# Netsol Technologies Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Netsol Technologies Inc](/companies/ntwk.md) (CIK 1039280)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 14:35 ET
- Period: 2023-09-30
- Accession: 0001493152-23-039723
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1039280/000149315223039723/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1039280/000149315223039723/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $14.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $8.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $6.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $378.4k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $350.6k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $276.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $121.9k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $30.9k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 11,345,856 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-07-01 to 2023-09-30 | $1.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $371.6k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $16.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $38.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $55.9m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $18.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $19.2m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $137.0k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $157.3k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $33.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,889 characters.

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 September 30, 2023. 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, 2023, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Our website is located at www.netsoltech.com, and our investor relations website is located at 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.*

### Business Overview

NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.

Our primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications, under the brand name NFS Ascent® for leading businesses in the global finance and leasing space. With constant innovation being a major part of our DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable our new customers to opt for a subscription-based pricing model rather than the traditional licensing model.

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.

Founded in 1997, NetSol is headquartered in Los Angeles County, 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 and Horsham, Flintshire |
| ● | Asia Pacific | Lahore, Karachi, Bangkok, Beijing, Shanghai, 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.

Our primary offerings include the following:

### NFS Ascent®

Covering the complete finance and leasing cycle starting from quotation origination through contract settlements, NFS Ascent® is designed and developed for a highly flexible setting and can deal with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. The solution fully automates the entire financing/leasing cycle for companies of any size, including those with multi-billion-dollar portfolios. NFS Ascent® empowers financial institutions to effectively manage their complex lending portfolios, enabling them to thrive in hyper-competitive global markets.

NFS Ascent® is built on cutting-edge, modern technology that enables auto, equipment and big-ticket finance companies, alongside banks, to run their retail and wholesale finance business with ease. With comprehensive domain coverage and powerful configuration engines, it is well architected to empower finance and leasing companies with a platform that supports their growth in terms of business volume and transactions.

Our next generation platform offers a technologically advanced solution for the asset finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on our collective experience with blue chip organizations and global Fortune 500 companies over the past 40 years combined with modern UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment.

At the core of the NFS Ascent® platform, is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting for multi-billion-dollar lease portfolios in compliance with various regulatory standards. NFS Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment.

Our premier solution has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. NFS Ascent® empowers users with:

- Improvement in overall productivity within the delivery organization:
- The features of the integrated Business Process Manager, Workflow Engine, Business Rule Engine and Integration Hub provide flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization.
- The NFS Ascent® platform and the SOA architecture allow us to develop portals and mobile applications quickly by utilizing our existing services.
- The n-tier architecture allows us to intelligently distribute processing and eases application maintenance. The loose coupling between various modules and layers reduces the risk of regression in other parts of the system as a result of changes made in one part of the system and follows proven and accepted SOA principles.
- Amplified customer satisfaction:
- NFS Ascent® and NFS Digital empower not only the finance company and dealerships, but the end customer as well with self-service digital tools allowing a seamless customer experience throughout the customer journey from origination through contract maturity.

**NFS ASCENT® CONSTITUENT APPLICATIONS**

### Omni Point of Sale (Omni POS)

A highly agile, easy-to-use, web-based application - also accessible through mobile devices - Ascent’s Omni POS system delivers an intuitive user experience, with features that enable rapid data capture. Information captured at the point of sale can be made available to anyone in an organization at any point in the lifecycle of each transaction.

### Contract Management System (CMS)

Ascent’s Contract Management System (CMS) is a powerful, highly agile, functionally rich application for managing and maintaining detailed credit contracts throughout their lifecycle – from pre-activation and activation through customer management, asset financial management, billing and collections, finance and accounting, restructuring and maturity.

### Wholesale Finance System (WFS)

The Ascent Wholesale Finance System (WFS) provides a powerful, seamless and efficient system for automating and managing the entire lifecycle of wholesale finance. With floor planning, dealer and inventory financing, it is ideal for a culture of collaboration. Dealers, distributors, partners and anyone in the supply chain are empowered to realize the benefits of financing – and leverage the advantages of real-time business intelligence. The system also supports asset and non-asset-based financing.

### Dealer Auditor Access System (DAAS)

DAAS is a web-based solution that can be used in conjunction with WFS or any third-party wholesale finance system. It addresses the needs of dealer, distributor, and auditor access in a wholesale financing arrangement.

