 $ 752,582 Total $ - $ - $ 752,582 $ 752,582 The Company did not have any financial assets that were measured at fair value on a recurring basis at June 30, 2023. The reconciliation from June 30, 2023 to March 31, 2024 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, 2023 $ - $ - $ - Additions 827,853 ( 103,958 ) 723,895 Amortization during the period - 30,773 30,773 Effect of Translation Adjustment ( 1,404 ) ( 682 ) ( 2,086 ) Balance at March 31, 2024 $ 826,449 $ ( 73,867 ) $ 752,582 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, and was adopted by the Company on July 1, 2023. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements. In August 2023, the FASB issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. ASU 2023-05 provides decision-useful information to a joint venture’s investors and reduces diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). ASU 2023-05 is effective prospectively for all joint ventures with a formation date on or after January 1, 2025, and early adoption is 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 13 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (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 14 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (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, most 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. 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. Page 15 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The Company’s disaggregated revenue by category is as follows: SCHEDULE OF DISAGGREGATED REVENUE BY CATEGORY 2024 2023 2024 2023 For the Three Months For the Nine Months Ended March 31, Ended March 31, 2024 2023 2024 2023 Core: License $ 558,340 $ 1,982,985 $ 4,829,242 $ 2,248,829 Subscription and support 7,140,358 6,656,082 20,480,382 19,175,585 Services 6,477,849 3,869,444 15,566,480 14,109,271 Total core revenue, net 14,176,547 12,508,511 40,876,104 35,533,685 Non-Core: Services 1,287,969 997,878 4,068,534 3,069,181 Total non-core revenue, net 1,287,969 997,878 4,068,534 3,069,181 Total net revenue $ 15,464,516 $ 13,506,389 $ 44,944,638 $ 38,602,866 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. 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. Page 16 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) 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 March 31, 2024 June 30, 2023 Revenues in excess of billings $ 16,412,388 $ 12,377,677 Unearned revenue $ 9,503,548 $ 7,932,306 The Company’s unearned revenue reconciliation is as follows: SCHEDULE OF UNEARNED REVENUE RECONCILIATION Unearned Revenue Balance at June 30, 2023 $ 7,932,306 Invoiced 18,714,384 Revenue Recognized ( 17,213,051 ) Adjustments 69,909 Balance at March 31, 2024 $ 9,503,548 During the three and nine months ended March 31, 2024, the Company recognized revenue of $ 620,000 and $ 7,074,000 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 17 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (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 $ 36,014,000 as of March 31, 2024, of which the Company estimates to recognize approximately $ 24,225,000 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. NOTE 4 – EARNINGS PER SHARE Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards. SCHEDULE OF DILUTIVE POTENTIAL COMMON SHARES For the three months ended March 31, 2024 For the nine months ended March 31, 2024 Net Income Shares Per Share Net Income Shares Per Share Basic income (loss) per share: Net income (loss) available to common shareholders $ 327,549 11,390,888 $ 0.03 $ 766,755 11,369,778 $ 0.07 Effect of dilutive securities Stock options - 39,605 - - 39,605 - Diluted income (loss) per share $ 327,549 11,430,493 $ 0.03 $ 766,755 11,409,383 $ 0.07 For the three months ended March 31, 2023 For the nine