NETSOL TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three months ended December 31, 2024. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 2024, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Our website is located at https://netsoltech.com/ , and our investor relations website is located at https://ir.netsoltech.com . The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website and on social media platforms linked to our corporate website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at https://netsoltech.com/about-us . The content of our websites is not intended to be incorporated by reference into this or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. Forward-Looking Information This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s business ultimately is built. The Company does not intend to update these forward-looking statements. Page 32 Business Overview NETSOL Technologies is a global business services and asset finance solutions provider. NETSOL delivers state-of-the-art solutions for the asset finance and leasing industry, serving automotive and equipment OEMs, auto captives and financial institutions across over 30 countries. Since its inception in 1997, NETSOL has been at the cutting edge of technology, pioneering innovations with its asset finance solutions and leveraging advanced AI and cloud services to meet the complex needs of the global market. Renowned for its deep industry expertise, customer-centric approach and commitment to excellence, NETSOL fosters strong partnerships with its clients, ensuring their success in an ever-evolving landscape. With a rich history of innovation, ethical business practices and a focus on sustainability, NETSOL is dedicated to empowering businesses worldwide, securing its position as the trusted partner for leading firms around the globe. Our primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications, under the brand name Transcend™ Finance (formerly called NFS Ascent ® ) for leading businesses in the global finance and leasing space. Our clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 manufacturers, financial institutions, global vehicle manufacturers and enterprise technology providers, all of which are serviced by our strategically placed support and delivery locations around the globe. We are also committed to serving Tier-2 and Tier-3 banks and financial institutions. We understand the unique challenges faced by these institutions, which is why we offer innovative cloud implementation solutions without any license fees, rapid deployments and the ability to scale. Further, our out-of-the-box, API-first products are designed to seamlessly integrate into existing systems, providing flexibility and scalability that smaller institutions often need. By prioritizing accessibility and ease of use, we empower smaller financial companies to enhance their service offerings and streamline operations, positioning ourselves as a trusted partner in their digital transformation journey. Founded in 1997, NETSOL is headquartered in Encino, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations: · North America Encino, California and Austin, Texas · Europe London Metropolitan area, Horsham and Flintshire · Asia Pacific Lahore, Karachi, Bangkok, Beijing, Tianjin, Jakarta and Sydney · Middle East Dubai We believe that our strong technology solutions offer our customers a return on their investment and allows us to thrive in a hyper competitive and mature global marketplace. Our solutions are bolstered by our people. We believe that people are the drivers of success; therefore, we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for us and a unique value for our customers. We continue to underpin our proven and effective business model which is a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with our global and regional customers. Expertise Our expertise in enterprise technology and financial application development has helped us emerge as a global player in the finance and leasing industry and enabled us to secure a broad footprint across the major markets of North America, Asia Pacific and Europe. The Asia Pacific region has particularly benefitted from the organic growth in the fast-developing leasing automation industry, which is still nascent as per Western standards. Page 33 Domain Experience NETSOL is a dynamic leader and has been able to accumulate a wealth of experience in the global asset finance and leasing industry. We have built a large knowledge base which is regularly refined and updated to ensure the most up-to-date best practices and business solutions for the benefit of our clients and partners. We have a strong presence in the captive asset-finance domain. We have had continual operations for nearly three decades in Asia Pacific and Europe and over four decades in North America. Proximity with Global and Regional Customers We have offices across the world, located strategically to maintain close contact and proximity with our customers in various key markets. This has not only helped us strengthen our customer relationships, but also build a deeper understanding of local market dynamics. Simultaneously, we can extend services and support development through a combination of onsite and offsite resources. This approach has allowed us to offer blended rates to our customers by employing a unique and cost-effective global development model. While our business model is built around the development, implementation and maintenance of our suite of financial applications, we employ the same facilities and competencies to extend our services to related segments, including but not limited to: · Information security · Digital solutions · AI, ML and data analytics · Generative AI · Policy and strategy · Emerging technologies| · Cloud services · Data engineering Our global operations are broken down into three primary regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational asset finance companies, leveraging the centralized marketing and pre-sales organization, and a network of employees connected across the globe to support local and global customers and partners. OUR PRODUCTS AND SERVICES Covering the complete finance and leasing lifecycle starting from quotation origination through contract settlements, our products are designed and developed for highly flexible settings and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Our solutions empower financial institutions to effectively manage their complex lending portfolios, enabling them to thrive in hyper-competitive global markets. Built on cutting-edge, modern technology, NETSOL’s unified Transcend™ Platform is an AI-powered digital retail and asset finance solution for automotive and equipment OEMs, auto captives, commercial lenders, dealers, brokers and financial institutions. PRODUCTS AND SERVICES: TRANSCEND™ PLATFORM The Transcend™ Platform, powered by NETSOL, is an AI-driven unified ecosystem that revolutionizes how assets are sold, financed and leased. Designed to automate and optimize every step - from sales to originations to servicing, Transcend™ leverages AI and ML to drive predictive insights and smarter decision-making. Page 34 Transcend™ Retail (Formerly Known as Otoz®) We revolutionize auto and equipment retail with a fully digital, integrated platform that simplifies the entire customer journey. From online purchasing to finance approval, Transcend™ Retail (formerly known as Otoz®) offers advanced retail and mobility solutions that keep dealerships or OEMs at the cutting edge of consumer expectations. Transcend™ Finance (Formerly Known as Ascent®) We streamline finance and leasing operations with a comprehensive solution for originations, servicing and wholesale finance. Transcend™ Finance (formerly known as Ascent®) empowers automotive and equipment OEMs, auto captives, commercial lenders, dealers, brokers and financial institutions with end-to-end visibility and control, ensuring seamless workflows and accelerated business outcomes. Originations We streamline the entire origination process, from submission to approval, with advanced features such as real-time, AI-powered credit decisioning, automated deal flows and more. Servicing We enable financial institutions to attain real-time insights into portfolio performance, delinquencies and losses, enabling proactive portfolio management and strategic decision-making. Wholesale finance Our wholesale finance solution empowers customers to gain a competitive edge by automating their wholesale finance and floor planning operations effortlessly. Transcend™ Marketplace (Formerly Known as Appex Now) Transcend™ Marketplace (formerly known as Appex Now) offers a suite of flexible, component-based solutions that integrate seamlessly with the customer’s existing infrastructure. Transcend™ Marketplace is a modular, API-first solution that addresses every aspect of finance and leasing using tools for calculations, document generation, loan origination and lending configurations. Flex™ Flex is an API-first, ready-to-use calculation and quotation engine. It is a one-stop solution that guarantees precise calculations at all stages of the contract lifecycle through various calculation types. All the calculations are parameter-driven, which helps perform simple, multi-dimensional or complex calculations based on the needs of a business. Flex™ has a lightning-fast onboarding process, which can take place in mere minutes. Hubex™ Hubex™ is an API library that enables companies to standardize all their API integration procedures across multiple API services through a single integration. In addition to traditional lending companies, Hubex™ can also streamline the operations of dealerships, vendors and consultants. With a ready-to-use service, Hubex™ makes it easy for businesses to seamlessly connect with multiple APIs and achieve their desired outcomes. Pre-integrated services in the Hubex™ library include, but are not limited to, payment processing, bank account authentication, finance and insurance products, fraud check, know your customer (KYC) service, driver license verification, address validation, vehicle valuation and notification service. Index™ Index™ is a cloud-based parameter storage that smoothly runs all of a company’s core lending operations. It is an accumulation of all the master setups, including asset catalog and inventory, programs, rates, and profiles for lenders, dealers and multiple partners, in one centralized location for all business types. Index TM can enhance delivery efficiency and program management for easy integration into all systems. Dock™ Dock™ is an advanced document generation tool that lets a company create accurate and professional-looking documents in just seconds. With Dock TM ’s template-based configuration, a company can set up placeholders for data, essentially simplifying the document creation process and reducing the chance of human error. Its API-first architecture ensures scalability, making it capable of handling any document generation task, from single documents to millions, with ease. Page 35 Lane™ Lane™ offers a feature-rich, end-to-end order management system for asset leasing and loans and credit companies. Our platform covers all aspects, from conducting end-to-end sales to performing dealer and partner-related tasks and marketing-related activities. The system offers a variety of dashboards that provide vital information for dealers and partners while enabling quick order