**NFS Ascent® deployed on the cloud**

Our premier, next generation solution NFS Ascent® is also available on the cloud. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent® is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees. Clients further benefit from a rapid deployment process and the ability to scale on demand.

### NFS Digital

NetSol is the pioneer in the global finance and leasing industry providing a full suite of digital transformation solutions. NFS Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape together with our valuable experience led us to define sound digital transformation strategies and compliment them with smart digital solutions so that our customers always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to effectively augment and enhance our customer’s ecosystem.

|  |  |
| --- | --- |
| ■ | **Self-Point of Sale** |
|  | Our Self POS portal allows customers to go through the complete buying and financing process online and on their mobile devices including car configuration, generating quotations, and filling out applications. It is the ultimate origination application that enables users to compare, select and configure an asset using a mobile device anywhere, at any time and submit an accompanying financial product application. |
| ■ | **Mobile Account** |
|  | mAccount is a powerful, self-service mobile solution. It empowers the dealer with a powerful backend system and allows the customer to setup a secure account and view information 24/7 to keep track of contract status, resolve queries and make payments, reducing inbound calls for customer queries and improving turnaround time for repayments. |
| ■ | **Mobile Point of Sale** |
|  | The mPOS application is a web and mobile-enabled platform featuring a customizable dashboard along with menu selling, application submission, loan calculator, work queues and detailed reporting. mPOS empowers the dealer to make the origination process quick and seamless, increasing overall productivity and system-wide efficiency. |
| ■ | **Mobile Dealer** |
|  | mDealer provides more visibility and control over inventories – with minimal effort. Dealers can view their use of floor plan facility, stock status and financial conditions, while entering settlement requests or relocating assets. |
| ■ | **Mobile Auditor** |
|  | mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency. It also enables the auditor to conduct audits and submit results in real-time through quick audit processing tools, providing visibility and saving significant time. |
| ■ | **Mobile Collector** |
|  | mCollector empowers collections teams to do more, with an easy-to-use interface and intelligent architecture. The tool exponentially increases the productivity of field teams by enabling them to carry out all collection related tasks on the go. |
| ■ | **Mobile Field Investigator** |
|  | By using Mobile Field Investigator (mFI), the applicant has access to powerful features that permit detailed applicant field verifications on the go. The application features a reporting dashboard that displays progress stats, action items and the latest notifications, enabling the client to achieve daily goals while tracking performance. |

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### OtozTM Digital Auto Retail and Mobility Orchestration

OtozTM provides a white-label SaaS platform to OEMs, finance companies, dealers, and start-ups that enables short and long-term on-demand mobility models (subscriptions, rental and car-sharing) and digital retail.

Our turn-key platform helps automotive companies make a move into the digital era, addressing a range of customer segments with evolving needs by offering them a seamless, omni-channel, end-to-end car buying and usage experience. It enables both direct-to-consumer transactions as well as traditional dealer models with the option to add peer-to-peer marketplace functionalities for the future of EV pay-per-use and mobility orchestration.

Digital auto-retail is not a one-size-fits-all. OtozTM offers a flexible, configurable, and scalable platform along with a proven launch strategy framework for auto companies that intend to launch and grow digital retail and mobility businesses quickly and seamlessly.

### OtozTM Ecosystem

OtozTM is built on state-of-the-art technology, offering open Application Programming Interfaces (APIs) and ecosystem partner integrations that are crucial to digital retail and mobility operations including finance and insurance providers, trade-in tools, KYC and fraud detection tools, CRM systems, website providers (Tier 1 – Tier 3), marketing toolkits, inventory feeds, pricing engines, tax engine, payment processors, an insurance marketplace and vehicle delivery logistics providers.

In addition, OtozTM is equipped with intelligent lead generation and product analytics capabilities, empowering dealerships with the tools to track customer journeys, personalize customer engagements, and convert qualified leads.

### OtozTM Platform

A fully digital, white-label platform for digital auto retail and mobility orchestration that delivers an intuitive and elegant user experience, both online and offline.

OtozTM expands into a comprehensive in-life subscription and rental platform that empowers in-life and end-of-life management of such contracts. The platform’s seamless handling of complex tax rules and contract management processes are compliant with local and state standards for jurisdictions it operates in across the U.S.

