NETSOL TECHNOLOGIES INC 10-K

ITEM 7- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in understanding our financial position and results of operations for the year ended June 30, 2026. It should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. Listed below are a few of NetSol’s highlights for the Year ended June 30, 2026: ● We entered into a four-year contract extension valued at approximately $50 million with a long-standing customer and strategic partner. The extension reinforces recurring revenue through ongoing maintenance and licensing fees and expands the customer’s continued use of the Transcend™ Finance platform across multiple countries. ● We executed an agreement with the captive finance arm of a leading Japanese commercial vehicle manufacturer in Thailand to migrate its contract management system from the legacy R1 platform to the next-generation Transcend Finance platform. The agreement carries a total contract value exceeding $12 million and underscores the client’s commitment to modernizing its core finance technology while strengthening our long-standing partnership. ● We generated approximately $6.6 million in revenue through major system enhancements and platform modifications for multiple clients across diverse global regions. ● We entered into a strategic agreement with an existing client to not only have the annual maintenance fee revised upwards but also to upgrade our legacy R1 platform, a project expected to generate approximately $1.5 million in revenue. ● We were selected by a Fortune 500 automotive and powersports dealership group in North America to lead a discovery engagement with them focused on defining the roadmap for their next-gen omnichannel digital retail platform to be powered by our Transcend Retail system. ● We launched an AI-powered credit decisioning engine within the Transcend™ Finance platform. The solution automates manual credit workflows, accelerates decision-making, and enhances underwriting accuracy through improved data aggregation, document processing, and financial analysis. ● We signed a contract valued at approximately $1.75 million with a provincial government entity in Pakistan, funded by the World Bank, to support the digitization of government workflows. The project focuses on process automation and cross-departmental system integration to improve operational efficiency and public service delivery. ● We successfully completed several significant customer go-lives across key international markets, including deployments of our Transcend™ Finance and Transcend™ Wholesale platforms for captive and multi-asset finance companies in China, Thailand and the United Kingdom. These implementations support a range of retail and wholesale finance operations, including credit workflows, loan origination and servicing, inventory management, dealer credit processes and digital dealer self-service. ● A leading German automotive manufacturer in North America successfully completed a dealer portal pilot, enabling enhanced dealer self-service, real-time financing workflows, and improved digital engagement. The pilot represents a milestone toward broader rollout. ● Our subsidiary, NetSol Institute of Artificial Intelligence, entered into a strategic partnership with Pakistan’s national vocational and technical training authority to train approximately 1,600 individuals in artificial intelligence, data science, and cybersecurity. The initiative is expected to generate over $1 million in revenue. ● We entered into a multi-million-dollar extension agreement with an existing customer to provide continued support for our legacy product platform. 9 ● We entered into a strategic partnership with a Stockholm-based fintech advisory and IT services firm to accelerate our expansion across the Nordics. By combining our Transcend Finance platform and decades of asset finance expertise with the partner’s deep local market knowledge and transformation consulting capabilities, the partnership will help banks, finance companies, and specialist lenders modernize their core technology platforms. ● Three U.S. automotive dealerships successfully went live with the Transcend Retail platform, including a multi-brand dealer group, a digital-first luxury and exotic vehicle dealership, and a recreational vehicle dealer. The deployments enable a connected and transparent digital retail experience spanning the entire customer journey from initial engagement through credit application and deal completion while further expanding Transcend Retail’s footprint across the U.S. automotive retail market. ● We successfully upgraded one of our long-standing captive finance clients in Thailand, serving the Asia-Pacific automotive sector for more than two decades, to the latest version of its Wholesale Finance System, a core module of the Transcend Finance platform. The implementation