UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED JUNE 30, 20172020

 

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact nameName of Registrant as specified in its charter)

 

NEVADA95-4627685
(State or other jurisdiction of (I.R.S.(I.R.S. Employer
incorporation or organization) Identification Number)

 

2402523975 Park Sorrento, Suite 410,250,

Calabasas, CA 91302

(Address of principal executive offices) (Zip code)

 

(818) 222-9195

(Issuer’s telephone number including area code)

 

SECURITIES REGISTERED UNDER SECTIONSecurities registered pursuant to Section 12(b) OF THE EXCHANGE ACT:of the Act:

 

COMMON STOCK, $.01 PAR VALUE

THE NASDAQ CAPITAL MARKET

Title of each classTrading Symbol(s)Name of exchange on which registered
Common Stock, $0.01 par value per shareNTWKNASDAQ

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K(§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

 Large Accelerated Filer [  ]Accelerated Filer [  ]
   
 Non-accelerated Filer [  ]Smaller reporting company [X]
(Do not check if a smaller reporting company)  
Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $50,679,647$40,605,532 based upon the closing price of the stock as reported on NASDAQ Capital Market ($5.24.0 per share) on December 31, 2016,2019, the last business day of the registrant’s second quarter. As of September 25, 2017,18, 2020, there were 11,114,59911,727,594 shares of common stock outstanding and no shares of its Preferred Stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

(None)

 

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

 

 

 

 

 

TABLE OF CONTENTS AND CROSS REFERENCE SHEET

 

PAGE
PART I
Note About Forward-Looking Statements1
 
 PART I
 
Item 1Business1
Item 1ARisk Factors1013
Item 1BUnresolved Staff Comments13
Item 2Properties
1013
Item 3Legal Proceedings1013
Item 4Mine Safety Disclosures1113
   
PART II 
   
Item 5Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities1214
Item 6Selected Financial Data1314
Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations1315
Item 7AQuantitative and Qualitative Disclosures about Market Risk2531
Item 8Financial Statements and Supplementary Data2631
Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure2632
Item 9AControls and Procedures2632
Item 9BOther Information27
   
PART III
 
  
Item 10Directors, Executive Officers and Corporate Governance2733
Item 11Executive Compensation3037
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters4152
Item 13Certain Relationships and Related Transactions, and Director Independence4252
Item 14Principal Accountant Fees and Services4253
   
PART IV 
  
Item 15Exhibits and Financial Statement Schedules4454

 

 

 

NOTE ABOUT FORWARD LOOKINGFORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the development of the Company’s products and services and future operation results, including statements regarding the Company that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “anticipate,” “intend,” variations of such words, and similar expressions, identify forward looking statements, but their absence does not mean that the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company’s actual results include the progress and costs of the development of products and services and the timing of the market acceptance. Forward looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risk and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

As used herein, “NetSol,“NETSOL,” “we”, “our,” and similar terms include NetSol Technologies, Inc. and its subsidiaries, unless the context indicates otherwise.

 

PART 1

 

ITEM 1 - BUSINESS

 

GENERAL

 

NetSol Technologies, Inc. (NasdaqCM:(Nasdaq CM: 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.

 

The Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial applications under the brand name NFS™ (NetSol Financial Suite) and NFS AscentTM® for leading businesses in the global leasefinance and financeleasing industry.

 

NetSol’sNETSOL’s clients include blue chip organizations, Dow-Jones 30 Industrials, and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NetSolNETSOL delivery locations around the globe.

 

Founded in 1997, NetSolNETSOL is headquartered in Calabasas, 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 AmericaLos Angeles Area
 EuropeLondon Metropolitan areaArea, Horsham
 Asia PacificLahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney

 

The Company continues to maintain services, solutions and/or sales specific offices in the USA, England, Pakistan,Australia, Thailand, China, Indonesia and Australia.Pakistan.

1

OUR BUSINESS

 

Company Business Model

 

NetSolNETSOL believes that strong technology solutions with provable returns on investment are required to sell to its globally competitive and mature marketplace. NetSolNETSOL believes that people are the drivers of success and we invest in hiring, training and retaining 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 NetSolNETSOL and a unique value for its customers. NetSolNETSOL continues to underpin this effective business model with a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.

 

Niche Market Focus

 

By specializing in leasing and financing solutions, we have gained footholds in several global locations and a market leading position in the captive auto-finance segment and a growing presence in the general asset finance space.

 

Subject Matter Expertise

 

NetSol’sOur dual expertise in enterprise technology implementation and financial application development has helped itus emerge as a global contender in the lease and finance industry and secure a broad footprint throughout the major markets of North America, Asia Pacific and Europe. The Asia Pacific operating region has particularly benefitted from the organic growth in the fast-developing leasing automation industry, which is still nascent by Western standards.

 

Domain Experience

 

NetSolNETSOL has a strong presence in the captive auto-finance domain. With a collective experience of over two decades in Asia Pacific and over three decades in North America and Europe, NetSolNETSOL is one of a few global competitors in this niche industry.

 

Proximity with Global and Regional Customers

 

The Company has offices across the world, located strategically to maintain close contact and proximity with its customers in various key markets. ItThis has helped in strengthening customer relationships and building a deeper understanding of local market dynamics. Simultaneously, the Company is able to extend services and even support development support through a combination of local/onsite and central/off-site resources. This approach allows the Company to offer blended rates to its customers by employing a unique and cost effectivecost-effective global development model.

 

While our business model is built around the development, implementation and maintenance of our suite of financial applications, under NFS™, NetSolNETSOL has employed the same facilities and competencies to extend its offerings into related segments, including:

 

 IT consulting & services
 business intelligence
 information security
 independent system review
 outsourcing services and software process improvement consulting
 maintenance and support of existing systems
 project management
 technology/start-up incubation

 

Our global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational asset finance companies, leveraging a centralized marketing and pre-sales organization and, a network of employees connected across the globe to support local and global customers and partners.

 

 2 

 

OUR SOLUTIONS

NetSol Financial Suite™NFS Ascent®

 

NetSol’s offerings include its flagship global solution, NFS™. A robust suite of four software applications that is an end-to-end solution for the asset finance industry coveringCovering the complete leasingfinance and financeleasing cycle starting from quotation origination through end of contract transactions, and including digital channel support with intuitive mobile applications. The four applications under NFS™ haveNFS Ascent® has been designed and developed for a highly flexible setting and areis capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. When used together, theyThe solution fully automateautomates the entire leasing/financingfinancing/leasing cycle for companies of any size, including those with multi-billion dollarmulti-billion-dollar portfolios.

 

On October 24, 2013, we announced the introductionNFS Ascent® is built on cutting-edge, modern technology that enables auto, equipment and releasebig-ticket finance companies to run their retail and wholesale finance business with ease. With comprehensive domain coverage and powerful configuration engines, it is architected to empower finance and leasing companies with a platform that supports their growth in terms of NFS Ascent™, thebusiness volume and transactions.

The Company’s next generation platform offeringoffers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s™Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with 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™Ascent® platform is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion dollarmulti-billion-dollar lease portfolios in compliance with various regulatory standards. NFS Ascent™Ascent®, with its distributed and clustered deployment across parallel application and high volumehigh-volume data servers, enables finance companies to process voluminous data in a hyper speed environment.

 

NFS Ascent™The Company’s 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. We believe that the transition from NFS™ to NFS Ascent™Ascent® allows:

 

 Improvement in overall productivity throughout the delivery organization:

 The features of the integrated Business Process Manager, Workflow Engine and Business Rule Engine, will provide flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization.
   
 The NFS Ascent™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.

 Improvement in talent acquisition and retention:

 Because NFS Ascent™Ascent® has been developed using the latest technologies and tools available in the market, it is helping us in attracting and retaining top engineers.

 Better customer satisfaction:

 As a result of the powerful NFS Ascent™Ascent® platform and improvement in the talent pool, the quality of our deliverables has increased.

3

NFS™ and NFS Ascent™ have the following as their constituent applicationsASCENT:®CONSTITUENT APPLICATIONS

 

Loan Origination System (LOS)Omni Point of Sale (Omni POS)

 

PointA 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 (POS)

POS is a front office processing system for companiessale can be made available to anyone in an organization at any point in the financial sector. It provides a quotation system which also incorporates a simulation for all kindslifecycle of financial products using a powerful built-in loan calculator.

Credit Application Processing System (CAP)

CAP provides companies in the financial sector with an environment to handle the incoming credit applications from dealers, agents, brokers and the direct sales force. CAP automatically gathers information from different interfaces like credit rating agencies, evaluation guides, and contract management systems and gives the applications a score against a user defined point scoring system. This automated workflow permits the credit team members to make their decisions more quickly and accurately. CAP is a database independent online system developed in Microsoft’s.Net framework. It can be run from any computer system with normal specifications, which is a key benefit for clients.each transaction.

 

Contract Management System (CMS)

 

CMS provides comprehensive business functionality that enables its users to effectivelyAscent’s Contract Management System (CMS) is a powerful, highly agile, functionally rich application for managing and smoothly managemaintaining detailed credit contracts throughout their lifecycle – from pre-activation and maintain a contract with the most comprehensive details throughout its life cycle. It provides interfaces with external systems such as banksactivation through customer management, asset financial management, billing and collections, finance and accounting, systems. CMS effectively maintains details of all business partners that do business with the company including, but not limited to, customers, dealers, debtors, guarantors, insurance companiesrestructuring and banks.maturity.

 

Wholesale Finance System (WFS)

 

WFS automatesThe Ascent Wholesale Finance System (WFS) provides a powerful, seamless and managesefficient system for automating and managing the entire lifecycle of wholesale finance. With floor plan/bailment activitiesplanning, dealer and inventory financing, it is ideal for a culture of dealerships through a finance company. The designcollaboration. Dealers, distributors, partners and anyone in the supply chain are empowered to realize the benefits of financing – and leverage the system is based on the conceptadvantages of one asset/one loan to facilitate asset tracking and costing.real-time business intelligence. The system covers credit limit, payment of loan, billingalso supports asset and settlement, stock auditing, online dealer and auditor access, and ultimately the pay-off functions.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 partythird-party wholesale finance system. It addresses the needs of dealer, distributor and auditor access in a wholesale financing arrangement.

 

Fleet Management System (FMS)

FMS is designed to efficiently handle all fleet management needs. FMS is easily integrated with CMS and WFS as well as with any third party contract management system to ensure a single comprehensive system. FMS key features include: a detailed tracking of information on every driver and vehicle; customizable reports; periodic reporting on fleet related aspects; internet based access to information; integration with third party software; and, linkage to GPS for real time tracking.

NFS MobilityAscent®On The Cloud

 

The Company’s premier, next generation solution NFS mobility enablesAscent® is now also available on the Cloud at a sales forceSaaS/Subscription based pricing. With quick, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for athe global finance and leasing company to access different channels like pointindustry. This cloud-version of sale, field investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application.NFS Ascent® is offered via flexible, value-driven subscription-based pricing options.

 

Mobile AccountNFS Digital

The powerfulmAccountNFS Digital is a self-service mobile solution. It empowerscombination of our core strengths, domain and technology. Our insight into the dealerevolving landscape along with a commanding backend systemour valuable experience enables us to define sound digital transformation strategies and allowscompliment them with smart digital solutions so our customers always remain competitive and relevant to the customerdynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to setup a secured accounteffectively augment and view information 24/7 to keep track of contract status, reducing inbound calls for customer queries and improving turnaround time for repayments.enhance our customer’s ecosystem.

Self Point of Sale
Our self-service 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.
Mobile Account
The powerful mAccount is a self-service mobile solution. It empowers the dealer with a commanding backend system and allows the customer to setup a secured account and view information 24/7 to keep track of contract status, reducing inbound calls for customer queries and improving turnaround time for repayments.
Mobile Point of Sale
The application mPOS is a web and mobile enabled platform featuring a customizable home screen dashboard along with multiple quotation, application submission, work queues and detailed reporting to empower dealer networks in making the right decisions at the right time, in turn optimizing productivity.

 

 4 

Mobile Dealer
Mobile Platform 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
The mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency, in real 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 verification on the go. The application features a reporting dashboard that displays progress stats, action items and latest notifications, enabling the client to achieve daily goals while tracking performance.

OTOZ INC.

Otoz Mobility Orchestration System

Otoz is a subsidiary of NetSol Technologies, Inc. and provides customer-friendly, business-to-business, white-label solutions for mobility. Our suite of agile and configurable solutions includes a range of car-sharing and subscription products. With just over 16 months since its inception, Otoz’s team of 40 individuals from 7 nationalities has developed a product which has been benchmarked by a partner company of Google in the UK. Otoz has recorded strong interests from tier 1 auto-finance companies across the globe.

Otoz is a digital platform that helps automotive asset-holders (auto-manufacturers, auto-captives and fleet owners) and start-ups to launch, orchestrate and scale mobility businesses. Otoz platform is built on cutting-edge technology stack which comprises of Cloud-Native Architecture, Microservices, Artificial Intelligence, Machine Learning, Blockchain, DevOps and APIs. Otoz powerful feature-set allows automotive asset-holders with the ability to orchestrate a range of car-share and vehicle subscription services. The data-driven nature of platform empowers automotive asset-holders to maximize optimize and utilize mobility offerings. Otoz enables customers to book car-share and subscribe to vehicles through its intuitive, digital, and easy to use interface. An API driven architecture allows quick integration of ecosystem partners such as maintenance, roadside and offline jobs providers to allow seamless operation of mobility services. Salient features are:

Otoz provides white-label solutions to OEMs, captive finance companies and other fleet owners/operators to launch their own mobility models.
Dynamic and personalized pricing: Our suite of AI models can assess consumer price sensitivities and fuel data-driven models and maximize conversion rates.
Optimal customer targeting and personalization: Segmenting target customers and developing data-driven incentive structures will drive growth.
Increased Asset utilization: Assets can be deployed across different mobility solutions, such as car sharing and car subscription to maximize utilization.
Telematics (real-time tracking): Otoz is a connected platform and IoT data is tracked in real time offering security and optimal asset management to operators.
Digital twin: Accuracy of mileage, service data, accidents, trip data are efficiently tracked through blockchain, ensuring transparency and supporting optimal asset management.
Blockchain: The automotive value chain can be managed via blockchain, for example, by using smart contracts to manage vehicle operations safely and efficiently.
The platform is built on the latest cloud-native architecture comprising of microservices, DevOps, containerization and continuous delivery to ensure quick time to market and global scalability (multitenancy and multicurrency).
An AI-driven chatbot ensures 24-hour availability of customer services.

5 

Mobile Point of SaleOtoz Mobility Orchestration System Applications:

 

Back Office

Otoz back-office consists of highly flexible and configurable modules that help manage and orchestrate mobility services. These modules include: Fleet Management, Trip Management, Communications Management, Notification Management, Payment Management, Member Management, Promotions and Discounts, WorkQueue and Template Management. In addition, Otoz back office provides insights related to market intelligence, business KPIs and car-usage analytics. The applicationmPOSback-office modules are configured according to client’s requirement and the module is a web and mobile enabled platform featuring a customizable home screen dashboard along with multiple quotation, application submission, work queues and detailed reporting to empower dealer networks in making the right decisions at the right time, in turn optimizing productivity.white-labelled as well.

Front Office

 

Mobile DealerApps

 

Mobile PlatformmDealer provides more visibilityOtoz offers its customers with native iOS and control over inventories –Android mobile apps. These apps serve as a channel to reach out to the end customers and offer multi-services on a single app.

Web Interface

Otoz offers a complete digital platform on a web-based front-office application. End customers of Otoz clients can visit the website to attain mobility services such as car-share, car subscription and rentals.

Chatbots

Otoz offers its client an AI powered chatbot that offers customers the ability to book a vehicle for their mobility needs on the chatbot. The chatbot is equipped with minimal effort. Dealerscomputer vision APIs that serve as a medium to verify customer’s documents. Customers can view their usepay through the chatbot and ultimately complete the booking. Otoz offers this chatbot as a white-label solution as well.

Artificial Intelligence Models

Otoz applications contain a suite of floor plan facility, stock statusAI models that makes the digital platform truly data driven in nature. Otoz has intelligence around, pricing, customer retention and financial conditions, while entering settlement requests or relocating assets.lifetime value, vehicle recommendations and customer segmentation. These models work seamlessly within the Otoz platform in harmony with other microservices. Team Otoz is working on packaging these AI models in a way to sell it independently to clients that requires only AI capability.

Super App

Otoz is a multi-service, multi-product platform comprising of various customer journeys such as car-share, car subscription, rentals, airport transfers, digital retail and more. Team Otoz has a product roadmap of building a Super App which will carry all services and features in one package; allowing our B2B customers to subscribe to different products on the go.

REGIONAL OFFERINGS

 

Mobile Auditor

ThemAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency, in real time.

Mobile Field Investigator

By using Mobile Field Investigator (mFI), the applicant has access to powerful features that permit detailed verification on the go. The application features a reporting dashboard that displays progress stats, action items and latest notifications, enabling the client to achieve daily goals while tracking performance.

Regional NFS™ Offerings

While NFS Ascent™Ascent® is designed to be a truly global solution ready for customization in any market, the Company has historically provided products tailored to various markets. As such, we offer the following additional regional products:

 

LeasePak

 

In North America, NetSol Technologies Americas, Inc. (NTA) has and continues to develop the LeasePak CMS product.product which is now tailored to be an offering on the Microsoft Azure™ cloud. LeasePak streamlines the lease and loan management lifecycle, enabling superior lease and loan portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reducingreduce operating costs, simplify accounting and improve profits. It is scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accrualaccounting methods for virtually all sizes and varying complexity of operations. It is partthe centerpiece of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers,Automotive Captives, as well as for some of the industry’s leading independent lessors. It handles every aspect of the lease or loan lifecycle, including credit application origination, credit adjudication, pricing, documentation, booking, payments, customer service, collections, midterm adjustments, and end-of-term options for asset disposition and asset disposition. It is also integrated with important partners in the asset-finance ecosystem, such as Vertex Series O.remarketing.

 

6

LeasePak-SaaS

 

LeasePak Cloud - SaaS

NTA also offers the LeasePak Software-as-a-Service (“SaaS”) business line, which provides high performance with a reduced total cost of ownership. SaaS offers a proven deployment option whereby customers only require access to the internet to use the software. With an elastic cloud price, revenue stream predictability and improved return on investment for customers, management believes that its SaaS customers will experience the performance, the reliability and the speed usually associated with a highly scalable private cloud. LeasePak-SaaS targets small and mid-sized leasing and finance companies.

 

LeaseSoft

 

In addition to offering NFS Ascent™Ascent® to the EuropeEuropean market, NTE has some regional offerings, including:

 

 LeaseSoft – a full lifecycle asset lease and finance system aimed predominantly at the UK and European funder market, including modules to support web portals and an electronic data interchange manager to facilitate integration between funders and introducers.
   
 LoanSoft – similar to LeaseSoft, but optimized for the consumer loan market.

5

Implementation ProcessIMPLEMENTATION PROCESS

 

The implementation process of our products can span from three to eighteen months depending upon the complexity and scope. The implementation process may also includesinclude related software services such as configuration, data migration, training, gaps development and any other additional third partythird-party interfaces. Even after implementation, customers seek enhancements and additions to improve their business processes. NetSolNETSOL charges these efforts in a man-day rate.

Post implementation, NetSolNETSOL consultants may remain at the client site to assist the customer in smooth operations. After this phase, the regular maintenance and support services phase for the implemented software begins. In addition to the daily rate paid by the customer for each consultant, the customer also pays for all the transportation related expenses, boarding of the consultants, and a living allowance. NetSol’sNETSOL’s involvement in all of the above steps is priced to bring value to our customers and increase our profitability from our interactions.

Cloud-enabled NFS Ascent® solutions are offered via seamless and rapid deployments. The swift speed of implementations for our cloud ready products enables businesses to be more responsive and attain a competitive advantage.

Pricing and Revenue StreamsPRICING AND REVENUE STREAMS

 

The Company’s revenue streams occur through the following three main areas:

 

 Product licensing
 Implementation related services
 Maintenance and support related services

 

License fees in a single market can vary generally between $100,000based on relatively low cost for a simple SaaS minimal modulesarrangement to more than $2,000,000a multi-million-dollar fee for more robust multiple module implementations. There are various attributes which determine the level of complexity, a few of which are: number of contracts; size of the portfolio; business strategy of the customer; internal business processes followed by the customer; number of business users; amount of customization required; complexity of data migration and branch network of the customer.

The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred,been delivered to the fee is fixed or determinable, and collectability is probable. However, revenue from sale of licenses with major customization, modification, and development is recognized on a percentage of completion basis.customer. Implementation related services, including configuration, data migration and third partythird-party interfaces are recognized in accordance withas the percentage of completion method.services are performed. Maintenance and support related services are then provided on a continued basis. The annual maintenance fee, which typically is an agreed upon percentage of overall monetary value of the license, then becomes an ongoing revenue stream realized on a yearly basis. Revenue from software services includes fixed price and time and materials-based contracts and is recognized in accordance withas the percentage of completion method using the output measure of “Unit of Work Completed.”

Joint Ventures

NetSol-Innovation

In November 2004, the Company entered into a joint venture agreement with 1insurer (formerly the Innovation Group) forming NetSol-Innovation (Pvt) Ltd., (“NetSol-Innovation”), a Pakistani company. NetSol-Innovation provides support services enabling 1insurer to scale solution delivery operations in key growth markets. NetSol-Innovation operations are centered in NetSol’s delivery center in Lahore, Pakistan. NetSol owns a majority of the venture. The entities share in the profits of the joint venture on the basis of their shareholding. The outsourcing model between 1insurer and NetSol involves services pertaining to business analyses, configuration, testing, software quality assurance, technical communication, research and development regarding its insurance platform, client support as well as project management for development of software for 1insurer.

Initiated with a 10-person outsourcing team in Lahore in February 2005, this arrangement has extended to 156 persons with the additional resources catering to the increased influx of outsourcing of configuration and testing assignments from 1insurer. Currently, prominent 1insurer’s customers being serviced from Lahore include GuideOne USA, Homesite USA, UPC USA and MDU UK.

Virtual Lease Services

Virtual Lease Services (VLS) is a joint venture partnership with NTE and Investec Bank. NetSol owns a majority of the venture. VLS provides an asset finance services proposition complementing our core solutions offerings. VLS provides three core services, covering business process outsourcing (BPO), provision of standby servicing to the securitization markets, and audit services. The cornerstone of VLS’s range of services is the BPO offering which provides portfolio management to a range of businesses, including start-ups, growth businesses, and those in run down mode. The BPO service also supports portfolio acquirers. VLS carries a Fitch ABS Primary Servicer Rating of “ABPS3”, upgraded from “ABPS3-” in October 2014.performed.

 

 67 

Additionally, in order to avoid lumpiness in its revenues and to ensure a predictable revenue base over coming years, the business has shifted to a new pricing strategy whereby the business is now offering its cloud ready products at SaaS/subscription-based pricing models. Rapid deployments coupled with affordable prices/payment schedules is expected to lead the business towards volume-based selling. Moreover, this value-driven pricing plan is intended to decrease the initial buy-in cost for new customers by eliminating heavy license fees and provides an alternative to current customers seeking lower software usage and maintenance costs.

ALLIANCES

Alliances

Daimler South East Asia Pte. Ltd. (“DSEA”), (through the regional office Daimler Financial Services (“DFS”) Africa Asia Pacific), has established a “Centre of Competence” (“CoC”) in Singapore to facilitate the regional companies in NFS™product related matters. The DSEA CoC is powered by highly qualified technical and business personnel. In conjunction with our Asia Pacific region, the CoC supports DFS companies in twelve different countries in Asia and Africa and this list can increase as more DFS companies from other countries opt for NFS Ascent™Ascent®. In July 2004, the Company entered into a Frame Agreement with DFS for the Asia Pacific and Africa region. This agreement was renewed in 2008, 2010, 2013 and most recently in January 2016. The agreement serves as a guideline for managing the business relationship with DFS and the use of licensed NFSTMproducts of the company by DFS and its affiliated companies.

 

Technical AffiliationsNETSOL has strategic partnerships with Microsoft and CGI pertaining to cloud-hosting activities for the Company’s cloud-based products. NETSOL hosts its cloud version of Ascent, NFS Ascent® on the Cloud and LeasePak Cloud - SaaS in the high performance and cost-effective Microsoft Azure cloud environment. A quick start implementation program combined with hassle-free Microsoft Azure™ cloud connectivity ensures new clients see a time-to-value faster than ever before.

NETSOL and CGI agreed to promote each other for their respective products and services amongst their respective existing customers across various regions. NETSOL also utilizes CGI for managed services and cloud hosting related activities for NETSOL’s engagements with their customers in Europe particularly.

TECHNICAL AFFILIATIONS

 

The Company is a Microsoft Certified Silver Partner and an Oracle Certified Partner.

 

Marketing and SellingMARKETING AND SELLING

 

NetSolNETSOL management continues its optimism that the Company will experience ever increasing opportunities for its product and services offerings in 20172020 and beyond. The objective of the Company’s marketing program is to create and sustain preference and loyalty for NetSol.NETSOL. Marketing is performed at the corporate and business unit levels. The corporate marketing department has overall responsibility for communications, advertising, public relations and the website. In addition, corporate marketing oversees central marketing and communications programs for use by each of the business units.

 

Our dedicated marketing personnel, within the regions, undertake a variety of marketing activities, including sponsoring focused client events to demonstrate our skills and products, sponsoring and participating in targeted conferences and holding private briefings with individual companies. We believe that the industry focus of our sales professionals and our business unit marketing personnel enhances their knowledge and expertise in these industries and will generate additional client engagements.

 

The MarketsTHE MARKETS

NetSolNETSOL provides its services primarily to clients in global commercial industries. In the global commercial area, the Company’s service offerings are marketed to clients in a wide array of industries including, automotive, software, banks, higher education and financial services.

 

The Asian continent, including Australia and New Zealand, from the perspective of marketing, are targeted by the Asia Pacific Region from its Bangkok, Beijing, Jakarta, Lahore, Shanghai and LahoreSydney facilities. The marketing for our core offerings in the Americas and Europe is carried out from our Los Angeles Area and London Metropolitan areaArea offices, respectively.

 

8

People and Culture

PEOPLE AND CULTURE

 

The Company believes it has developed a strong corporate culture that is critical to its success. Its key values are delivering world-class quality software, client-focused timely delivery, leadership, long-term relationships, creativity, openness and transparency and professional growth. The services provided by NetSolNETSOL require proficiency in many fields, such as software engineering, project management, business analysis, technical writing, sales and marketing, and communication and presentation skills.

 

Due to the growing demand for our core offerings and IT services, retention of technical and management personnel is essential. We have enhanced the compensation structure for our technical teams and senior management to stay ahead of global and regional competition. As a result, we have improved ITOur employee turnover from almost 20%was under 10% in 2014 to less than 15% today2020 with a goal is to improvemaintain the turnover level to under 10% in thisduring the 2021 fiscal year and onwards. In addition, we are committed to improving key performance indicators such as efficiency, productivity and revenue per employee.

 

To encourage all employees to build on our core values, we reward teamwork and promote individuals that demonstrate these values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. We support gender diversity on a global basis. NetSolNETSOL is an equal opportunity employer with the largest concentration of female employees in Lahore, Pakistan and our U.S. headquarters.