### OtozTM platform consists of two portals:

- Dealer/Admin Tool
- Customer Portal

### Dealer/Admin Tool

- Account creation
- Order management work queue
- User roles and rights
- Tax configurator
- Customer KYC reports
- Vehicle delivery scheduling
- Payment gateways
- Inventory management
- Finance and insurance products feed and prioritization
- Accessories/add-on management and association
- Dealer fee management
- Ecosystem APIs
- DMS integrations
- Send referral
- Deal builder

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### Customer Portal

- Inventory search and selection
- Multi-lender capabilities
- Deal builder and personalized pricing for purchase, lease, finance, subscription, and rentals
- Dealer-Customer-Chat tool
- Buy finance and insurance products including collision & liability insurance via integrated provider marketplaces
- Buy accessories
- License checks (paperless)
- Vehicle options and finance and insurance products
- Trade-in valuation
- Credit application and decision
- Paperless contracts and e-signing
- Digital payments
- Vehicle delivery and pick-up scheduling

### AppexNow

NetSol introduced AppexNow - the first marketplace for API-first products specifically for the global credit, finance, and leasing industry. Two products have been launched under the umbrella of the AppexNow marketplace until now; i.e., Flex and Hubex. NetSol will introduce and launch further products and services under this marketplace in the future.

### AppexNow: Flex

The first product offering from the AppexNow marketplace, Flex is an API-based, ready-to-use calculation engine. It is a pure play SaaS product that is cloud-based and can be integrated seamlessly into an organization’s products, services, and ecosystem. The calculation engine intelligently adapts to demand by monitoring usage to maintain reliable and predictable performance at desired costs. It is a one-stop solution that guarantees precise calculations at all stages of the contract lifecycle through various calculation types.

It is a comprehensive solution which creates an ecosystem of value across multiple functions, systems and industries to fuel growth and propel businesses into the future by increasing delivery efficiency and product management, centralization through a connected ecosystem resulting in a higher ROI and a larger market share.

Flex proves versatility by covering all the calculation aspects ranging from the pricing for the end customer at inception, in-life financial modifications, the re-creation of the repayment plan, termination, amortizations/re-amortizations, among other calculation types. All the calculations are parameter-driven, which helps perform simple, multi-dimensional, or complex calculations based on the needs.

### AppexNow: Hubex

Hubex is an API library that enables companies to standardize all their API integration procedures across multiple API services through a single integration. Hubex is NetSol’s second product offering from the AppexNow marketplace following Flex.

In addition to traditional lending companies, Hubex can also streamline the operations of dealerships, vendors, and consultants through an API library. 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, KYC service, driver license verification, address validation, vehicle valuation and notification service.

### Professional Services

We offer professional services to organizations in different regions to enable them to meet their business objectives. These services primarily consist of technical consultancy, web development, app development, digital marketing, cloud services, outsourcing and co-sourcing.

Pertaining to our professional services offerings, our highly skilled and experienced professionals include skilled software programmers, well-versed business analysists, competent quality assurance engineers, technical and solution architects, project managers, cloud native developers and architects, mobile/web app developers and automation specialists.

We enable businesses to employ the industry’s best talent to help them develop and refine their technology strategy, innovate, execute their roadmap, and optimize service quality.

### Amazon Web Services

We have expanded our footprint in the cloud services domain by offering services to the AWS community. We aim for our cloud services to be well recognized, expanding our reach to relevant prospects. Since AWS is the most comprehensive and highly adopted cloud offering, we are leveraging its power to ensure lower costs, increased agility, a secure environment, and innovative solutions across all domains.

Our AWS customer offerings include: analytics, data pipeline and big data services; application modernization services; database migration and modernization; development operations; managed services; and, information security services.

### Artificial Intelligence

A dedicated team is under the leadership of Dr. Ali Ahmed, Chief Data Scientist at NetSol, to develop artificial intelligence and machine learning solutions. With experience in machine learning, scientific computing and computer vision, Dr. Ahmed has extensive experience in developing and implementing algorithms for industrial solutions in predictive maintenance.

Our AI team seeks to deploy AI solutions leveraging cutting-edge technologies to enable clients to optimize production, decrease downtime and provide a holistic view of their business processes.