months ended March 31, 2023 Net Income Shares Per Share Net Loss Shares Per Share Basic income (loss) per share: Net income (loss) available to common shareholders $ 2,544,623 11,283,954 $ 0.23 $ ( 169,032 ) 11,270,466 $ ( 0.01 ) Effect of dilutive securities Stock options - - - - - - Diluted income (loss) per share $ 2,544,623 11,283,954 $ 0.23 $ ( 169,032 ) 11,270,466 $ ( 0.01 ) Page 18 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY The following table represents the functional currencies of the Company and its subsidiaries: The Company and Subsidiaries Functional Currency NetSol Technologies, Inc. USD NTA USD Otoz USD NTE British Pound AEL British Pound VLSH British Pound VLS British Pound VLSIL Euro NetSol PK Pakistan Rupee Connect Pakistan Rupee NetSol Innovation Pakistan Rupee NetSol Thai Thai Bhat Otoz Thai Thai Bhat Australia Australian Dollar Namecet AED NetSol Beijing Chinese Yuan Tianjin Chinese Yuan 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 $ 45,505,920 and $ 45,975,156 as of March 31, 2024 and June 30, 2023, respectively. During the three and nine months ended March 31, 2024, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $ 364,389 and $ 469,236 , respectively. During the three and nine months ended March 31, 2023, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $ ( 5,181,654 ) and $ ( 7,829,909 ) , respectively. NOTE 6 – MAJOR CUSTOMERS During the three and nine months ended March 31, 2024, revenues from Daimler Financial Services (“DFS”) were $ 4,207,409 and $ 11,840,101 , representing 27.2 % and 26.3 % of revenues, respectively. During the three and nine months ended March 31, 2023, revenues from Daimler Financial Services (“DFS”) were $ 3,754,752 and $ 10,824,636 , representing 27.8 % and 28.0 % of revenues. The revenues from DFS are shown in the Asia – Pacific segment. Accounts receivable from DFS at March 31, 2024 and June 30, 2023, were $ 7,379,879 and $ 4,368,881 , respectively. Revenues in excess of billings at March 31, 2024 and June 30, 2023, were $ 2,275,426 and $ 1,961,750 , respectively. Page 19 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 7 - OTHER CURRENT ASSETS Other current assets consisted of the following: SCHEDULE OF OTHER CURRENT ASSETS As of As of March 31, 2024 June 30, 2023 Prepaid Expenses $ 1,408,652 $ 1,299,334 Advance Income Tax 295,226 144,428 Employee Advances 116,184 68,488 Security Deposits 193,289 177,148 Other Receivables 135,690 92,716 Other Assets 249,362 196,400 Net Balance $ 2,398,403 $ 1,978,514 NOTE 8 – 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 March 31, 2024 June 30, 2023 Revenues in excess of billings - long term $ 826,449 $ - Present value discount ( 73,867 ) - Net Balance $ 752,582 $ - Pursuant to revenue recognition for contract accounting, the Company has recorded revenues in excess of billings long-term for amounts billable after one year. During the three and nine months ended March 31, 2024, the Company accreted $ 12,309 and $ 30,773 , respectively, which was recorded in interest income for that period. During the three and nine months ended March 31, 2023, the Company accreted $ 9,372 and $ 28,029 , respectively. The Company used the discounted cash flow method with an interest rate of 7.34 % for the period ended March 31, 2024. The Company used the discounted cash flow method with interest rates ranging from 4.65 % to 6.25 % for the period ended March 31, 2023. Page 20 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 9 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: SCHEDULE OF PROPERTY AND EQUIPMENT As of As of March 31, 2024 June 30, 2023 Office Furniture and Equipment $ 2,469,658 $ 2,678,664 Computer Equipment 8,561,715 8,317,131 Assets Under Capital Leases 154,762 46,554 Building 3,607,498 3,497,913 Land 914,722 885,474 Autos 