transitioned the client to an AI-enabled, API-first architecture featuring a modular and scalable framework that integrates OEMs, dealers, brokers, credit bureaus, and ERP systems into a unified data ecosystem. Marketing and Business Development Activities We continue to pursue a series of strategic marketing and business development initiatives to strengthen market presence and support growth across our business lines. These efforts reflect our commitment to building a stronger market presence, expanding our customer base and maintaining a careful focus on profitability. These efforts include: repositioning our brand and messaging; brand strengthening and awareness; raising industry expertise through speaking engagements and participation in awards and recognitions; accelerating digital campaigns focused on content marketing; leveraging analytics and marketing automation tools to improve campaign effectiveness and optimize marketing return on investment; creating comprehensive go-to-market plans for new launches and feature upgrades; customer centric sales enablement; targeting new global and product markets; using AI to enhance productivity; expanding market reach through participation in industry associations; and, adopting practices that strengthen leadership and talent retention. Industry trends affecting our business Management believes the following trends and uncertainties may have a material, favorable or unfavorable impact on the Company’s business. Interest rate environment and credit conditions Interest rate levels and broader monetary policy conditions continue to influence borrowing costs, credit availability and financing activity across consumer and commercial lending markets, including automotive finance. Sustained elevated rates may temper near-term financing volumes among customers, while creating demand for technology investments that support operational efficiency and risk management. ( Board of Governors of the Federal Reserve System, Monetary Policy Report, July 2026.) Electrification of the automotive industry The automotive industry continues its transition toward electrified vehicles, supported by regulatory developments and long-term manufacturer strategies. Chinese automotive manufacturers have become significant participants in the electric vehicle segment, with EVs now accounting for nearly 55% of new vehicle sales in China and Chinese EV exports reaching record levels, intensifying competition across the global automotive landscape. The Company’s established presence and customer base in China may support participation in this growth, while shifts in market share among traditional automotive OEMs could affect technology investment patterns across the Company’s broader customer base. ( International Energy Agency (IEA), ‘Global EV Outlook 2026’. ) 10 Digital and omnichannel automotive retail OEMs and dealers continue to adopt digital tools and omnichannel retail approaches, integrating online and physical channels across vehicle research, configuration and transaction processes. Continued investment in digital retail capabilities by automotive OEMs and dealerships may support demand for the Company’s Transcend Retail platform, although adoption pace and implementation timing vary across customers and regions. ( McKinsey & Company, ‘Auto retail productivity in the digital era’, January 2025.) Digital transformation in financial services Financial institutions and captive finance companies continue to invest in digital transformation initiatives, including cloud adoption, data infrastructure modernization and automation of operational processes. Continued investment in these areas may support demand for the Company’s Transcend Finance platform. The pace and scale of customer transformation initiatives vary based on internal priorities, budget cycles and the complexity of replacing or integrating with existing core systems. ( PwC, ‘What will be left of financial services tomorrow?’, PwC FS Survey, July 2025. ) Global regulatory and compliance environment Financial institutions continue to operate within an evolving global regulatory environment, including banking supervision and capital adequacy frameworks, which may influence compliance requirements and operational processes. The Company’s platform supports risk management, audit and compliance reporting workflows that may help customers address evolving requirements. At the same time, regulatory uncertainty and compliance-related investment may extend customer decision-making timelines or shift technology priorities toward maintenance and remediation initiatives. ( Bank for International Settlements, ‘Basel Committee on Banking Supervision, Basel III Monitoring Report’, March 2026. ) Geopolitical and trade policy developments Ongoing geopolitical developments, including the conflict in the Middle East and its impact on global energy markets, alongside evolving trade policy between major economies, may influence cross-border technology deployment, currency dynamics and client investment decisions in markets where the Company operates, including China. The Company’s platform architecture, designed to operate across multiple jurisdictions and regulatory environments, may help mitigate some of this exposure, though continued volatility could affect the pace of customer technology investment decisions in affected regions. ( International Monetary Fund, ‘World Economic Outlook Update’, July 2026. ) CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, stock-based compensation, and goodwill. 