NetSol

NETSOL believes it should give back to the community and employees as much as possible. Certain of our subsidiaries are located in regions where basic services are not readily available. Where possible, NetSolNETSOL acts to not only improve the quality of life of its employees but also the standard of living in these regions. Examples of such programs are:

 

Humanitarian Relief—Relief: We are all aware of the devastation that can be wrought by natural disasters. NetSolNETSOL has historically supported earthquake and flood relief where the need is the greatest.
Literacy Program— launchedProgram: Launched to educate low paidour illiterate employees, of the organization. The main objective of this program is to enable these resourcesemployees to acquire basic reading, writing and arithmetic skills.
Higher Education and Science and Research Institutions: In order to support higher education in Pakistan, we have contributed endowments to NUST, Forman Christian College, and a few other universities who are focused on science and engineering.
Noble Cause Fund—Fund: A noble cause fund has been established to meet medical and education expenses of the children of low paid employees. NetSolNETSOL employees voluntarily contribute a fixed amount every month to the fund and the Company matches the employee subscriptions with an equivalent contribution amount. A portion of this fund is also utilized to support social needs of certain institutions and individuals, outside NetSol.NETSOL.
Day Care Facility—NetSol’sFacility: NETSOL’s human resources are its key assets and thus the Company takes numerous steps to ensure the provision of basic comforts to its employees. In Pakistan, the provision of outside pre-school child carechildcare is a rarity. With this in mind, a childchildren’s day care facility has been created in close proximity to NetSolnear NETSOL’s offices providing employees with peace of mind knowing their children are nearby and being taken care of by qualified staff in a child friendly facility. Due to COVID-19 restrictions, the facility is temporarily closed.
Preventative Health Care Program—Program: In addition to the comprehensive out-patientoutpatient and in-patient medical benefits, preventive health care has also been introduced. This phased program focuses on vaccination of our employees against such diseases as Hepatitis – A/B, Tetanus, Typhoid and Flu on a routine basis.

 

There is significant competition for employees with the skills required to perform the services we offer. The Company runs an elaborate training program for different cadre of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. The Company believes that it has been successful in its efforts to attract and retain the highest level of talent available, in part because of the emphasis on core values, training and professional growth. We intend to continue to recruit, hire and promote employees who share our vision.

 

As of June 30, 2017,2020, we had approximately 1,4611,400 employees; comprised of 1,082 IT80% software engineers, programmers, project and technical personnel; and 380 non-IT personnel. The IT project and technical personnel include 766managers, quality assurance, sales, pre-sales, business development, dedicated employees dedicated to core NFS and NFS Ascent™, 151 employees dedicated to the joint venture with 1insurerAscent® and 16520% non-IT personnel, and 140 plus employees supporting the regional offerings as well as IT consulting and services. None of our employees are subject to a collective bargaining agreement.

9

 

CompetitionCOMPETITION

 

Neither a single company, nor a small number of companies, dominate the IT market in the space in which the Company competes. A substantial number of companies offer services that overlap and are competitive with those offered by NetSol.NETSOL. Some of these are large include computer manufacturers and computer consulting firms that have greater financial resources than NetSolNETSOL and, in some cases, may have greater capacity to perform services similar to those provided by NetSol.NETSOL.

 

In the NFS™ business space, the barriers to entry are getting higher. The products are becoming more cutting-edge while richness in functionality is paramount. Older companies have prolonged the life of their legacy products by creating web-based front ends, while the core of the systems has not been re-engineered. In the case of NFS™, weWe compete chiefly against leading suppliers of IT solutions to the financialglobal asset finance and leasing industry, including names such as White Clarke Fimasys,Group, Alfa, Cassiopae, LineData, FIS, International Decision Systems (IDS), and Data Scan, Alfa, 3i Infotech, Finnone and Nucleus Software.Scan.

 

In the IT based business services areas, we compete with both smaller local firms and many global IT services providers, including names such as Wipro, InfoSys, Satyam Infoway, HCL and TCS (Tata Consulting).

 

Many ofOtoz competes in a niche space which has seen growth in the competitors of NetSolcompetition recently. Mature players include RideCell, Invers and Vulog that have longer operating history, larger client bases,been around for more than 7 years. These players dominate the market share in the US, Europe and longer relationships with clients, greater brand or name recognitionIndia. Recently, new players have emerged which includes Wunder Mobility and significantly greater financial, technical, and public relations resources than NetSol. Existing or future competitors may develop or offer servicesM-Tribes that are comparable or superior to ours at a lower price,focused towards micromobility and delivery-based services. Otoz competes with these companies over shared mobility offerings which could have a material adverse effectincludes P2P car-share, daily rentals, station-based car-share and free-float car-share. Otoz does not compete with the aforementioned players on our business, financial condition and results of operations.fleet management hardware. Lastly, Otoz also offers vehicle subscription SaaS platform for which it competes with Clutch Technologies.

 

CustomersCUSTOMERS

 

NetSolNETSOL’s solutions and services cater to a broad spectrum of finance and leasing businesses, from automotive captive finance companies to equipment finance and leasing companies to large regional banks.

NETSOL customers include world renowned auto manufacturers through their finance arms and large regional banks. In addition, NetSol provides offshore development and testing services to 1insurer, formerly Innovation Group Plc UK, and their blue chip global insurance customers through the NetSol-Innovation joint venture, which contributes about 8.67% of NetSol’s revenues. NetSolarms. NETSOL is also a strategic business partner for Daimler and BMW (which consists of a group of many companies in different countries), which accounts for 44.25%approximately 26.4% and 15.8% of our revenue.revenue for our fiscal year ended June 30, 2020, respectively. Other globally renowned auto captives that are customers of the Company include Toyota, Nissan, Ford, and FIAT.

 

8

Other customers of the Company include equipment finance and leasing companies and banks worldwide.

 

Global Operations and Geographic DataGLOBAL OPERATIONS AND GEOGRAPHIC DATA

 

The Company divides its operations into three regions: the Americas, Europe and Asia Pacific. The regions consist of individual subsidiaries which operate as autonomous companies and are strategically managed on a regional basis.

 

The Americas

At NTA, Mr. Jeffrey Bilbrey, formerly aPeter Minshall joined NetSol Technologies Americas, Inc. independent board member for three years and also(NTA) as executive Vice President at Majesco Softwarein August 2020 and Services, actsis responsible for the entire portion of NTA’s business operations. He brings over three decades of international experience in the financial services industry holding various senior leadership roles with Daimler Financial Services. Peter continues to be supported by Doug Jones as President.Vice President - Operations for NTA. Doug is a visionary, focused, and driven technology leader credited with shaping team performance to deliver best-in-class, leading web-based and embedded software applications for the finance and leasing industry.

Otoz CEO and Founder, Mr. Bilbrey brings 24 years of software product management, consulting services delivery and technology business operations leadership to NTA. His focusNaeem Ghauri is to expand the presencebased out of NetSol Thai offices located in Bangkok, Thailand. Co-founder and Chief Product Officer, Murad Baig is based out of NetSol London office. Co-founder and Chief Strategy Officer, Heidi Bauer is based out of the Americas region while assuring elevated service levels to all existing clients.U.S. where she leads global business development and sales.

 

10

Operations and head of sales continue to be led by Mr. Farooq Ghauri. He is a technology industry and domain expert with a 13 year proven track record in driving the rapid expansion of an industry leading global software organization. He has been working in NTA since 2008 as an active member of the management team. He has worked in NetSol’s Pakistan, China, Australia, Thailand and US offices providing him with the complete understanding of NetSol’s global operations in an industry that is rapidly expanding and changing.

 

Europe

Mr. Asad Ghauri leads our European market asis the President of Asia Pacific (APAC) and Group Managing Director.Director of Europe. Mr. Ghauri has a long history of experience in the Company, including a tenure as a board of director member, and vast experience in leading our Asia PacificAPAC unit. We believe this experience will be utilized to lead growth in Europe. The NTE entity is led by Mr. Tim O’Sullivan

Due to the demand for the Company’s premier solution NFS Ascent’s® Wholesale Platform in Europe, the Company appointed Chris Mobley as Managing Director. Mr. O’Sullivan hasHead of NFS Ascent® Wholesale Operations in Europe. Mobley brings over two decades of industry experience to NETSOL with an accomplished background and domain-specific knowledge and expertise within the necessary industry expertise and domain knowledge to servicewholesale finance space.

At the needsstarting of the European Market.previous financial year, NETSOL acquired the remaining stake in Virtual Lease Services (VLS), a UK-based portfolio and risk management servicing partner for business and consumer finance providers. By acquiring the remaining stake, NETSOL became the outright owner of the organization.

 

VLS is led by Ms. Louise Ikonomides. As Managing Director and founding shareholder of VLS, Ms. Ikonomides has been with VLS since its inception in 1999.

 

Asia Pacific Region

 

NetSolNETSOL Technologies, Ltd., (“NETSOL PK”) a majority owned subsidiary of the parent company is located in Lahore, Pakistan and is headed by Mr. Salim Ghauri as its CEO. Mr. Ghauri is a co-founder of NetSol TechnologiesNETSOL PK and has been with the Company since 1996. NETSOL PK is the “Center of Excellence” and state of the art facility for programming, R&D, global implementations and 24-hour support to our customers worldwide.

 

NetSolNETSOL Beijing entity is headed by Mr. Umar QadriHui Liang as President. Mr. QadriA two-decade long veteran of the tech industry, Liang brings his vast expertise to the Company. He has been with NetSolpreviously worked at Abeam Consulting, a Japanese consulting company specializing in enterprise solutions in a vast range of industries as well as for over five years where he has gained valuable experience in both technology and management.IBM Japan.

 

The Global Sales Division is headed by Mr. NaeemAsad Ghauri as President of Sales from the NetSol Thai offices located in Bangkok, Thailand.NETSOL Lahore office. Mr. Ghauri has been with NetSolNETSOL since 19992000 and has over 28 combined20 years of experience in business and IT. He is also a member of the board of directors of the parent Company.

 

The Asia Pacific region including Australia/New Zealand and the Middle East, is targetedsupported and clients serviced from the Asia PacificAPAC region offices located in Sydney, Beijing, China;Shanghai, Bangkok, Thailand;Indonesia, Lahore and Karachi, Pakistan.Karachi. While Lahore, Pakistan continues to be a mainstaynucleus of the Company’s delivery and research and development, Bangkok’s expanded sales operation and client relations facility has grown into a back-up to the Lahore facility. With the continued growth of the Chinese market, our Beijing office continues to expand as both a sales and support facility. Finally, the Asia Pacific region maintains and will establish offices through the region as is necessary to support its customers and to explore potential new markets.

 

Our Asia PacificAPAC Region accounted for approximately 81%71% of our revenues in 2017 and our North America and European regions together accounted for approximately 19% of our revenues in 2017.2020. Information regarding financial data by geographic areas is set forth in Item 7 and Item 8 of this Annual Report on form 10-K. See note 1921 of Notes to Consolidated Financial Statements under Item 8.

 

9

Intellectual PropertyINTELLECTUAL PROPERTY

 

The Company relies upon a combination of nondisclosure and other contractual arrangements, as well as common law trade secret, copyright and trademark laws to protect its proprietary rights. The Company enters into confidentiality agreements with its employees, generally requires its consultants and clients to enter into these agreements, and limits access to and distribution of its proprietary information. The NetSolNETSOL “N” logo and name, as well as the NFS logo and product name have been copyrighted and trademark registered in Pakistan. The NetSolNETSOL “N” logo and BestShoring® name has been registered with the U.S. Patent and Trademark Office. An application NFS Ascent® has been filed to trademark the NFS Ascent™registered with the U.S. Patent and Trademark Office and is currently being processed.Office.. The Company intends to trademark and copyright its intellectual property as necessary and in the appropriate jurisdictions.

 

11

Governmental Approval and Regulation

GOVERNMENTAL APPROVAL AND REGULATION

 

Current Company operations do not require specific governmental approvals. Like all companies, including those with multinational subsidiaries, we are subject to the laws of the countries in which the Company maintains subsidiaries and conducts operations. Pakistani law allows a tax exemption on income from exports of IT services and products up to 2018.2025. While foreign based companies may invest in Pakistan, repatriation of their investment, in the form of dividends or other methods, requires approval of the State Bank of Pakistan.

 

Available InformationAVAILABLE INFORMATION

 

Our website is located atwww.netsoltech.com, and our investor relations website is located athttp://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 atwww.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 Annual Report on Form 10-K 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. 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 athttp://ir.netsoltech.com/governance-docs. The content of our websites areis not intended to be incorporated by reference into this Annual Report on Form 10-K 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.

12

ITEM 1A - RISK FACTORS

Not Applicable

 

ITEM 1A - RISK FACTORS1B – UNRESOLVED STAFF COMMENTS

Not Applicable.None

 

ITEM 2 - PROPERTIES

 

Our corporate headquarters are located in Calabasas, California where we lease 7,2105,000 square feet of office space. We own our Lahore Technology Campus which consists of approximately 140,000 square feet of computer and general office space. This includes the newly constructed buildingtwo adjacent five story buildings having a covered area of approximately 90,000 square feet with the capacity to house approximately 1,000 resources. In addition, we maintain leased office spacespaces in the UK, China, Australia, Thailand and a shared office in Indonesia. Our NTA office has been consolidated with the corporate headquarters. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.

 

ITEM 3 - LEGAL PROCEEDINGS

 

On October 27, 2015, a shareholder derivative lawsuit was filed inor about July 13, 2020, the California state court entitledMcArthur v Ghauri, et al., Case No. BC599020 (Los Angeles, Cty.), naming current and former members of the Company’s board of directors as defendants. The complaint alleges that the defendants breached their fiduciary duties. The Company was named as a nominal defendant onlyin a civil lawsuit based on an alleged breach of contract claim filed by Royal News Corp. d/b/a Royal Media Group (“RMG”). The lawsuit is captioned Royal News Corp. d/b/a Royal Media Group v. Netsol Techs., Inc., U.S. District Court Case No. 1:20-cv-05381-PAE (S.D.N.Y.) (the “Lawsuit”). On or about August 24, 2020, the Company and no damages are sought from it. On March 16, 2016, the parties in the California lawsuitRMG reached an agreement-in-principle providing for the settlement of that case.

On December 30, 2015, a virtually identical shareholder derivative lawsuit was filed in Nevada state court,Paulovits v. Ghauri, et al., Case No. CV15-02470 (Washoe Cty.). The Nevada complaint named the same defendants and was based on the same alleged facts as the earlier-filed California case. On April 29, 2016, the Company filed a motion to dismiss or stay the Nevada proceeding on multiple grounds, including that is it duplicative of the first-filed California action. On May 23, 2016, pursuant to the parties’ stipulation, the Nevada court ordered that matter to be stayed for a period of one year.

On June 15, 2016, the parties in the California and the Nevada cases jointly executed a Stipulation and Agreement of Settlement of Derivative Claims, which is intendedagreement to fully resolve both cases. Pursuant to the stipulationcase and subject toare in the court’s approval,process of documenting the agreement, which includes a release of each other from all obligations, contractual or otherwise, claims, disputes or other matters, in exchange for (i) a payment by the Company has agreed to adopt or maintain certain corporate governance measures,RMG in the amount of $100,000; and has agreed(ii) RMG dismissing the Lawsuit, with prejudice, pursuant to cause its insurers to pay plaintiff counsel’s fees and expenses in an aggregate amount not to exceed $175,000. On June 16, 2016, the California plaintiff filed a motion for preliminary approvalRule 41(a) of the derivative settlement.

Federal Rules of Civil Procedure. On May 30, 2017, Los Angeles Superior Court Judge Kenneth R. Freeman signed the Final Judgment and Order approving settlement and dismissingSeptember 22, 2020, a notice of dismissal with prejudice was filed with the shareholder derivative litigation involving the Company. The order became effective on June 29, 2017.

On April 7, 2017, Conister Bank Limited filed a complaint in the HighUnited States District Court Southern District of Justice Chancery Division, as claim no HC-2017-001045 against our subsidiary, Virtual Lease Services Limited (“VLS”). The complaint alleges that VLS was in willful default of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint alleges damages in excess of £200,000 (approximately $260,000).  VLS has responded to the complaint and its expenses are currently covered by available insurance.  VLS denies all claims and intends to vigorously defend the action.New York.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

13

PART II

 

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY

 

(a) MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on NASDAQ Capital Market under the ticker symbol “NTWK”.

 

The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the NASDAQ for each quarter during the last two fiscal years.

 

Fiscal Year 2017 High Low 
Fiscal Year 2020 High Low 
First Quarter $7.00  $5.64  $6.45  $4.95 
Second Quarter $6.65  $5.00  $5.85  $3.50 
Third Quarter $5.55  $4.35  $4.50  $2.00 
Fourth Quarter $5.60  $3.80  $3.65  $2.05 

 

Fiscal Year 2016  High   Low 
Fiscal Year 2019 High Low 
First Quarter $5.96  $4.20  $6.95  $5.43 
Second Quarter $9.50  $5.02  $10.53  $5.16 
Third Quarter $8.20  $6.02  $8.27  $6.03 
Fourth Quarter $7.46  $5.40  $7.63  $5.12 

 

RECORD HOLDERS - As of September 25, 2017,18, 2020, the number of holders of record of the Company’s common stock was 162.149.

 

DIVIDENDS - The Company has not paid dividends on its Common Stock in the past two fiscal years.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN

 

The table shows information related to our equity compensation plans as of June 30, 2017:2020:

 

 Number of
securities to be issued
upon exercise of
outstanding options,
warrants and rights
 Weighted-average
exercise price of
outstanding
options, warrants
and rights
 

Number of securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected in

column (a)

  Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
 Weighted average
exercise price of
outstanding
options, warrants
and rights
 Number of securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)
 
Equity Compensation
Plans approved by
Security holders
  475,133(1) $4.20(2)  474,111(3) None  None   425,004(1)
Equity Compensation
Plans not approved by
Security holders
  None   None   None  None  None   None 
Total  475,133  $4.20   474,111  None  None   425,004 

 

 (1)Consists of 1,000 under the 2003 Incentive and Nonstatutory Stock Option Plan; 53,462Represents 20,386 available for issuance under the 2005 Incentive and Nonstatutory Stock Option Plan; and 420,671 under the 2013 Incentive and Nonstatutory Stock Option Plan.
(2)The weighted average exercise price of the options is $4.20.
(3)Represents 130,000 available for issuance under the 2011 Incentive and Nonstatutory Stock Option Plan, 2,59598,196 under the 2013 Incentive and Nonstatutory Stock Option Plan and 341,516306,422 under the 2015 Incentive and Nonstatutory Stock Option Plan.

As of June 30, 2020, 66,421 shares of common stock that have been granted as compensation, but have not yet vested.

(b) RECENT SALES OF UNREGISTERED SECURITIES

 

None.

(c) ISSUER PURCHASES OF EQUITY SECURITIES

Effective July 30, 2020, the Company’s, Board of Directors authorized the repurchase of up to two million dollars’ worth of the Company’s issued and outstanding common shares. The repurchase plan is authorized commencing July 30, 2020, and ending December 24, 2020, subject to an additional six-month extension at the discretion of management. Although no shares were repurchased during fiscal year 2020, the Company purchased 147,052 shares at an average price of $3.16 per share subsequent to the fiscal year ended June 30, 2020.

 

ITEM 6 – SELECTED FINANCIAL DATA

 

Not applicable.

 

14

ITEM 7- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDResults RESULTS OF OPERATIONS

 

The following discussion is intended to assist in an understanding our financial position and results of operations for the year ended June 30, 2017.2020. 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.

 

A few of our highlights for 2016-2017the fiscal year ended June 30, 2020 were:

 

NETSOL acquired the remaining stake in Virtual Lease Services, a UK-based portfolio and risk management servicing partner for business and consumer finance providers. By acquiring the remaining stake, NETSOL became the outright owner of the organization.
Due to the demand for the Company’s premier solution NFS Ascent’s® Wholesale Platform in Europe, NETSOL appointed Chris Mobley as Head of NFS Ascent® Wholesale Operations in Europe. Mr. Mobley brings over two decades of industry experience to NETSOL with an accomplished background and domain-specific knowledge and expertise within the wholesale finance space.
NETSOL announced the SaaS or subscription-based pricing model for our global markets in addition to its existing license options. All global contracts now provide NETSOL customers with the option for subscription-based pricing as an alternative to the traditional license model. This Software-as-a-Service (SaaS) pricing option is now available for all cloud-based NETSOL products and services, including NETSOL’s core, next-gen solution NFS Ascent®.
NETSOL signed a multi-million-dollar agreement with a large UK vehicle finance company to implement its NFS Ascent® Wholesale Platform. This agreement pertains to accessing NFS Ascent® Wholesale Finance System (WFS) via subscription-based pricing, the dynamic pricing model that NETSOL has introduced in all operating regions in response to growing demand for this model. This monumental implementation marked the first roll-out of NFS Ascent® in the United Kingdom.
NETSOL signed an agreement with a bank in the United Kingdom for NFS Ascent® on the cloud. This contract covers the implementation of NFS Ascent’s® Retail platform, including its Omni Point of Sale solution (Omni POS) and Contract Management System (CMS). Similar to the previous contract with a large independent used vehicle finance company in the United Kingdom, implementation is expected in less than six months, enabling the bank to gain value from Ascent’s technology in the shortest possible timeframe and setting a new standard for time to deployment in the industry. This major agreement not only validates increasing traction and demand for NFS Ascent® in the United Kingdom, but also its European market readiness.
NETSOL announced its first North American customer for NFS Ascent®. This was done as the company secured a contract with SCI Lease Corp, a Canadian-based national automotive leasing company, for the deployment of its NFS Ascent® Contract Management System (CMS) on the cloud. This contract represented NETSOL’s first official sale of NFS Ascent® in the North American market and also the first Software-as-a-Service (SaaS) based agreement for Ascent in this region.
A major American multinational automaker went live in China with NETSOL’s next-gen solution NFS Ascent’s® Retail Platform. This deployment covered the complete Ascent® Retail Platform, which includes its Omni-Point of Sale (Omni-POS) and Contract Management System (CMS). This multi-million-dollar contract marked the second successful implementation of NETSOL’s next-gen product NFS Ascent® in China.
NETSOL went live with its NFS Ascent® Wholesale Platform with BMW Automotive Finance in China. This second largest customer has a strong presence in China as well as the rest of the Asia-Pacific region, and this deployment was part of a previously announced $30 million contract in which NETSOL was selected as the vendor of choice after an extensive evaluation process.
NETSOL went live with its NFS Digital Mobile Collector application for a top tier multi-finance company in Indonesia. This mCollector go-live, which was part of a larger contract originally signed in 2018, was carried out to improve the client’s existing business practices through the use of new digital technology.

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 The first implementationAs part of ourthe previously announced $100 million plus contract with a long-standing customer to upgrade toDaimler Financial Services, the largest signing in NETSOL’s history, for implementations in 12 countries, NFSAscent™ Ascent® went live in 11 countriesHong Kong. NETSOL implemented its NFS Ascent® Retail Platform, consisting of its Omni Point of Sale (Omni POS) and implement NFS Ascent™Contract Management System (CMS), in one new country was recently completed in Australia and New Zealand. The implementation phase continues in China, Korea, and South Africa.for this existing customer.
 Sold LeasePak license valued at $500,000As part of the DFS contract, the Company’s next-gen solution NFS Ascent® also went live in Malaysia. This implementation consisted of the full suite of NFS Ascent®, including its Omni Point of Sale (Omni POS) and Contract Management System (CMS), as well as its Wholesale Finance System (WFS). Malaysia marked the ninth deployment to Korean based automotive captive for their U.S. operations.go live following successful implementations in Japan, China, South Africa, Thailand, New Zealand, Australia, South Korea, and Hong Kong. This series of deployments constitutes the largest and most prestigious contract signing in NETSOL’s history.
 NetSol PK signed a collaboration agreementPertaining to provide technology services to WRLD3D, an interactive 3D mapping company based inNETSOL’s wholly-owned subsidiary Otoz, as the United Kingdom. The WRLD3D platform enables businesses to easily visualize complex data sets and location-based servicesfirst in a 3D mobile experience.number of planned rollouts, the new mobility technology startup announced the creation of an Ai-powered chatbot that is intended to cater to renters and car owners, which will be integrated into the current Drivemate chat application LINE. Otoz also provided further information regarding its ongoing strategic partnership with Drivemate, the leading peer-to-peer car-sharing service in Thailand.
 Went liveOtoz also announced a pilot car-sharing program with a major implementation of our NFS legacy system with Tri Petch Isuzu Leasingan existing tier-one European auto captive finance customer in Thailand.
Went live with NFS legacy system in China.
A restructuring of the Company’s efficiencies, initiated in December 2016, is expected to result in approximately $4 million in savings spread over the next year.
Teamed up with Microsoft Pakistan to foster innovation, encourage entrepreneurship and provide senior mentorship to promising new start-ups as As part of the NSPIRE program.
NetSol PK signed an agreement with Microsoft North Africa, East Mediterranean & Pakistanprogram, thousands of the auto captive’s employees will be eligible to further supportuse flexible car-sharing products, all of which will be deployed on the Pakistan technological start-ups.Otoz platform. Among the many use cases and trials being conducted, Otoz will enable options for flexible car rentals as well as peer-to-peer car-sharing and other subscription-based programs.

 

Our success, in the near term, will depend in large part on the Company’s ability to: (a) continue to grow revenues and improve profits, (b) adequately capitalize for growth in various markets and verticals, (c) make progress in the North American and European markets and, (d) continue to increase sales and marketing efforts in every market we operate.

Marketing and Business Development Activities

 

Management has developed and the board of directors has ratified, an aggressivea growth strategy aimed at increasing competitiveness, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space.

 

The growth strategy contemplates the following enhanced activities and initiatives to accomplish these goals:

 

 Build strong C-level executive teams in each key location to execute our long-term strategy.
 Develop, groom and groomretain the next tier level management for leadership to navigate long term growth.
 UpgradeUpgraded Bangkok and Beijing offices to support the growing and existing client relationships and new client acquisitions in the region.
 Strengthen the NetSolNETSOL brand in the Americas and Europe and further penetrate the APAC markets such as China, Thailand, Indonesia, Japan, Australia and New Zealand.
 Develop the sales and account management teams with Ascent domain expertise for the Americas markets, in particular the growth in the US auto and banking sectors.
Maximize penetration into new and existing smaller markets by increasing the sales activities for our legacy version of NFS™ in emerging markets in Latin America, APAC, and the Middle Eastern regions where the legacy product is better suited to middle market companies to meet their requirements and IT budgets.
Maintain the quality of our delivery, after delivery support, and client relationships.
 Further penetration of NFS Ascent™Ascent® into the leasing and financing sectors in China, APAC, Europe and North America by focusing on multi-national auto captive Fortune 500 companies.
Pursue a well thought out strategy to diversify into complimentary verticals by way of organic expansion, partnerships and synergistic M&A.
 Continue to implement new tools, systems and processes, such as JIRA, and the Agile frame workframework to further enhance productivity, efficiencies and operating margins.

 13Offer a cloud enabled NFS Ascent® at subscription-based pricing models to generate additional interest from prospects.
 Continue investing in Otoz and our innovation lab to generate new verticals for the business.

 

Growth Prospects for NFS™NFS Ascent®

 

Growth prospects for NFS™NFS Ascent® are linked to the maturing of the product portfolio and its growing customer base across different geographic and product markets. NetSol isWe are eyeing key international markets for growth in sales. ItsOur sales strategy now carefully balances expansion into new geographic markets, including North and South America,the Americas, Europe, and further penetration of our leading position in Asia Pacific.

 

Growth in North America is expected to come from the potential market for replacement of legacy systems. NFS Ascent™Ascent® is aimed at providing a highly flexible and robust solution based on the latest technology and advanced architecture for the North American customers looking to replace their legacy systems. We believe that NFS Ascent™Ascent® can provide substantial competitive disruption to the market’s lagging technology provided by incumbent vendors. The existing customer base may also represent latent demand for increased service and maintenance revenues by offering business process optimization, customization and upgrade services.

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Growth in Europe will come from the introduction of NFS AscentTM®, which will allow NTE to support larger organizations than those typically selecting the existing LeaseSoft product set, and also opens the door for European expansion. This willis designed to attract larger license and professional services revenues across a wider geography. In addition, leveraging the core strengths of NFS AscentTM® will increasingly provide opportunities in the automotive sector where NTE is currently underrepresented.