1,964,370 1,941,063 Improvements 207,726 205,289 Subtotal 17,880,451 17,572,088 Accumulated Depreciation ( 12,374,842 ) ( 11,410,902 ) Property and Equipment, Net $ 5,505,609 $ 6,161,186 For the three and nine months ended March 31, 2024, depreciation expense totaled $ 391,290 and $ 1,225,198 , respectively. Of these amounts, $ 250,126 and $ 781,442 , respectively, are reflected in cost of revenues. For the three and nine months ended March 31, 2023, depreciation expense totaled $ 507,314 and $ 1,598,325 , respectively. Of these amounts, $ 327,177 and $ 1,029,012 , respectively, are reflected in cost of revenues. Following is a summary of fixed assets held under finance leases as of March 31, 2024 and June 30, 2023: SCHEDULE OF FIXED ASSETS HELD UNDER CAPITAL LEASES As of As of March 31, 2024 June 30, 2023 Vehicles $ 154,762 $ 46,554 Total 154,762 46,554 Less: Accumulated Depreciation - Net ( 18,647 ) ( 17,366 ) Fixed assets held under capital leases, Total $ 136,115 $ 29,188 Finance lease term and discount rate were as follows: SCHEDULE OF FINANCE LEASE TERM As of As of March 31, 2024 June 30, 2023 Weighted average remaining lease term - Finance leases 3 Years 1.21 Years Weighted average discount rate - Finance leases 11.3 % 16.4 % Page 21 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 10 - LEASES The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years. The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts. Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants. Supplemental balance sheet information related to leases was as follows: SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASE As of As of March 31, 2024 June 30, 2023 Assets Operating lease assets, net $ 1,490,669 $ 1,151,575 Liabilities Current Operating $ 635,168 $ 505,237 Operating, Current $ 635,168 $ 505,237 Non-current Operating 837,756 652,194 Operating, Non Current 837,756 652,194 Total Lease Liabilities $ 1,472,924 $ 1,157,431 Page 22 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The components of lease cost were as follows: SCHEDULE OF COMPONENTS OF LEASE COST 2024 2023 2024 2023 For the Three Months For the Nine Months Ended March 31, Ended March 31, 2024 2023 2024 2023 Amortization of finance lease assets $ 3,963 $ 2,569 $ 8,624 $ 8,564 Interest on finance lease obligation 1,434 1,043 3,073 4,402 Operating lease cost 99,201 115,392 304,543 346,993 Short term lease cost 41,087 39,356 122,311 143,978 Sub lease income ( 8,406 ) ( 8,099 ) ( 25,011 ) ( 23,697 ) Total lease cost $ 137,279 $ 150,261 $ 413,540 $ 480,240 Lease term and discount rate were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE As of As of March 31, 2024 June 30, 2023 Weighted average remaining lease term - Operating leases 2.2 Years 3.09 Years Weighted average discount rate - Operating leases 4.6 % 4.0 % Supplemental disclosures of cash flow information related to leases were as follows: SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION RELATED TO LEASES For the Nine Months Ended March 31, 2024 2023 Operating cash flows related to operating leases $ 230,943 $ 358,778 Operating cash flows related to finance leases $ 3,070 $ 4,472 Financing cash flows related finance leases $ 20,180 $ 24,362 Page 23 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) Maturities of operating lease liabilities were as follows as of March 31, 2024: SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES Amount Within year 1 $ 698,961 Within year 2 485,363 Within year 3 275,582 Within year 4 108,551 Within year 5 27,494 Thereafter 119 Total Lease Payments 1,596,070 Less: Imputed interest ( 123,146 ) Present Value of lease liabilities 1,472,924 Less: Current portion ( 635,168 ) Non-Current portion $ 837,756 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 nine months ended March 31, 2024, the