management and providing a way for users to record and submit a complete credit application for their clients. Link™ Link is a purpose-built platform designed for brokers, lenders, dealers and borrowers to work seamlessly together. With tailored solutions that simplify applications and automate key processes, Link TM is designed to enhance customer relationships whilst making compliance effortless. This results in faster approvals, enriched customer experiences and stronger loyalty via elevated customer satisfaction. Intermediary portals: Broker portals Efficiency and effectiveness are paramount for any broker. Managing disparate systems and processes can be cumbersome and time consuming, often leading to inefficiencies and missed opportunities. NETSOL offers a solution to these challenges by consolidating disparate processes into a single unified interface, revolutionizing the way a brokerage operates. Lender portals NETSOL’s lender-specific portals are designed to transform the lending process by enhancing risk management and driving profitability. Our advanced tools not only streamline loan origination, but also facilitate seamless communication and collaboration with the lending ecosystem. We empower a company’s lending process with intuitive and efficient lender portals designed for a seamless user experience. Dealer portals In the competitive automotive industry, dealers need efficient and comprehensive solutions to manage their operations effectively. NETSOL’s intermediary portals serve as digital command centers, providing dealers with a wide array of tools, resources and services to optimize every aspect of their business, from inventory management to sales and marketing. Transcend™ Consultancy Empowering businesses with Transcend™ Consulting Services, we offer expert guidance across critical areas like information security, data engineering and cloud services. Our team partners with businesses to create tailored solutions that drive innovation, efficiency and growth. Transcend™ AI Labs We are leading AI-driven innovation with our Transcend™ AI Labs, integrating advanced AI services into our product suite to solve the unique challenges of BFSI, equipment and auto OEMs and dealerships. Our tailored solutions drive industry-specific advancements, helping companies stay ahead in a competitive market. Page 36 Highlights Listed below are a few of NETSOL’s highlights for the quarter ended December 31, 2024: · We generated nearly $1.6 million in services revenues from modifications and enhancements for multiple customers across various regions. · Under our Transcend Consultancy banner, we entered into an agreement with a client for the development of an application with a total contract value of $225,000. · We entered into an agreement with a U.K. based financial services provider to provide subscription services under our Transcend Marketplace banner with an estimated contract value of $250,000. · We continued to make significant progress in the implementation of our solution at the auto captive finance company of a notable US manufacturer in China. Management has identified the following material trends affecting NETSOL. Positive trends: · According to S&P Global Mobility, the forecast for new vehicle sales worldwide in 2025 is 89.6 million units, which is a modest 1.7% year-over-year growth in light vehicle sales. · According to S&P Global Mobility and Edmunds, the US automotive sales of new vehicles in 2025 are expected to be around 16.2 million units, which is a 1.2% to 1.4% increase from 2024. This would be the highest annual sales figure since 2019. · As of January 15, 2025, the U.S. inflation rate was 2.89% which is lower than the long-term average of 3.28%. · The U.S. market remains strong and resilient for NETSOL to continue investing in building local teams for its core offerings. · According to recent forecasts, China’s auto sales in 2025 are expected to reach approximately 32 million units representing a 3% year-over-year increase. (China Automobile Manufacturers Association) · The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $65 billion from the originally planned $46 billion, in Pakistan energy and infrastructure sectors. In June 2024, China authorized a new $2.3 billion loan at a discounted rate to Pakistan as a short-term loan. · The overall size of the mobility market in Europe and the United States is projected to increase over $425 billion combined, by 2035 or a compound CAGR of 5% from 2022. (Deloitte Global Automotive Mobility Market Simulation Tool) · The global automotive finance market accounted for $245 billion in 2022 and is expected to more than double by 2035 at a CAGR of 7.4% according to Precedence Research. · The U.S. economy grew at an annual rate of 3% for the second quarter of 2024. This report reflects the U.S. economy to be resilient despite other pressures including inflation and higher interest rates. (Associated Press August 29, 2024) · The Federal Reserve cut interest rates by 50 basis points in September 2024 and by 25 basis points in December 2024. · The Russell Microcap index has returned an average of 13.7% during 2024. (Royce Investment Partners) Page 37 Negative trends: · The conflict in Gaza has disrupted the entire Middle East region since October 7, 2023. The conflict has expanded to neighboring nations such as Syria, Lebanon and Iran. The unrest and turmoil in the region is viewed unfavorably by the regional business community. · General economic conditions in our geographic markets; inflation, geopolitical tensions, including trade wars, tariffs and/or sanctions in geographic areas; and global conflicts or disasters that impact the global economy or one or more sectors of the global economy. · The imposition of tariffs