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. 11 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 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 subscriptions 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. Subscription Subscription revenue is recognized ratably over the initial subscription period committed 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. 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. 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, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice. 12 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. For fixed-fee implementation and customization services that are satisfied over time, revenue is recognized using an input method based on person-days incurred relative to total estimated person-days required to complete the services. 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 over time on a monthly basis. Significant Judgments Due to the complexity of certain contracts, the revenue recognition treatment under Topic 606 for the Company’s arrangements may depend 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 standalone 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 judgments and estimates involved in the Company’s revenue recognition policies are: (1) determining standalone selling prices of the Company’s software licenses, and (2) measuring progress toward satisfaction of performance obligations for implementation, customization, and other services. The standalone selling price of the licenses is measured primarily through an analysis of pricing that management evaluates 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 standalone 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 separately 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 “person-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 person-days required to complete implementation and customization services each reporting period. If a group of agreements is entered into 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 comprises 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. 13 If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company considers all relevant facts and circumstances. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. 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, or contract liabilities on the Company’s Consolidated Balance Sheets. The Company records contract assets when the Company has transferred goods or services but does not yet have the right to consideration. The Company records contract liabilities when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer. Contract Liabilities 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-cancellable licenses and services starting in future periods are included in accounts receivable and contract liabilities. 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 cash 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, we incur few direct incremental costs of obtaining new customer contracts. We rarely incur incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, our sales personnel receive fees that we refer to as commissions, but that are based on more than simply signing up new customers. Our sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts. STOCK-BASED COMPENSATION Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The Company recognizes compensation expense net of actual forfeitures as they occur. Accordingly, no estimate is made for the future forfeitures at the time of grant. 