Company received lease income of $ 8,406 and $ 25,011 , respectively. For the three and nine months ended March 31, 2023, the Company received lease income of $ 8,099 and $ 23,697 , respectively. NOTE 11 - INTANGIBLE ASSETS Intangible assets consisted of the following: SCHEDULE OF INTANGIBLE ASSETS As of As of March 31, 2024 June 30, 2023 Product Licenses - Cost $ 39,395,533 $ 47,244,997 Effect of Translation Adjustment ( 24,348,267 ) ( 24,756,959 ) Accumulated Amortization ( 15,047,266 ) ( 22,360,107 ) Net Balance $ - $ 127,931 Product Licenses Product licenses include internally developed software cost. Product licenses are amortized on a straight-line basis over their respective lives. Amortization expense for the three and nine months ended March 31, 2024, was $ nil and $ 126,041 , respectively. Amortization expense for the three and nine months ended March 31, 2023, was $ 275,652 and $ 921,144 , respectively. NOTE 12 - 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 March 31, 2024 June 30, 2023 Accounts Payable $ 1,364,926 $ 1,114,915 Accrued Liabilities 3,619,695 3,695,091 Accrued Payroll 1,110,573 982,884 Accrued Payroll Taxes 169,967 170,063 Taxes Payable 88,591 195,491 Other Payable 354,185 393,737 Total $ 6,707,937 $ 6,552,181 Page 24 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 13 – DEBTS Notes payable and finance leases consisted of the following: SCHEDULE OF COMPONENTS OF NOTES PAYABLE AND CAPITAL LEASES As of March 31, 2024 Current Long-Term Name Total Maturities Maturities D&O Insurance (1) $ 237,600 $ 237,600 $ - Bank Overdraft Facility (2) - - - Loan Payable Bank - Export Refinance (3) 1,799,014 1,799,014 - Loan Payable Bank - Running Finance (4) - - - Loan Payable Bank - Export Refinance II (5) 1,367,251 1,367,251 - Loan Payable Bank - Export Refinance III (6) 2,518,620 2,518,620 - Sale and Leaseback Financing (7) 149,141 107,694 41,447 Term Finance Facility (8) - - - 6,071,626 6,030,179 41,447 Subsidiary Finance Leases (9) 106,266 17,332 88,934 $ 6,177,892 $ 6,047,511 $ 130,381 As of June 30, 2023 Current Long-Term Name Total Maturities Maturities D&O Insurance (1) $ 89,823 $ 89,823 $ - Bank Overdraft Facility (2) - - - Loan Payable Bank - Export Refinance (3) 1,741,493 1,741,493 - Loan Payable Bank - Running Finance (4) - - - Loan Payable Bank - Export Refinance II (5) 1,323,535 1,323,535 - Loan Payable Bank - Export Refinance III (6) 2,438,089 2,438,089 - Sale and Leaseback Financing (7) 321,113 148,264 172,849 Term Finance Facility (8) 13,356 13,356 - 5,927,409 5,754,560 172,849 Subsidiary Finance Leases (9) 28,330 24,950 3,380 $ 5,955,739 $ 5,779,510 $ 176,229 (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 8.6 % to 10.9 % as of March 31, 2024 and 5.0 % to 7.9 % as of June 30, 2023, respectively. (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 $ 379,747 . The annual interest rate was 9.5 % as of March 31, 2024. The total outstanding balance as of March 31, 2024 and June 30, 2023 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 March 31, 2024, NTE was in compliance with this covenant. Page 25 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) (3) 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 $ 1,799,014 at March 31, 2024 and Rs. 500,000,000 or $ 1,741,493 at June 30, 2023. The interest rate for the loan was 19.0 % and 17.0 % at March 31, 2024 and June 30, 2023, respectively. (4) 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 $ 192,854 , at March 31, 2024. The balance outstanding at March 31, 2024 and June 30, 2023 was Rs. Nil . The interest rate for the loan was 24.0 % and 24.9 % at March 31, 2024 and June 30, 2023, respectively. This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and a current ratio of 1:1. As of March 31, 2024, NetSol PK was in compliance with this