 

Growth in NetSol’sour traditionally strong base in Asia Pacific is expected through diversification across market segments to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and maintenance revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS AscentTM® in Asia Pacific in the form of existing customers who are looking for replacement of their current system.

 

In China, NetSol iswe are a de facto leader in the leasing and finance enterprise solution domain. With this position, NetSol continueswe continue to enjoy demand for the current NFS™ solution, as well as NFS Ascent™Ascent®. NetSolWe will continue strengthening itsour position within existing multinational auto manufacturers, as well as, local Chinese captive finance and leasing companies. The Chinese auto leasing market is young and low on consumer penetration in comparison with the giant U.S. market. We see a tremendous opportunity to grow demand for our products widely and in new markets in China such as Shanghai.

 

In Thailand, NetSolwe established a sales headquarters, and client service center.center, as well as a headquarters for OTOZ. The NetSol Thai operation is the hub for NetSol Globalour global markets and directly supports all APAC markets including China, Indonesia and Australia. Our operation in Bangkok serves a very robust and growing market for leasing companies and regional banks.

 

MATERIAL TRENDS AFFECTING NETSOL

 

Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

 Improving U.S. economy generally,NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in North American and particularly auto and bankingEuropean markets.
 Robust Chinese markets as asset based leasingMobility and financedigital transformation is the new norm showing acceleration in every sector are far from maturity levels.particularly in auto and banking.
 Latin American markets, primarily in Mexico, remain largely untapped.On Cloud demand for our solution is on the rise.
 COVID-19 has created new dynamics for businesses and corporations with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, should positively impact our financials.
COVID-19 is creating new opportunities for our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors.
In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms.
Growing opportunities and dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools.
OTOZ platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe.
Improved stability in US and Pakistan economy growth in gross domestic product reached 4.7% in 2016, according torelationship boosting confidence and trade relations.
China’s China Pakistan Economic Corridor (CPEC) investment has exceeded $62 billion investment from the originally planned $46 billion on Pakistan Bureau of Statistics;energy and improved credit ratings by Bloomberg, S&P, Moody’s and Forbes Pakistan security and geopolitical environment has improved.infrastructure sectors.
 China investmentauto sector remains strong as our customers are constantly demanding ‘Change Requests’ or CPEC (China Pakistan Economic Corridor) has exceeded $50 billion from originally $46 billion in Pakistan on energyadditional services and infrastructure projects.reflects resilience.

 17Continuous strong U.S. auto sales in excess of 17 million units in 2016 according to Auto news.com.
 New emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia.
Continued interest from Fortune 500 multinational auto captives and global companies in NetSol Ascent™.
Growing interest from existing clients in the NFS™ legacy systems in emerging and developing markets.
Growing demand and traction for upgrading to NFS Ascent™ by existing tier one auto captive clients.
Higher caliber and quality talent joining NetSol, globally.
Employee turnover is contained to under 15% level in 2017 from 20% in 2014.

Negative trends:

 

 Growing Global terrorism and extremism threats in European countries.COVID-19 has caused a global recession that will adversely impact every one of our business sectors.
 Geopolitical unrest in the Middle EastMost OEMs and potential terrorism and the disruption risk it creates.
Restricted liquidity and financial burdenauto sectors are experiencing major slowdown due to tighter internal processeslockdowns and limited budgets might cause delays in the receivables from some clients.health concerns.
 The threatsC-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of conflict between in the Middle Eastern countries could potentially create volatility inCOVID-19 virus.
The steep drop of global oil prices causing readjustmentsreflects a sudden drop in transportation, air travels and road travels. The lockdowns worldwide present layers of corporate budgetschallenges for every business worldwide.
US and consumer spending slowingChina trade conflicts tend to further aggravate the global business environment.
Working from office poses its own risk of virus spread until it vanishes completely.
Global outlook for auto sales.sector is uncertain if the recessionary impact worsens. This might cause delay or procrastination on decision making by our customers.
Marketing activities have been reduced dramatically particularly global and regional industry conferences. The indications it will be quite some time before these marketing activities can resume.

 

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, intangible assets, software development costs, and goodwill.

 

REVENUE RECOGNITION

 

The Company derives revenuesdetermines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

The Company has two primary revenue streams: core revenue and non-core revenue.

Core Revenue

The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support.support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

Non-Core Revenue

 

The Company recognizesgenerates its non-core revenue from license contracts without major customizationby 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, a non-cancelable, non-contingent license agreement has been signed, deliveryor 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 software has occurred,contract.

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The Company’s contracts which contain multiple performance obligations generally consist of the feeinitial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance 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 fixedrecognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or determinable,annual installments and collectability is probable. Deliverytypical 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 electronic transfer of the license key that provides immediate availabilitydelivery of the product to the purchaser. Determining whether and when somecustomer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue the Company reports.invoice.

 

If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.Maintenance

 

Revenue from consultingsupport services is recognizedand product updates, referred to as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.

Revenue from maintenance agreementsrevenue, is recognized ratably over the term of the maintenance agreement,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.

Professional Services

Revenue from professional services is typically one year.comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

BPO and Internet Services

Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.

Multiple Element ArrangementsSignificant Judgments

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

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Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.

The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from maintenance and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.

The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

Deferred Revenue

 

The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenancetypically invoices its customers for subscription and support as well as trainingfees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and development.services starting in future periods are included in accounts receivable and deferred revenue.

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Practical Expedients and Exemptions

 

Vendor specific objective evidence (“VSOE”)There are several practical expedients and exemptions allowed under Topic 606 that impact timing of fair valuerevenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:

Application

●     The Company does not evaluate a contract for each elementa significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

●     The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the priceConsolidated Statement of Operations.

●     The Company does not disclose the value of unsatisfied performance obligations for contracts for which the element is sold separately. The Company determinesrecognizes revenue at the VSOEamount to which it has the right to invoice for services performed (applies to time-and-material engagements).

Modified Retrospective Transition Adjustments

●     For contract modifications, the Company reflected the aggregate effect of fair value of each element based on historical evidence ofall modifications that occurred prior to the Company’s stand-alone sales of these elementsadoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to third-parties or from the stated renewal ratesatisfied and unsatisfied performance obligations for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the pointmodified contract at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.

COST OF REVENUEStransition.

 

Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.

ALLOWANCE FOR DOUBTFUL ACCOUNTSCosts to Obtain a Contract

 

The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In establishing thegeneral, 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 allowance, management regularly reviews the composition of accounts receivableto perform additional duties beyond new customer contract inception dates, including fulfillment duties and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.collections efforts.

 

INTANGIBLE ASSETS

 

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the discountedundiscounted expected future cash flows. If the future discountedundiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

SOFTWARE DEVELOPMENT COSTS

 

Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

 

The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated presentnet realizable value of future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the presentnet realizable value, of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such presentnet realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.

 

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SHARE-BASED

STOCK-BASED COMPENSATION

 

The Company records stockOur stock-based compensation in accordance with ASC 718,Compensation – Stock Compensation. ASC 718 requires companies to measure compensation cost for stock employee compensation at fair valueexpense 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 recognize theis recognized as expense over the employee’s requisite service period. The Company recognizesBSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the statement of operationsBSM model changes significantly, stock-based compensation expense may differ materially in the grant-date fair value of stock optionsfuture from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and other equity-based compensation issuedonly recognize expense for those shares expected to employees and non-employees.vest. We estimate the grant date fair valueforfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our stock options using the Black-Scholes option-pricing model with the assumptions of expected term, expected volatility, risk-free interestactual forfeiture rate and expected dividend. Each of these assumptions is subjective and generally requires significant judgment to determine. We estimate the volatility usingdifferent from our own common stock data.estimate; stock-based compensation expense is adjusted accordingly.

 

GOODWILL

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses 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. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

The source Fair value of the Company’s goodwill relatesreporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to the acquisition of four companies. NetSol PK operates in the Asia Pacific region; CQ Systems (now NetSol Technologies Europe Limited) and VLS both operate in Europe; and McCue Systems (now NetSol Technologies Americas, Inc.) operates in the North American region. All these geographies are considered as different reporting segments. Goodwill arising from the acquisition of these companies has been allocated to their respective geographical segments to which they relate. While identifying reporting segments, we take into consideration the reports reviewed by the CEO (chief operating decision maker). As our financial reports are analyzed on this regional basis, we have defined this as segment reporting for purposes of goodwill impairment testing. The Company tests for goodwill impairment at each reporting unit.be performed.

 

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.

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RESULTS OF OPERATIONS

 

THE YEAR ENDED JUNE 30, 20172020 COMPARED TO THE YEAR ENDED JUNE 30, 20162019

 

The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 20172020 and 20162019 as a percentage of revenues.

 

  2017  %  2016  % 
Net Revenues:                
License fees $18,218,912   27.87% $8,352,441   12.94%
Maintenance fees  14,157,367   21.66%  13,310,591   20.62%
Services  24,798,899   37.94%  30,037,459   46.53%
License fees - related party  246,957   0.38%  1,616,138   2.50%
Maintenance fees - related party  311,359   0.48%  365,772   0.57%
Services - related party  7,632,774   11.68%  10,867,792   16.84%
Total net revenues  65,366,268   100.00%  64,550,193   100.00%
                 
Cost of revenues:                
Salaries and consultants  24,645,223   37.70%  21,789,329   33.76%
Travel  3,137,671   4.80%  2,334,019   3.62%
Depreciation and amortization  5,448,059   8.33%  5,926,969   9.18%
Other  3,727,379   5.70%  3,698,290   5.73%
Total cost of revenues  36,958,332   56.54%  33,748,607   52.28%
                 
Gross profit  28,407,936   43.46%  30,801,586   47.72%
Operating expenses:                
Selling and marketing  9,746,229   14.91%  7,823,916   12.12%
Depreciation and amortization  1,114,275   1.70%  1,225,170   1.90%
Provision for bad debts  1,407,751   2.15%  237,703   0.37%
General and administrative  16,747,550   25.62%  14,727,313   22.82%
Research and development cost  393,345   0.60%  485,783   0.75%
Total operating expenses  29,409,150   44.99%  24,499,885   37.95%
                 
Income from (loss) operations  (1,001,214)  -1.53%  6,301,701   9.76%
Other income and (expenses)                
Gain (loss) on sale of assets  (30,147)  -0.05%  23,930   0.04%
Interest expense  (310,044)  -0.47%  (264,511)  -0.41%
Interest income  179,723   0.27%  161,794   0.25%
Gain (loss) on foreign currency exchange transactions  306,819   0.47%  (738,158)  -1.14%
Other income (expense)  50,378   0.08%  224,931   0.35%
Total other income (expenses)  196,729   0.30%  (592,014)  -0.92%
                 
Net income (loss) before income taxes  (804,485)  -1.23%  5,709,687   8.85%
Income tax provision  (931,951)  -1.43%  (652,546)  -1.01%
Net income (loss)  (1,736,436)  -2.66%  5,057,141   7.83%
Non-controlling interest  (3,241,594)  -4.96%  (1,654,380)  -2.56%
Net income (loss) attributable to NetSol $(4,978,030)  -7.62% $3,402,761   5.27%

  For the Years 
  Ended June 30, 
  2020  %  2019  % 
Net Revenues:                
License fees $4,564,560   8.1% $16,768,749   24.7%
Maintenance fees  18,951,248   33.6%  15,521,413   22.9%
Services  32,555,690   57.8%  34,892,290   51.4%
Services - related party  300,821   0.5%  636,731   0.9%
Total net revenues  56,372,319   100.0%  67,819,183   100.0%
                 
Cost of revenues:                
Salaries and consultants  18,821,738   33.4%  19,253,364   28.4%
Travel  4,181,742   7.4%  6,527,868   9.6%
Depreciation and amortization  2,897,371   5.1%  3,525,857   5.2%
Other  3,508,098   6.2%  3,625,478   5.3%
Total cost of revenues  29,408,949   52.2%  32,932,567   48.6%
                 
Gross profit  26,963,370   47.8%  34,886,616   51.4%
Operating expenses:                
Selling and marketing  6,450,663   11.4%  7,831,758   11.5%
Depreciation and amortization  834,583   1.5%  897,800   1.3%
General and administrative  17,138,832   30.4%  17,357,918   25.6%
Research and development cost  1,468,954   2.6%  1,971,228   2.9%
Total operating expenses  25,893,032   45.9%  28,058,704   41.4%
                 
Income from operations  1,070,338   1.9%  6,827,912   10.1%
Other income and (expenses)                
Gain on sale of assets  23,103   0.0%  81,455   0.1%
Interest expense  (346,856)  -0.6%  (311,798)  -0.5%
Interest income  1,569,536   2.8%  955,061   1.4%
Gain on foreign currency exchange transactions  398,610   0.7%  6,345,859   9.4%
Share of net loss from equity investment  (605,864)  -1.1%  (841,845)  -1.2%
Other income  224,224   0.4%  18,680   0.0%
Total other income (expenses)  1,262,753   2.2%  6,247,412   9.2%
                 
Net income before income taxes  2,333,091   4.1%  13,075,324   19.3%
Income tax provision  (1,141,068)  -2.0%  (1,057,784)  -1.6%
Net income  1,192,023   2.1%  12,017,540   17.7%
Non-controlling interest  (254,942)  -0.5%  (3,434,141)  -5.1%
Net income attributable to NetSol $937,081   1.7% $8,583,399   12.7%

23

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 1921 “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  (Unfavorable)  Total 
              (Unfavorable)  Change due  Favorable 
  For the Year  Change in  to  (Unfavorable) 
  Ended June 30,  Constant  Currency  Change as 
  2017  %  2016  %  Currency  Fluctuation  Reported 
                      
Net Revenues:  65,366,268   100.00%  64,550,193   100.00%  2,166,632   (1,350,557)  816,075 
                             
Cost of revenues:  36,958,332   56.54%  33,748,607   52.28%  (3,878,280)  668,555   (3,209,725)
                             
Gross profit  28,407,936   43.46%  30,801,586   47.72%  (1,711,648)  (682,002)  (2,393,650)
                             
Operating expenses:  29,409,150   44.99%  24,499,885   37.95%  (5,855,816)  946,551   (4,909,265)
                             
Income (loss) from operations  (1,001,214)  -1.53%  6,301,701   9.76%  (7,567,464)  264,549   (7,302,915)

     Favorable  Favorable  Total 
     (Unfavorable)  (Unfavorable)  Favorable 
  For the Year  Change in  Change due to  (Unfavorable) 
  Ended June 30,  Constant  Currency  Change as 
  2020  %  2019  %  Currency  Fluctuation  Reported 
                      
Net Revenues: $56,372,319   100.0% $67,819,183   100.0% $(5,684,344) $(5,762,520) $(11,446,864)
                             
Cost of revenues:  29,408,949   52.2%  32,932,567   48.6%  (90,133)  3,613,751   3,523,618 
                             
Gross profit  26,963,370   47.8%  34,886,616   51.4%  (5,774,477)  (2,148,769)  (7,923,246)
                             
Operating expenses:  25,893,032   45.9%  28,058,704   41.4%  287,257   1,878,415   2,165,672 
                             
Income (loss) from operations $1,070,338   1.9% $6,827,912   10.1% $(5,487,220) $(270,354) $(5,757,574)

 

Net revenues for the years ended June 30, 20172020 and 20162019 by segment are as follows:

 

  2017  2016 
   Revenue   %   Revenue   % 
North America $5,624,434   8.60% $5,464,740   8.47%
Europe  6,850,320   10.48%  10,670,117   16.53%
Asia-Pacific  52,891,514   80.92%  48,415,336   75.00%
Total $65,366,268   100.00% $64,550,193   100.00%

  2020     2019 
  Revenue  %  Revenue  % 
             
North America $4,444,862   7.9% $3,947,408   5.8%
Europe  11,914,071   21.1%  9,148,164   13.5%
Asia-Pacific  40,013,386   71.0%  54,723,611   80.7%
Total $56,372,319   100.0% $67,819,183   100.0%

 

Revenues

 

License fees

 

License fees for the year ended June 30, 20172020 were $18,218,912$4,564,560 compared to $8,352,441$16,768,749 for the year ended June 30, 20162019 reflecting an increasea decrease of $9,866,471$12,204,189 with a change in constant currency of $9,933,367. The increase in license revenue for the fiscal year ended June 30, 2017 compared to 2016 is primarily due to the $16,345,000 of license revenue recognized for the 12 country NFS Ascent contract. We also had license revenues through sales of our regional offerings in the U.S. and the U.K.

License fees – related party

License fees from related party for the year ended June 30, 2017 were $246,957 compared to $1,616,138 for the year ended June 30, 2016 reflecting a decrease of $1,369,181 with a change in constant currency of $1,326,335.$11,493,282. The decrease in license revenue for the fiscal year ended June 30, 20172020 compared to 20162019 is primarily due to unexpected delaysthe decrease in a complex implementation duringlicense revenue recognized for the DFS and BMW contracts to implement our NFS Ascent® Retail Platform. In the fiscal year 2017.ended June 30, 2020, we recorded $2,500,000 of license revenue for the DFS, 12 country NFS Ascent® contract, $470,000 for an NFS Ascent® contract in the U.K., and $1,540,000 from license revenues through sales of our regional offerings in China, Australia, the U.S. and the U.K. In fiscal year ended June 30, 2019, we recorded $6,600,000 of license revenue recognized for the DFS, 12 country NFS Ascent® contract, $8,000,000 related to the NFS Ascent® contracts signed with a tier-one auto captive finance company and a major American multinational automaker to implement our product in China, and $2,200,000 from license revenues through sales of our regional offerings in China, Australia, the U.S. and the U.K.

24

Maintenance fees

 

Maintenance fees for the year ended June 30, 20172020, were $14,157,367$18,951,248 compared to $13,310,591$15,521,413 for the year ended June 30, 20162019 reflecting an increase of $846,776$3,429,835 with a change in constant currency of $1,170,153.$5,286,321. Maintenance fees begin once a customer has “gone live” with our product. The increase was due to the start of new maintenance agreements from customers who went live with our product during the latter stages of fiscal year 20162019 and into fiscal year 2017.2020. We anticipate maintenance fees to gradually increase as we implement both our NFS legacy product and NFS Ascent™Ascent®.

Maintenance fees – related party

Maintenance fees from related party for the year ended June 30, 2017 were $311,359 compared to $365,772 for the year ended June 30, 2016 reflecting a decrease of $54,413 with a change in constant currency of $1,353. The decrease was due to fluctuation in foreign currency translation.

 

Services

 

Services income for the year ended June 30, 20172020, was $24,798,899$32,555,690 compared to $30,037,459$34,892,290 for the year ended June 30, 20162019, reflecting a decrease of $5,238,560$2,336,600 with a changean increase in constant currency of $4,486,525.$751,124. The services revenue decreaseincrease based on constant currency was due to a decreasean increase in services revenue associated with new implementations and change requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process.

 

Services – related party

 

Services income from related party for the year ended June 30, 20172020 was $7,632,774$300,821 compared to $10,867,792$636,731 for the year ended June 30, 20162019 reflecting a decrease of $3,235,018$335,910 with a changedecrease in constant currency of $3,125,381.$228,507. The decrease in related party service revenue is due to a decrease in revenue from our joint venture with 1insurer of approximately $2,500,000 and a decrease of approximately $1,700,000 due to implementation delays, offset by an approximately $975,000 increase in service revenue related toless services performed for WRLD3D.

 

Gross Profit

 

The gross profit was $28,407,936,$26,963,370, for the year ended June 30, 20172020 as compared with $30,801,586$34,886,616 for the year ended June 30, 2016.2019. This is a decrease of $2,393,650$7,923,246 with a decrease in constant currency of $1,711,648.$5,774,477. The gross profit percentage for the year ended June 30, 20172020 also decreased to 43.5%47.8% from 47.7%51.4% for the year ended June 30, 2016.2019. The cost of sales was $36,958,332$29,408,949 for the year ended June 30, 20172020 compared to $33,748,607$32,932,567 for the year ended June 30, 2016,2019 for an increasea decrease of $3,209,725$3,523,618 and on a constant currency basis an increasea decrease of $3,878,280.$90,133. As a percentage of sales, cost of sales increased from 52.3%48.6% for the year ended June 30, 20162019 to 56.5%52.2% for the year ended June 30, 2017.2020.

 

Salaries and consultant fees increaseddecreased by $2,855,894$431,626 from $21,789,329$19,253,364 for the year ended June 30, 20162019 to $24,645,223$18,821,738 for the year ended June 30, 20172020 and on a constant currency basis increased $3,253,753.by $1,754,053. The increasedecrease in salaries and consultant fees is due to the hiring and trainingdevaluation of the Pakistan Rupee (“PKR”) compared to the U.S. Dollar. The increase in salaries on a constant currency basis is due to the increase in the number of technical employees at key locations including Pakistan, Thailand, China, UK and North America as we anticipated new projects associated with NFS Ascent™. In order to prepare for growth with our new product NFS AscentTM, we continued to focus on hiring technical personnel. However, due to the declineannual increase in revenues, we began cost cutting measures during Q3 of fiscal year 2017.salaries and wages. We had 1,195, 1,234976, 932, and 1,0811,009 technical employees as of June 30, 2015, 20162018, 2019 and 2017,2020, respectively. As a percentage of sales, salaries and consultant expense increased from 33.8%28.4% for the year ended June 30, 20162019 to 37.7%33.4% for the year ended June 30, 2017.2020.

Travel decreased by $2,346,126 from $6,527,868 for the year ended June 30, 2019 to $4,181,742 for the year ended June 30, 2020 and on a constant currency basis decreased by $1,799,905. The decrease in travel is due to the COVID-19 Pandemic. As a percentage of sales, travel expense decreased from 9.6% for year ended June 30, 2019 to 7.4% for the year ended June 30, 2020.

 

Depreciation and amortization expense decreased to $5,448,059$2,897,371 compared to $5,926,969$3,525,857 for the year ended June 30, 20162019 or a decrease of $478,910$628,486 and on a constant currency basis a decrease of $504,554.$146,175. Depreciation and amortization expense decreased as some products became fully amortized.

 

Operating Expenses

 

Operating expenses were $29,409,150$25,893,032 for the year ended June 30, 20172020 compared to $24,499,885,$28,058,704, for the year ended June 30, 20162019 for an increasea decrease of 20.0%7.7% or $4,909,265$2,165,672 and on a constant currency basis an increasea decrease of 23.9%1.0% or $5,855,816.$287,257. As a percentage of sales, it increased from 38.0%41.4% to 45.0%45.9%. The increasedecrease in operating expenses was primarily due to increasesdecreases in selling and marketing expenses, provision for bad debt,salaries and wages and research and development cost offset by an increase in general and administrative expenses.

 

Selling and marketing expenses increased $1,922,313decreased $1,381,095 or 24.6%17.6% and on a constant currency basis an increasea decrease of $2,228,963$844,758 or 28.5%10.8%. The increasedecrease in selling and marketing expenses is due to the increasedecrease in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™Ascent® globally.

 

25

Provision for bad debt increased by approximately $1,170,048 or $1,297,623 on a constant currency basis as certain accounts were estimated to be uncollectible.

 

General and administrative expenses were $16,747,550$17,138,832 for the year ended June 30, 20172020 compared to $14,727,313$17,357,918 at June 30, 20162019 or an increasea decrease of $2,020,237$219,086 or 13.7%1.3% and on a constant currency basis an increase of $2,499,144$797,684 or 17.0%4.6%. During the year ended June 30, 2017,2020, salaries increaseddecreased by approximately $2,758,127$1,112,184 or $2,957,980$512,629 on a constant currency basis due to the increasereduction in the number of employees, annual raises,salaries, and less share grants, cash bonuses and options,grants. Professional services increased by $104,726 or $130,533 on a constant currency basis and other general and administrative expenses decreasedincreased by approximately $770,208$1,077,944 or $526,883increased $1,466,481 on a constant currency basis. The increase on a constant currency basis is primarily due to the increase in withholding taxes on payments from customers and funds transferred from China of approximately $850,000, a new office lease in London of approximately $150,000, and software license and subscription fees of approximately $140,000.

Research and development costs were $1,468,954 for the year ended June 30, 2020 compared to $1,971,228 at June 30, 2019 or a decrease of $502,274 or 25.5% and on constant currency basis a decrease of $239,075 or 12.1%. The decrease in research and development costs is due to less spending on our innovation initiatives with Blockchain, AI, and IoT.

 

Income/Loss from Operations

 

LossIncome from operations was $1,001,214$1,070,338 for the year ended June 30, 20172020 compared to income of $6,301,701$6,827,912 for the year ended June 30, 2016.2019. This represents a decrease of $7,302,915$5,757,574 with a decrease of 7,567,464$5,487,220 on a constant currency basis for the year ended June 30, 20172020 compared with the year ended June 30, 2016.2019. As a percentage of sales, lossincome from operations was 1.53%1.9% for the year ended June 30, 20172020 compared to income of 9.76% %10.1% for the year ended June 30, 2016.2019.

 

Net Income/LossOther Income and Expense

 

Net lossOther income was $4,978,030$1,262,753 for the year ended June 30, 20172020 compared to net income of $3,402,761$6,247,412 for the year ended June 30, 2016.2019. This represents a decrease of $4,984,659 with a decrease of $5,137,165 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 year ended June 30, 2020, we recognized a gain of $398,610 in foreign currency exchange transactions compared to a gain of $6,345,859 for the year ended June 30, 2019. During the year ended June 30, 2020, the value of the U.S. dollar and the Euro increased 3.1% and 1.8%, respectively, compared to the PKR. During year ended June 30, 2019, the value of the U.S. dollar and the Euro increased 33.9% and 30.8%, respectively, compared to the PKR. Interest income was $1,569,536 for the year ended June 30, 2020 compared to $955,061 for the period ended June 30, 2019. This represent an increase of $614,475 or a change of $800,815 on constant currency basis. The increase is due to the increase in cash which is invested into short term deposits and interest accrued on convertible note receivables.

Non-controlling Interest

For the year ended June 30, 2020 and 2019, the net income attributable to non-controlling interest was $254,942 and $3,434,141, respectively. The decrease in non-controlling interest is primarily due to the decrease in net income of NetSol PK.

Net Income/Loss attributable to NetSol

Net income was $937,081 for the year ended June 30, 2020 compared to $8,583,399 for the year ended June 30, 2019. This is a decrease of $8,380,791$7,646,318 with a decrease of $8,684,151$7,622,678 on a constant currency basis, compared to the prior year. For the year ended June 30, 2017,2020, net lossincome per share was $0.46$0.08 for basic and diluted shares. For the year ended June 30, 2016,2019, net income per share was $0.33 and $0.32$0.74 for basic and diluted shares, respectively.shares.

26

 

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 before net interest expense, income tax expense, depreciation and amortization.
   
 Non-GAAP adjusted EBITDA is EBITDA lessplus 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 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.