### Highlights

Listed below are a few of NetSol’s highlights for the quarter ended September 30, 2023:

- The Company renegotiated to extend the NFS Ascent license term for an existing client in Thailand for another 3 years. The extension generated approximately $1.1 million in revenues.
- The Company implemented modifications requested by a number of its existing customers across multiple geographies to generate over $1.1 million in revenues.
- The Company concluded the implementation re-planning activity with one of its existing clients to generate nearly $1.7 million in revenues on top of the previously contracted revenues.
- The Company onboarded two new asset finance companies to use its recently launched product FLEX, which will further strengthen the recurring revenues of the business.
- The Company concluded its discussions with an existing customer to generate additional service revenue of approximately $1.9 million across the APAC region.
- The Company began a professional services project with the finance company of a current customer in China. This contract is expected to generate approximately $1 million in revenues for the business.
- The Company signed a professional services contract with a renowned IT consultancy firm based in the US which would generate approximately $300K in revenues over the term of the contract.

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Management has identified the following material trends affecting NetSol.

Positive trends:

- According to S&P Global Mobility, new vehicles sales globally are expected to reach 84 million units in 2023 for a 5.6% increase. U.S. sales volumes are expected to reach approximately 15 million units, an estimated increase of 8% from the projected 2022 levels.
- Reduction of the U.S. inflation rate over the last few months to approximately 3.7% in 2023.
- The U.S. market remains strong and resilient for NetSol to continue investing in building local teams for its core offerings.
- The Chinese car market is expected to maintain its position as the world’s largest and fastest growing, projecting 10% sales growth to 25.5 million units, with electric vehicles (EVs) representing nearly 35% of new sales. Government incentives, reduced car taxes, and preferential financing rates contributed to an 8.8% increase in Chinese auto sales in the first half of 2023, with total vehicle sales, including trucks and buses, rising by 9.8% to 13.2 million.
- The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $65 billion investment, from the originally planned $46 billion, in Pakistan energy and infrastructure sectors. Last June, 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 the 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.

Negative trends:

- The conflict escalating in the Middle East region has disturbed the entire area, which could cause higher global inflation amid growing concerns over sharp rise in oil prices (Guardian, October 18, 2023).
- The European Union Real GDP growth is at 0.7% annual growth rate per the World Economic Report October, 2023.
- 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.
- A global recession fear impacts the future expansions and budgets in every country and every sector. The World Bank forecasts that global growth will slow to 1.7% in 2023, down from 3% forecasted last June.
- Continued interest rate increases by the U.S. Federal Reserve Board in 2023 restricting buying power for consumers.
- Political, monetary, and economic challenges and 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 uncertainty.
- The Russell 2000 index, a major benchmark for U.S. stocks, turned negative for the year in late September 2023. The index’s year-to-date performance is a loss of 0.2%.
- Working from the office might not return to pre-pandemic levels which may affect employee collaboration potentially lessening efficiency.
- The Pakistan political and economic environment will likely remain unsteady until new elections are called.
- Continued tensions between the U.S. and China are causing some American companies to pull out of China and move their supply chain elsewhere. (Business Insider, Aug. 28, 2023).

Page 37

CHANGES IN FINANCIAL CONDITION

### Quarter Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended September 30, 2023 and 2022 as a percentage of revenues.

|  | For the Three Months Ended September 30, |  |
| --- | ---: | ---: |
|  | 2023% | 2022% |
| **Net Revenues:** |  |  |
| License fees | $1,280,449 9.0% | $249,960 2.0% |
| Subscription and support | 6,512,243 45.7% | 6,016,834 47.4% |
| Services | 6,449,489 45.3% | 6,439,325 50.7% |
| Total net revenues | 14,242,181 100.0% | 12,706,119 100.0% |
| **Cost of revenues** | 8,080,164 56.7% | 8,454,122 66.5% |
| **Gross profit** | 6,162,017 43.3% | 4,251,997 33.5% |
| **Operating expenses:** |  |  |
| Selling, general and administrative | 5,432,969 38.1% | 5,678,561 44.7% |
| Research and development cost | 378,419 2.7% | 469,627 3.7% |
| Total operating expenses | 5,811,388 40.8% | 6,148,188 48.4% |
| **Income (loss) from operations** | 350,629 2.5% | (1,896,191) -14.9% |
| **Other income and (expenses)** |  |  |
| Interest expense | (276,017) -1.9% | (121,610) -1.0% |
| Interest income | 414,718 2.9% | 431,857 3.4% |
| Gain (loss) on foreign currency exchange transactions | (134,253) -0.9% | 1,315,705 10.4% |
| Other income (expense) | 57,881 0.4% | 25,616 0.2% |
| Total other income (expenses) | 62,329 0.4% | 1,651,568 13.0% |
| **Net income (loss) before income taxes** | 412,958 2.9% | (244,623) -1.9% |
| **Income tax provision** | (121,895) -0.9% | (193,348) -1.5% |
| **Net income (loss)** | 291,063 2.0% | (437,971) -3.4% |
| **Non-controlling interest** | (260,173) -1.8% | (182,758) -1.4% |
| **Net income (loss) attributable to NetSol** | $30,890 0.2% | $(620,729) -4.9% |
| **Net income (loss) per share:** |  |  |
| Net income (loss) per common share |  |  |
| Basic | $0.003 | $(0.06) |
| Diluted | $0.003 | $(0.06) |
| Weighted average number of shares outstanding |  |  |
| Basic | 11,345,856 | 11,257,539 |
| Diluted | 11,345,856 | 11,257,539 |