covenant. (5) 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 $ 1,367,251 and Rs. 380,000,000 or $ 1,323,535 at March 31, 2024 and June 30, 2023, respectively. The interest rate for the loan was 19.0 % and 18.0 % at March 31, 2024 and June 30, 2023, 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 March 31, 2024, NetSol PK was in compliance with these covenants. (6) 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 $ 3,238,225 and Rs. 900,000,000 or $ 3,134,687 , at March 31, 2024 and June 30, 2023, respectively. NetSol PK used Rs. 700,000,000 or $ 2,518,620 and Rs. 700,000,000 or $ 2,438,089 , at March 31, 2024 and June 30, 2023, respectively. The interest rate for the loan was 19.0 % and 18.0 % at March 31, 2024 and June 30, 2023, respectively. (7) 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 March 31, 2024, NetSol PK used Rs. 41,450,876 or $ 149,141 of which $ 41,447 was shown as long term and $ 107,694 as current. As of June 30, 2023, NetSol PK used Rs. 92,194,774 or $ 321,113 of which $ 172,849 was shown as long term and $ 148,264 as current. The interest rate for the loan was 9.0 % to 16.0 % at March 31, 2024, and June 30, 2023. (8) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £ 69,549 , or $ 88,037 , for a period of 5 years with monthly payments of £ 1,349 , or $ 1,708 . As of March 31, 2024, the subsidiary has paid this facility in full. As of June 30, 2023, the subsidiary has used this facility up to $ 13,356 , which was shown as current. The interest rate was 6.14 % at March 31, 2024 and June 30, 2023. (9) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2028. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended March 31, 2024 and 2023. Page 26 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) Following are the aggregate minimum future lease payments under finance leases as of March 31, 2024: SCHEDULE OF AGGREGATE MINIMUM FUTURE LEASE PAYMENTS UNDER CAPITAL LEASES Amount Minimum Lease Payments Within year 1 $ 29,213 Within year 2 22,805 Within year 3 88,023 Total Minimum Lease Payments 140,041 Interest Expense relating to future periods ( 33,775 ) Present Value of minimum lease payments 106,266 Less: Current portion ( 17,332 ) Non-Current portion $ 88,934 Following are the aggregate future long term debt payments as of March 31, 2024 which consists of “Sale and Leaseback Financing (7)” and “Term Finance Facility (8)”. SCHEDULE OF AGGREGATE FUTURE LONG TERM DEBT PAYMENTS Amount Loan Payments Within year 1 $ 107,696 Within year 2 41,445 Total Loan Payments 149,141 Less: Current portion ( 107,694 ) Non-Current portion $ 41,447 NOTE 14 - STOCKHOLDERS’ EQUITY During the three and nine months ended March 31, 2024, the Company issued 14,352 and 54,384 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 $ 119,250 , respectively. During the three and nine months ended March 31, 2024, the Company issued nil and 5,000 shares of common stock for services rendered by the employees of the Company as part of their compensation. These shares were valued at the fair market value of $ nil and $ 9,050 . Page 27 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) Stock Grants The following table summarizes stock grants awarded as compensation: SUMMARY OF UNVESTED STOCK GRANTS AWARDED AS COMPENSATION # Number of shares Weighted Average Grant Date Fair Value ($) Unvested, June 30, 2022 - $ - Granted 58,317 $ 2.73 Vested ( 58,317 ) $ 2.73 Unvested, June 30, 2023 - $ - Granted 59,384 $ 2.16 Vested ( 59,384 ) $ 2.16 Unvested, March 31, 2024 - $ - For the three and nine months ended March 31, 2024, the Company recorded compensation expense of $ 39,750 and $ 128,300 , respectively. For the three and nine months ended March 31, 2023, the Company recorded compensation expense of $ 39,750 and $ 119,250 , respectively. The weighted