 

27

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 years ended June 30, 20172020 and 20162019 are as follows:

 

  Year  Year 
  Ended  Ended 
  June 30, 2017  June 30, 2016 
       
Net Income (loss) before preferred dividend, per GAAP $(4,978,030) $3,402,761 
Non-controlling interest  3,241,594   1,654,380 
Income taxes  931,951   652,546 
Depreciation and amortization  6,562,334   7,152,139 
Interest expense  310,044   264,511 
Interest (income)  (179,723)  (161,794)
EBITDA $5,888,170  $12,964,543 
Add back:        
Non-cash stock-based compensation  2,763,323   1,533,209 
Adjusted EBITDA, gross $8,651,493  $14,497,752 
Less non-controlling interest (a)  (5,841,143)  (5,363,326)
Adjusted EBITDA, net $2,810,350  $9,134,426 
         
Weighted Average number of shares outstanding        
Basic  10,912,284   10,391,157 
Diluted  10,919,169   10,584,835 
         
Basic adjusted EBITDA $0.26  $0.88 
Diluted adjusted EBITDA $0.26  $0.86 
         
(a) The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows        
         
Net Income attributable to non-controlling interest $3,241,594  $1,654,380 
Income Taxes  140,499   178,689 
Depreciation and amortization  2,168,249   3,442,235 
Interest expense  98,331   51,023 
Interest (income)  (60,042)  (98,638)
EBITDA $5,588,631  $5,227,689 
Add back:        
Non-cash stock-based compensation  252,512   135,637 
Adjusted EBITDA of non-controlling interest $5,841,143  $5,363,326 

  For the Year Ended  For the Year Ended 
  June 30, 2020  June 30, 2019 
       
Net Income (loss) attributable to NetSol $937,081  $8,583,399 
Non-controlling interest  254,942   3,434,141 
Income taxes  1,141,068   1,057,784 
Depreciation and amortization  3,731,954   4,423,657 
Interest expense  346,856   311,798 
Interest (income)  (1,569,536)  (955,061)
EBITDA $4,842,365  $16,855,718 
Add back:        
Non-cash stock-based compensation  808,616   1,174,625 
Adjusted EBITDA, gross $5,650,981  $18,030,343 
Less non-controlling interest (a)  (1,330,352)  (5,140,004)
Adjusted EBITDA, net $4,320,629  $12,890,339 
         
         
Weighted Average number of shares outstanding        
Basic  11,734,648   11,599,290 
Diluted  11,784,414   11,621,990 
         
Basic adjusted EBITDA $0.37  $1.11 
Diluted adjusted EBITDA $0.37  $1.11 
         
(a) The reconciliation of adjusted EBITDA of non-controlling interest        
to net income attributable to non-controlling interest is as follows        
         
Net Income attributable to non-controlling interest $254,942  $3,434,141 
Income Taxes  223,675   351,778 
Depreciation and amortization  1,060,605   1,397,613 
Interest expense  100,373   99,696 
Interest (income)  (391,644)  (229,802)
EBITDA $1,247,951  $5,053,426 
Add back:        
Non-cash stock-based compensation  82,401   86,578 
Adjusted EBITDA of non-controlling interest $1,330,352  $5,140,004 

 

28

As of June 30, 2017, the compensation expense related to unvested stock grants was $2,565,438 which will be recognized during fiscal years 2018 and 2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $14,172,954$20,166,830 at June 30, 2017,2020, compared to $11,557,527$17,366,364 at June 30, 2016.2019.

Net cash provided by operating activities was $454,365$3,972,426 for the year ended June 30, 20172020 compared to $1,659,036$4,933,210 for the year ended June 30, 2016.2019. At June 30, 2017,2020, we had current assets of $44,272,075$51,895,711 and current liabilities of $21,117,015.$20,116,106. We had accounts receivable of $8,228,141$11,414,257 at June 30, 20172020 compared to $15,382,407$15,599,314 at June 30, 2016.2019. We had revenues in excess of billings of $24,380,632$18,506,733 at June 30, 20172020 compared to $11,297,264$16,111,366 at June 30, 20162019 of which $5,173,538 is$1,300,289 and $1,281,492 are shown as long term as of June 30, 2017.2020 and 2019, respectively. The long-term portion was discounted by $310,331$41,286 and $99,139 at June 30, 2020 and 2019, respectively, using the discounted cash flow method with an interest rate of 3.96% which is NetSol PK’s weighted average borrowing rate at4.35%, during years ended June 30, 2017.2020 and 2019. During the year ended June 30, 2017,2020, 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 increaseddecreased by $5,929,102$1,789,690 from $26,679,671$31,710,680 at June 30, 20162019 to $32,608,773$29,920,990 at June 30, 2017. The increase is due to the increase in revenues recognized on the 12 country NFS Ascent contract.2020. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,880,194$5,680,837 and $10,222,795,$9,139,561, respectively at June 30, 2017.2020. The average days sales outstanding for the years ended June 30, 20172020 and 20162019 were 165200 and 119171 days respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.

 

Net cash used by investing activities amounted to $2,727,740$2,054,890 for the year ended June 30, 2017,2020, compared to $3,672,441$3,649,680 for the year ended June 30, 2016.2019. We had net purchases of property and equipment of $1,422,185$1,270,965 compared to $2,349,488$1,555,680 for the comparable period last fiscal year. For the year ended June 30, 2017,2020 and 2019, we invested $200,000$600,000 and $1,526,500, respectively, in a short-term convertible note receivable from WRLD3D, Inc. (“WRLD3D”), (formerly “eeGeo, Inc.”).notes. For the year ended June 30, 2017,2019, we invested $2,336,670 in WRLD3D by payingpurchased the remaining 49% share of VLS for $927,100. We paid cash of $1,105,555$317,500 at the closing date and providing services valued at $1,231,115 compared to cash payments of $555,556 foraccrued the remaining $609,600, which was subsequently paid during the fiscal year ended June 30, 2017. We used $nil and $767,397 for the years ended June 30, 2017 and 2016, respectively, to purchase shares of NetSol PK on the open market.2020.

 

Net cash provided by financing activities was $4,377,249 and $598,179$1,700,293 compared to $17,167, for the years ended June 30, 2017,2020, and 2016,2019, respectively. The year ended June 30, 20172020 included the cash inflow of $866,438$Nil from the exercising of stock options and warrants compared to $1,137,480$85,000 for the year ended June 30, 2016. The Company2019. During the year ended June 30, 2020, we purchased 7,500zero shares of itsour common stock from the open market at an average pricecompared to 41,650 shares of $5.18 per share.common stock for $250,945 for the same period last year. The year ended June 30, 2020, included cash inflow of $4,221,203 from bank proceeds compared to $1,227,158 for the same period last year. During the year ended June 30, 2017,2020, we had net proceeds frompayments for bank loans and capital leases of $5,630,587$611,913 compared to $382,877$480,231 for the year ended June 30, 2016.2019. We are operating in various geographical regions of the world through itsour various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long termlong-term funding requirements. These loans will become due at different maturity dates as described in Note 1415 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.

 

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 and warrants.options. As of June 30, 2017,2020, we havehad approximately $14.17$20.2 million of cash, cash equivalents and marketable securities of which approximately $11.56$18.2 million is held by our foreign subsidiaries. As of June 30, 2016,2019, we hadhave approximately $11.56$17.4 million of cash, cash equivalents and marketable securities of which approximately $7.64$16.1 million is held by our foreign subsidiaries. We intend to permanently reinvest these funds outside the U.S., and therefore, we do not anticipate repatriating undistributed earnings from our non-U.S. operations. If funds from foreign operations are required to fund U.S. operations in the future and if U.S. tax has not previously been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.

 

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 termlong-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing working capital of $1$2 to $2$3 million for APAC, U.S. and European new business development activities and infrastructure enhancements.

 

While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.

 

 2329 

 

Financial Covenants

 

Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($389,610)370,370) 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 ($4,776,461) which requires2,975,482) and a running finance facility of Rupees 75 million ($446,322). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($5,355,868). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. During the year, NetSol PK availedalso has an approved export refinance facility of Rs. 200380 million ($1,910,585)2,261,366) and a running finance facility of Rs. 300120 million ($2,865,877)714,116) from Samba Bank Limited. TheseDuring the tenure of loan, these two facilities require NetSol PK to maintain at a minimum ofa current ratio of 1:1, Interestan interest coverage ratio of 4 times, Leveragea leverage ratio of 2 times, and Debt Service Coverage Ratioa debt service coverage ratio of 4 times during the tenure of loan.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.

 

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 
              More than 5 
Contractual Obligation Total  Less than 1 year  1-3 Years  3-5 Years  years 
Debt Obligations                    
D&O Insurance $87,485  $87,485  $-  $-  $- 
Bank Overdraft Facility  221,379   221,379   -   -   - 
Loan Payable Bank - Export Refinance  4,776,461   4,776,461   -   -   - 
Loan Payable Bank - Export Refinance  1,910,585   1,910,585   -   -   - 
Loan Payable Bank - Running Finance  2,865,877   2,865,877   -   -   - 
Capital Lease Obligations                  - 
Subsidiary Capital Leases  727,770   361,008   366,762   -   - 
                   - 
Operating Lease Obligations                  - 
Non-cancellable operating lease  2,445,105   1,121,034   946,029   226,161   151,881 
                   - 
Total $13,034,662  $11,343,829  $1,312,791  $226,161  $151,881 

  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 $81,728  $81,728  $-  $-  $- 
Paycheck Protection Program Loans  469,721   182,669   287,052   -   - 
Term Finance Facility  1,380,878   354,337   1,026,541       - 
Loan Payable Bank - Export Refinance  2,975,482   2,975,482   -   -   - 
Loan Payable Bank - Export Refinance II  2,261,365   2,261,365   -   -   - 
Loan Payable Bank - Export Refinance III  2,975,483   2,975,483   -   -   - 
Term Finance Facility  65,473   16,423   32,846   16,204   - 
Subsidiary Finance Leases  469,406   292,074   177,332   -   - 
Operating Lease Obligations  2,624,890   1,215,699   1,329,763   76,286   3,142 
Total $13,304,426  $10,355,260  $2,853,534  $92,490  $3,142 

 

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.

30

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

 

Foreign Currency Exchange Risk

 

Economic Exposure

 

We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. Since the majority of the Company’s operations are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the US Dollar and we don’t have any imports; therefore, we believe it is counter-productive to hedge this exposure. The devaluation of the Pakistan Rupee results in a foreign exchange gain to the Company.

 

Transaction Exposure

 

Our exposure to foreign currency transaction gains and losses is the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary, primarily the Euro, Yuan, Baht and the Pakistan Rupee. Our foreign subsidiaries conduct their businesses in local currency. Since the majority of the Company’s operations of the Company are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the US Dollar and we don’t have any imports; therefore, we believe it is counter-productive to hedge this exposure.

25

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Consolidated Financial Statements that constitute Item 8 are included at the end of this report on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

NetSol’s financial statements for the fiscal years ended June 30, 20172020 and June 30, 2016,2019, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

In connection with the audit of NetSol’s financial statements for the fiscal yearsyear ended June 30, 20172020, there were no disagreements, disputes, or differences of opinion with BF Borgers CPA PC. (“BF Borgers”) on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of BF Borgers would have caused BF Borgers to make reference to the matter in its report.

In connection with the audit of NetSol’s financial statements for the fiscal year ended June 30, 2016,2019, there were no disagreements, disputes, or differences of opinion with KSP Group, Inc. (“KSP”) on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of KSP would have caused KSP to make reference to the matter in its report.

31

 

ITEM 9A. CONTROLS AND PROCEDURES

 

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 Annual Report on Form 10-K. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were ineffective.effective.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).

 

Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2017.2020. This assessment was based on the criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, the Company has determined that as of June 30, 2017,2020, the Company’s internal control over financial reporting are not effective due to the material weakness described below.effective.

 

A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness was identified in our form 10-Q filed on May 22, 2017 relating to the restatement of certain quarterly financial information, as described therein.

The Company is in the process of remediating the material weakness, including, but not limited to, by continuing the implementation of a leading cloud-based global ERP system, as approved by the Company’s Board in fiscal year 2016, which is already live in certain locations, and is expected to be completed by June 30, 2018. Further, on June 7,2017, the Company engaged an internal audit consulting firm to advise and assist with the remediation and internal control improvements, including to assist with the expansion and training of the Company’s internal audit function, and to augment corporate oversight and internal audit coverage.

26

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal year 2017,2020, 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)).

 

ITEM 9B. OTHER INFORMATION

The Company purchased shares of its common stock according to a repurchase plan since the last reporting period as follows:

Issuer Purchases of Equity Securities (1)
Month Total Number of Shares Purchased  Average Price Paid Per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  Maximum Number of Shares that may be Purchased Under the Plans or Programs 
Jul-17  20,247  $4.32   20,247   - 
Aug-17  91,533  $4.51   111,780   - 
Total  111,780       111,780   1,000,000 

 

NONE

32

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers and persons owning more than 10% of the outstanding Common Stock, file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and beneficial owners of more than 10% of the Company’s Common Stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on copies of such forms furnished as provided above, or written representations that no such forms were required, the Company believes that during the fiscal year ended June 30, 2017,2020, all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of more than 10% of its Common Stock were complied with.

 

CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS

 

Board of Directors

 

At the 20172019 Annual Shareholders Meeting held in June 2020, a five-member board stood for election. The members were elected and, according to the bylaws of the company shall retain their position as directors until the next meeting. The board of directors is made up of:of Mr. Najeeb U. Ghauri (Chairman of the Board), Mr. Eugen Beckert,Mark Caton, Ms. Malea Farsai, Mr. Naeem U. Ghauri, Mr. Shahid BurkiKausar Kazmi and Mr. Mark Caton.Henry Tolentino.

 

Committees

 

The Audit committeeCommittee is made up of Mr. BurkiKazmi, as Chairman, andwith Mr. Caton and Mr. BeckertTolentino as members. The Compensation committeeCommittee consists of Mr. Caton, as its Chairman, with Mr. Kazmi and Mr. Beckert and, Mr. BurkiTolentino as its members. The Nominating and Corporate Governance Committee consists of Mr. BeckertTolentino, as chairmanChairman, with Mr. Caton and Mr. Burki and, Mr. CatonKazmi as its members.

 

The table below provides the membership for each of the committees during Fiscal Year 2017.2020.

 

      Nominating and
      and Corporate
  Audit Compensation CompensationGovernance
Director Governance
DirectorCommittee Committee CommitteeCommittee
Najeeb Ghauri      
Naeem Ghauri *      
Malea Farsai      
Shahid J. Burki (I)* X(C) X X
Eugen Beckert (I)XXX(C)
Mark Caton (I) X X (C) X
(C)Kausar Kazmi (I) (A) X XX

Henry Tolentino (I) XXX (C)

*Mr. Ghauri and Mr. Burki did not stand for reelection in June 2020.
(I)Denotes an independent director.Independent Director.
(C)Denotes the Chairperson of the committee.Committee.
(A)Mr. Kazmi became the Audit Committee Chairman in July 2020.

 

 2733 

 

DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The Board of Directors elects the executive officers of the Company annually. Each year the stockholders elect the Board of Directors. The executive officers serve varying terms until their death, resignation or removal by the Board of Directors. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.

 

The directors and executive officers of the Company are as follows:

 

Name Year First Elected As an Officer or Director Age Position Held with the Registrant Family Relationship Year First Elected as an Officer or Director Age Position Held with the Registrant Family Relationship
Najeeb Ghauri 1997 63 Chief Executive Officer, Chairman and Director Brother to Naeem Ghauri 1997 66 Chief Executive Officer, Chairman and Director None
Roger Almond 2013 52 Chief Financial Officer None 2013 55 Chief Financial Officer None
Patti L. W. McGlasson 2004 52 Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel None 2004 55 Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel None
Naeem Ghauri 1999 60 Director Brother to Najeeb Ghauri
Shahid Javed Burki 2000 78 Director None
Eugen Beckert 2001 70 Director None
Mark Caton 2002 68 Director None 2002 71 Director None
Malea Farsai 2018 51 Director; Corporate Counsel None
Henry Tolentino 2018 71 Director None
Syed Kausar Kazmi 2019 67 Director None

 

Business Experience of Officers and Directors:

 

NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer from January 1998 to September 2002 and from October 2006 to present. Mr. Ghauri is a co-founder of NetSol Technologies, Inc. He was responsible for NetSol listing on NASDAQ in 1999, the NetSol subsidiary listing on KSE (Karachi Stock Exchange) in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008. Mr. Ghauri served as the Company’s Chief Executive Officer from 1999 to 2001 and as the Chief Financial Officer from 2001 to 2005. As CEO, Mr. Ghauri is responsible for managing the day-to-day operations of the Company, as well as the Company’s overall growth and expansion plan. In 2017, Mr. Najeeb Ghauri as the CEO, implemented a Company-wide initiative cutting costs which saved the Company in excess of $7,000,000. Mr. Ghauri was also instrumental in the substantial increase in revenue for fiscal year end 2015. In addition, Mr. Ghauri traveled overseas multiple times to execute the largest contract for the Company, worth over $100 million, in December 2015. Prior to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company (ARCO) (now acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent nearly five years with Unilever as brand and sales managers. Mr. Ghauri attended Eastern Illinois University where he received a Bachelor of Science degree in Management/Economics in 1978. He also received an M.B.A. in Marketing Management from Claremont Graduate School in California in 1981. Mr. Ghauri was elected Vice Chairman of US Pakistan Business Council in 2006, a Washington D.C. based council of US Chamber of Commerce. He is also very active in several philanthropic activities in emerging markets and is a founding director of Pakistan Human Development Fund, a non-profit organization, a partnership with UNDP to promote literacy, health services and poverty alleviation in Pakistan. Mr. Ghauri has participated in NASDAQ opening and/or closing bell ceremonies in 2006, 20082008,2009 and 2009.2020.

Skills and Qualifications: Mr. Ghauri has an extensive executive, operational and strategic leadership experience in a global setting. Substantial experience in establishing management performance objective and establishing goals.

 

 2834 

 

ROGER ALMOND was appointed Chief Financial Officer on September 9, 2013.

Since 2007, Roger Almond held the position of Senior Manager at Pickard & Green Certified Public Accountants where he and his team waswere responsible for assisting national and international companies with their financial reporting requirements to the SEC. Roger Almond’s duties also included overseeing multiple entity consolidations, converting financial data to US GAAP, preparing financials statements, footnotes and MD&A. Prior to his current position, Roger Almond held the position of Assurance Manager at Grant Thornton LLP, in Los Angeles, California from 2003-2006; and from2003-2006. From November 1999 to August 2003. He2003, he was the Chief Financial Officer of Keysor Century Corporation located in Saugus, California.

 

Roger Almond received his BS in Accounting from Brigham Young University in 1991 and he is a Certified Public Accountant licensed in California. He has also completed executive management courses at UCLA in 2001.

 

PATTI L. W. MCGLASSON joined NetSol as General Counsel in January 2004 and was elected to the position of Secretary in March 2004. She was appointed Senior Vice President, Corporate and Legal Affairs in 2013.

 

In the role of General Counsel, Ms. McGlasson is responsible for leading NetSol’s legal department company-wide. She is also responsible for the implementation of the Company’s internal corporate governance and policy plans, ethics and business conduct. She oversees all board meetings in her executive position as corporate secretary.

 

Ms. McGlasson has nearly 2528 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. PriorImmediately prior to joining NetSol, Patti practiced at Vogt & Resnick, law corporation. She was admitted to practice in California in 1991.

 

She received her Bachelor of Arts in Political Science in 1987 from the University of California, San Diego and, her Juris Doctor and Masters in Law in Transnational Business from the University of the Pacific, McGeorge School of Law, in 1991 and 1993, respectively. As part of her Masters in Law in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke in Rotterdam, the Netherlands in 1991.

 

NAEEM GHAURI has been a Director of the Company since 1999 and was the Company’s Chief Executive Officer from August 2001 to October 2006. Mr. Ghauri was also a co-founder of the Company. Currently, Mr. Ghauri serves as the President and Head of Global Sales of NetSol as well as the director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company located in London, England. While instrumental in numerous transactions, his most significant and recent contribution to the revenue of the Company was his role in overseeing and leading the closing of the largest contract to date for the Company worth $100 million signed in December 2015. Prior to joining the Company, Mr. Ghauri was Program Director for Mercedes-Benz Finance Ltd., from 1994-1999. Mr. Ghauri supervised over 200 project managers, developers, analysis and users in nine European Countries.

EUGEN BECKERT was appointed to the Board of Directors in August 2001. A native of Germany, Mr. Beckert received his master’s in Engineering and Economics from the University of Karlsruhe, Germany.

Mr. Beckert was with Daimler AG during his career, initially working in technology and systems development of the car division. Other appointments include servicing as Vice President Corporate Strategy from 1991 and Director of Global IT (CIO) for Daimler Financial Services from 1993. From 1996 to 2000, he acted as Director of Processes and Systems (CIO) for Financial Services Asia Pacific out of Singapore. During this period he was instrumental to having the LeaseSoft products of NetSol developed and introduced in several countries. From 2001 to 2004, he served as Vice President in the Japanese company of Daimler. From 2005 he was overseeing the implementation of LaeseSoft in the newly established Daimler Finance company in China. Mr. Beckert retired from Daimler in November 2006.

Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and a member of the Audit and Compensation Committees.

SHAHID JAVED BURKIwas first appointed to the Board of Directors in February 2003. Before joining the World Bank in 1974 he was a member of the Civil Service of Pakistan. He had a distinguished career with the World Bank from 1974 to 1999 where he held a number of senior positions including Chief of Policy Planning (1974-1981); Director of International Relations Department (1981-87); Director of China Department (1987-94); and Vice President of Latin America and the Caribbean Region (1994-99). Upon taking early retirement from the Bank, he took up the position of Chief Executive Officer of EMP Financial Advisors, a consulting company linked with the Washington based EMP Global, a private equity firm and worked there until 2005. He is currently Chairman the Institute of Public Policy, a think tank associated with the Beacon house National University, Lahore, Pakistan. He also spends some time each year as Senior Visiting Research Fellow at the Institute of South Asian Studies, National Singapore University. In 1996-97 he took leave of absence from the World Bank to take up the position of Finance Minister of Pakistan. Mr. Burki was educated at Government College, Lahore from where he received M.Sc. in Physics; at Oxford University as a Rhodes Scholar from where he received M.A. (Hons) in Economics; at Harvard University as a Mason Fellow from where he received M.P.A. and also studied for Ph.D. in Economics (not completed). In 1997, he received a Diploma in Advanced Management from Harvard University’s Business School. Mr. Burki has authored several books and articles on development issues includingStudy of Chinese Communes(Harvard University Press, 1969);Pakistan Under Bhutto (Macmillan, 1990);Changing Perceptions, Altered Reality: Pakistan’s Economy Under Musharraf, 1999-2006 (Oxford University Press, 2007). Finally, Mr. Burki’s most recent book isRising Powers and Global Governance which was published in January 2107 (Macmillan Palgrave, New York). Mr. Burki is the chairman of the Audit Committee and a member of the Compensation and Nominating and Corporate Governance Committees. Mr. Burki is the Company’s Financial Expert on the Audit Committee.

29

MARK CATON joined the boardBoard of directorsDirectors in 2007. Mr. Caton is currently President of Ciena Financial, Inc. a diversified financial services company, a position he has held since 2003.2006. Prior to joining Ciena, Mr. Caton was President of NetSol Technologies USA, responsible for US sales, from June 2002 to December 2003. Mr. Caton was employed by ePlus from 19971994 to 2002 as Senior Account Representative.Vice President-Business Development. He was a member of the UCLA Alumni Association Board of Directors and served on the Board of Directors of NetSol from 2002-2003. Mr. Caton is a Chairman of the Compensation Committee and a member of the Audit and Nominating and Corporate Governance Committees. Mr. Caton received his BA from UCLA in psychology in 1971.

Skills and Qualifications: Mr. Caton has over 25 years of experience in marketing and management.

MALEA FARSAI joined the Board of Directors for the first time in 2018 and is currently the Company’s Corporate Counsel. Before joining NetSol in March 2000, Ms. Farsai was an associate at the law firm of Horowitz and Beam where she represented both domestic and international private and public clients from technology to apparel in various transactions. She has also worked on the formation of business startups and IPOs. Ms. Farsai was on the team that took the Company public and is the one who listed NetSol on NASDAQ in 1999 and has maintained its listing since then to current. After nearly two decades with NetSol, Ms. Farsai continues to work part-time as the Company’s Corporate Counsel overseeing the Company’s insurance needs as well as day to day corporate legal needs. She has also obtained many of NetSol’s various trademarks for the Company. During her tenure as a Board member this past year, Ms. Farsai has been actively updating and overseeing the Company’s Corporate and Social Responsibilities (CSR) globally. Prior to joining NetSol, she practiced law with the law firm of Horowitz and Beam in Irvine, California from 1996-2000. Ms. Farsai received her B.A. degree from University of California, Irvine and her J.D. in 1996, and has been a member of the California State Bar since 1996. She sits on the board of various charitable organizations in Los Angeles.

Skills and Qualifications: Ms. Farsai has served the Company and its legal department since its inception and has a breadth of knowledge and understanding about NetSol’s business through her role as Corporate Counsel. She also has an understanding of Public Company corporate governance as well as the management and retention of a diverse group of employees.

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HENRY TOLENTINO joined the Board of Directors in 2018. Mr. Tolentino brings more than 30 years of experience in the auto finance industry working with global manufacturers such as Toyota and General Motors. Prior to joining NetSol’s advisory board, Mr. Tolentino has held several executive positions at Toyota Leasing (Thailand) Co., Ltd., including most recently as president from 2006 to 2014 and then served as an advisor from 2015 to 2016. Prior to Toyota Leasing, Mr. Tolentino spent more than 10 years with Toyota Motor Credit Corporation, USA. He began his career in the auto finance industry with General Motors Acceptance Corporation. Mr. Tolentino joined the advisory board of NetSol in September 2017 where he provided strategic advice to the senior management of the Company. Mr. Tolentino is the Chairman of the Nomination and Corporate Governance Committee and member of the Audit and Compensation Committees.

Skills and Qualifications: Mr. Tolentino has significant knowledge in international automobile manufacturing, business strategy and managing growth in the automotive industry.

SYED KAUSAR KAZMI joined the Board of Directors in 2019. Mr. Kazmi brings over 40 years of expertise in the banking industry and is currently the Head of Commercial Banking and Business Development at Habib Bank Zurich PLC, located in London where he has served in this capacity since 2016. Prior to this position, Mr. Kazmi served as the Head of Business Development for UK and Europe at Habib Bank AG Zurich in London from 2012-2016, before which Mr. Kazmi was the CEO of the UK operations of Habib Bank AG Zurich from 2009-2012. In 2018, Mr. Kazmi was awarded by Power 100, Parliamentary Review in association with The British Publishing Company a “Lifetime Achievement Award” for his significant and lasting impact on the banking sector. In addition, Mr. Kazmi has been awarded by the Asian Media Group the “GG2 Power List” celebrating Britain’s 101 most influential Asians from 2016-2018.

Mr. Kazmi received his BSc in Chemical Engineering with II Class Honors from Habib Institute of Technology in 1974. He sits on the board of many charitable organizations, with a focus on helping raise funds. Mr. Kazmi will succeed Mr. Burki as the Chairman of the Audit Committee and is a member of the Nominating and Corporate Governance and Compensation Committees.

Skills and Qualifications: Mr. Kazmi has strong financial services and management expertise. He directs the operations of a financial services business, expending its focus on business development.

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CORPORATE GOVERNANCE

 

Code of Business Conduct & Ethics

 

The Company adopted its Code of Business Conduct & Ethics, as amended and restated on September 9, 2013, applicable to every officer, director and employee of the Company, including, but not limited to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct & Ethics has been posted on our website and may be viewed athttp://ir.netsoltech.com/governance-docs.

 

Audit Committee

 

The Company has an audit committeeAudit Committee whose members are the independent directors of the Company, specifically, Mr. Beckert,Kazmi, Mr. BurkiCaton, and Mr. Caton.Tolentino. Mr. BurkiKazmi is the current chairmanChairman of the audit committee.Audit Committee.