14 GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. In conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the Company performs a quantitative assessment, and the fair value of the reporting unit is determined by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded. Recent Accounting Pronouncement See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption. RESULTS OF OPERATIONS THE YEAR ENDED JUNE 30, 2026 COMPARED TO THE YEAR ENDED JUNE 30, 2025 The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2026 and 2025 as a percentage of revenues. For the Years Ended June 30, 2026 % 2025 % Net Revenues: License fees $ 4,954,378 6.7 % $ 598,633 0.9 % Subscription and support 35,799,842 48.1 % 32,934,648 49.8 % Services 33,617,160 45.2 % 32,554,948 49.3 % Total net revenues 74,371,380 100.0 % 66,088,229 100.0 % Cost of revenues 35,224,037 47.4 % 33,513,697 50.7 % Gross profit 39,147,343 52.6 % 32,574,532 49.3 % Operating expenses: Selling, general and administrative 31,418,598 42.2 % 27,796,936 42.1 % Research and development cost 782,080 1.1 % 1,275,878 1.9 % Total operating expenses 32,200,678 43.3 % 29,072,814 44.0 % Income from operations 6,946,665 9.3 % 3,501,718 5.3 % Other income and (expenses) Interest expense (605,619 ) -0.8 % (871,355 ) -1.3 % Interest income 1,071,472 1.4 % 1,871,040 2.8 % Gain (loss) on foreign currency exchange transactions (389,814 ) -0.5 % 1,301,613 2.0 % Other income 203,175 0.3 % 244,241 0.4 % Total other income (expenses) 279,214 0.4 % 2,545,539 3.9 % Net income before income taxes 7,225,879 9.7 % 6,047,257 9.2 % Income tax provision (1,630,376 ) -2.2 % (1,476,338 ) -2.2 % Net income 5,595,503 7.5 % 4,570,919 6.9 % Non-controlling interest (2,645,150 ) -3.6 % (1,647,686 ) -2.5 % Net income attributable to NetSol $ 2,950,353 4.0 % $ 2,923,233 4.4 % Net income per share: Net income per common share Basic $ 0.25 $ 0.25 Diluted $ 0.25 $ 0.25 Weighted average number of shares outstanding Basic 11,814,041 11,576,287 Diluted 11,827,950 11,576,287 15 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 18 “Segment Information and Geographic Areas” within the Notes to the 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 Years Change in Change due (Unfavorable) Ended June 30, Constant to Currency Change as 2026 % 2025 % Currency Fluctuation Reported Net Revenues: $ 74,371,380 100.0 % $ 66,088,229 100.0 % $ 7,264,076 $ 1,019,075 $ 8,283,151 Cost of revenues: 35,224,037 47.4 % 33,513,697 50.7 % (1,617,580 ) (92,760 ) (1,710,340 ) Gross profit 39,147,343 52.6 % 32,574,532 49.3 % 5,646,496 926,315 6,572,811 Operating expenses: 32,200,678 43.3 % 29,072,814 44.0 % (2,792,086 ) (335,778 ) (3,127,864 ) Income (loss) from operations $ 6,946,665 9.3 % $ 3,501,718 5.3 % $ 2,854,410 $ 590,537 $ 3,444,947 Net revenues for the years ended June 30, 2026 and 2025 by segment are as follows: 2026 2025 Revenue % Revenue % North America $ 9,055,391 12.2 % $ 12,003,827 18.2 % Europe 14,044,445 18.9 % 14,644,000 22.2 % Asia-Pacific 51,271,544 68.9 % 39,440,402 59.7 % Total $ 74,371,380 100.0 % $ 66,088,229 100.0 % Revenues License Fees License fees for the year ended June 30, 2026 were $4,954,378 compared to $598,633 for the year ended June 30, 2025 reflecting an increase of $4,355,745 with a change in constant currency of $4,345,711. In the fiscal year ended June 30, 2026, we recognized approximately $4,656,000 of software license revenue associated with the renewal and amendment of an existing customer agreement for our Transcend TM software platform. The license revenue relates to additional license consideration associated with expanded portfolio usage under the customer arrangement. Revenue associated with maintenance and support services under the arrangement will continue to be recognized over the contractual service period. In the fiscal year ended June 30, 2025, we recognized approximately $487,000 from a new customer in Indonesia. 16 Subscription and Support Subscription and support fees for the year ended June 30, 2026, were $35,799,842 compared to $32,934,648 for the year ended June 30, 2025 reflecting an increase of $2,865,194 with an increase in constant currency of $2,318,648. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we increase our SaaS customer base and implement Transcend ® . Services Services income for the year ended June 30, 2026, was $33,617,160 compared to $32,554,948 for the year ended June 30, 2025, reflecting an increase of $1,062,212 with an increase in constant currency of $599,717. The increase is mainly due to implementation services in APAC and Europe. Gross Profit The gross profit was $39,147,343 for the year ended June 30, 2026, compared with $32,574,532 for the year ended June 30, 2025. This is an increase of $6,572,811 with an increase in constant currency of $5,646,496. The gross profit percentage for the year ended June 30, 2026, increased to 52.6% from 49.3% for the year ended June 30, 2025. The cost of sales was $35,224,037 for the year ended June 30, 2026, compared to $33,513,697 for the year ended June 30, 2025, for an increase of $1,710,340 and on a constant currency basis an increase of $1,617,580. As a percentage of sales, cost of sales decreased from 50.7% for the year ended June 30, 2025, to 47.4% for the year ended June 30, 2026. Salaries and consultant fees decreased by $100,129 from $25,797,465 for the year ended June 30, 2025, to $25,697,336 for the year ended June 30, 2026, and on a constant currency basis decreased