average grant date fair value is determined by the Company’s closing stock price on the grant date. NOTE 15 – INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN Common stock purchase options consisted of the following: OPTIONS: SCHEDULE OF COMMON STOCK PURCHASE OPTIONS # of shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding and exercisable, June 30, 2023 - - - Granted 250,000 $ 2.15 0.74 Exercised - - - Expired / Cancelled - - - Outstanding and exercisable, March 31, 2024 250,000 $ 2.15 0.74 $ 155,000 The aggregate intrinsic value at March 31, 2024 represents the difference between the Company’s closing stock price of $ 2.77 on March 31, 2024 and the exercise price of the in-the-money stock options. Page 28 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The following table summarizes information about stock options outstanding and exercisable at March 31, 2024. SUMMARY OF STOCK OPTIONS OUTSTANDING Exercise Price Number Outstanding and Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price OPTIONS: $2.15 250,000 0.74 $ 2.15 $ 2.15 250,000 0.74 $ 2.15 Totals 250,000 0.74 $ 2.15 OPTIONS During the nine months ended March 31, 2024, the Company granted 250,000 options to officers and employees with an exercise price of $ 2.15 per share, an expiration date of one year , and immediate vesting. Using the Black-Scholes method to value the options, the Company recorded $ 101,424 in compensation expense for these options in the accompanying condensed consolidated financial statements. The fair market value was calculated using the Black-Scholes option pricing model with the following assumptions: ● Risk-free interest rate - 5.24 % ● Expected life – 6 months ● Expected volatility – 63.6 % ● Expected dividend - 0 % NOTE 16– 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 March 31, 2024 and June 30, 2023: SUMMARY OF IDENTIFIABLE ASSETS As of As of March 31, 2024 June 30, 2023 Identifiable assets: Corporate headquarters $ 984,161 $ 878,899 North America 6,060,509 7,344,122 Europe 9,296,634 8,716,656 Asia - Pacific 46,965,482 41,439,733 Consolidated $ 63,306,786 $ 58,379,410 Identifiable assets $ 63,306,786 $ 58,379,410 Page 29 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The following table presents a summary of revenue streams by segment for the three months ended March 31, 2024 and 2023: SUMMARY OF REVENUE STREAMS License fees Subscription and support Services Total License fees Subscription and support Services Total 2024 2023 License fees Subscription and support Services Total License fees Subscription and support Services Total North America $ - $ 1,161,417 $ 203,657 $ 1,365,074 $ - $ 1,075,286 $ 290,270 $ 1,365,556 Europe 92,925 869,429 2,083,430 3,045,784 65,177 665,585 1,819,610 2,550,372 Asia-Pacific 465,415 5,109,512 5,478,731 11,053,658 1,917,808 4,915,211 2,757,442 9,590,461 Total $ 558,340 $ 7,140,358 $ 7,765,818 $ 15,464,516 $ 1,982,985 $ 6,656,082 $ 4,867,322 $ 13,506,389 The following table presents a summary of revenue streams by segment for the nine months ended March 31, 2024 and 2023: License fees Subscription and support Services Total License fees Subscription and support Services Total 2024 2023 License fees Subscription and support Services Total License fees Subscription and support Services Total North America $ - $ 3,454,455 $ 784,455 $ 4,238,910 $ 28,000 $ 3,251,397 $ 809,299 $ 4,088,696 Europe 101,891 2,457,513 5,520,770 8,080,174 115,416 1,847,690 5,680,302 7,643,408 Asia-Pacific 4,727,351 14,568,414 13,329,789 32,625,554 2,105,413 14,076,498 10,688,851 26,870,762 Total $ 4,829,242 $ 20,480,382 $ 19,635,014 $ 44,944,638 $ 2,248,829 $ 19,175,585 $ 17,178,452 $ 38,602,866 Revenue $ 4,829,242 $ 20,480,382 $ 19,635,014 $ 44,944,638 $ 2,248,829 $ 19,175,585 $ 17,178,452 $ 38,602,866 Page 30 