 

Audit Committee Financial Expert

 

The Company has identified its audit chairperson, Mr. Shahid Javed BurkiKausar Kazmi as its audit committeeAudit Committee financial expert. Mr. BurkiKazmi is an independent board member as the term is defined in the Nasdaq Listing Rules. Mr. Burki’sKazmi’s over 40 years of experience as Finance Minister of Pakistan, Chief Executive Officer of EMP Financial Advisors,in the banking industry including his various roles at the World Bank, and hiscurrent tenure as both an audit committeeHead of Commercial Banking and Business Development for UK and Europe for Habib Bank AG Zurich as well as his service as a board member and chairon various charities as the board member responsible for the Company,fundraising, provides him with an understanding of generally accepted accounting principles and financial reporting. Additionally, this experience provides an ability to assess the general application of accounting principles in connection with the accounting for estimates, accruals and reserves; experience analyzing financial statements that were comparable in the breadth and complexity of issues that can be reasonably expected to be raised by the Company’s financial statements; an understanding of internal control over financial reporting; and an understanding of audit committee functions.

 

ITEM 11-EXECUTIVE COMPENSATION

 

Introduction

Our Compensation Committee is responsible for establishing and overseeing compensation programs that comply with NetSol’s executive compensation philosophy. As described in this Compensation Discussion and Analysis (“CD&A”), the Compensation Committee follows a disciplined process for setting executive compensation. This process involves analyzing factors such as company performance, individual performance, strategic goals and competitive market data to arrive at each element of compensation. The Compensation Committee approves compensation decisions for all executive officers. An independent compensation consultant helps the Compensation Committee by providing advice, information, and an objective opinion. This CD&A will focus on the compensation awarded to NetSol’s “named executive officers”—the Chief Executive Officer, Chief Financial Officer, and General Counsel, Corporate Secretary. You can find more complete information about all elements of compensation for the named executive officers in the following discussion and in the Summary Compensation table that appears on page 45.

Fiscal 2020 Executive Compensation Highlights and Governance

 

NetSol Technologies’ Named Executive Officers, a group comprisedThis section identifies the most significant decisions and changes made regarding NetSol’s executive compensation in fiscal year 2020.

Shareholder Approval of Compensation

At the last annual general meeting held on June 26, 2020, shareholders expressed support for our executive compensation programs, with 80.40% of votes cast at the meeting voting to ratify the compensation of our named executive officers. Although the advisory shareholder vote on executive compensation is non-binding, the Compensation Committee has considered, and will continue to consider, the outcome of the vote and the sentiments of our shareholders when making future compensation decisions for the named executive officers. Based on the results from our last annual general meeting, the Compensation Committee believes shareholders support the Company’s executive compensation philosophy and the compensation paid to the named executive officers.

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Taking into account the marked increase in support of this plan at the June 26, 2020 Annual Shareholders Meeting, the Compensation Committee believes the compensation program meaningfully explains the Compensation Committee’s compensation decisions and its determination to tie long term incentives of the Chief Executive Officer to performance criteria. The Compensation Committee continues to reach out to its shareholders regarding their positions on the Company’s compensation program. In connection with the proxy solicitations, the executive compensation was discussed with certain of our top shareholders and their general acceptance of the compensation structure is reflected in the proxy vote results. Accordingly, the Compensation Committee will continue to provide the CEO with a bonus criterion that is based on total revenues and income from operations on a graduated basis. Bonuses would be paid 60% in cash and 40% in stock valued at the share price on June 30th of the fiscal year in which it was earned.

Based on the 2016 Annual Meeting of Shareholders vote on the Frequency of Say on Pay voting, we will continue to provide our stockholders with an annual opportunity to cast an advisory vote on the compensation programs for our named executive officers and as always, the stockholders are welcome to contact Investor Relations with any questions.

Governance and Evolving Compensation Practices

The Compensation Committee and the Board are aware of evolving practices in executive compensation and corporate governance. In response, we have adopted and/or maintained certain policies and practices that are in keeping with “best practices” in many areas. For example:

The Compensation Committee engages an independent compensation consultant to evaluate our chief executive officer’s executive compensation practices in comparison to a peer group.

We do not provide excessive executive perquisites to our named executive officers.

Our incentive plans expressly prohibit repricing of options (directly or indirectly) without prior shareholder approval.

Our policy on the prevention of insider trading prohibits various types of transactions involving Company stock or securities, including short sales, options trading, hedging, margin purchases and pledges.

Our stock ownership guidelines require our executive officers to align their long-term interests with those of our stockholders.

Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, in an open market transaction.

Beginning with our fiscal year 2018 to current, we modified our compensation practices for our CEO to tie a significant portion to financial results both on a top line and bottom-line basis.

General Compensation Overview

For 2020, compensation designed for our executive officers consisted of:

Base Salary
Cash awards at the discretion of the Compensation Committee
Long term equity in the form of time-based restricted stock; and
Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees.

In response to discussions we have had with certain shareholders and given the percentage voting in favor of our executive compensation, beginning with the 2019 fiscal year, Chief Executive Officer compensation shall consist of:

Base Salary
Short-term cash awards conditioned upon achieving objective performance targets
Long-term equity in the form of time and objective performance targets; and
Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees.

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The Compensation Committee administers the cash and non-cash compensation programs applicable to our executive officers. The Compensation Committee makes all decisions about executive officer compensation for the Chief FinancialExecutive Officer and the Secretaryremaining named executives after discussion with our Chief Executive Officer about his direct reports. The Compensation Committee has often refined the direct reports’ compensation recommendations made by the Chief Executive Officer. Our Chief Executive Officer’s compensation is determined solely by the Compensation Committee, which, consistent with NASDAQ requirements, is comprised exclusively of independent directors, and General Counselthe Chief Executive Officer does not participate in Committee decisions surrounding his compensation.

Independent Compensation Consultant

The Compensation Committee retained Compensation Resources, Inc. as its independent compensation consultant. Compensation Resources provided chief executive officer and director compensation consulting services to the 2016-2017Compensation Committee, including a competitive market analysis of peers and the base salary, total cash compensation and total direct compensation. Interactions with Compensation Resources was limited to the Compensation Committee Chair and interaction with executives was generally limited to discussions as required to compile information at the Compensation Committee’s direction. During fiscal year are2020, Compensation Resources did not provide services to the following individuals:Company. Based on these factors and its own evaluation of Compensation Resources independence pursuant to the requirements approved and adopted by the SEC, the Compensation Committee has determined that the work performed by Compensation Resources does not raise any conflicts of interest.

Najeeb GhauriChief Executive Officer
Roger K. AlmondChief Financial Officer
Patti L. W. McGlassonSr. V.P. Legal and Corporate Affairs, Secretary and General Counsel

 

Compensation Philosophy and Objectives

 

Our executive compensation philosophy calls for competitive total compensation that will reward executives for achieving individual and corporate performance objectives and will attract, motivate and retain leaders who will drive the creation of shareholder value. It incorporates elements that create shareholder value by driving financial performance, retaining a high-performing and talented executive team, and aligning the interests of the executive team with the interests of shareholders. The Compensation Committee believes thatreviews the most effectivecompensation and benefit programs for executive officers, including the named executive officers, and performs an annual assessment of the Company’s executive compensation program is one that is designed to rewardpolicy. In determining total compensation, the achievementCompensation Committee considers the objectives and attributes described below.

Executive Compensation Principles
Shareholder AlignmentOur executive compensation programs are designed to create shareholder value.
Long-term incentive awards, delivered in the form of equity, make up a portion of our executives’ total compensation and closely align the interests of executives with the long-term interests of our shareholders. Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, on an open market transaction.
Performance basedLong-term incentive awards are designed to reward our executive officers for creating long-term shareholder value. Long-term incentive awards are granted primarily in the form of stock options and/or shares.
Appropriate RiskOur executive compensation programs are designed to encourage executive officers to take appropriate risks in managing their businesses to achieve optimal performance.
Competitive with external talent marketsOur executive compensation programs are designed to be competitive within the relevant markets.
Simple and transparentOur executive compensation programs are designed to be readily understood by our executives, and transparent to our investors.

Compensation Analysis Peer Group

After consideration of specific annual, long-termbusiness models, company revenue and strategic goalsmarket capitalization of other companies in the Company’s technology industry segment, and with the input from Compensation Resources, Inc., the compensation consultant used by the Company and which aligns executives’ interests with those ofat the stockholders by rewarding performance at or above established goals, withtime the ultimate objective of increasing stockholder value. The philosophy ofstudy was last conducted, the Compensation Committee isestablished the following list of peer companies to evaluate both performance and compensation to ensure that we maintain our ability to attract and retain superior employeesprovide a comparative framework for use in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the Compensation Committee believessetting executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.compensation:

Amber Road, Inc.B Square Corp.
Cass Information SystemsData Watch Corp.
Digital Turbine, Inc.Everbridge, Inc.
Mitek Systems, Inc.SPS Commerce Inc.
USA Technologies, Inc.Zix Corp.

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Setting Executive Officer Base Salaries and Compensation Comparisons

 

Management develops our compensationCompensation plans are developed by utilizing publicly available compensation data in the mediainformation technology and software services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. The Compensation Committee has determined to utilize the services of a consultant for purposes of comparing our compensation program with similarly situated companies in like industries. The recommendations of these consultants will be utilized by the Compensation Committee in determining the appropriate compensation packages.packages in addition to taking into account the unique global scale of the Company’s business. While these consultants may make general recommendations about the size and components of compensation, we anticipate our philosophy to continue on the basis of a pay-for-performance philosophy.

 

Based on management’s analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to establish base salaries and total executive compensation (taking into consideration the executive’s experience and abilities) that are competitive with those companies with a similar number of employees represented inIn establishing the compensation of our named Chief Executive Officer, we based the amounts primarily on the market data we review.

We work within the framework of this pay-for-performance compensation philosophyand advice provided by Compensation Resources, Inc. with respect to determine each component of an executive’s initial compensation package based on numerous factors, including:

The individual’s particular background, track record and circumstances, including training and prior relevant work experience;

The individual’s role with us and the compensation paid to individuals who perform substantially similar persons infunctions within the companies represented inpeer group companies. In connection with the compensation data thatother named executive officers, we review;also relied on the recommendations of the Chief Executive Officer’s analysis relative to those individuals’ performance and compensation. We also examined the outstanding stock options and equity grants held by the executive officers for the purpose of considering the retention value of any additional equity awards.

 

The demandAs a general guideline, for individuals withour named executive officers, we aim to set base salary, cash compensation and total compensation at approximately the individual’s specific expertise and experience;

Performance goals and other expectations for the position; and

Uniqueness of industry skills.

The terms of each executive officer’s compensation are derived from employment agreements negotiated between the Company and the executive. Each executive’s employment agreement is generally negotiated to cover a one to three-year period, and prescribesmean market range. Our analysis determined that the base salary and other annual payments, if any, to the executive. Employment agreements for all executive officers are approved by the Board of Directors and the Compensation Committee. Employment agreements for other executives are approved by the Company’sour Chief Executive Officer.officer was slightly above the mean, cash compensation was generally within the mean, but the total direct compensation was below the mean. As such, it was determined to develop a long-term, performance-based element of the compensation that brought the total direct compensation within the mean.

 

20172020 Executive Compensation Components

 

For the fiscal year ended June 30, 2017, the principal components of compensation that our named executive officers were eligible to receive were:

Base salary;

Long Term Equity Incentive Compensation;

Performance-based incentive compensation (discretionary bonus); and

Perquisites and other personal benefits.

The Company’s executive compensation program is intended to promote and maintain stability within the executive team. The Company’s goal for its executive compensation program is to attract, motivate and retain a talented, entrepreneurial, ethical and creative team of executives who will provide leadership for the Company’s success in dynamic and competitive markets.

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Base Salary

 

An executive’s base salary is a fixed element of the executive’s compensation intended to attract and retain executives. It is evaluated together with components of the executive’s other compensation to ensure that the executive’s total compensation is consistent with our overall compensation philosophy. Base salaries are adjusted annually by the Compensation Committee.

 

The base salaries were established in arms-length negotiations between the executive and the Company, taking into accountconsidering their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company. The Company expects each named executive officer to contribute to the Company’s overall success as a member of the executive team rather than focus solely on specific objectives within the officer’s area of responsibility.

We provided a 3% increase in base salary for Ms. McGlasson in fiscal 2020. Due to the effects of COVID-19, the Company reduced her base salary by 13%. We provided a 4% increase in base salary for Mr. Almond in fiscal 2020. Due to the effects of COVID-19, the Company reduced his salary by 13%. In fiscal year 2020, Mr. Ghauri’s base salary did not increase. Due to the effects of COVID-19, Mr. Ghauri’s base salary was reduced by 4.7%. Mr. Ghauri’s perquisites were reduced by 8% for a total compensation reduction of 5.4%. The Compensation Committee determined that salary alone was an adequate basis for short term compensation, and that equity incentives would be used for the long-term elements of incentive programs for Ms. McGlasson and Mr. Almond.

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Annual Bonus

 

Our compensation program includes eligibility for bonuses as rewarded by the Compensation Committee. All executives are eligible for annual performance-based cash bonuses in accordance with Company policies. The compensation committeeCompensation Committee takes into consideration the executive’s performance during the previous year to determine eligibility for discretionary bonuses. Further, the compensation committee will review, if applicable, the performance criteria set forth in an executive’s previous year’s agreement and will determine if the executive has met such criteria in order to achieve the bonus. The Company’s bonus criteria at the executive management level, is typically based on a gross revenue and per share profitincome from operations targets. Cash bonuses, if any for 2020 are reflected in the summary of compensation discussed below starting on page 48. For 2020, based on structured KPI’s by the compensation committee, Mr. Ghauri did not earn a bonus. See bonus structure as discussed below on page 46. The Compensation Committee determined that Gross Revenue and Income from Operations structure used in fiscal 2020 continues to be a proper measure for measuring Mr. Ghauri’s performance in that it encourages his participation in revenue generating activities and continues to incentivize him to monitor and maximize cost efficiency.

 

Long-Term Equity Incentive Compensation

 

We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Our various Employee Stock Option Plans allowBecause base salary and equity awards are such basic elements of compensation within our industry, as well as the high technology and software industries in general, and are generally expected by employees, we believe that these components must be included in our compensation mix in order for us to grantcompete effectively for talented executives. We award time based vested stock options to employees. We currently make initial equityfrom our Equity Incentive Plans for several reasons. First, such awards facilitate retention of our executives. Restricted stock options to new executives and certain non-executive employees in connection with their employmentgenerally vests only if the executive remains employed by the Company. Second, time-based stock awards align executive compensation with the Company. Annual grantsinterests of our shareholders and thereby focuses executives on increasing value for the shareholders. Time vested stock generally only provides a superior return if the stock price appreciates, and results in materially less dilution to the shareholders than options if any, are approved bywhile frequently providing equivalent value to the employee at less cost to the Company than options. In determining the number of shares to be granted to executives, we take into account the individual’s position, scope of responsibility, ability to affect profits and shareholder value, past and recent performance, and the estimated value of shares at the time of grant. Assuming individual performance at a level satisfactory to the Compensation Committee,.

Equity Incentives. Executives, certain non-executive employees, and directors who join us may be awarded stock awards and/or stock option grants after they join the Company. These grants have an exercise price equal to the fair market value of our common stock on the grant date. Such awards are intended to provide the executive with incentive to build value in the organization over an extended period of time. The size of total equity compensation is generally targeted at the stock option award is also50th percentile for the peer group. As indicated above, market data, including compensation percentiles, were among several factors the committee reviewed in light of the executive’s track record, base salary, other compensation and other factors to ensure that the executive’s total compensation is in line with our overall compensation philosophy. A review of all components of compensation is conducted when determining equity awards to ensure that total compensation conforms to our overall philosophy and objectives.compensation.

 

Equity incentives provided to executives are determined by the Fair Market Value of our common stock on the grant date were provided to the executives as an adjustment of their overall compensation while taking in to account the need to continue to incentivize the executive to build value in the organization.date. Each executive’s stock award was based on an analysis of the Compensation Committee of an appropriate overall cash compensation for each individual taking into account their position and compensation at similarly situated companies. Each executive’s stock award was based on a desired overall compensation cash value less the base salary as approved by the Compensation Committee.

In fiscal year 2020, Ms. McGlasson and Mr. Almond received a grant of 7,500 and 10,000 shares of common stock, respectively, vesting quarterly over a two-year period.

Mr. Ghauri is eligible to receive grants of shares based on the performance criteria connected to gross revenues and net income from operations as discussed below. The total compensation including equity grants is designed to bring the Chief Executive Officer to the mean market average.

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Mr. Ghauri’s bonus for fiscal year 2020 is based on the total revenues and income from operations on a graduated basis. The following table demonstrates the graduated percentage of bonus that Mr. Ghauri will be eligible to earn based on the percentage of the goal achieved. Bonuses will be paid 60% in cash and 40% in shares of common stock valued on June 30, 2020. Total net revenues and income from operations are based on those values reported for the year ending June 30, 2020 excluding any adjustments relating to changes in revenue recognition policy.

  Allocated                        
  Bonus %  % of Bonus 25 50 100 125 150 175 200
Net revenues  55% Increase in revenues  5%  10%  15%  20%  25%  30%  35%
Bonus Earned        82,500   165,000   330,000   412,500   495,000   577,500   660,000 
                                   
      % of Bonus  25%  50%  100%  125%  150%  175%  200%
Income from Operations  45% Income from Operations %  5.0%  7.5%  10.0%  12.5%  15.0%  17.5%  20.0%
Bonus Earned        67,500   135,000   270,000   337,500   405,000   472,500   540,000 
                                   
Total Bonus        150,000   300,000   600,000   750,000   900,000   1,050,000   1,200,000 

 

Mr. Ghauri’s bonus for the fiscal year 2021 will be based on the same criteria stated above.

Perquisites and Other Personal Benefits

 

We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the levelslevel of perquisites and other personal benefits provided to NetSol’s executive officers.

 

We maintain benefits and perquisites that are offered to all employees, including health and dental insurance. Benefits and perquisites may vary in different country locations and are consistent with local practices and regulations.

 

Termination Based Compensation

 

Upon termination of employment, all executive officers with a written employment agreement are entitled to receive severance payments under their employment agreements. In determining whether to approve, and as part of the process of setting the terms of, such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges securing new employment following termination. Further, the Committee recognizes that many of the named executives and officers have participated in the Company since its founding and that this participation has not resulted in a return on their investments. Termination and Change in Control Payments considered both the risk and the dedication of these executives’ service to the Company.

Our Chief Executive Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the fourth anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the fourth anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.

 

Our Chief Financial Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the first anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the first anniversary from the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.

 

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The Secretary of the Company has an employment agreement that provides, if she is terminated without cause or if the executive terminates the agreement with Good Reason, she is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the second anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for her and her family until the end of the employment term and through the end of the second anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.

 

These agreements were designed to assist in the retention of the services of our named executives and to determine in advance the rights and remedies of the parties in connection with any termination. The types and amounts of compensation and the triggering events set forth in these agreements were based on a review of the terms and conditions of normal and customary agreements in our competitive marketplace.

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believeThe Compensation Committee is aware of the limitations imposed by Section 162(m) and considers the issue of deductibility when and if circumstances warrant. The committee reviews proposed compensation plans in light of applicable tax deductions, and generally seeks to maximize the deductibility for tax purposes of all elements of compensation. However, the committee may approve compensation that compensation paid underdoes not qualify for deductibility, including stock option and time-based restricted stock awards, if and when the management incentive plans is generally fully deductible for federal income tax purposes.committee deems it to be in the best interests of the Company and our shareholders.

 

Accounting for Stock-Based Compensation

 

Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718,Compensation – Stock Compensation.

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Summary Compensation

 

The following table shows the compensation for the fiscal year ended June 30, 2017, June 30, 2016,2019, 2018, and June 30, 2015,2017, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.

 

Name and Principle Position Fiscal Year Ended Salary ($) Bonus ($) Stock Awards ($) (1) Option Awards ($) All Other Compensation ($) Total ($)  Fiscal Year Ended Salary ($) Bonus ($) Stock Awards ($) (1) Option Awards ($) All Other Compensation ($)  Total ($) 
Najeeb Ghauri 2017 $600,000  $200,000  $500,000  $76,723(2) $200,000(3) $1,576,723  2020 $689,000  $-  $-  $-  $156,586(4) $845,586 
CEO & Chairman 2016 $497,700  $-  $-  $44,937(2) $65,745(3) $608,382  2019 $675,000  $432,488  $-  $21,598(3) $200,000(4) $1,329,086 
 2015 $497,700  $-  $-  $-(2) $65,724(3) $563,424  2018 $600,000  $300,000(2) $-  $-  $200,000(4) $1,100,000 
Roger K Almond 2017 $189,263  $10,000  $-      $16,360(4) $215,623  2020 $217,111  $20,000  $56,900  $-  $10,639(5) $304,650 
Chief Financial Officer 2016 $181,563  $32,550  $100,400      $11,725(4) $326,238  2019 $221,520  $20,000  $55,500  $-  $10,191(5) $307,211 
 2015 $128,433  $-  $60,000  $-  $3,485(4) $191,918  2018 $213,000  $10,000  $-  $-  $9,952(5) $232,952 
Patti L. W. McGlasson 2017 $211,087  $-  $-      $9,795(5) $220,882  2020 $219,481  $-  $42,675  -  $10,019(6) $272,175 
Secretary, General Counsel 2016 $215,049  $-  $100,400      $10,393(5) $325,842  2019 $226,113  $-  $55,500  $-  $10,378(6) $291,991 
 2015 $188,180  $-  $-  $-  $17,616(5) $205,796  2018 $217,420  $-  $-  $-  $9,935(6) $227,355 

 

(1) The stock was awarded as compensation to the officers. See also Grants of Plan Based Awards. These amounts do not reflect compensation actually received by the named executive officer. These amounts represent the aggregate grant date fair value of the stock awards granted during the relevant time period, computed in accordance with FASB ASC 718, excluding the effect of any estimated forfeitures based on vesting conditions. A summary of the assumptions we applied in calculating these estimates is set forth in the Notes to Consolidated Financial Statements included in Note 18. The awards for which the aggregate grant date fair value is shown in this column include awards described under the Grants of Plan-Based Awards Table and in the Outstanding Equity Awards at Fiscal Year-End Table.

 

(2) Bonus was awarded by the Compensation Committee in late September 2018 for the results of his cost saving initiatives in fiscal 2018. The expense was accounted for in fiscal year 2019.

(3) The life of 150,67120,000 outstanding options, granted in June 2014,February 2009, was extended for one year.year for the year ended June 30, 2019.

 

(3) Consists of $36,000, $36,000(4) Per Mr. Najeeb Ghauri’s compensation agreement, he received $156,586, $200,000 and $36,000 paid for automobile$200,000 in allowances, perquisites and travelbenefits such as car allowance, $16,758, $16,758 and $16,758 on account of life insurance, $16,758, $12,987 and $12,966 paid for medical and dental insurance premiums, $24,000, $nil and $nil paid for housinghome office allowance and $108,514, $nil and $nil paid for temporary relocation by the Company for participation in the health insurance program for the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively.

 

(4)(5) Consists of $16,360, $11,725$10,639, $10,191 and $3,485$9,952 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively.

 

(5)(6) Consists of $nil, $nil$10,019, $9,935 and $4,855 paid for automobile allowance and $9,795 $10,393 and $12,761 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively.

 

Grants of Plan-Based Awards

 

In September 2016, Mr. Najeeb Ghauri was granted 82,644 shares of the Company’s common stock which 50% vested immediately and the remaining 50% will vest annually throughfrom June 2017 to June 2021. The shares were approved by the Compensation Committee as an incentive for the named officer.

 

In September, 2015,July 2018, Mr. Roger Almond was granted 20,00010,000 shares of the Company’s common stock, which vest quarterly over the period of three years. The shares were approved by the Compensation Committee as an incentive for the named officer.

In August 2019, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.

44

In July 2018, Ms. Patti McGlasson was granted 7,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.

 

In September, 2015,August 2019, Ms. Patti McGlasson was granted 20,0007,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.

In March, 2015, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly. The shares were approved by the Compensation Committee as an incentive for the named officer.

 

Discussion of Summary Compensation Table

 

The terms of our executive officers’ compensation are derived from our employment agreements with them and the annual performance review by our Compensation Committee. The terms of Mr. Najeeb Ghauri’s employment agreement with the Company were the result of negotiations between the Company and the executive and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Almond’s employment agreement with the Company were the result of negotiations between our Chief Executive Officer and the employees and were approved by our Compensation Committee.

 

34

Employment Agreement with Najeeb Ghauri

 

Effective January 1, 2007, the Company entered into an Employment Agreement with our Chief Executive Officer, Najeeb Ghauri (the “CEO Agreement”). The CEO Agreement was amended effective January 1, 2008, January 1, 2010, July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Pursuant to the CEO Agreement, as amended, between Mr. Ghauri and the Company (the “CEO Agreement”), the Company agreed to employ Mr. Ghauri as its Chief Executive Officer for a five yearfive-year term. The term of employment automatically renews for 12 additional months unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. UnderFor the CEO Agreement,fiscal year 2020, Mr. Ghauri is entitled to an annualized basecompensation of $900,000 consisting of salary, of $497,700allowances, perquisites and benefits, and is eligible for annual bonuses atbased on the discretion ofbonus structure adopted by the Compensation Committee.

Bonuses may be paidCommittee as described in cash or shares of common stock. Mr. Ghauri earned 12,500 shares of common stock for each quarter of service commencing withItem 11 under Executive Compensation beginning on page 38. As previously discussed, the first quarter ended September 30, 2014 through June 30, 2015. Mr. Ghauri$900,000 was granted 82,644 shares of common stock for services commencing from September 2016temporarily reduced to June 2021, he earned 49,586 shares of common stock for$851,000 in response to the year ended June 30, 2017. Mr. Ghauri was granted options to purchase 200,000 shares common stock of which 25% of these options vest at the completion of each quarter.COVID-19 pandemic. Mr. Ghauri is entitled to six weeks of paid vacation per calendar year, receives a car allowance totaling $3,000 per month for the term of the CEO Agreement, and the Company shall pay premiums not to exceed $16,600 (or $4,150 quarterly) for life insurance for the Executive.year.

 

The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CEO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 48 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 48 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 30 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CEO Agreement by Mr. Ghauri.

 

The above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2007. The above summary of the First Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2008. The above summary of the Second Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31, 2009. The above summary of the Third Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary of the Fourth Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.

 

45

As of July 1, 2016, the compensation committee approved an adjustment of total cash compensation to $800,000 per annum consisting of salary, allowances, prerequisites and benefits retroactive to July 1, 2016. Also, the committee approved $500,000 worth of shares of the Company’s common stock to be granted on an annual basis commencing June 30, 2017 and ending on June 30, 2021; all share grants conditioned upon continued employment of the CEO with the Company on June 30 of each year.

 

Employment Agreement with Roger K. Almond

Effective March 1, 2015, the Company entered into an Employment Agreement with our Chief Financial Officer, Mr. Roger K. Almond. Pursuant to the Employment Agreement, between Mr. Almond and the Company (the “CFO Agreement”), the Company agreed to employ Mr. Almond as its Chief Financial Officer from the date of the CFO Agreement through February 28, 2017. According to the terms of the CFO Agreement, the term of the agreement automatically extends for an additional one yearone-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. UnderFor the CFO Agreement,fiscal year 2020, Mr. Almond is entitled to an annualized base salary of $199,263$230,381 per annum, a $2,000 per month car allowance, 10,000 shares of common stock to be granted in 25% tranchesequally on a quarterly basis over 2 years issued after each quarter of service through February 28, 2016,June 30, 2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $230,381 base salary was temporarily reduced to $186,515 in response to the COVID-19 pandemic. In addition, Mr. Almond is entitled to participate in the Company’s stock optionequity incentive plans and is entitled to four weeks of paid vacation per calendar year.

The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CFO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 12 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 12 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CFO Agreement by Mr. Almond.

 

The above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on March 4, 2015.