on China and threatened tariffs on other US trading partners may affect the price of consumer goods including vehicles amongst others, negatively affecting the profitability of many of our customers. · Political, monetary, and economic challenges and a higher inflation rate than other regional countries impacting Pakistan exports. · Inflation and higher interest rates globally have greatly increased the cost of doing business, including salaries and benefits worldwide, affecting profitability. · War and hostility between Russia and Ukraine continue to foster global economic uncertainty. · The geo-political environment in South Asia will continue to influence Pakistan’s economic prospects. Pakistan’s political uncertainty has caused higher inflation with constant pressure on its currency being devalued against the US Dollar. According to a report issued by the World Bank, while marginal economic growth is expected in Pakistan, implementing an ambitious and credibly communicated economic reform plan is critical for a robust economic recovery. There is no guarantee that such reforms will be implemented. See Press Release, dated April 2, 2024, World Bank. · The US and EU have placed tariffs on a range of high-tech products from China including the US placing 100% tariffs on EV vehicles and 25% tariffs on EV batteries imported from China. (Center for Strategic and International Studies June 28, 2024). The US imposed additional tariffs on China in February 2025 with retaliatory tariffs from China on US goods. Page 38 CHANGES IN FINANCIAL CONDITION Quarter Ended December 31, 2024 Compared to the Quarter Ended December 31, 2023 The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2024 and 2023 as a percentage of revenues. For the Three Months Ended December 31, 2024 % 2023 Net Revenues: License fees $ 72,688 0.5 % $ 2,990,453 Subscription and support 8,642,629 55.6 % 6,827,781 Services 6,821,344 43.9 % 5,419,707 Total net revenues 15,536,661 100.0 % 15,237,941 Cost of revenues 8,616,320 55.5 % 8,062,204 Gross profit 6,920,341 44.5 % 7,175,737 Operating expenses: Selling, general and administrative 7,073,622 45.5 % 5,807,494 Research and development cost 333,669 2.1 % 341,411 Total operating expenses 7,407,291 47.7 % 6,148,905 Income (loss) from operations (486,950 ) -3.1 % 1,026,832 Other income and (expenses) Interest expense (236,386 ) -1.5 % (290,322 ) Interest income 529,072 3.4 % 468,280 Gain (loss) on foreign currency exchange transactions (698,392 ) -4.5 % (14,617 ) Other income 38,064 0.2 % (57,305 ) Total other income (expenses) (367,642 ) -2.4 % 106,036 Net income before income taxes (854,592 ) -5.5 % 1,132,868 Income tax provision (331,614 ) -2.1 % (150,053 ) Net income (1,186,206 ) -7.6 % 982,815 Non-controlling interest 39,164 0.3 % (574,499 ) Net income attributable to NetSol $ (1,147,042 ) -7.4 % $ 408,316 Net income per share: Net income per common share Basic $ (0.10 ) $ 0.04 Diluted $ (0.10 ) $ 0.04 Weighted average number of shares outstanding Basic 11,484,298 11,372,819 Diluted 11,496,038 11,372,819 Page 39 A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 15 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency. Favorable Favorable Total (Unfavorable) (Unfavorable) Favorable For the Three Months Change in Change due to (Unfavorable) Ended December 31, Constant Currency Change as 2024 % 2023 % Currency Fluctuation Reported Net Revenues: $ 15,536,661 100.0 % $ 15,237,941 100.0 % $ 136,930 $ 161,790 $ 298,720 Cost of revenues: 8,616,320 55.5 % 8,062,204 52.9 % (412,633 ) (141,483 ) (554,116 ) Gross profit 6,920,341 44.5 % 7,175,737 47.1 % (275,703 ) 20,307 (255,396 ) Operating expenses: 7,407,291 47.7 % 6,148,905 40.4 % (1,139,949 ) (118,437 ) (1,258,386 ) Income (loss) from operations $ (486,950 ) -3.1 % $ 1,026,832 6.7 % $ (1,415,652 ) $ (98,130 ) $ (1,513,782 ) Net revenues for the three months ended December 31, 2024 and 2023 are broken out among the segments as follows: 2024 2023 Revenue % Revenue % North America $ 3,207,273 20.6 % $ 1,465,221 9.6 % Europe 3,261,180 21.0 % 2,472,357 16.2 % Asia-Pacific 9,068,208 58.4 % 11,300,363 74.2 % Total $ 15,536,661 100.0 % $ 15,237,941 100.0 % Revenues License fees License fees for the three months ended December 31, 2024 were $72,688 compared to $2,990,453 for the three months ended December 31, 2023 reflecting a decrease of $2,917,765 with a decrease in constant currency of $2,920,457. During the three months ended December 31, 2023, we recognized approximately $2,800,000 related to the sale of our NFS Ascent® CMS software to a renowned US auto manufacturer based in China. Page 40 Subscription and support Subscription and support fees for the three months ended December 31, 2024 were $8,642,629 compared to $6,827,781 for the three months ended December 31, 2023 reflecting an increase of $1,814,848 with an increase in constant currency of $1,746,037. The increase includes a one-time catch up of approximately $1,000,000 from four of our customers. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent ® . Services Services income for the three months ended December 31, 2024 was $6,821,344 compared to $5,419,707 for the three months ended December 31, 2023 reflecting an increase of $1,401,637 with an increase in constant currency of $1,286,921. The increase is mainly due to implementation services in US and Europe. Gross Profit The gross profit was $6,920,341, for the three months ended December 31, 2024 compared with $7,175,737 for the three months ended December 31, 2023. This is a decrease of $255,396 with a decrease in constant currency of $275,703. The gross profit percentage for the three months ended December 31, 2024 also decreased to 44.5% from 47.1% for the three months ended December 31, 2023. The cost of sales was $8,616,320 for the three months ended December 31, 2024 compared to $8,062,204 for the three months ended December 31, 2023 for an increase of $554,116 and on a constant currency basis an increase of $412,633. As a percentage of sales, cost of sales increased from 52.9% for the three months ended December 31, 2023 to 55.5% for the three months ended December 31, 2024. Salaries and consultant fees increased by $811,075 from $5,903,362 for the three months ended December 31, 2023 to $6,714,437 for the three months ended December 31, 2024 and on a constant currency basis increased by $701,239. The increase is due to annual salary raises. As a percentage of sales, salaries and consultant expense increased from 38.7% for the three months ended December 31, 2023 to 43.2% for the three months ended December 31, 2024. Travel expenses were $601,251 for the three months ended December 31, 2024 compared to $748,072 for the three months ended December 31, 2023 for a decrease of $146,821 with a decrease in constant currency of $155,834. As a percentage of sales, travel expense decreased from 4.9% for the three months ended December 31, 2023 to 3.9% for the three months ended December 31, 2024. Depreciation and amortization expense decreased to $237,882 compared to $264,374 for the three months ended December 31, 2023 or a decrease of $26,492 and on a constant currency basis a decrease of $30,214. Other costs decreased to $1,062,750 for the three months ended December 31, 2024 compared to $1,146,396 for the three months ended December 31, 2023 or a decrease of $83,646 and on a constant currency basis a decrease of $102,558. Operating Expenses Operating expenses were $7,407,291 for the three months ended December 31, 2024 compared to $6,148,905, for the three months ended December 31, 2023 for an increase of $1,258,386 and on a constant currency basis an increase of $1,139,949. As a percentage of sales, it increased from 40.4% to 47.7%. The increase in operating expenses was primarily due to increases in selling and marketing expenses, salaries and wages, provision for doubtful accounts, and other general and administrative expenses. Selling expenses were $2,662,397 for the three months ended December 31, 2024 compared to $1,784,510, for the three months ended December 31, 2023 for an increase of $877,887 and on a constant currency basis an increase of $831,571. The increase is mainly due to increases is salaries and consultants of approximately $586,000, due to annual raises and the hiring of additional marketing personnel. Other marketing expenses increased by approximately $108,000 due to the increase in marketing events. Page 41 General and administrative expenses were $4,411,225 for the three months ended December 31, 2024 compared to $4,022,984 for the three months ended December 31, 2023 or an increase of $388,241 and on a constant currency basis an increase of $321,393. During the three months ended December 31, 2024, salaries increased by $123,788 and increased $86,685 on a constant currency basis, bad debt expense increased $117,355 and increased $114,936 on a constant currency basis, and other general and administrative expenses increased $147,098 or increased by $119,772 on a constant currency basis. Research and development cost was $333,669 for the three months ended December 31, 2024 compared to $341,411, for the three months ended December 31, 2023 for a decrease of $7,742 and on a constant currency basis a decrease of $13,015. Income/Loss from Operations Loss from operations was $486,950 for the three months ended December 31, 2024 compared to income from operations of $1,026,832 for the three months ended December 31, 2023. This represents an increase in loss of $1,513,782 with an increase in loss of $1,415,652 on a constant currency basis for the three months ended December 31, 2024 compared with the three months ended December 31, 2023. As a percentage of sales, loss from operations was 3.1% for the three months ended December 31, 2024 compared to income from operations of 6.7% for the three months ended December 31, 2023. Other Income and Expense Other expense was $367,642 for the three months ended December 31, 2024 compared to other income of $106,036 for the three months ended December 31, 2023. This represents an increase in other expense of $473,678 with an increase of $457,864 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions and interest income. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the three months ended December 31, 2024, we recognized a loss of $698,392 in foreign currency exchange transactions compared to a loss of $14,617 for the three months ended December 31, 2023. During the three months ended December 31, 2024, the value of the U.S. dollar increased 0.4% and the Euro decreased 6.6%, compared to the PKR. During the three months ended December 31, 2023, the value of the U.S. dollar decreased 2.8% and the Euro increased 1.5%, compared to the PKR. Non-controlling Interest For the three months ended December 31, 2024, the net loss attributable to non-controlling interest was $39,164, compared to net income of $574,499 for the three months ended December 31, 2023. The decrease in non-controlling interest is primarily due to the increase in net loss of NetSol PK and NetSol Innovation. Net income (loss) attributable to NetSol The net loss was $1,147,042 for the three months ended December 31, 2024 compared to net income of $408,316 for the three months ended December 31, 2023. This is an increase in loss of $1,555,358 with an increase of net loss of $1,520,406 on a constant currency basis, compared to the prior year. For the three months ended December 31, 2024, net loss per share was $0.10 for basic and diluted shares