Page 38

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.

|  | For the Three Months Ended September 30, |  | Favorable (Unfavorable) Change in Constant | Favorable (Unfavorable) Change due to Currency | Total Favorable (Unfavorable) Change as |
| --- | ---: | ---: | ---: | ---: | ---: |
|  | 2023% | 2022% | Currency | Fluctuation | Reported |
| **Net Revenues:** | $14,242,181 100.0% | $12,706,119 100.0% | $1,575,873 | $(39,811) | $1,536,062 |
| **Cost of revenues:** | 8,080,164 56.7% | 8,454,122 66.5% | (1,165,567) | 1,539,525 | 373,958 |
| **Gross profit** | 6,162,017 43.3% | 4,251,997 33.5% | 410,306 | 1,499,714 | 1,910,020 |
| **Operating expenses:** | 5,811,388 40.8% | 6,148,188 48.4% | (284,862) | 621,662 | 336,800 |
| **Income (loss) from operations** | $350,629 2.5% | $(1,896,191) -14.9% | $125,444 | $2,121,376 | $2,246,820 |

Net revenues for the three months ended September 30, 2023 and 2022 are broken out among the segments as follows:

|  | 2023 Revenue% |  | 2022 Revenue% |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,408,615 | 9.9% | $1,125,288 | 8.9% |
| Europe | 2,562,033 | 18.0% | 2,247,335 | 17.7% |
| Asia-Pacific | 10,271,533 | 72.1% | 9,333,496 | 73.5% |
| Total | $14,242,181 | 100.0% | $12,706,119 | 100.0% |

#### Revenues

#### License fees

License fees for the three months ended September 30, 2023 were $1,280,449 compared to $249,960 for the three months ended September 30, 2022 reflecting an increase of $1,030,489 with an increase in constant currency of $1,250,079. During the three months ended September 30, 2023, we recognized approximately $1,142,000 related to the license renewal with an existing customer. During the three months ended September 30, 2022, we recognized approximately $188,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent® product.

#### Subscription and support

Subscription and support fees for the three months ended September 30, 2023 were $6,512,243 compared to $6,016,834 for the three months ended September 30, 2022 reflecting an increase of $495,409 with an increase in constant currency of $499,159. 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 September 30, 2023 was $6,449,489 compared to $6,439,325 for the three months ended September 30, 2022 reflecting an increase of $10,164 with an increase in constant currency of $76,595.

#### Gross Profit

The gross profit was $6,162,067, for the three months ended September 30, 2023 compared with $4,251,997 for the three months ended September 30, 2022. This is an increase of $1,910,020 with an increase in constant currency of $410,306. The gross profit percentage for the three months ended September 30, 2023 also increased to 43.3% from 33.5% for the three months ended September 30, 2022. The cost of sales was $8,080,164 for the three months ended September 30, 2023 compared to $8,454,122 for the three months ended September 30, 2022 for a decrease of $373,958 and on a constant currency basis an increase of $1,165,567. As a percentage of sales, cost of sales decreased from 66.5% for the three months ended September 30, 2022 to 56.7% for the three months ended September 30, 2023.