 

Employment Agreement with Patti L. W. McGlasson

 

Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary, General Counsel and Sr. Vice President, Legal and Corporate Affairs, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement and its related amendments, between Ms. McGlasson and the Company (the “General Counsel Agreement”), the Company agreed to employ Ms. McGlasson as its Secretary and General Counsel from the date of the General Counsel Agreement through June 30, 2017. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. The General Counsel Agreement was amended on July 25, 2013 and again on June 30, 2014 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”). Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the GC Agreement, Ms. McGlasson is entitled to an annualized base salary of $211,087$232,896 per annum, 10,0007,500 shares of common stock to be granted in 25% tranchesequally on a quarterly basis over 2 years issued after each quarter of service through June 30, 2015,2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $232,896 was temporarily reduced to $188,552 in response to the COVID-19 pandemic. In addition, Ms. McGlasson is entitled to participate in the Company’s stock optionequity incentive plans and, is entitled to six weeks of paid vacation per calendar year.

46

 

The General Counsel Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the General Counsel Agreement, if she terminates her employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, she shall be entitled to all remaining salary from the termination date until 24 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 24 months. She shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If she is terminated by the Company for Cause (as described below), or at the end of the employment term, she shall not be entitled to further compensation. Under the General Counsel Agreement, Good Reason includes the assignment of duties inconsistent with her title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks her to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the General Counsel Agreement by the Company. Under the General Counsel Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform her duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the General Counsel Agreement by Ms. McGlasson.

 

The above summary of the General Counsel Agreement is qualified in its entirety by reference to the full text of the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2006 on September 27, 2006. The above summary is also qualified in its entirety by reference to the full text of the Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q for the quarter ended March 31, 2010. The above summary is also qualified in its entirety by reference to the full text of the Second Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary is also qualified in its entirety by reference to the full text of the Third Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.

 

36

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows grants of stock options and grants of unvested stock awards outstanding on June 30, 2017,2020, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.

 

NAME NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE  NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE  OPTION EXERCISE PRICE ($)  OPTION EXPIRATION DATE
Najeeb Ghauri  150,671       3.88  6/30/18
   30,000       6.50  2/12/19
               
Roger K Almond  -       -   
   -       -   
Patti L. W. McGlasson  1,000       16.00  7/23/17

  OPTION AWARDS STOCK AWARDS 
NAME NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE  NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE  OPTION EXERCISE PRICE ($)  OPTION EXPIRATION DATE NUMBER OF SHARES OF COMMON STOCK THAT HAVE NOT VESTED  MARKET VALUE OF SHARES THAT HAVE NOT VESTED ($)  EQUITY INCENTIVE PLAN AWARDS:
NUMBER OF UNEARNED SHARES THAT HAVE NOT VESTED
  EQUITY INCENTIVE PLAN AWARDS:
MARKET OR PAYOUT VALUE OF SHARES THAT HAVE NOT VESTED ($)
 
Najeeb Ghauri        -          -       -  

 

  

  8,265   50,000        -         - 
Roger K Almond  -   -   -     8,336   46,964   -   - 
Patti L. W. McGlasson  -   -   -     3,752   21,349   -   - 

 

Pension Benefits

 

We do not have any qualified or non-qualified defined benefit plans.

 

Potential Payments upon Termination or Change of Control

 

Generally, regardless of the manner in which a named executive officer’s employment terminates, hethe executive officer is entitled to receive amounts earned during histhe term of employment. Such amounts include the portion of the executive’s base salary that has accrued prior to any termination and not yet been paid, and unused vacation pay.

 

In addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment or a change of control, as set forth below.

 

47

Change-in-Control Payments

 

Najeeb Ghauri, Chairman and Chief Executive Officer

 

In the event that Mr. Ghauri is terminated as a result of a change in control, (defined below), he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one percent of the Company’s consolidated gross revenues for the previous twelve (12) months; and at the election of the Executive, (c) a one-time cash payment equal to the cash value of all shares eligible for exercise upon the exercise of Executive’s Options then currently outstanding and exercisable as if they had been exercised in full (the “Change of Control Termination Payment”). In the event Executive elects to receive the cash value of the shares underlying Executive’s options, he shall so notify the Company of his intent.

 

The following table summarizes the potential payments to Mr. Ghauri assuming his employment with us was terminated or a change of control occurred on June 30, 2017,2020, the last day of our most recently completed fiscal year.

BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL  TERMINATION UPON DEATH OR DISABILITY  TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON 
          
Base Salary Continuance $2,400,000  $100,000  $2,400,000 
Health Related Benefits  58,752   -   58,752 
Bonus  -��  -   - 
Salary Multiple Pay-out  1,794,000   -   - 
Bonus or Revenue One-time Pay-Out  653,663   -   - 
Net Cash Value of Options  779,603   -   - 
             
Total $5,686,018  $100,000  $2,458,752 

BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL  TERMINATION UPON DEATH OR DISABILITY  TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON 
          
Base Salary Continuance $2,756,000  $114,833  $2,756,000 
Health Related Benefits  63,168   -   63,168 
Bonus  -   -   - 
Salary Multiple Pay-out  2,060,110   -   - 
Bonus or Revenue One-time Pay-Out  563,723   -   - 
Net Cash Value of Options  -   -   - 
             
Total $5,443,001  $114,833  $2,819,168 

 

Roger Almond, Chief Financial Officer

 

In the event that Mr. Almond is terminated as a result of a change in control, (defined below), he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).

 

48

The following table summarizes the potential payments to Mr. Almond assuming his employment with us was terminated or a change of control occurred on June 30, 2017,2020, the last day of our most recently completed fiscal year.

 

BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON  TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON 
              
Base Salary Continuance $199,263  $33,210  $199,263  $217,111  $36,185  $217,111 
Health related benefits  16,356   -   16,356   10,644   -   10,644 
Bonus  -   -   -   -   -   - 
Salary Multiple Pay-out  595,795   -   -   649,162   -   - 
Bonus or Revenue One-time Pay-Out  326,831   -   -   281,862   -   - 
Net Cash Value of Options  -   -   -   -   -   - 
                        
Total $1,138,245  $33,210  $215,619  $1,158,778  $36,185  $227,755 

Patti L. W. McGlasson, Senior V.P. of Legal and Corporate Affairs, Secretary and General Counsel

 

In the event that Ms. McGlasson is terminated as a result of a change in control, (defined below), she is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and her salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).

 

The following table summarizes the potential payments to Ms. McGlasson assuming her employment with us was terminated or a change of control occurred on June 30, 20172020, the last day of our most recently completed fiscal year.

 

BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON  TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON 
              
Base Salary Continuance $422,174  $35,181  $422,174  $445,822  $37,152  $445,822 
Health related benefits  19,584   -   19,584   20,040   -   20,040 
Bonus  -   -   -   -   -   - 
Salary Multiple Pay-out  631,150   -   -   666,504   -   - 
Bonus or Revenue One-time Pay-Out  326,831   -   -   281,862   -   - 
Net Cash Value of Options  -   -   -   -   -   - 
                        
Total $1,399,739  $35,181  $441,758  $1,414,227  $37,152  $465,862 

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Director Compensation

 

Director Compensation Table

 

The following table sets forth a summary of the compensation earned by our Directors and/or paid to certain of our Directors pursuant to the Company’s compensation policies for the fiscal year ended June 30, 2017,2020, other than Najeeb Ghauri, and Naeem Ghauri and Malea Farsai who arewere paid as part of their employment agreements with the Company or its subsidiaries and not as directors.

 

NAME FEES EARNED OR PAID IN CASH ($) SHARES AWARDS ($) (1) TOTAL ($)  FEES EARNED OR PAID IN CASH ($) SHARE AWARDS ($) (1) TOTAL ($) 
Eugen Beckert  42,209   98,177   140,386 
Shahid Javed Burki  49,245   98,177   147,422   59,197   55,845   115,042 
Mark Caton  45,725   98,177   143,902   57,240   54,396   111,636 
Henry Tolentino  55,287  ��40,952   96,239 
Kausar Kazmi  51,376   38,057   89,433 
  137,179   294,531   431,710   223,100   189,250   412,350 

 

 (1)In fiscal 2020, the Directors’ fee structure was 60% cash and 40% common stock. During the fiscal year ended June 30, 2017, 52,2512020, there were 15,171 shares were issued to independent directors.Mr. Shahid Javed Burki, 14,734 shares issued to Mr. Mark Caton, 12,317 shares issued to Mr. Henry Tolentino and 11,445 shares issued to Mr. Kausar Kazmi.

Director Compensation Policy

 

Messrs. Najeeb and Naeem Ghauri and Ms. Farsai are not paid any fees or other compensation for services as members of our Board of Directors.

The Committee relied on a survey conducted by Compensation Resources, Inc. in setting the compensation for the non-employee members of our Board of Directors. As with named executives, the aim is to compensate the Board of Directors at the mean of peer companies. Any additional cash and/or equity compensation for the fiscal year beginning was designed to maintain this mean.

 

The non-employee members of our Board of Directors received as compensation for services as directors as well as reimbursement for documented reasonable expenses incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company paid the following amounts to members of the Board of Directors for the activities shown during the fiscal year ended June 30, 2017.2020.

 

BOARD ACTIVITY CASH PAYMENTS  CASH PAYMENTS 
Board Member Fee $105,525  $205,506 
Chairperson for Audit Committee $14,070  $7,820 
Chairperson for Compensation Committee $10,550  $5,864 
Chairperson for Nominating and Corporate Governance Committee $7,035  $3,910 
 $137,180  $223,100 

��

MembersIndependent members of our Board of Directors are also eligible to receive stock option or stock award grants both upon joining the Board of Directors and on an annual basis in line with recommendations by the Compensation Committee, which grants are non-qualified stock options under our Employee Stock Option Plans. Further, from time to time, the non-employee members of the Board of Directors are eligible to receive stock grants that may be granted if and only if approved by the shareholders of the Company.

 

In July 2014, the board approved compensation for service on the Audit, Compensation and Nominating and Corporate Governance Committees. This compensation is discussed in the sections entitled “Directors’ Compensation”.

50

 

On October 1, 2015, the Compensation Committee granted independent board members 10,000 shares of common stock vesting at 25% at the completion of each quarter served commencing with the quarter ending December 31, 2015 and ending September 30, 2016.

The Compensation Committee further approved to grant a bonus of 10,000 shares of common stock to all independent board members to vest 12.5% over the following eight quarters commencing with December 31, 2015 and ending September 30, 2017.

 

On September 12, 2016, the Compensation Committee granted independent board members 19,834 shares of common stock vesting at 50% immediately and rest at the completion of each year served commencing with the period endingended September 30, 2017 and ending September 30, 2021.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee are Messrs.Mr. Caton (Chairman), Mr. BeckertKazmi, and Mr. Burki. There were no other members of the committee during the fiscal year ended June 30, 2017.Tolentino. All current members of the Compensation Committee are “independent directors” as defined under the NASDAQ Listing Rules. None of these individuals were at any time during the fiscal year ended June 30, 2017,2020, or at any other relevant time, an officer or employee of the Company.

 

No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.

 

Employee Stock OptionEquity Plans

 

The 2001 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 200,000 have been granted. The grant prices range between $7.50 and $25.00.OPTIONS:

 

The 2002 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 199,913 options have been granted. The grant prices range between $3.00 and $50.00.

  Number of Options Authorized  Options Grants Issued  Options Grants Cancelled / Expired  Available for Issue  

Options

Issued but Outstanding

 
                
The 2003 stock option plan  200,000   200,000   -   -     - 
The 2005 stock option plan  500,000   500,000   (40,386)  40,386   - 
The 2011 stock option plan  500,000   500,000   -   -   - 
The 2013 stock option plan  1,250,000   1,151,804   -   98,196   - 
The 2015 stock option plan  1,250,000   947,546   (3,968)  306,422   - 
                     
   3,700,000   3,299,350   (44,354)  445,004   - 

 

In March 2004, our shareholders approved the 2003 stock option plan. This plan authorizes up to 200,000 options to purchase common stock of which 198,000 have been granted. The grant prices range between $5.00 and $50.00.

In March 2005, our shareholders approved the 2004 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 460,526 have been granted. The grant prices range between $3.00 and $28.90.

51

 

In April 2006, our shareholders approved the 2005 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 440,947 have been granted. The grant prices range between $3.00 and $26.20.

In June 2008, our shareholders approved the 2008 Equity incentive plan. This plan authorizes up to 100,000 grants and/or options of common stock of which 100,000 have been granted. The grant prices range between $3.20 and $23.20.

In May 2011, our shareholders approved the 2011 Equity incentive plan. This plan authorizes up to 500,000 grants and/or options of common stock of which 500,000 have been granted. The grant prices range between $3.00 and $16.70. 130,000 options at strike price of $7.50 were expired. These expired options were put back into pool and available for re-issue.

In July 2013, our shareholders approved the 2013 Equity incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which 1,247,405 have been granted. The grant prices range between $2.90 and $10.68.

In May 2015, our shareholders approved the 2015 Equity incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which 908,484 have been granted. The grant prices range between $3.78 and $6.25.

 

ITEM 12 -12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock, its only class of outstanding voting securities as of September 19, 2017,18, 2020, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding common Stock with the address of each such person, (ii) each of the Company’s present directors and officers, and (iii) all officers and directors as a group:

 

  Number of Shares      Number of Shares    
Name of Beneficial Owner (1)  Beneficially Owned (2)  Percentage   Beneficially Owned (2) Percentage (4) 
Najeeb Ghauri(3)  791,080   6.56% (3)  748,901   6.39%
Naeem Ghauri(3)  459,769   3.92% (3)  406,689   3.47%
Eugen Beckert(3)  57,617   * 
Shahid Javed Burki(3)  87,167   *  (3)  159,611   1.36%
Mark Caton(3)  59,853   *  (3)  99,597   * 
Henry Tolentino (3)  27,313   * 
Patti McGlasson(3)  67,050   *  (3)  78,235   * 
Roger Almond(3)  32,500   *  (3)  33,747   * 
All officers and directors as a group (ten persons)   1,555,036   13.17%
Kausar Kazmi (3)  11,445   * 
Malea Farsai (3)  39,811   * 
Moab Capital Partners LLC (5)  877,213   7.48%
All officers and directors as a group (nine persons)  1,605,349   13.69%

 

* Less than one percent

 

(1) Except as otherwise indicated, the Company believes that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.

(2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock relating to share grants that will vest or options currently exercisable or exercisable within 60 days of September 25, 2017,18, 2020, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

(3) Address c/o NetSol Technologies, Inc. at 2402523975 Park Sorrento, Suite 410,250, Calabasas, CA 91302.

 

(4) Shares issued and outstanding as of September 25, 201718, 2020 were 11,114,599.11,727,594.

 

41

(5) 5% or greater shareholder based on Schedule 13G filing on February 14, 2020.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

 

On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company, was appointed CEO of WRLD3D. On March 2, 2016, The Company purchased a 4.9% interest in WRLD3D for $1,111,111 andby the Company’s subsidiary NetSol PK purchased a 12.2% investment inBoard of WRLD3D for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions.does not include Najeeb Ghauri.

 

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of June 30, 2017,2018, the Company had disbursed $200,000.$750,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018.

52

The Company entered into an agreement with WRLD3D, whereby NetSol Thai was issued a Convertible Promissory Note (the “Thai Convertible Note”) which was fully executed on February 9, 2018. The maximum principal amount of the Convertible Note is convertible$2,500,000, and as of June 30, 2019, NetSol Thai had disbursed $2,500,000. The Thai Convertible Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon NetSol Thai’s request on or after March 31, 2019.

The Company entered into Series BB Preferred shares atan agreement with WRLD3D, whereby the lesser of (i) the price paid per share for the equity security by the investors in the qualified financing and (ii) $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the dateCompany was issued a Convertible Promissory Note (the “April 1, 2019 Note”) which was fully executed on April 1, 2019. The maximum principal amount of the Convertible Note). The ConvertibleApril 1, 2019 Note is convertible$600,000, and as of June 30, 2020, the Company had disbursed $600,000. The April 1, 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon the occurrenceCompany’s request on or after March 31, 2020.

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “August 2019 Note”) which was fully executed on August 19, 2019. The maximum principal amount of $400,000 was paid on September 9, 2019. The August 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon the following events Conversion upon a qualified financing which is an equity financing of at least $2,000,000; Optional conversion upon an equity financing less than $2,000,000; Optional conversionCompany’s request on or after the maturity date; and Change of control. March 31, 2020.

 

Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC which purchased a 4.9% investment in WRLDS3DWRLD3D for $1,111,111.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

KSP Group, Inc.BF Borgers audited the Company’s financial statements for the fiscal yearsyear ended June 30, 20172020 and KSP audited the Company’s financial statements for the fiscal year ended June 30, 2016.2019. The aggregate fees billed by principal accountants for the annual audit and review of financial statements included in the Company’s Form 10-K, services related to providing an opinion in connection with our public offering of shares of common stock and/or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended June 30, 20172020 was $365,635$250,000 and for the year ended June 30, 20162019 was $244,500.  The 2017 balances are comprised of audit and review services of $175,000 for KSP Group, Inc., $140,635 for Squar Milner, and $50,000 for Kabani and Co. The 2016 balances are comprised of audit and review services of $244,500 for Kabani and Co.$280,000.

 

Tax Fees

 

Tax fees for fiscal year 20172020 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2016.2019. Tax fees for fiscal year 20162019 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2015.2018.

 

All Other Fees

 

No other fees were paid to principal accountant during the fiscal year 20172020 and 2016.2019.

 

Pre-Approval Procedures

 

The Audit Committee and the Board of Directors are responsible for the engagement of the independent auditors and for approving, in advance, all auditing services and permitted non-audit services to be provided by the independent auditors. The Audit Committee maintains a policy for the engagement of the independent auditors that is intended to maintain the independent auditor’s independence from NetSol. In adopting the policy, the Audit Committee considered the various services that the independent auditors have historically performed or may be needed to perform in the future. The policy, which is to be reviewed and re-adopted at least annually by the Audit Committee:

 

(i)Approves the performance by the independent auditors of certain types of service (principally audit-related and tax), subject to restrictions in some cases, based on the Committee’s determination that this would not be likely to impair the independent auditors’ independence from NetSol;
(ii)Requires that management obtain the specific prior approval of the Audit Committee for each engagement of the independent auditors to perform other types of permitted services; and
(iii)Prohibits the performance by the independent auditors of certain types of services due to the likelihood that their independence would be impaired.

(i) Approves the performance by the independent auditors of certain types of service (principally audit-related and tax), subject to restrictions in some cases, based on the Committee’s determination that this would not be likely to impair the independent auditors’ independence from NetSol;

(ii) Requires that management obtain the specific prior approval of the Audit Committee for each engagement of the independent auditors to perform other types of permitted services; and

(iii) Prohibits the performance by the independent auditors of certain types of services due to the likelihood that their independence would be impaired.

 

Any approval required under the policy must be given by the Audit Committee, by the Chairman of the Committee in office at the time, or by any other Committee member to whom the Committee has delegated that authority. The Audit Committee does not delegate its responsibilities to approve services performed by the independent auditors to any member of management.

 

The standard applied by the Audit Committee in determining whether to grant approval of an engagement of the independent auditors is whether the services to be performed, the compensation to be paid therefore and other related factors are consistent with the independent auditors’ independence under guidelines of the Securities and Exchange Commission and applicable professional standards. Relevant considerations include, but are not limited to, whether the work product is likely to be subject to, or implicated in, audit procedures during the audit of NetSol’s financial statements; whether the independent auditors would be functioning in the role of management or in an advocacy role; whether performance of the service by the independent auditors would enhance NetSol’s ability to manage or control risk or improve audit quality; whether performance of the service by the independent auditors would increase efficiency because of their familiarity with NetSol’s business, personnel, culture, systems, risk profile and other factors; and whether the amount of fees involved, or the proportion of the total fees payable to the independent auditors in the period that is for tax and other non-audit services, would tend to reduce the independent auditors’ ability to exercise independent judgment in performing the audit.

53

PART IV

 

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a) Exhibits

 

3.1 3.1Articles of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated March 18, 1997,incorporated by reference as Exhibit 3.1 to NetSol’sNETSOL’s Registration Statement No. 333-28861 filed onForm SB-2 filed June 10, 1997.*
3.2Amendment to Articles of Incorporation dated May 21, 1999, incorporated by reference as Exhibit 3.2 to NetSol’sNETSOL’s Annual Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed September 28, 1999.*
3.3Amendment to the Articles of Incorporation of NetSolNETSOL International, Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’sNETSOL’s Annual Report on Form 10-KSB/A filed on February 2, 2001.*
3.4Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated August 20, 2003 filed as Exhibit A to NetSol’sNETSOL’s Definitive Proxy Statement filed June 27, 2003.*
3.5Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated March 14, 2005 filed as Exhibit 3.0 to NetSol’sNETSOL’s quarterly report filed on Form 10-QSB for the period ended March 31, 2005.*
3.6Amendment to the Articles of Incorporation dated October 18, 2006 filed as Exhibit 3.5 to NetSol’sNETSOL’s Annual Report for the fiscal year ended June 30, 2007 on Form 10-KSB.*
3.7Amendment to Articles of Incorporation dated May 12, 2008*
3.8Bylaws of Mirage Holdings, Inc., as amended and restated as of November 28, 2000 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February 2, 2001.2008. *
3.93.8Amendment to the Articles of Incorporation dated August 6, 2012, filed as Appendix A to NETSOL’s Definitive Proxy Statement filed June 14, 2012. *
3.9Amended and Restated Bylaws of NetSol Technologies, Inc. dated February 16, 2002 incorporated by reference as Exhibit 3.5 to NetSol’s Registration Statement filed on Form S-8 filed on March 27, 2002.*9, 2018*.
4.1Form of Common Stock Certificate*
4.2Form of Warrant*.
4.3Form of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s Definitive Proxy Statement filed September 18, 2006*.
10.1Company Stock Option Plan dated May 18, 1999 incorporated by reference as Exhibit 10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30, 1999 on Form 10K-SB filed September 28, 1999.*
10.2Company Stock Option Plan dated April 1, 1997 incorporated by reference as Exhibit 10.5 to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June 10, 1997*
10.3Company 2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed February 6, 2004.Certificate. *
10.4Company 2001 Stock Options Plan dated March 27, 2002 incorporated by reference as Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March 27, 2002.*
10.5Company 2008 Equity Incentive Plan incorporated by reference as Annex A to NetSol’s Definitive Proxy Statement filed May 28, 2008.*
10.610.1Stock Purchase Agreement dated May 6, 2006 by and between the Company, McCue Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated by reference as Exhibit 2.1 to NetSol’sNETSOL’s Current Report filed on form 8-K on May 8, 2006.*
10.710.3Employment Agreement by and between NetSol Technologies, Inc. and Patti L. W. McGlasson dated May 1, 2006 incorporated by reference as Exhibit 10.20 to NetSol’sNETSOL’s Annual Report on form 10-KSB dated September 18, 2006.*
10.8.10.4Employment Agreement by and between the Company and Najeeb Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.910.5Employment Agreement by and between the Company and Naeem Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.1010.15 10.6Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007.*
10.1110.7Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. *
10.12Tenancy Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky Goldstar Building Development Co. Ltd. dated June 26, 2007 filed as Exhibit 10.21 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.1310.8Company 2005 Stock Option Plan incorporated by reference as Exhibit 99.11.1 to NetSol’sNETSOL’s Definitive Proxy Statement filed on March 3, 2006.*
10.1410.9Company 2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on February 7, 2005.*
10.15Rent Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies Ltd. Dated January 21, 2008. *
10.16Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2010. *

10.1710.10Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2010.*
10.18Office Lease by and between NetSol Technologies North America, Inc. and Legacy Partners I Alameda Mariner Loop, LLC dated November 27, 2009.*
10.1910.11Amendment to Employment Agreement by and between Company and Patti L. W. McGlasson dated effective April 1, 2010.*
10.20Employment Agreement10.12Company’s 2011 Equity Incentive and Nonstatutory Plan incorporated by and between Company and Boo-Ali Siddiqui dated effectivereference as Appendix A to NETSOL’s Proxy Statement filed on April 1, 2010.11, 2011. *
10.2110.13Company’s 2013 Equity Incentive Plan incorporated by reference as Appendix A to NETSOL’s Definitive Proxy Statement filed on May 29, 2013. *
10.14Amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective July 25, 2013.*
10.22Amendment to Employment Agreement between NetSol Technologies, Inc. and Boo-Ali Siddiqui dated effective July 25, 2013.*
10.2310.15Amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L.W. McGlasson dated effective July 25, 2013.*
10.2410.16Restated Charter of the Compensation Committee dated effective September 10, 2013*2013. *
10.2210.17Restated Charter of the Nominating and Corporate Governance Committee dated effective September 10, 2013.*
10.2310.18Restated Charter of the Audit Committee dated effective September 10, 2013*2013. *
10.2410.19Restated Code of Business Conduct & Ethics dated effective September 10, 2013*2013. *
10.25Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2013.10.20Company’s 2015 Equity Incentive Plan incorporated by reference as Appendix A to NETSOL’s Definitive Proxy Statement filed on April 15, 2015. *
10.26Amendment to Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2014*
21.1A list of all subsidiaries of the Company(1)Company (1)
31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO) (1)
31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO) (1)
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- OxleySarbanes-Oxley Act of 2002 (CEO)(1)
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002 (CFO)(1)

 

*Previously Filed

(1) Filed Herewith

 

 4554 

 

SIGNATURES

 

In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 NetSol Technologies, Inc.
  
Date: September 28, 20172020BY:/S/ NAJEEB GHAURI
  Najeeb Ghauri
  Chief Executive Officer
   
Date: September 28, 20172020BY:/S/ ROGER K. ALMOND
  Roger K. Almond
  Chief Financial Officer
  Principal Financial Officer

55

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: September 28, 20172020BY:/S/ NAJEEB U. GHAURI
  Najeeb U. Ghauri
  Chief Executive Officer
  Director, Chairman
   
Date: September 28, 20172020BY:/S/ ROGER K. ALMOND
  Roger K. Almond
  Chief Financial Officer
  Principal Accounting Officer
   
Date: September 28, 2017BY:/S/ NAEEM GHAURI
Naeem Ghauri
Director
Date: September 28, 2017BY:/S/ EUGEN BECKERT
Eugen Beckert
Director
Date: September 28, 2017BY:/S/ SHAHID JAVED BURKI
Shahid Javed Burki
Director
Date: September 28, 20172020BY:/S/ MARK CATON
  Mark Caton
  Director
Date: September 28, 2020BY:/S/ MALEA FARSAI
Malea Farsai
Director
Date: September 28, 2020BY:/S/ HENRY TOLENTINO
Henry Tolentino
Director
Date: September 28, 2020BY:/S/ KAUSAR KAZMI
Kausar Kazmi
Director

56

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

DescriptionPage
  
Report of Independent Registered Public Accounting FirmF-2
  
Financial Statements 
  
Consolidated Balance Sheets as of June 30, 20172020 and 20162019F-3F-4
  
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended June 30, 20172020 and 20162019F-4F-5
  
Consolidated Statement of Equity for the Years Ended June 30, 20172020 and 20162019F-6F-7
  
Consolidated Statements of Cash Flows for the Years Ended June 30, 20172020 and 20162019F-8F-9
  
Notes to Consolidated Financial StatementsF-10F-11

 

 F-1 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

NetSol Technologies, Inc. and subsidiaries

Calabasas, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2019, and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity and cash flow for the period then ended. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial positions of NetSol Technologies, Inc. and subsidiaries as of June 30, 2019 and the results of their operations and their cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ KSP Group, Inc.

CERTIFIED PUBLIC ACCOUNTANTS

We have served as the Company’s auditor since 2017.