compared to net income per share of $0.04 for basic and diluted shares for the three months ended December 31, 2023. Page 42 Six Months Ended December 31, 2024 Compared to the Six Months Ended December 31, 2023 The following table sets forth the items in our unaudited condensed consolidated statement of operations for the six months ended December 31, 2024 and 2023 as a percentage of revenues. For the Six Months Ended December 31, 2024 % 2023 % Net Revenues: License fees $ 73,917 0.2 % $ 4,270,902 14.5 % Subscription and support 16,835,100 55.9 % 13,340,024 45.3 % Services 13,226,142 43.9 % 11,869,196 40.3 % Total net revenues 30,135,159 100.0 % 29,480,122 100.0 % Cost of revenues 16,650,706 55.3 % 16,142,368 54.8 % Gross profit 13,484,453 44.7 % 13,337,754 45.2 % Operating expenses: Selling, general and administrative 14,037,943 46.6 % 11,240,463 38.1 % Research and development cost 693,618 2.3 % 719,830 2.4 % Total operating expenses 14,731,561 48.9 % 11,960,293 40.6 % Income (loss) from operations (1,247,108 ) -4.1 % 1,377,461 4.7 % Other income and (expenses) Interest expense (494,605 ) -1.6 % (566,339 ) -1.9 % Interest income 1,298,939 4.3 % 882,998 3.0 % Gain (loss) on foreign currency exchange transactions (155,847 ) -0.5 % (148,870 ) -0.5 % Other income 191,555 0.6 % 576 0.0 % Total other income (expenses) 840,042 2.8 % 168,365 0.6 % Net income before income taxes (407,066 ) -1.4 % 1,545,826 5.2 % Income tax provision (561,431 ) -1.9 % (271,948 ) -0.9 % Net income (968,497 ) -3.2 % 1,273,878 4.3 % Non-controlling interest (107,750 ) -0.4 % (834,672 ) -2.8 % Net income attributable to NetSol $ (1,076,247 ) -3.6 % $ 439,206 1.5 % Net income per share: Net income per common share Basic $ (0.09 ) $ 0.04 Diluted $ (0.09 ) $ 0.04 Weighted average number of shares outstanding Basic 11,456,996 11,359,338 Diluted 11,456,996 11,359,338 Page 43 A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 15 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency. Favorable Favorable Total (Unfavorable) (Unfavorable) Favorable For the Six Months Change in Change due to (Unfavorable) Ended December 31, Constant Currency Change as 2024 % 2023 % Currency Fluctuation Reported Net Revenues: $ 30,135,159 100.0 % $ 29,480,122 100.0 % $ 357,270 $ 297,767 $ 655,037 Cost of revenues: 16,650,706 55.3 % 16,142,368 54.8 % (109,219 ) (399,119 ) (508,338 ) Gross profit 13,484,453 44.7 % 13,337,754 45.2 % 248,051 (101,352 ) 146,699 Operating expenses: 14,731,561 48.9 % 11,960,293 40.6 % (2,435,341 ) (335,927 ) (2,771,268 ) Income (loss) from operations $ (1,247,108 ) -4.1 % $ 1,377,461 4.7 % $ (2,187,290 ) $ (437,279 ) $ (2,624,569 ) Net revenues for the six months ended December 31, 2024 and 2023 are broken out among the segments as follows: 2024 2023 Revenue % Revenue % North America $ 6,075,934 20.2 % $ 2,873,836 9.7 % Europe 5,756,466 19.1 % 5,034,390 17.1 % Asia-Pacific 18,302,759 60.7 % 21,571,896 73.2 % Total $ 30,135,159 100.0 % $ 29,480,122 100.0 % Revenues License fees License fees for the six months ended December 31, 2024 were $73,917 compared to $4,270,902 for the six months ended December 31, 2023 reflecting a decrease of $4,196,985 with a decrease in constant currency of $4,199,708. During the six months ended December 31, 2023, we recognized approximately $2,800,000 related to the sale of our NFS Ascent® CMS software to a renowned US auto manufacturer based in China and we recognized approximately $1,142,000 related to the license renewal with an existing customer. Page 44 Subscription and support Subscription and support fees for the six months ended December 31, 2024 were $16,835,100 compared to $13,340,024 for the six months ended December 31, 2023 reflecting an increase of $3,495,076 with an increase in constant currency of $3,371,069. The increase includes a one-time catch up of approximately $1,693,000 from five of our customers. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent ® . Services Services income for the six months ended December 31, 2024 was $13,226,142 compared to $11,869,196 for the six months ended December 31, 2023 reflecting an increase of $1,356,946 with an increase in constant currency of $1,139,746. The increase is mainly due to implementation services in US and Europe. Gross Profit The gross profit was $13,484,453, for the six months ended December 31, 2024 compared with $13,337,754 for the six months ended December 31, 2023. This is an increase of $146,699 with an increase in constant currency of $248,051. The gross profit percentage for the six months ended December 31, 2024 decreased to 44.8% from 45.2% for the six months ended December 31, 2023. The cost of sales was $16,650,706 for the six months ended December 31, 2024 compared to $16,142,368 for the six months ended December 31, 2023 for an increase of $508,338 and on a constant currency basis an increase of $109,219. As a percentage of sales, cost of sales increased from 54.8% for the six months ended December 31, 2023 to 55.3% for the six months ended December 31, 2024. Salaries and consultant fees increased by $1,056,666 from $11,861,505 for the six months ended December 31, 2023 to $12,918,171 for the six months ended December 31, 2024 and on a constant currency basis increased by $749,645. The increase is due to annual salary raises. As a percentage of sales, salaries and consultant expense increased from 40.2% for the six months ended December 31, 2023 to 42.9% for the six months ended December 31, 2024. Travel expenses were $1,172,113 for the six months ended December 31, 2024 compared to $1,408,439 for the six months ended December 31, 2023 for a decrease of $236,326 with a decrease in constant currency of $260,082. As a percentage of sales, travel expense decreased from 4.8% for the