Salaries and consultant fees decreased by $128,592 from $6,086,735 for the three months ended September 30, 2022 to $5,958,143 for the three months ended September 30, 2023 and on a constant currency basis increased by $962,826. The increase on a constant currency basis is due to annual salary raises. As a percentage of sales, salaries and consultant expense decreased from 47.9% for the three months ended September 30, 2022 to 41.8% for the three months ended September 30, 2023.

Travel expenses were $660,367 for the three months ended September 30, 2023 compared to $392,345 for the three months ended September 30, 2022 for an increase of $268,022 with an increase in constant currency of $389,142. The increase in travel expense is due to the increase in travel as countries have been lifting travel restrictions. As a percentage of sales, travel expense increased from 3.1% for the three months ended September 30, 2022 to 4.6% for the three months ended September 30, 2023.

Depreciation and amortization expense decreased to $392,983 compared to $654,049 for the three months ended September 30, 2022 or a decrease of $261,066 and on a constant currency basis a decrease of $140,417. The decrease is primarily attributed to the full amortization of capitalized software costs in the quarter ending September 30, 2023.

Other costs decreased to $1,068,671 for the three months ended September 30, 2023 compared to $1,320,993 for the three months ended September 30, 2022 or a decrease of $252,322 and on a constant currency basis a decrease of $45,984.

#### Operating Expenses

Operating expenses were $5,811,388 for the three months ended September 30, 2023 compared to $6,148,188, for the three months ended September 30, 2022 for a decrease of $336,800 and on a constant currency basis an increase of $284,862. As a percentage of sales, it decreased from 48.4% to 40.8%. The increase in operating expenses on a constant currency basis was primarily due to increases in selling and marketing expenses, salaries and wages, professional services, and provision for doubtful debts, offset by a decrease in other general and administrative expenses.

Selling expenses were $1,708,865 for the three months ended September 30, 2023 compared to $1,762,177, for the three months ended September 30, 2022 for a decrease of $53,312 and on a constant currency basis an increase of $155,473.

General and administrative expenses were $3,586,301 for the three months ended September 30, 2023 compared to $3,725,430 for the three months ended September 30, 2022 or a decrease of $139,129 and on a constant currency basis an increase of $161,886. During the three months ended September 30, 2023, salaries increased by approximately $79,101 and increased $284,266 on a constant currency basis, and other general and administrative expenses decreased approximately $218,230 or decreased by $122,380 on a constant currency basis.

Research and development cost was $378,419 for the three months ended September 30, 2023 compared to $469,627, for the three months ended September 30, 2022 for a decrease of $91,208 and on a constant currency basis an increase of $5,279.

#### Income/Loss from Operations

Income from operations was $350,629 for the three months ended September 30, 2023 compared to a loss of $1,896,191 for the three months ended September 30, 2022. This represents an increase in income of $2,246,820 with an increase in income of $125,444 on a constant currency basis for the three months ended September 30, 2023 compared with the three months ended September 30, 2022. As a percentage of sales, income from operations was 2.5% for the three months ended September 30, 2023 compared to loss of 14.9% for the three months ended September 30, 2022.

#### Other Income and Expense

Other income was $62,329 for the three months ended September 30, 2023 compared to $1,651,568 for the three months ended September 30, 2022. This represents a decrease of $1,589,239 with a decrease of $1,570,221 on a constant currency basis. The decrease is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the three months ended September 30, 2023, we recognized a loss of $134,253 in foreign currency exchange transactions compared to gain of $1,315,705 for the three months ended September 30, 2022. During the three months ended September 30, 2023, the value of the U.S. dollar increased 0.2% and the Euro decreased 2.6%, compared to the PKR. During the three months ended September 30, 2022, the value of the U.S. dollar and the Euro increased 11.0% and 4.11%, respectively, compared to the PKR.

#### Non-controlling Interest

For the three months ended September 30, 2023, the net income attributable to non-controlling interest was $260,173, compared to $182,758 for the three months ended September 30, 2022. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK.

#### Net income (loss) attributable to NetSol

The net income was $30,890 for the three months ended September 30, 2023 compared to a net loss of $620,729 for the three months ended September 30, 2022. This is an increase in income of $651,619 with an increase in loss of $835,295 on a constant currency basis, compared to the prior year. For the three months ended September 30, 2023, net income per share was $0.003 for basic and diluted shares compared to net loss per share of $0.06 for basic and diluted shares for the three months ended September 30, 2022.