Los Angeles, CA

September 23, 2019

 

 F-2 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

NetSol Technologies, Inc. and subsidiaries

Calabasas, California

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESOpinion on the Financial Statements
Consolidated Balance Sheets
As

We have audited the accompanying consolidated balance sheet of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020, and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity and cash flow for the period then ended. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial positions of NetSol Technologies, Inc. and subsidiaries as of June 30, 2020 and the results of their operations and their cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

 

 2017  2016 
ASSETS      
Current assets:        
Cash and cash equivalents $14,172,954  $11,557,527 
Accounts receivable, net of allowance of $571,511 and $492,498  6,583,199   9,691,229 
Accounts receivable, net - related party  1,644,942   5,691,178 
Revenues in excess of billings  19,126,389   10,493,096 
Revenues in excess of billings - related party  80,705   804,168 
Convertible note receivable - related party  200,000   - 
Other current assets  2,463,886   2,214,628 
Total current assets  44,272,075   40,451,826 
Restricted cash  90,000   90,000 
Revenues in excess of billings, net - long term  5,173,538   - 
Property and equipment, net  20,370,703   22,774,435 
Other assets  3,211,295   842,553 
Intangible assets, net  17,043,151   19,674,033 
Goodwill  9,516,568   9,516,568 
Total assets $99,677,330  $93,349,415 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $6,880,194  $5,962,770 
Current portion of loans and obligations under capitalized leases  10,222,795   4,440,084 
Unearned revenues  3,925,702   4,739,214 
Common stock to be issued  88,324   88,324 
Total current liabilities  21,117,015   15,230,392 
Loans and obligations under capitalized leases; less current maturities  366,762   477,692 
Total liabilities  21,483,777   15,708,084 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, $.01 par value; 500,000 shares authorized;  -   - 
Common stock, $.01 par value; 14,500,000 shares authorized; 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017 and 10,713,372 shares issued and 10,686,093  outstanding as of June 30, 2016  112,254   107,134 
Additional paid-in-capital  124,409,998   121,448,946 
Treasury stock (At cost, 34,779 shares and 27,279 shares as of June 30, 2017 and June 30, 2016, respectively)  (454,310)  (415,425)
Accumulated deficit  (42,301,390)  (37,323,360)
Stock subscription receivable  (297,511)  (783,172)
Other comprehensive loss  (18,074,570)  (18,730,494)
Total NetSol stockholders’ equity  63,394,471   64,303,629 
Non-controlling interest  14,799,082   13,337,702 
Total stockholders’ equity  78,193,553   77,641,331 
Total liabilities and stockholders’ equity $99,677,330  $93,349,415 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

The accompanying notes are an integral partWe conducted our audit of these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ BF Borgers CPA PC.

CERTIFIED PUBLIC ACCOUNTANTS

We have served as the Company’s auditor since 2020.

Lakewood, CO

September 28, 2020

 

 F-3 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended June 30,Balance Sheets

 

  For the Year 
  Ended June 30, 
  2017  2016 
Net Revenues:        
License fees $18,218,912  $8,352,441 
Maintenance fees  14,157,367   13,310,591 
Services  24,798,899   30,037,459 
License fees - related party  246,957   1,616,138 
Maintenance fees - related party  311,359   365,772 
Services - related party  7,632,774   10,867,792 
Total net revenues  65,366,268   64,550,193 
         
Cost of revenues:        
Salaries and consultants  24,645,223   21,789,329 
Travel  3,137,671   2,334,019 
Depreciation and amortization  5,448,059   5,926,969 
Other  3,727,379   3,698,290 
Total cost of revenues  36,958,332   33,748,607 
         
Gross profit  28,407,936   30,801,586 
         
Operating expenses:        
Selling and marketing  9,746,229   7,823,916 
Depreciation and amortization  1,114,275   1,225,170 
Provision for bad debts  1,407,751   237,703 
General and administrative  16,747,550   14,727,313 
Research and development cost  393,345   485,783 
Total operating expenses  29,409,150   24,499,885 
         
Income (loss) from operations  (1,001,214)  6,301,701 
         
Other income and (expenses)        
Gain (loss) on sale of assets  (30,147)  23,930 
Interest expense  (310,044)  (264,511)
Interest income  179,723   161,794 
Gain (loss) on foreign currency exchange transactions  306,819   (738,158)
Other income (expense)  50,378   224,931 
Total other income (expenses)  196,729   (592,014)
         
Net income (loss) before income taxes  (804,485)  5,709,687 
Income tax provision  (931,951)  (652,546)
Net income (loss)  (1,736,436)  5,057,141 
Non-controlling interest  (3,241,594)  (1,654,380)
Net income (loss) attributable to NetSol $(4,978,030) $3,402,761 
         
Net income (loss) per share:        
Net income (loss) per common share        
Basic $(0.46) $0.33 
Diluted $(0.46) $0.32 
         
Weighted average number of shares outstanding        
Basic  10,912,284   10,391,157 
Diluted  10,912,284   10,584,835 
  As of  As of 
  June 30, 2020  June 30, 2019 
ASSETS        
Current assets:        
Cash and cash equivalents $20,166,830  $17,366,364 
Accounts receivable, net of allowance of $435,611 and $192,786  10,131,752   12,332,714 
Accounts receivable, net of allowance of $90,594 and $166,075 - related party  1,282,505   3,266,600 
Revenues in excess of billings, net of allowance of $188,914 and $194,684  17,198,281   14,719,047 
Revenues in excess of billings - related party  8,163   110,827 
Other current assets  3,108,180   3,146,264 
Total current assets  51,895,711   50,941,816 
Revenues in excess of billings, net - long term  1,300,289   1,281,492 
Convertible note receivable - related party  

4,250,000

   

3,650,000

 
Property and equipment, net  11,329,631   12,096,855 
Right of use of assets - operating leases  2,360,129   - 
Long term investment  2,387,692   2,653,769 
Other assets  41,992   23,569 
Intangible assets, net  5,391,077   7,332,950 
Goodwill  9,516,568   9,516,568 
Total assets $88,473,089  $87,497,019 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $5,680,837  $7,476,560 
Current portion of loans and obligations under finance leases  9,139,561   6,905,597 
Current portion of operating lease obligations  1,111,912   - 
Unearned revenues  4,095,472   5,977,736 
Common stock to be issued  88,324   88,324 
Total current liabilities  20,116,106   20,448,217 
Loans and obligations under finance leases; less current maturities  1,539,975   564,572 
Operating lease obligations; less current maturities  1,339,965   - 
Total liabilities  22,996,046   21,012,789 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, $.01 par value; 500,000 shares authorized;  -   - 
Common stock, $.01 par value; 14,500,000 shares authorized; 12,122,149 shares issued and 11,874,646 outstanding as of June 30, 2020 and 11,911,742 shares issued and 11,664,239 outstanding as of June 30, 2019  121,222   119,117 
Additional paid-in-capital  128,677,754   127,737,999 
Treasury stock (at cost, 247,503 shares as of June 30, 2020 and 2019)  (1,455,969)  (1,455,969)
Accumulated deficit  (34,269,817)  (35,206,898)
Other comprehensive loss  (34,085,047)  (33,125,006)
Total NetSol stockholders’ equity  58,988,143   58,069,243 
Non-controlling interest  6,488,900   8,414,987 
Total stockholders’ equity  65,477,043   66,484,230 
Total liabilities and stockholders’ equity $88,473,089  $87,497,019 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-4 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended June 30,Operations

 

  2017  2016 
       
Net income (loss) $(4,978,030) $3,402,761 
Other comprehensive income (loss):        
Translation adjustment  778,673   (2,011,810)
Translation adjustment attributable to non-controlling interest  (122,749)  448,416 
Net translation adjustment  655,924   (1,563,394)
Comprehensive income (loss) attributable to NetSol $(4,322,106) $1,839,367 
  For the Years 
  Ended June 30, 
  2020  2019 
Net Revenues:        
License fees $4,564,560  $16,768,749 
Maintenance fees  18,951,248   15,521,413 
Services  32,555,690   34,892,290 
Services - related party  300,821   636,731 
Total net revenues  56,372,319   67,819,183 
         
Cost of revenues:        
Salaries and consultants  18,821,738   19,253,364 
Travel  4,181,742   6,527,868 
Depreciation and amortization  2,897,371   3,525,857 
Other  3,508,098   3,625,478 
Total cost of revenues  29,408,949   32,932,567 
         
Gross profit  26,963,370   34,886,616 
         
Operating expenses:        
Selling and marketing  6,450,663   7,831,758 
Depreciation and amortization  834,583   897,800 
General and administrative  17,138,832   17,357,918 
Research and development cost  1,468,954   1,971,228 
Total operating expenses  25,893,032   28,058,704 
         
Income (loss) from operations  1,070,338   6,827,912 
         
Other income and (expenses)        
Gain on sale of assets  23,103   81,455 
Interest expense  (346,856)  (311,798)
Interest income  1,569,536   955,061 
Gain on foreign currency exchange transactions  398,610   6,345,859 
Share of net loss from equity investment  (605,864)  (841,845)
Other income  224,224   18,680 
Total other income (expenses)  1,262,753   6,247,412 
         
Net income before income taxes  2,333,091   13,075,324 
Income tax provision  (1,141,068)  (1,057,784)
Net income  1,192,023   12,017,540 
Non-controlling interest  (254,942)  (3,434,141)
Net income attributable to NetSol $937,081  $8,583,399 
         
Net income per share:        
Net income per common share        
Basic $0.08  $0.74 
Diluted $0.08  $0.74 
         
Weighted average number of shares outstanding        
Basic  11,734,648   11,599,290 
Diluted  11,784,414   11,621,990 

 

The accompanying notes are an integral part of these consolidated financial statementsstatements.

 

 F-5 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated StatementStatements of Stockholders’ Equity
For the Years Ended June 30, 2017 and 2016Comprehensive Income (Loss)

 

        Additional         Stock  Shares   Other  Non   Total  
  Common Stock  Paid-in  Treasury  Accumulated  Subscriptions  to be  Comprehensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  Issued  Loss  Interest  Equity 
Balance at June 30, 2015  10,307,826  $103,078  $119,209,807  $(415,425) $(40,726,121) $(1,204,603) $-  $(17,167,100) $13,840,641   73,640,277 
Exercise of common stock options  177,024   1,770   779,210   -   -   -   -   -   -   780,980 
Exercise of subsidiary common stock options  -   -   (28,331)  -   -   -   -   -   45,075   16,744 
Common stock issued for:                                        
Cash  -   -   -   -   -   64,931   -   -   -   64,931 
Services  228,522   2,286   1,262,332   -   -   -   -   -   -   1,264,618 
Adjustment for payment of cash in lieu of shares  -   -   (25,391)  -   -   -   -   -   -   (25,391)
Equity component shown as current liability at                                        
June 30, 2015  -   -   -   -   -   -   88,324   -   -   88,324 
June 30, 2016  -   -   -   -   -   -   (88,324)  -   -   (88,324)
Fair value                                        
of options issued  -   -   145,716   -   -   -   -   -   -   145,716 
of options extended  -   -   122,875   -   -   -   -   -   -   122,875 
Acquisition of non-controlling interest in subsidiary  -   -   (17,272)  -   -   -   -   -   (750,125)  (767,397)
Dividend to non-controlling interest  -   -   -   -   -   -   -   -   (1,003,853)  (1,003,853)
Payment received for stock subscription  -   -   -   -   -   356,500   -   -   -   356,500 
Foreign currency translation adjustment  -   -   -   -   -   -   -   (1,563,394)  (448,416)  (2,011,810)
Net income for the year  -   -   -   -   3,402,761   -   -   -   1,654,380   5,057,141 
Balance at June 30, 2016  10,713,372  $107,134  $121,448,946  $(415,425) $(37,323,360) $(783,172) $-  $(18,730,494) $13,337,702  $77,641,331 
  For the Years 
  Ended June 30, 
  2020  2019 
Net income $937,081  $8,583,399 
Other comprehensive income (loss):        
Translation adjustment  (1,229,927)  (13,463,469)
Translation adjustment attributable to non-controlling interest  269,886   4,724,534 
Net translation adjustment  (960,041)  (8,738,935)
Comprehensive income (loss) attributable to NetSol $(22,960) $(155,536)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-6 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Years Ended June 30, 20172020 and 20162019

 

        Additional         Stock  Shares  Other  Non   Total  
  Common Stock  Paid-in  Treasury  Accumulated  Subscriptions  to be  Comprehensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  Issued  Loss  Interest  Equity 
Balance at June 30, 2016  10,713,372  $107,134  $121,448,946  $(415,425) $(37,323,360) $(783,172) $-  $(18,730,494) $13,337,702   77,641,331 
Exercise of common stock options  84,838   848   379,929   -   -   -   -   -   -   380,777 
Exercise of subsidiary common stock options  -   -   (177,928)  -   -   -   -   -   253,310   75,382 
Common stock issued for:                                        
Services  427,175   4,272   2,517,886   -   -   -   -   -   -   2,522,158 
Purchase of treasury shares              (38,885)                      (38,885)
Equity component shown as current liability at                                        
June 30, 2016  -   -   -   -   -   -   88,324   -   -   88,324 
June 30, 2017  -   -   -   -   -   -   (88,324)  -   -   (88,324)
Fair value                                        
of options issued  -   -   26,956   -   -   -   -   -   -   26,956 
of options extended  -   -   214,209   -   -   -   -   -   -   214,209 
Dividend to non-controlling interest  -   -   -   -   -   -   -   -   (2,156,273)  (2,156,273)
Payment received for stock subscription  -   -   -   -   -   485,661   -   -   -   485,661 
Foreign currency translation adjustment  -   -   -   -   -   -   -   655,924   122,749   778,673 
Net loss for the year  -   -   -   -   (4,978,030)  -   -   -   3,241,594   (1,736,436)
Balance at June 30, 2017  11,225,385  $112,254  $124,409,998  $(454,310) $(42,301,390) $(297,511) $-  $(18,074,570) $14,799,082  $78,193,553 
                 Stock     Other       
        Additional        Sub-     Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  scriptions  Shares to  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  be Issued  Loss  Interest  Equity 
Balance at June 30, 2018  11,708,469  $117,085  $126,479,147  $(1,205,024) $(37,994,502) $(221,000) $-  $(24,386,071) $14,146,417  $76,936,052 
Adjustment in retained earnings on adoption of ASC 606                  (5,795,795)              (2,957,860)  (8,753,655)
Exercise of common stock options  13,076   131   84,869   -   -   -   -   -   -   85,000 
Exercise of subsidiary common stock options  -   -   (6,629)  -   -   -   -   -   9,279   2,650 
Common stock issued for:                                        
Services  190,197   1,901   1,138,109   -   -   -   -   -   -   1,140,010 
Purchase of treasury shares  -   -   -   (250,945)  -   -   -   -   -   (250,945)
Equity component shown as current liability at                                        
June 30, 2018  -   -   -   -   -   -   88,324   -   -   88,324 
June 30, 2019  -   -   -   -   -   -   (88,324)  -   -   (88,324)
Fair value of options extended  -   -   43,612   -   -   -   -   -   -   43,612 
Acquisition of non-controlling interest in subsidiary  -   -   (1,109)  -   -   -   -   -   (925,991)  (927,100)
Dividend to non-controlling interest  -   -   -   -   -   -   -   -   (566,465)  (566,465)
Adjustment in subscription receivable  -   -   -   -   -   221,000   -   -   -   221,000 
Foreign currency translation adjustment  -   -   -   -   -   -   -   (8,738,935)  (4,724,534)  

(13,463,469

)
Net income for the year  -   -   -   -   

8,583,399

   -   -   -   

3,434,141

   

12,017,540

 
Balance at June 30, 2019  

11,911,742

  $119,117  $

127,737,999

  $(1,455,969) $

(35,206,898

) $-  $-  $

(33,125,006

) $

8,414,987

  $

66,484,230

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-7 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated StatementsStatement of Cash FlowsStockholders’ Equity

For the Years Ended June 30, 2020 and 2019

 

  2017  2016 
Cash flows from operating activities:        
Net income (loss) $(1,736,436) $5,057,141 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization  6,562,334   7,152,139 
Provision for bad debts  1,407,751   237,703 
(Gain) Loss on sale of assets  30,147   (23,930)
Stock issued for services  2,522,158   1,264,618 
Fair market value of warrants and stock options granted  241,165   268,591 
Changes in operating assets and liabilities:        
Accounts receivable  2,292,980   (3,758,422)
Accounts receivable - related party  2,803,520   (2,564,819)
Revenues in excess of billing  (13,966,522)  (4,987,772)
Revenues in excess of billing - related party  211,615   (884,738)
Other current assets  72,522   (729,359)
Accounts payable and accrued expenses  751,835   558,033 
Unearned revenue  (738,704)  69,851 
Net cash provided by operating activities  454,365   1,659,036 
         
Cash flows from investing activities:        
Purchases of property and equipment  (2,203,203)  (3,335,921)
Sales of property and equipment  781,018   986,433 
Convertible note receivable - related party  (200,000)  - 
Investment in WRLD3D  (1,105,555)  (555,556)
Purchase of subsidiary shares from open market  -   (767,397)
Net cash used in investing activities  (2,727,740)  (3,672,441)
         
Cash flows from financing activities:        
Proceeds from sale of common stock  -   64,931 
Proceeds from the exercise of stock options and warrants  866,438   1,137,480 
Proceeds from exercise of subsidiary options     75,382   16,744 
Purchase of treasury stock  (38,885)  - 
Dividend paid by subsidiary to non-controlling interest  (2,156,273)  (1,003,853)
Proceeds from bank loans  6,184,635   1,333,406 
Payments on capital lease obligations and loans - net  (554,048)  (950,529)
Net cash provided by financing activities  4,377,249   598,179 
Effect of exchange rate changes  511,553   (1,196,204)
Net increase (decrease) in cash and cash equivalents  2,615,427   (2,611,430)
Cash and cash equivalents, beginning of the period  11,557,527   14,168,957 
Cash and cash equivalents, end of period $14,172,954  $11,557,527 
                 Other       
        Additional        Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Loss  Interest  Equity 
Balance at June 30, 2019  11,911,742  $119,117  $127,737,999  $(1,455,969) $(35,206,898) $(33,125,006) $8,414,987  $66,484,230 
Exercise of subsidiary common stock options  -   -   (28,097)  -   -   -   39,718   11,621 
Subsidiary common stock issued for:                                
-Services  -   -   -   -   -   -   158   158 
Common stock issued for:                                
Services  210,407   2,105   988,345   -   -   -   -   990,450 
Equity component shown as  current liability at                                
June 30, 2019  -   -   -   -   -   -   -   88,324 
June 30, 2020  -   -   -   -   -   -   -   (88,324)
Acquisition of non-controlling interest in subsidiary  -   -   (20,493)  -   -   -   (30,401)  (50,894)
Dividend to non-controlling interest  -   -   -   -   -   -   (1,920,618)  (1,920,618)
Foreign currency  translation adjustment  -   -   -   -   -   (960,041)  (269,886)  (1,229,927)
Net income for the year  -   -   -   -   937,081   -   254,942   1,192,023 
Balance at June 30, 2020  12,122,149  $121,222  $128,677,754  $(1,455,969) $(34,269,817) $(34,085,047) $6,488,900  $65,477,043 

 

The accompanying notes are an integral part of these consolidated financial statements.statements

 

 F-8 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the Years Ended June 30,

 

  2017  2016 
SUPPLEMENTAL DISCLOSURES:        
Cash paid during the period for:        
Interest $225,641  $251,551 
Taxes $195,726  $391,285 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Provided services for investment in WRLD3D $1,231,115  $164,794 
Assets acquired under capital lease $498,333  $269,427 
  For the Years 
  Ended June 30, 
  2020  2019 
Cash flows from operating activities:        
Net income $1,192,023  $12,017,540 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  3,731,954   4,423,657 
Provision for bad debts  184,944   474,516 
Share of net loss from investment under equity method  605,864   841,845 
Gain on sale of assets  (23,103)  (80,470)
Stock based compensation  808,616   1,131,013 
Fair market value of stock options  -   43,612 
Changes in operating assets and liabilities:        
Accounts receivable  2,035,843   (1,836,962)
Accounts receivable - related party  1,957,864   (977,445)
Revenues in excess of billing  (3,252,704)  (10,764,428)
Revenues in excess of billing - related party  105,441   (122,810)
Other current assets  (132,175)  (861,128)
Accounts payable and accrued expenses  (1,399,828)  (47,819)
Unearned revenue  (1,842,313)  692,089 
Net cash provided by operating activities  3,972,426   4,933,210 
         
Cash flows from investing activities:        
Purchases of property and equipment  (1,377,145)  (2,726,558)
Sales of property and equipment  106,180   1,170,878 
Convertible note receivable - related party  (600,000)  (1,526,500)
Investment in associates  (94,500)  (250,000)
Purchase of subsidiary shares  (89,425)  (317,500)
Net cash used in investing activities  (2,054,890)  (3,649,680)
         
Cash flows from financing activities:        
Proceeds from the exercise of stock options and warrants  -   85,000 
Proceeds from exercise of subsidiary options  11,621   2,650 
Purchase of treasury stock  -   (250,945)
Dividend paid by subsidiary to non-controlling interest  (1,920,618)  (566,465)
Proceeds from bank loans  4,221,203   1,227,158 
Payments on finance lease obligations and loans - net  (611,913)  (480,231)
Net cash provided by financing activities  1,700,293   17,167 
Effect of exchange rate changes  (817,363)  (6,023,186)
Net decrease in cash and cash equivalents  2,800,466   (4,722,489)
Cash and cash equivalents at beginning of the period  17,366,364   22,088,853 
Cash and cash equivalents at end of period $20,166,830  $17,366,364 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-9 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

  For the Years 
  Ended June 30, 
  2020  2019 
SUPPLEMENTAL DISCLOSURES:        
Cash paid during the period for:        
Interest $355,927  $293,969 
Taxes $1,027,950  $848,497 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Assets acquired under finance lease $-  $268,276 
Amount accrued for the purchase of VLS $-  $609,600 
Assets recognized under operating lease $3,474,583  $- 

The accompanying notes are an integral part of these consolidated financial statements.

F-10

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”), was incorporated under the laws of the State of Nevada on March 18, 1997. (NetSol Technologies, Inc. and subsidiaries collectively referred to as the “Company”)

 

The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(A) Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company as follows:

 

Wholly-ownedWholly owned Subsidiaries

NetSol Technologies Americas, Inc. (“NTA”)
NetSol Technologies Limited (“NetSol UK”)
NetSol Technologies Australia Pty Limited (“NetSol Australia”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)

NetSol Connect (Private), Ltd. (“Connect”)

NetSol Technologies (Beijing) Co.Australia Pty Ltd. (NetSol Beijing)

NetSol Omni (Private) Ltd. (“Omni”Australia”)

NetSol Technologies (GmbH)Europe Limited (“NTG”NTE”)

NTPK (Thailand) Co. Limited (“NTPK Thailand”)

NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)

Virtual Lease Services Limited (“VLS”)

Virtual Lease Services (Ireland) Limited (“VLSIL”)

 

Majority-owned Subsidiaries

NetSol Technologies, Ltd. (“NetSol PK”)

NetSol Innovation (Private) Limited (“NetSol Innovation”)

NetSol Technologies Thailand Limited (“NetSol Thai”)

Virtual Lease Services HoldingsOTOZ, Inc. (“OTOZ”)

OTOZ (Thailand) Limited (“VLSH”OTOZ Thai”)
Virtual Lease Services Limited (“VLS”)
Virtual Lease Services (Ireland) Limited (VLSIL)

 

The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation.

 

 F-10F-11 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

(B) For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current period. Below is the table of reclassified amounts:

  For the Year ended 
  June 30, 2019 
  Originally reported  Reclassified 
       
REVENUES        
License fees $16,768,749  $16,768,749 
Maintenance fees  15,010,171   15,521,413 
Services  34,185,992   34,892,290 
Maintenance fees - related party  511,242   - 
Services - related party  1,343,029   636,731 
Total net revenues $67,819,183  $67,819,183 
         
Cost of revenues:        
Other $4,066,443  $3,625,478 
         
Operating expenses:        
General and administrative $16,916,953  $17,357,918 

Basis of Presentation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

(C) Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates.

 

(D) Cash and Cash Equivalents

 

Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

 

(E) Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance.insurance, except balances maintained in China are insured for RMB500,000 ($70,721) in each bank. The Company maintains two bank accounts in China. As of June 30, 20172020 and 2016,2019, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $11,564,343$18,210,378 and $7,640,095,$16,124,339, respectively. The Company has not experienced any losses in such accounts.

F-12

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Also, due to the current economic conditions in China and challenges being faced by the Chinese economy, the Company may face a risk of reduction in future revenue growth and non-collection of receivables from the customers in China.

F-11

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 

On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on importsAccounts Receivable and exports between the U.K. and E.U. countries and perhaps increased regulatory complexities. These changes may adversely affect the Company’s operations and financial results.

(F) Restricted Cash

The Company has placed $90,000 in a savings account with HSBC as collateral against a standby letter of credit issued by the bank in favor of the landlord for office space.

(G) Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As

Notes Receivable

Notes Receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of June 30, 2017purchase premiums and 2016, the Company had recordeddiscounts, deferred loan fees and costs, and an allowance for doubtful accountsloan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of $571,511certain direct origination costs, are deferred and $492,498, respectively.recognized in interest income.

 

(H) Revenues in Excess of Billings

 

Revenues in excess of billings represent the total of the project to be billed to the customer over thefor revenues recognized per US GAAP. As the customers are billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.”

 

(I) Investments

 

The Company uses the costequity investment without readily determinable fair value method to account for investments in businesses that are not publicly traded and for which the Company does not control or have the ability to exercise significant influence over operating and financial policies. In accordance with the costthis method, these investments are recorded at lower of cost or fair value, as appropriate, and are classified as long-term.

 

Investments held by the Company in businesses that are not publicly traded and for which the Company has the ability to exercise significant influence over operating and financial management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded at cost and are adjusted for the Company’s proportionate share of earnings, losses and distributions. These investments are classified as long-term.

 

F-12

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

The Company assesses and records impairment losses when events and circumstances indicate the investments might be impaired. Gains and losses are recognized when realized and recorded in other income (expense), net in the accompanying Consolidated Statements of Income.Operations.

F-13

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

(J) Property and Equipment

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using various methods over the estimated useful lives of the assets, ranging from three to twenty years. Following is the summary of estimated useful lives of the assets:

 

Category Estimated Useful Life
   
Computer Equipmentequipment & Softwaresoftware3 to 5 Years
Office furniture and equipment:equipment 5 to 10 Years
Building 20 Years
Autos 5 Years
Assets under capital leases 3 to 10 Years
Improvements 5 to 10 Years

 

The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included with “Computer equipment and software.”

 

(K) Impairment of Long-Lived Assets

 

The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 

(L) Intangible Assets

 

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

F-13

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

(M) Software Development Costs

 

Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

 

The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated present value of expected future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.

 

F-14

(N) –

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Research and Development Costs

 

Research and development expenses are comprised of salaries, benefits and overhead expenses of employees involved in software product enhancement and development, cost of outside contractors engaged to perform quality assurance, software product enhancement and development (if any). Development costs are expensed as incurred.

 

(O) Goodwill

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combinations.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. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value including goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

 

(P) Fair Value of Financial Instruments

 

The Company applies the provisions of ASC 820-10,“Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible notes receivable and long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

 

F-14

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

The three levels of valuation hierarchy are defined as follows:

 

Level 1:Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.
  
Level 2:Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.
  