six months ended December 31, 2023 to 3.9% for the six months ended December 31, 2024. Depreciation and amortization expense decreased to $466,432 compared to $657,357 for the six months ended December 31, 2023 or a decrease of $190,925 and on a constant currency basis a decrease of $204,128. Other costs decreased to $2,093,990 for the six months ended December 31, 2024 compared to $2,215,067 for the six months ended December 31, 2023 or a decrease of $121,077 and on a constant currency basis a decrease of $176,216. Operating Expenses Operating expenses were $14,731,561 for the six months ended December 31, 2024 compared to $11,960,293, for the six months ended December 31, 2023 for an increase of $2,771,268 and on a constant currency basis an increase of $2,435,341. As a percentage of sales, it increased from 40.6% to 48.9%. The increase in operating expenses was primarily due to increases in selling and marketing expenses, salaries and wages, provision for doubtful accounts, and other general and administrative expenses. Selling expenses were $4,954,596 for the six months ended December 31, 2024 compared to $3,493,375, for the six months ended December 31, 2023 for an increase of $1,461,221 and on a constant currency basis an increase of $1,367,174. The increase is mainly due to increases is salaries and consultants of approximately $1,021,000, due to annual raises and the hiring of additional marketing personnel. Other marketing expenses increased by approximately $443,000 due to the increase in marketing events. Page 45 General and administrative expenses were $9,083,347 for the six months ended December 31, 2024 compared to $7,747,088 for the six months ended December 31, 2023 or an increase of $1,336,259 and on a constant currency basis an increase of $1,114,972. During the six months ended December 31, 2024, salaries increased by approximately $562,832 and increased $472,349 on a constant currency basis, bad debt expense increased $445,981 and $430,243 on a constant currency basis, and other general and administrative expenses increased approximately $327,446 or increased by $212,380 on a constant currency basis. Research and development cost was $693,618 for the six months ended December 31, 2024 compared to $719,830, for the six months ended December 31, 2023 for a decrease of $26,212 and on a constant currency basis a decrease of $46,805. Income/Loss from Operations Loss from operations was $1,247,108 for the six months ended December 31, 2024 compared to income from operations of $1,377,461 for the six months ended December 31, 2023. This represents an increase in loss of $2,624,569 with an increase in loss of $2,187,290 on a constant currency basis for the six months ended December 31, 2024 compared with the six months ended December 31, 2023. As a percentage of sales, loss from operations was 4.1% for the six months ended December 31, 2024 compared to income from operations of 4.7% for the six months ended December 31, 2023. Other Income and Expense Other income was $840,042 for the six months ended December 31, 2024 compared to $168,365 for the six months ended December 31, 2023. This represents an increase of $671,677 with an increase of $638,009 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions and interest income. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the six months ended December 31, 2024, we recognized a loss of $155,847 in foreign currency exchange transactions compared to $148,870 for the six months ended December 31, 2023. During the six months ended December 31, 2024, the value of the U.S. dollar increased 0.2% and the Euro decreased 2.9%, compared to the PKR. During the six months ended December 31, 2023, the value of the U.S. dollar and the Euro decreased 2.6% and 1.2%, respectively, compared to the PKR. During the six months ended December 31, 2024, interest income was $1,298,939 compared to $882,998 for the six months ended December 31, 2023, for an increase of $415,941 and on constant currency basis an increase of $374,167. The increase in interest income was driven by a higher balance of interest-bearing funds during the period. Non-controlling Interest For the six months ended December 31, 2024, the net income attributable to non-controlling interest was $107,750, compared to $834,672 for the six months ended December 31, 2023. The decrease in non-controlling interest is primarily due to the increase in net loss of NetSol PK and NetSol Innovation. Net income (loss) attributable to NetSol The net loss was $1,076,247 for the six months ended December 31, 2024 compared to net income of $439,206 for the six months ended December 31, 2023. This is an increase in loss of $1,515,453 with an increase of $1,316,457 on a constant currency basis, compared to the prior year. For the six months ended December 31, 2024, net loss per share was $0.09 for basic and diluted shares compared to net income per share of $0.04 for basic and diluted shares for the six months ended December 31, 2023. Page 46 Non-GAAP Financial Measures Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows: · EBITDA is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization. · Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense. · Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company. The non-GAAP measures reflect adjustments based on the following items: EBITDA : We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers. Stock-based compensation expense : We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers. Non-controlling interest : We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA. Page 47 Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the three and six months ended December 31, 2024 and 2023 are as follows: For the Three