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The following table presents a summary of operating information for the three and nine months ended March 31: SUMMARY OF OPERATING INFORMATION 2024 2023 2024 2023 For the Three Months For the Nine Months Ended March 31, Ended March 31, 2024 2023 2024 2023 Revenues from unaffiliated customers: North America $ 1,365,074 $ 1,365,556 $ 4,238,910 $ 4,088,696 Europe 3,045,784 2,550,372 8,080,174 7,643,408 Asia - Pacific 11,053,658 9,590,461 32,625,554 26,870,762 Revenues from unaffiliated customers 15,464,516 13,506,389 44,944,638 38,602,866 Revenue from affiliated customers Asia - Pacific - - - - Revenue from affiliated customers - - - - Consolidated $ 15,464,516 $ 13,506,389 $ 44,944,638 $ 38,602,866 Revenue $ 15,464,516 $ 13,506,389 $ 44,944,638 $ 38,602,866 Intercompany revenue Europe $ 100,315 $ 103,249 $ 300,732 $ 292,210 Asia - Pacific 2,601,585 3,026,986 8,087,181 7,720,764 Eliminated $ 2,701,900 $ 3,130,235 $ 8,387,913 $ 8,012,974 Revenue $ 2,701,900 $ 3,130,235 $ 8,387,913 $ 8,012,974 Net income (loss) after taxes and before non-controlling interest: Corporate headquarters $ ( 1,003,157 ) $ 289,652 $ ( 2,229,549 ) $ 919,914 North America 7,679 ( 3,702 ) ( 61,546 ) 82,677 Europe 14,516 ( 103,219 ) ( 228,303 ) ( 586,607 ) Asia - Pacific 1,296,832 4,059,800 4,109,146 986,613 Consolidated $ 315,870 $ 4,242,531 $ 1,589,748 $ 1,402,597 Net income (loss) after taxes and before non-controlling interest $ 315,870 $ 4,242,531 $ 1,589,748 $ 1,402,597 Depreciation and amortization: North America $ 407 $ 657 $ 1,305 $ 1,866 Europe 58,469 65,584 179,128 207,186 Asia - Pacific 332,414 716,725 1,170,806 2,310,417 Consolidated $ 391,290 $ 782,966 $ 1,351,239 $ 2,519,469 Depreciation and amortization $ 391,290 $ 782,966 $ 1,351,239 $ 2,519,469 Interest expense: Corporate headquarters $ 12,028 $ 7,834 $ 24,687 $ 16,226 North America - - - - Europe 508 1,806 6,984 8,146 Asia - Pacific 277,141 178,497 824,345 487,738 Consolidated $ 289,677 $ 188,137 $ 856,016 $ 512,110 Interest Expense $ 289,677 $ 188,137 $ 856,016 $ 512,110 Income tax expense: Corporate headquarters $ - $ - $ - $ ( 44,154 ) North America 800 1,600 800 45,754 Europe - 2,822 ( 93,583 ) 2,822 Asia - Pacific 145,769 223,296 511,300 636,700 Consolidated $ 146,569 $ 227,718 $ 418,517 $ 641,122 Income tax expense $ 146,569 $ 227,718 $ 418,517 $ 641,122 Page 31 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) The following table presents a summary of capital expenditures for the nine months ended March 31: SUMMARY OF CAPITAL EXPENDITURES 2024 2023 For the Nine Months Ended March 31, 2024 2023 Capital expenditures: North America $ - $ 4,880 Europe 592,432 31,519 Asia - Pacific 355,905 1,538,660 Consolidated $ 948,337 $ 1,575,059 Capital expenditures $ 948,337 $ 1,575,059 NOTE 17 – 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 March 31, 2024 NetSol PK 32.38 % $ 4,624,485 NetSol-Innovation 32.38 % ( 393,420 ) NAMECET 32.38 % ( 15,591 ) NetSol Thai 0.006 % ( 136 ) OTOZ Thai 5.60 % ( 18,532 ) OTOZ 5.59 % ( 55,887 ) Total $ 4,140,919 SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at June 30, 2023 NetSol PK 32.38 % $ 3,314,659 NetSol-Innovation 32.38 % ( 223,504 ) NAMECET 32.38 % ( 5,384 ) NetSol Thai 0.006 % ( 194 ) OTOZ Thai 5.60 % ( 23,572 ) OTOZ 5.59 % ( 86,952 ) Total $ 2,975,053 Page 32 NETSOL TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) NOTE 18– 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 nine months ended March 31, 2024, the Company recorded an income tax provision of $ 146,569 and $ 418,517 , respectively. During the three and nine months ended March 31, 2023, the Company recorded an income tax provision of $ 227,718 and $ 641,122 , respectively. The tax is derived from non-core business activities generated from NetSol PK. Page 33