by $227,030. The decrease is due to capitalization of software development costs off set by annual increases in salary. As a percentage of sales, salaries and consultant expense decreased from 39.0% for the year ended June 30, 2025, to 34.6% for the year ended June 30, 2026. Travel increased by $746,181 from $2,063,511 for the year ended June 30, 2025, to $2,809,692 for the year ended June 30, 2026, and on a constant currency basis increased by $731,534. The increase in travel expense is due to the increase in travel for the current implementations. As a percentage of sales, travel expense increased from 3.1% for year ended June 30, 2025, to 3.8% for the year ended June 30, 2026. Depreciation and amortization expense decreased to $783,692 compared to $952,331 for the year ended June 30, 2025, or a decrease of $168,639 and on a constant currency basis a decrease of $165,806. Other costs increased to $5,933,317 for the year ended June 30, 2026, compared to $4,700,390 for the year ended June 30, 2025, or an increase of $1,232,927 and on a constant currency basis an increase of $1,278,882. The increase is mainly due to increase in third party hardware costs of approximately $1,015,865. Operating Expenses Operating expenses were $32,200,678 for the year ended June 30, 2026, compared to $29,072,814, for the year ended June 30, 2025, for an increase of $3,127,864 and on a constant currency basis an increase of $2,792,086. As a percentage of sales, it decreased from 44.0% to 43.3%. The increase in operating expenses was primarily due to increases in selling expenses, general and administrative expenses offset by a decrease in research and development costs. Selling and marketing expenses increased by $1,692,136 and on a constant currency basis increased by $1,518,546. The increase is mainly due to increases in salaries of approximately $956,109, travel of approximately $307,028 and other selling expenses of approximately $428,999. General and administrative expenses were $19,431,136 for the year ended June 30, 2026, compared to $17,501,610 at June 30, 2025, or an increase of $1,929,526, and on a constant currency basis an increase of $1,761,860. During the year ended June 30, 2026, salaries increased by approximately $2,058,745 or increased by approximately $1,955,668 on a constant currency basis, due to increases in salaries including bonuses, medical costs and subsidiary options granted to staff in NetSol PK. The provision for doubtful accounts decreased by approximately $165,930 and on a constant currency basis decreased by approximately $177,581. Other general and administrative costs increased by approximately $36,711 and on a constant currency basis a decrease of approximately $16,227. 17 Research and development costs decreased by approximately $493,798 and on a constant currency basis a decrease of approximately $488,320. Income from Operations Income from operations was $6,946,665 for the year ended June 30, 2026, compared to $3,501,718 for the year ended June 30, 2025. This represents an increase of $3,444,947 with an increase of $2,854,410 on a constant currency basis for the year ended June 30, 2026, compared with the year ended June 30, 2025. As a percentage of sales, income from operations was 9.3% for the year ended June 30, 2026, compared to 5.3% for the year ended June 30, 2025. Other Income and Expense Other income was $279,214 for the year ended June 30, 2026, compared to $2,545,539 for the year ended June 30, 2025. This represents a decrease of $2,266,325 with a decrease of $2,182,442 on a constant currency basis. The decrease is primarily due to lower interest income, driven by a reduction in interest rates from approximately 10.0%-19.5% for the year ended June 30, 2025, to approximately 8.9% to 10.8% for the year ended June 30, 2026. The decrease is also due to foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. Dollar and the Euro. During the year ended June 30, 2026, we recognized a loss of $389,814 in foreign currency exchange transactions compared to a gain of $1,301,613 for the year ended June 30, 2025. During the year ended June 30, 2026, the value of the U.S. dollar and the Euro decreased 2.1% and 4.9%, respectively, compared to the PKR. During the year ended June 30, 2025, the value of the U.S. dollar and the Euro increased 2.1% and 11.9%, respectively, compared to the PKR. Non-controlling Interest For the year ended June 30, 2026, and 2025, the net income attributable to non-controlling interest was $2,645,150 and $1,647,686, respectively. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK and NAMECET. Net Income (Loss) Attributable to NetSol Net income was $2,950,353 for the year ended June 30, 2026, compared to $2,923,233 for the year ended June 30, 2025. This is an increase in income of $27,120 with a decrease of $489,366 on a constant currency basis, compared to the prior year. For the year ended June 30, 2026, net income per share was $0.25 for basic and diluted shares. For the year ended June 30, 2025, net income per share was $0.25 for basic and diluted shares. 