Months Ended December 31, For the Six Months Ended December 31, 2024 2023 2024 2023 Net Income (loss) attributable to NetSol $ (1,147,042 ) $ 408,316 $ (1,076,247 ) $ 439,206 Non-controlling interest (39,164 ) 574,499 107,750 834,672 Income taxes 331,614 150,053 561,431 271,948 Depreciation and amortization 372,585 429,163 738,582 959,949 Interest expense 236,386 290,322 494,605 566,339 Interest (income) (529,072 ) (468,280 ) (1,298,939 ) (882,998 ) EBITDA $ (774,693 ) $ 1,384,073 $ (472,818 ) $ 2,189,116 Add back: Non-cash stock-based compensation 47,355 51,433 95,134 111,787 Adjusted EBITDA, gross $ (727,338 ) $ 1,435,506 $ (377,684 ) $ 2,300,903 Less non-controlling interest (a) (61,529 ) (710,171 ) (207,310 ) (1,109,611 ) Adjusted EBITDA, net $ (788,867 ) $ 725,335 $ (584,994 ) $ 1,191,292 Weighted Average number of shares outstanding Basic 11,484,298 11,372,819 11,456,996 11,359,338 Diluted 11,484,298 11,372,819 11,456,996 11,359,338 Basic adjusted EBITDA $ (0.07 ) $ 0.06 $ (0.05 ) $ 0.10 Diluted adjusted EBITDA $ (0.07 ) $ 0.06 $ (0.05 ) $ 0.10 (a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows Net Income (loss) attributable to non-controlling interest $ (39,164 ) $ 574,499 $ 107,750 $ 834,672 Income Taxes 102,414 75,407 173,001 111,784 Depreciation and amortization 92,546 109,765 181,681 251,116 Interest expense 68,636 91,295 147,828 177,184 Interest (income) (165,365 ) (144,578 ) (408,012 ) (272,669 ) EBITDA $ 59,067 $ 706,388 $ 202,248 $ 1,102,087 Add back: Non-cash stock-based compensation 2,462 3,783 5,062 7,524 Adjusted EBITDA of non-controlling interest $ 61,529 $ 710,171 $ 207,310 $ 1,109,611 Page 48 LIQUIDITY AND CAPITAL RESOURCES Our cash position was $21,270,642 at December 31, 2024, compared to $19,127,165 at June 30, 2024. Net cash provided by operating activities was $369,716 for the six months ended December 31, 2024 compared to $604,684 for the six months ended December 31, 2023. At December 31, 2024, we had current assets of $42,953,392 and current liabilities of $19,955,153. We had accounts receivable of $7,829,823 at December 31, 2024 compared to $13,049,614 at June 30, 2024. We had revenues in excess of billings of $11,438,977 at December 31, 2024 compared to $13,638,547 at June 30, 2024 of which $777,428 and $954,029 is shown as long term as of December 31, 2024 and June 30, 2024, respectively. The long-term portion was discounted by $115,126 and $152,446 at December 31, 2024 and June 30, 2024, respectively, using the discounted cash flow method with interest rates ranging from 7.3% to 17.5%. During the six months ended December 31, 2024, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings decreased by $4,508,691 from $26,688,161 at June 30, 2024 to $19,268,800 at December 31, 2024. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $7,332,560 and $8,784,232, respectively at December 31, 2024. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $8,232,342 and $6,276,125, respectively, at June 30, 2024. The average days sales outstanding for the six months ended December 31, 2024 and 2023 were 140 and 147 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenues in excess of billings. Net cash used in investing activities was $531,477 for the six months ended December 31, 2024, compared to $569,336 for the six months ended December 31, 2023. We had purchases of property and equipment of $568,134 compared to $570,584 for the six months ended December 31, 2023. Net cash provided by financing activities was $2,637,763 for the six months ended December 31, 2024, compared to net cash used in financing activities of $27,359 for the six months ended December 31, 2023. During the six months ended December 31, 2024, we received bank proceeds of $2,676,932 compared to $135,123 during the six months ended December 31, 2023. During the six months ended December 31, 2024, we had net payments for bank loans and finance leases of $162,370 compared to $162,482 for the six months ended December 31, 2023. Employees of the Company exercised 200,00 options of common stock for $430,000. NetSol PK, a subsidiary of the Company, paid a dividend of $306,799 to the non-controlling interest. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 12 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources. We typically fund the cash requirements for our operations in the U.S. through our license, services, and subscription and support agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of December 31, 2024, we had approximately $21.3 million of cash, cash equivalents and marketable securities of which approximately $20 million is held by our foreign subsidiaries. As of June 30, 2024, we had approximately $19.1 million of cash, cash equivalents and marketable securities of which approximately $18.2 million is held by our foreign subsidiaries. We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise. As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2.5 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations. Page 49 Financial Covenants Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($375,000) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($1,793,915) and a running finance facility of Rupees 3.6 million ($12,740). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 1.3 billion ($4,664,180). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol PK also has an approved export refinance facility of Rs. 380 million ($1,363,375) from Samba Bank Limited. During the loan tenure, these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities. CRITICAL ACCOUNTING POLICIES Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024. RECENT ACCOUNTING PRONOUNCEMENTS For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures about Market Risks. None.