### 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.

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 months ended September 30, 2023 and 2022 are as follows:

|  | For the Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net Income (loss) attributable to NetSol | $30,890 | $(620,729) |
| Non-controlling interest | 260,173 | 182,758 |
| Income taxes | 121,895 | 193,348 |
| Depreciation and amortization | 530,786 | 845,003 |
| Interest expense | 276,017 | 121,610 |
| Interest (income) | (414,718) | (431,857) |
| EBITDA | $805,043 | $290,133 |
| Add back: |  |  |
| Non-cash stock-based compensation | 60,354 | 81,834 |
| Adjusted EBITDA, gross | $865,397 | $371,967 |
| Less non-controlling interest (a) | (399,423) | (399,535) |
| Adjusted EBITDA, net | $465,974 | $(27,568) |
| Weighted Average number of shares outstanding |  |  |
| Basic | 11,345,856 | 11,257,539 |
| Diluted | 11,345,856 | 11,257,539 |
| Basic adjusted EBITDA | $0.04 | $(0.002) |
| Diluted adjusted EBITDA | $0.04 | $(0.002) |
| (a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows |  |  |
| Net Income (loss) attributable to non-controlling interest | $260,173 | $182,758 |
| Income Taxes | 36,377 | 59,910 |
| Depreciation and amortization | 141,334 | 238,333 |
| Interest expense | 85,889 | 37,396 |
| Interest (income) | (128,091) | (132,489) |
| EBITDA | $395,682 | $385,908 |
| Add back: |  |  |
| Non-cash stock-based compensation | 3,741 | 13,627 |
| Adjusted EBITDA of non-controlling interest | $399,423 | $399,535 |

Page 43

### LIQUIDITY AND CAPITAL RESOURCES

Our cash position was $16,551,677 at September 30, 2023, compared to $15,533,254 at June 30, 2023.

Net cash provided by operating activities was $1,663,619 for the three months ended September 30, 2023 compared to $1,298,857 for the three months ended September 30, 2022. At September 30, 2023, we had current assets of $38,675,408 and current liabilities of $18,268,130. We had accounts receivable of $6,870,956 at September 30, 2023 compared to $11,714,422 at June 30, 2023. We had revenues in excess of billings of $13,733,160 at September 30, 2023 compared to $12,377,677 at June 30, 2023 of which $724,875 and $nil is shown as long term as of September 30, 2023 and June 30, 2023, respectively. The long-term portion was discounted by $98,103 and $nil at September 30, 2023 and June 30, 2023, respectively, using the discounted cash flow method with an interest rate of 7.24%. During the three months ended September 30, 2023, 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 $3,487,983 from $24,092,099 at June 30, 2023 to $20,604,116 at September 30, 2023. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,802,879 and $5,756,553, respectively at September 30, 2023. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,552,181 and $5,779,510, respectively, at June 30, 2023.

The average days sales outstanding for the three months ended September 30, 2023 and 2022 were 144 and 165 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 $370,400 for the three months ended September 30, 2023, compared to $893,994 for the three months ended September 30, 2022. We had purchases of property and equipment of $371,630 compared to $1,347,601 for the three months ended September 30, 2022.

Net cash used in financing activities was $44,474 for the three months ended September 30, 2023, compared to $445,737 for the three months ended September 30, 2022. During the three months ended September 30, 2023, we had net payments for bank loans and finance leases of $44,474 compared to $445,737 for the three months ended September 30, 2022. 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, 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 September 30, 2023, we had approximately $16.6 million of cash, cash equivalents and marketable securities of which approximately $15.2 million is held by our foreign subsidiaries. As of June 30, 2023, we had approximately $15.5 million of cash, cash equivalents and marketable securities of which approximately $13.5 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.

### Financial Covenants

Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($365,854) 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 ($1,737,619) and a running finance facility of Rupees 53 million ($186,273). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($3,127,715). 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 ($1,320,591) 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, 2023.

### 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.

## Controls and procedures

As filed, 874 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were effective.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended September 30, 2023, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).

## Risk factors

As filed, 628 characters.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended June 30, 2023, filed with the SEC on September 22, 2023. Any of such factors could result in a significant or material adverse effect on our result of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-039723. Last ingested by Listed: Nov 4, 2026, 18:59 ET. No prices; not investment advice.