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 meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows: ● EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. ● Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense and adjusted for foreign currency gains and losses. 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 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. 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 that generally requires cash settlement by NetSol, and therefore is not included in certain measures by management to evaluate operating performance. 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. 18 Foreign currency exchange gains and losses: We have excluded the effect of foreign currency exchange gains and losses from non-GAAP adjusted EBITDA. As a multinational company, we are exposed to fluctuations in foreign currency exchange rates, which may result in significant gains or losses from period to period. Although foreign currency exchange gains and losses are reflected in our results in accordance with GAAP and may recur in future periods, we exclude these amounts from our non-GAAP measures because they are affected by changes in foreign currency exchange rates and are not considered by management to be indicative of the underlying operating performance of our business. We believe excluding foreign currency exchange gains and losses provides investors with additional information regarding our operating performance and facilitates period-to-period comparisons of our results. 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 adjusted EBITDA attributable to NetSol. Our reconciliation of the non-GAAP financial measures of adjusted EBITDA to the most comparable GAAP measures for the years ended June 30, 2026, and 2025 is as follows: For the Years Ended June 30, 2026 2025 Net Income (loss) attributable to NetSol $ 2,950,353 $ 2,923,233 Non-controlling interest 2,645,150 1,647,686 Income taxes 1,630,376 1,476,338 Depreciation and amortization 1,238,421 1,463,783 Interest expense 605,619 871,355 Interest (income) (1,071,472 ) (1,871,040 ) EBITDA $ 7,998,447 $ 6,511,355 Add back: Currency exchange (gain) loss 389,814 (1,301,613 ) Non-cash stock-based compensation 758,895 208,116 Adjusted EBITDA $ 9,147,156 $ 5,417,858 Less non-controlling interest (a) (3,139,679 ) (1,687,270 ) Adjusted EBITDA attributable to NetSol $ 6,007,477 $ 3,730,588 (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 $ 2,645,150 $ 1,647,686 Income Taxes 301,619 321,973 Depreciation and amortization 285,075 358,180 Interest expense 174,805 251,658 Interest (income) (322,555 ) (567,285 ) EBITDA $ 3,084,094 $ 2,012,212 Add back: Currency exchange (gain) loss 55,585 (330,004 ) Non-cash stock-based compensation - 5,062 Adjusted EBITDA of non-controlling interest $ 3,139,679 $ 1,687,270 19 LIQUIDITY AND CAPITAL RESOURCES Our cash position was $27,123,955 at June 30, 2026, compared to $17,357,944 at June 30, 2025. Net cash provided by operating activities was $13,884,176 for the year ended June 30, 2026, compared to $447,267 for the year ended June 30, 2025. The increase in operating cash flows was primarily attributable to changes in working capital and net income. During fiscal year 2026, contract liabilities increased by $6.5 million compared to a decrease of $6.3 million in fiscal year 2025, resulting in a significant year-over-year improvement in operating cash flows. The increase in contract liabilities during fiscal 2026 primarily reflects cash collections in advance of the recognition of the related revenue. Operating cash flows also benefited from a $0.6 million decrease in contract assets during fiscal year 2026 compared to a $5.2 million increase in fiscal year 2025. These favorable changes were partially offset by a $2.8 million increase in accounts receivable during fiscal year 2026 compared to a $5.5 million decrease in fiscal year 2025. At June 30, 2026, we had current assets of $56,861,176 and current liabilities of $27,629,756. We had accounts receivable of $10,286,342 at June 30, 2026, compared to $7,527,572 at June 30, 2025. We had contract assets of $18,707,582 at June 30, 2026, compared to $19,134,385 at June 30, 2025, of which $2,467,018 and $903,766 are shown as long-term as of June 30, 2026, and 2025, respectively. The long-term portion was discounted by $373,219 and $208,037 at June 30, 2026, and 2025, respectively, using the discounted cash flow method with interest rates ranging from 4.5% to 6.6%, for the year ended June 30, 2026, and interest rates ranging from 4.2% to 17.5% for the year ended June 30, 2025, respectively. During the year ended June 30, 2026, our contract assets were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and contract assets increased by $2,331,967 from $26,661,957 at June 30, 2025, to $28,993,924 at June 30, 2026. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $8,708,029 and $8,187,170, respectively, at June 30, 2026. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $8,010,844 and $8,240,061, respectively, at June 30, 2025. The average days sales outstanding for the years ended June 30, 2026, and 2025 were 137 and 147 days, respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and contract assets. Net cash used by investing activities amounted to $4,581,969 for the year ended June 30, 2026, compared to $1,274,865 for the year ended June 30, 2025. We had net purchases of property and equipment of $1,920,120 compared to $1,265,987 for the comparable period last fiscal year. We invested $2,686,392 in capitalization of software development cost for the year ended June 30, 2026 compared to $nil in prior period. Net cash provided by financing activities was $269,080 compared to $822,881, for the years ended June 30, 2026, and 2025, respectively. During the year ended June 30, 2026, we received bank proceeds of $1,044,523 compared to $2,920,149 during the year ended June 30, 2025. During the year ended June 30, 2026, we had net payments for bank loans and capital leases of $1,188,684 compared to $773,535 for the year ended June 30, 2025. During the year ended June 30, 2025, Company employees exercised 220,000 options of common stock for $473,000. Employees of our subsidiary, NetSol PK, exercised 1,543,987 options of common stock for $425,661, of which $413,241 was received during the year ended June 30, 2026 and $12,420 was received during the fiscal year ended June 30, 2025. NetSol PK, a subsidiary of the Company, paid a dividend of $306,799 to the non-controlling shareholders, and NetSol PK purchased 2,690,251 shares of its common stock from the open market for $1,503,662. 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 13 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default that may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates. We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options. As of June 30, 2026, we had approximately $27.1 million of cash, cash equivalents and marketable securities of which approximately $26.5 million is held by our foreign subsidiaries. As of June 30, 2025, we had approximately $17.4 million of cash, cash equivalents and marketable securities of which approximately $16.4 million was held by our foreign subsidiaries. 20 We remain open to strategic relationships that would provide value-added benefits. The focus will remain on continuously improving cash reserves internally. As a growing company, we have ongoing capital expenditure requirements to support our short-term and long-term business plans. Over the next 12 months, we expect to incur approximately $2.0 to $2.5 million in capital expenditures across our APAC, U.S. and European operations. Financial Covenants The following tables present financial covenants associated with our borrowings. Subsidiary Bank / Facility Facility Amount Key Financial Covenants / Conditions NTE (UK) Overdraft facility £300,000 ($394,737) Eligible trade receivables (≤90 days old, net of provisions, excluding intercompany) must be at least 200% of the facility balance NetSol PK Askari Bank – Export refinance PKR 600 million ($2,157,963) Long-term debt-to-equity ratio of 60:40; Current ratio of at least 1:1 NetSol PK Askari Bank – Running finance PKR 4.1 million ($14,570) NetSol PK Habib Metro – Export refinance PKR 1.3 billion ($4,675,586) NetSol PK Bank Al-Habib – Export refinance PKR 400 million ($1,438,642) NetSol PK Samba Bank – Export refinance PKR 380 million ($1,366,710) Current ratio ≥ 1:1; Interest coverage ≥ 4x; Leverage ratio ≤ 2x; Debt service coverage ≥ 4x 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. Dividends and Redemption It has been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since our inception is expected to continue but is subject to regular review by the Board of Directors. Contractual Obligations Our contractual obligations are as follows: Payment due by period Contractual Obligation Total 0 - 1 year 1-3 Years 3-5 Years More than 5 years Debt Obligations D&O Insurance $ 121,043 $ 121,043 $ - $ - $ - Loan Payable Bank - Export Refinance 1,798,302 1,798,302 - - - Loan Payable Bank - Export Refinance IV 1,366,710 1,366,710 - - - Loan Payable Bank - Export Refinance V 4,675,586 4,675,586 - - - Sale and Leaseback Financing 354,169 146,062 208,107 - - Subsidiary Finance Leases 84,342 79,467 4,875 - - Operating Lease Obligations 875,823 447,332 428,491 - - Total $ 9,275,975 $ 8,634,502 $ 641,473 $ - $ - Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. 21