Level 3:Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

 

F-15

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Our financial assets that are measured at fair value on a recurring basis as of June 30, 2017,2020 are as follows:

 

 Level 1 Level 2 Level 3 Total Assets  Level 1 Level 2 Level 3 Total Assets 
Revenue in excess of billing - long term  -   -   5,173,538   5,173,538 
Revenues in excess of billings - long term $    -  $    -  $1,300,289  $1,300,289 
Total $-  $-  $5,173,538  $5,173,538  $-  $-  $1,300,289  $1,300,289 

Our financial assets that are measured at fair value on a recurring basis as of June 30, 2019, are as follows:

  Level 1  Level 2  Level 3  Total Assets 
Revenues in excess of billing - long term $    -  $    -  $1,281,492  $1,281,492 
Total $-  $-  $1,281,492  $1,281,492 

The reconciliation for the years ended June 30, 2020 and 2019 is as follows:

  Revenues in excess of billings - long term  Fair value discount  Total 
Balance at June 30, 2018 $1,445,245  $(238,576) $1,206,669 
Effect of ASC 606 adoption  (1,445,245)  238,576   (1,206,669)
Additions  1,380,631   (99,139)  1,281,492 
Balance at June 30, 2019 $1,380,631  $(99,139) $1,281,492 
Amortization during the period  -   55,344   55,344 
Effect of Translation Adjustment  (39,056)  2,509   (36,547)
Balance at June 30, 2020 $1,341,575  $(41,286) $1,300,289 

 

The Company appliedused the discounted cash flow method to calculatewith an interest rate of 4.35% during the fair value and used NetSol PK’s weighted average borrowing rate, which was 3.96% as ofyears ended June 30, 2017.2020 and 2019.

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480,“Distinguishing Liabilities From Equity”and ASC 815,“Derivatives and Hedging.”Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrantwarrants and option derivatives are valued using the Black-Scholes model.

 

(Q) Revenue Recognition

The Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support.

The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product to the purchaser. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue the Company reports.

F-15

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.

Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.

Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.

Multiple Element Arrangements

The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.

Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.

(R) Unearned Revenue

 

Unearned revenue represents billings in excess of revenue earned on contracts and are recognized on a pro-rata basis over the life of the contract. Unearned revenue was $3,925,702$4,095,472 and $4,739,214$5,977,736 as of June 30, 20172020 and 2016,2019, respectively.

 

(S) Cost of Revenues

 

Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.

 

F-16

(T)

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Advertising Costs

 

The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 20172020 and 20162019 were $237,221$285,964 and $293,683,$282,354, respectively.

 

F-16

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

(U) Share-Based Compensation

 

The Company records stock compensation in accordance with ASC 718,Compensation – Stock Compensation. ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes forfeitures as they occur. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

 

(V) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.

 

(W) Foreign Currency Translation

 

The Company transacts business in various foreign currencies. The accounts of NetSol UK, NTE, AEL, VLSH and VLS use the British Pound; VLSIL and NTG useuses the Euro; NetSol PK, Connect, Omni and NetSol Innovation use Pakistan Rupees; NTPK Thailand, NetSol Thai and NetSolOTOZ Thai use Thai Baht; NetSol Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary,subsidiaries, NTA and OTOZ, use the U.S. dollar as the functional currency. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are recorded to other comprehensive income. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheets were $18,074,570 and $18,730,494 as of June 30, 2017 and 2016, respectively. During the years ended June 30, 2017 and 2016, comprehensive income (loss) in the consolidated statements of operations included NetSol’s share of translation gain of $655,924 and $1,563,394, respectively.

Net foreign exchange transaction gains (losses) included in non-operating income (expense) in the accompanying consolidated statements of operations were gains of $306,819 and losses of $738,158 for the years ended June 30, 2017 and 2016, respectively.

 

 F-17 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

(X) Statement of Cash Flows

 

The Company’s cash flows from operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

 

(Y) Segment Reporting

 

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the geographic locations of its subsidiaries (seesubsidiaries. (See Note 19).

(Z) Reclassifications

Certain 2016 balances have been reclassified to conform to the 2017 presentation. Below is the table of reclassified amounts:

  For the Year 
  Ended June, 30 2016 
  Originally reported  Reclass 
       
Net Revenues:        
License fees $6,352,441  $8,352,441 
Maintenance fees  13,310,591   13,310,591 
Services  32,288,229   30,037,459 
License fees - related party  1,616,138   1,616,138 
Maintenance fees - related party  365,772   365,772 
Services - related party  10,617,022   10,867,792 
Total net revenues  64,550,193   64,550,193 
Operating expenses:        
Provision for bad debts  -   237,703 
General and administrative  14,965,016   14,727,313 
   14,965,016   14,965,016 

The Company reclassified $2,000,000 from services to license fees to correspond with the current accounting treatment of the 12 market NFS Ascent implementation,21 “Segment Information and $250,770 from services to services - related party for the services provided to WRLD3D, Inc. (“WRLD3D”Geographic Areas”) (formerly “eeGeo, Inc.”).

The Company also reclassified “Provision for bad debts” as a separate line item from general and administrative expenses.

F-18

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

(AA) New Accounting Pronouncements

 

Recent Accounting Standards Adopted by the Company:

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12,Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15,Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01,Income Statement – Extraordinary and Unusual items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items(ASU 2015-01). The amendment eliminates from U.S. GAAP the concept of extraordinary items. This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2015, FASB issued ASU No. 2015-02, (Topic 810):Amendments to the Consolidation Analysis. ASU No. 2015-02 provides amendments to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. Stakeholders expressed concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. ASU No. 2015-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

F-19

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016,

In April 2015, FASB issued ASU No. 2015-03, (Subtopic 835-30):Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 provides guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. ASU No. 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2015, FASB issued ASU No. 2015-05, (Subtopic 350-40):Customer’s Accounting for Fees Paid in a Cloud Computing Arrangements. ASU No. 2015-05 provides guidance on a customer’s accounting for fees paid in a cloud computing arrangement, which includes software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. ASU No. 2015-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2015-16,Business Combinations2016-02, Leases (Topic 805) Simplifying842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the Accounting for Measurement-Period Adjustments.”ASU No. 2015-06 simplifies the accounting for measurement-period adjustments attributablediscounted obligation to an acquisition. Under prior guidance, adjustments to provisional amounts during the measurement period that arise due to new information regarding acquisition date circumstances must be made retrospectively withmake future lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of July 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods presented in the year of adoption. Accordingly, the comparative periods and disclosures have not been restated.

The Company elected the package of practical expedients to not reassess:

whether a contract is or contains a lease
lease classification
initial direct costs

Additionally, the Company adopted the policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

Adoption of the new standard resulted in the recording of a non-cash transitional adjustment to goodwill.ROU assets and lease liabilities of approximately $3,011,814 and $3,091,236, respectively, as of July 1, 2019. The amended guidance requires an acquirer to record adjustments to provisional amounts made duringdifference between the measurement periodROU assets and lease liabilities represented existing deferred rent expense and prepaid rent that were derecognized and adjusted ROU assets in the period that the adjustment is determined. The adjustments should reflect the impact on earnings of changes in depreciation, amortization, or other income effects, if any, as if the accounting had been completed as of the acquisition date. Additionally, amounts recorded in the current period that would have been reflected in prior reporting periods if the adjustments had been recognized as of the acquisition date must be disclosed either on the face of the income statement or in the notes to financial statements. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2015 and early application is permitted.Consolidated Balance Sheets. The adoption of this guidanceASU 2016-02 did not have a materialmaterially impact on the Company’s consolidated financial statements.

F-20

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016results of operations or cash flows.

 

In March 2016,July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting Standards Update 2016-07,Investments- Equity Methodfor Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Joint Ventures: SimplifyingCertain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the Transition to the Equity Methodcomplexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of Accounting (“liabilities and equity. The ASU, 2016-07”). ASU 2016-07among other things, eliminates the requirementneed to applyconsider the equity methodeffects of accounting retrospectivelydown round features when analyzing convertible debt, warrants and other financing instruments. As a reporting entity obtains significant influence overresult, a previously held investment. ASU 2016-07 isfreestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2016,2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim periods within those fiscal years and early application is permitted.period. The Company adoptedadoption of this guidance with respect to its investment in WRLD3D and appliedstandard did not materially impact the equity methodresults of accounting prospectively.operations or cash flows.

 

Accounting Standards Recently Issued Butbut Not Yet Adopted by the Company:

 

In May 2014, the (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of the new revenue standard by one year, which will make it effective for the Company in the first quarter of its fiscal year ending June 30, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.

In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which changes how deferred taxes are classified on the balance sheet and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2016, the FASB issued ASU No. 2016-02,Leases, which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

F-21

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting. The guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits and tax deficiencies to be recorded as income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when they occur. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In August 2016, the FASB issued ASU 2016-15,Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

On November 17, 2016, the FASB issued Accounting Standards Update No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted. The Company maintains restricted cash balances and will show restricted cash as part of cash and restricted cash equivalents in the statement of cash flows.

In January 2017, the FASB issued ASU No. 2017-01,Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.

F-22

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

In January 2017, the FASB issued ASU No. 2017-04,Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after the adoption date.

 

F-18

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

In May 2017,June 2016, the FASB issued ASU 2017-09,2016-13, Compensation-Stock Compensation (Topic 718): Scope“Financial Instruments - Credit Losses (“ASU 2016-13”). This accounting standard update changes the accounting for recognizing impairments of Modification Accounting,which clarifies when changes tofinancial assets. Under the terms or conditionsupdate, credit losses for certain types of a share-based payment award mustfinancial instruments will be accountedestimated based on expected losses. The update also modifies the impairment models for as modifications. The new guidance will reduce diversity in practiceavailable-for-sale debt securities and result in fewer changes to the terms of an award being accounted for as a modification. The standardpurchased financial assets with credit deterioration since their origination. This update is effective for fiscal years beginning after December 15, 2017,2019, including interim periods within those fiscal years. The new standard will be effective prospectively for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU No. 2017-11,“Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

 

NOTE 3 – REVENUE RECOGNITION

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

The Company has two primary revenue streams: core revenue and non-core revenue.

Core Revenue

The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

Non-Core Revenue

The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.

 F-23F-19 

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance 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 to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

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.

Maintenance

Revenue from support services and product updates, referred to as maintenance 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.

Professional Services

Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

F-20

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

BPO and Internet Services

Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s disaggregated revenue by category is as follows:

  For the Years
Ended June 30,
 
  2020  2019 
Core:        
License $4,564,560  $16,768,749 
Maintenance  18,951,248   15,521,413 
Services  25,713,554   28,683,468 
Services - related party  300,821   636,731 
Total core revenue, net  49,530,183   61,610,361 
         
Non-Core:        
Services  6,842,136   6,208,822 
Total non-core revenue, net  6,842,136   6,208,822 
         
Total net revenue $56,372,319  $67,819,183 

Significant Judgments

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.

F-21

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from maintenance and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.

The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

F-22

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

The Company’s revenues in excess of billings and deferred revenue are as follows:

  As of
June 30, 2020
  As of
June 30, 2019
 
       
Revenues in excess of billings $18,506,733  $16,111,366 
         
Deferred Revenue $4,095,472  $5,977,736 

During the year ended June 30, 2020, the Company recognized revenue of $5,977,736, which was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $62,919,547 as of June 30, 2020, of which the Company estimates to recognize approximately $13,818,077 in revenue over the next 12 months and the remainder over an estimated 6 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

Deferred Revenue

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.

Practical Expedients and Exemptions

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:

Application

● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.

● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

Modified Retrospective Transition Adjustments

● For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.

F-23

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Costs to Obtain a Contract

The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts.

 

NOTE 34 – EARNINGS PER SHARE

 

Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options warrants, and stock awards.

 

The components of basic and diluted earnings per share were as follows:

 

  For the year ended June 30, 2017 
  Net Loss  Shares  Per Share 
Basic loss per share:         
Net loss available to common shareholders $(4,978,030)  10,912,284  $(0.46)
Effect of dilutive securities            
Stock options  -   -   - 
Warrants  -   -   - 
Diluted loss per share $(4,978,030)  10,912,284  $(0.46)
  For the year ended June 30, 2020 
  Net Income  Shares  Per Share 
Basic income per share:            
Net income available to common shareholders $937,081   11,734,648  $0.08 
Effect of dilutive securities            
Share grants  -   49,766   - 
Diluted income per share $937,081   11,784,414  $0.08 

 

  For the year ended June 30, 2016 
   Net Income   Shares   Per Share 
Basic income per share:            
Net income available to common shareholders $3,402,761   10,391,157  $0.33 
Effect of dilutive securities            
Stock options  -   190,595   - 
Warrants  -   3,083   - 
Diluted income per share $3,402,761   10,584,835  $0.32 

As of June 30, 2017 and 2016, the following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

  2017  2016 
       
Stock Options  475,133   - 
Share Grants  449,950   - 
   925,083   - 
  For the year ended June 30, 2019 
  Net Income  Shares  Per Share 
          
Basic income per share:            
Net income available to common shareholders $8,583,399   11,599,290  $0.74 
Effect of dilutive securities            
Stock options  -   4,418   - 
Share grants  -   18,282   - 
Diluted income per share $8,583,399   11,621,990  $0.74 

 

NOTE 45RELATED PARTY TRANSACTIONSMAJOR CUSTOMERS

 

NetSol-Innovation

In November 2004, the Company entered into a joint venture agreement with 1insurer formerlyInnovation Group called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the yearsyear ended June 30, 20172020, revenues from Daimler Financial Services (“DFS”) and 2016, NetSol Innovation provided servicesBMW Financial (“BMW”) were $14,869,030 and $8,904,809, respectively representing 26.4% and 15.8%, respectively of $5,665,872revenues. During the year ended June 30, 2019, revenues from DFS and $8,161,015,BMW were $23,912,605 and $12,522,867 representing 35.3% and 18.5%, respectively of revenues. The revenue from these customers are shown in the Asia – Pacific segment.

Accounts receivable from DFS and BMW at June 30, 2020, were $4,821,468 and $474,271, respectively. Accounts receivable at June 30, 20172019, were $7,917,814 and 2016$159,322, respectively. Revenues in excess of billings at June 30, 2020 were $1,462,078$5,709,226 and $4,689,322,$6,977,375, respectively. Revenues in excess of billings at June 30, 2019, were $4,371,081 and $5,472,043, respectively. Included in this amount was $1,300,289 and $1,281,492 shown as long term at June 30, 2020 and 2019, respectively.

 

F-24

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

Investec Asset Finance

In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the year ended June 30, 2017 and 2016, NTE and VLS provided maintenance and services of $1,299,784 and $4,437,917, respectively. Accounts receivable at June 30, 2017 and 2016 were $133,218 and $1,001,856, respectively. Revenue in excess of billing was $Nil and $804,168 as of June 30, 2017 and 2016, respectively. Included in the provision for bad debts is $557,909 related to Investec.

WRLD3D

On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company was appointed CEO of WRLD3D, a non-public company. On March 2, 2016, the Company purchased a 4.9% interest in WRLD3D for $1,111,111 and the Company’s subsidiary NetSol PK purchased a 12.2% investment in WRLD3D for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. See Note 6 and Note 10.

G-Force; LLC

Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC which purchased a 4.9% investment in WRLD3D, Inc.) for $1,111,111. See Note 10 “Other Long Term Assets”

NOTE 5 – MAJOR CUSTOMERS

The Company is a strategic business partner for Daimler Financial Services (which consists of a group of many companies in different countries), which accounts for approximately 44.25% and 19.96% of revenue, and 1insurer accounts for approximately 8.67% and 12.64% of revenue for the fiscal years ended June 30, 2017 and 2016, respectively. The revenue from these two customers is shown in the Asia – Pacific segment. Accounts receivable at June 30, 2017 for these customers were $1,620,717 and $1,462,078, respectively. Accounts receivable at June 30, 2016 for these customers were $5,306,166 and $4,689,322, respectively. Revenue in excess of billing at June 30, 2017 for these customers was $18,579,540 and $nil, respectively. Included in this amount was $5,173,538 shown as long term. Revenue in excess of billing at June 30, 2016 for these customers was $2,801,354 and $nil, respectively.

On December 21, 2015, the Company entered into a 10-year contract with Daimler Financial Services to provide license, maintenance and services for 12 countries in the Asia Pacific Region.  The implementation phase is expected to be over a five-year period with maintenance and support over 10 years.  The contract is a fixed fee arrangement with total license and maintenance fees of approximately €71,000,000 (approximately $81,000,000) with services to be separately agreed upon and billed as they are performed. The customer will make fixed annual payments of €5,850,000 (approximately $6,648,000) for years 1-5 and €8,350,000 (approximately $9,489,000) for years 6-10. Under the terms of the contract, the customer has the right to withdraw from certain modules and terminate the agreement as to certain countries based on good cause or business reasons prior to the beginning of implementation.

 

NOTE 6 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY

Convertible Note Receivable - May 25, 2017

 

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of June 30, 2017,2020, the Company had disbursed $200,000.$750,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018. 2019. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

The Convertible Note is convertible upon the occurrence of the following events:

1.Upon a qualified financing which is an equity financing of at least $2,000,000.
2.Optionally, upon an equity financing less than $2,000,000.
3.Optionally after the maturity date.
4.Upon a change of control.

The Convertible Note is convertible into Series BB Preferred shares at the lesser of (i) the price paid per share for the equity security by the investors in the qualified financing and (ii) $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Convertible Note). Note.

Convertible Note Receivable – February 9, 2018

The Company’s subsidiary NetSol Thai entered into an agreement with WRLD3D, whereby NetSol Thai was issued a Convertible Promissory Note (the “Thai Convertible Note”) which was fully executed on February 9, 2018. The maximum principal amount of the Thai Convertible Note is $2,500,000, and as of June 30, 2020, NetSol Thai had disbursed $2,500,000. The Thai Convertible Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2020. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

The Thai Convertible Note is convertible upon the occurrence of the following events:

 

F-25

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 1.Conversion upon a qualified financing which is an equity financing of at least $2,000,000.$1,000,000.
 2.Optional conversion upon an equity financing less than $2,000,000.$1,000,000.
 3.Optional conversion after the maturity date.
 4.Change of control.

 

Subsequent to June 30, 2017,If the Company loanedconverts the Thai Convertible Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securities by the investors multiplied by (B) 70%.

If the Company converts the Thai Convertible Note either as an additional $500,000optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Thai Convertible Note.

Convertible Note Receivable – April 1, 2019

The Company entered into an agreement with WRLD3D, pursuant towhereby the Company was issued a Convertible Promissory Note agreement. (See(the “April 1, 2019 Note”) which was fully executed on April 1, 2019. The maximum principal amount is $600,000, and as of June 30, 2020, the Company had disbursed $600,000. The April 1, 2019 Note 21)bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2020. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

F-25

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

The April 1, 2019 Note is convertible upon the occurrence of the following events:

1.Conversion upon a qualified financing which is an equity financing of at least $1,000,000.
2.Optional conversion upon an equity financing less than $1,000,000.
3.Optional conversion after the maturity date.
4.Change of control.

If the Company converts the April 1, 2019 Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securities by the investors multiplied by (B) a calculated conversion rate which is determined based on the amount of the principal and interest outstanding and the Company’s ownership percentage.

If the Company converts the April 1, 2019 Note either as an optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the April 1, 2019 Note.

Convertible Note Receivable – August 19, 2019

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “August 19, 2019 Note”) which was fully executed on August 19, 2019. The maximum principal amount is $400,000, and as of June 30, 2020, the Company had disbursed $400,000. The August 19, 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2020. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

The August 19, 2019 Note is convertible upon the occurrence of the following events:

1.Conversion upon a qualified financing which is an equity financing of at least $1,000,000.
2.Optional conversion upon an equity financing less than $1,000,000.
3.Optional conversion after the maturity date.
4.Change of control.

If the Company converts the August 19, 2019 Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securities by the investors multiplied by (B) a calculated conversion rate which is determined based on the amount of the principal and interest outstanding and the Company’s ownership percentage.

If the Company converts the August 19, 2019 Note either as an optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the August 19, 2019 Note.

The following table summarizes the convertible notes receivable from WRLD3D.

      Convertible 
Agreement Interest Maturity  Note 
Date Rate Date  Amount 
May 25, 2017 5% On Demand $750,000 
February 9, 2018 10% On Demand  2,500,000 
April 1, 2019 10% On Demand  600,000 
August 19, 2019 10% On Demand  400,000 
      $4,250,000 

The Company has accrued interest of $701,062 and $328,748 at June 30, 2020 and 2019, respectively, which is included in “Other current assets”.

F-26

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

NOTE 7 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
          
Prepaid Expenses $597,687  $386,578  $1,035,415  $991,528 
Advance Income Tax  1,052,935   968,334   355,482   800,798 
Employee Advances  128,100   83,978   44,415   33,778 
Security Deposits  103,255   72,985   270,403   147,668 
Other Receivables  252,590   486,562   1,239,221   733,826 
Other Assets  329,319   216,191   163,244   438,666 
Total $2,463,886  $2,214,628  $3,108,180  $3,146,264 

 

NOTE 8 – REVENUEREVENUES IN EXCESS OF BILLINGS – LONG TERM

 

RevenueRevenues in excess of billings, net consisted of the following:

 

 As of June 30,  As of As of 
 2017  June 30, 2020 June 30, 2019 
        
Revenue in excess of billing - long term $5,483,869 
Revenues in excess of billings - long term $1,341,575  $1,380,631 
Present value discount  (310,331)  (41,286)  (99,139)
Net Balance $5,173,538  $1,300,289  $1,281,492 

 

Pursuant to revenue recognition for contract accounting, the Company hashad recorded revenuerevenues in excess of billings – long termlong-term for amounts billable after one year. During the years ended June 30, 2020 and 2019, the Company accreted $55,344 and $Nil, respectively, which was recorded in interest income for that period. The fair valueCompany used the discounted cash flow method with an interest rate of 4.35% during the payments to be received after one year has been estimated at $5,173,538. The fair value adjustment of $310,331 will be accreted in subsequent periods.years ended June 30, 2020 and 2019.

 

F-26F-27

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

NOTE 9 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
          
Office Furniture and Equipment $3,755,710  $3,346,156  $3,143,833  $3,125,382 
Computer Equipment  26,693,730   25,935,620   19,256,543   18,905,603 
Assets Under Capital Leases  1,965,650   2,409,074   1,443,423   1,720,490 
Building  9,243,866   9,185,570   5,848,813   6,021,939 
Land  2,428,626   2,410,664   1,512,905   1,559,111 
Capital Work In Progress  27,648   - 
Autos  1,270,339   1,073,447   1,348,405   1,024,754 
Improvements  592,652   385,135   36,929   111,165 
Subtotal  45,950,573   44,745,666   32,618,499   32,468,444 
Accumulated Depreciation  (25,579,870)  (21,971,231)  (21,288,868)  (20,371,589)
Property and Equipment, Net $20,370,703  $22,774,435  $11,329,631  $12,096,855 

 

For the years ended June 30, 20172020 and 2016,2019, depreciation expense totaled $3,785,334$1,903,640 and $4,387,121,$2,285,225, respectively. Of these amounts, $2,671,586$1,069,057 and $3,161,951$1,387,425, respectively, are reflected as part ofin cost of revenues for the years ended June 30, 2017 and 2016, respectively.revenues.

 

Following is a summary of fixed assets held under capital leases:leases as of June 30, 2020 and 2019:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
Computers and Other Equipment $309,863  $503,926  $328,621  $324,466 
Furniture and Fixtures  227,914   408,200   51,119   65,084 
Vehicles  1,427,873   1,496,948   1,063,683   1,330,940 
Total  1,965,650   2,409,074   1,443,423   1,720,490 
Less: Accumulated Depreciation - Net  (711,622)  (713,248)  (667,096)  (538,564)
 $1,254,028  $1,695,826  $776,327  $1,181,926 

 

NOTE 10 – OTHER LONG TERM ASSETS- LEASES

 

     As of June 30,  As of June 30, 
     2017  2016 
          
Investment  (1) $3,057,020  $720,350 
Long Term Security Deposits      154,275   122,203 
Total     $3,211,295  $842,553 

The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years.

 

(1)The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company used the incremental borrowing rate on July 1, 2019 for all leases that commenced prior to that date. For finance leases, the Company used the incremental borrowing rate implicit in the lease.

F-28

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.

The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.

Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants.

Supplemental balance sheet information related to leases was as follows:

  As of 
  June 30, 2020 
Assets    
Operating lease assets, net $2,360,129 
     
Liabilities    
Current    
Operating $1,111,912 
Non-current    
Operating  1,339,965 
Total Lease Liabilities $2,451,877 

The components of lease cost were as follows:

  For the Year 
  Ended June 30, 2020 
    
Amortization of finance lease assets $253,071 
Interest on finance lease obligation  81,907 
Operating lease cost  1,258,102 
Short term lease cost  282,806 
Sub lease income  (33,426)
Total lease cost $1,842,460 

F-29

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Lease term and discount rate were as follows:

As of
June 30, 2020
Weighted average remaining lease term - Operating leases2.45 Years
Weighted average discount rate - Operating leases5.6%

Supplemental disclosures of cash flow information related to leases were as follows:

  For the Year 
  Ended June 30, 2020 
    
Cash flows related to lease liabilities    
Operating cash flows related to operating leases $1,263,089 

Maturities of operating lease liabilities were as follows as of June 30, 2020:

  Amount 
Within year 1 $1,215,699 
Within year 2  855,582 
Within year 3  474,181 
Within year 4  75,500 
Within year 5  786 
Thereafter  3,142 
Total Lease Payments  2,624,890 
Less: Imputed interest  (173,013)
Present Value of lease liabilities  2,451,877 
Less: Current portion  (1,111,912)
Non-Current portion $1,339,965 

As of June 30, 2020, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under non-cancelable operating leases for the following five fiscal years and thereafter were as follows:

Within year 1 $1,575,573 
Within year 2  917,556 
Within year 3  530,632 
Within year 4  105,665 
Within year 5  35,154 
Total $3,164,580 

The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and terminate by July 2021. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the year ended June 30, 2020, the Company received $33,426 of lease income.

F-30

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

NOTE 11 – LONG-TERM INVESTMENT IN WRLD3D

Drivemate

The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate Agreement”) whereby the Company will purchase an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company will purchase 5,469 preferred shares for $1,800,000 consisting of $500,000 cash and $1,300,000 in services. The Company paid $250,000 on May 2, 2019 and received 760 shares for a 5.27% holding in Drivemate. The remaining $250,000 will be paid in $62,500 increments beginning 15 months from the date of the Drivemate Agreement signing with the final payment due 24 months from the date of the Drivemate Agreement signing. During the year ended June 30, 2020, the Company paid $94,500 leaving a balance of $155,500 to be paid. As of June 30, 2020, the Company owns 5.05% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company is to own 30% of Drivemate at the final payment date; therefore, the Company accounts for the investment using the equity method of accounting.

During the year ended June 30, 2020 and 2019, the Company performed $1,054,372 and $245,280 of services, respectively.

Under the equity method of accounting, the Company recorded its share of net loss of $16,714 and $3,235 for the years ended June 30, 2020 and 2019, respectively.

WRLD3D-Related Party

 

On March 2, 2016,2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2016.2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which will bewas earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. If NetSol PK fails to provide the future services, it may be required to forfeit the shares back to WRLD3D. As of June 30, 2017,2020, the investment earned by NetSol PK is $1,945,909.

F-27

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

was $2,777,778. As of June 30, 20172020, NTI and 2016NTPK own 1,636,876 and 4,092,189, respectively, of Series BB Preferred Stock.

 

In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of WRLD3D which included the following key terms and features:

 

 The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”.
 The warrants expireexpired on March 2, 2020.
 “Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016.
 “Qualified Financing” is defined as financing with total proceeds of at least $2 million.
 The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred.
 The exercise price of the warrants is equal to the greater of

 

 a)70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or
 b)25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant).

 

The Company had originally accounted for the investment under the cost method. On May 31, 2017, the Company determined that it met the significant influence criteria since the newly appointed CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company changedaccounts for the accounting treatment from the costinvestment using equity method to the equity method.of accounting.

 

During the years ended June 30, 20172020 and 2016,2019, NetSol PK provided services valued at $1,225,434$300,821 and $250,770,$636,731, respectively, which is recorded as services-related party. These services are recorded as accountsAccounts receivable until approved by WRLD3D after which the shares are released from restriction. During the year endedat June 30, 20172020 and 2016, NetSol PK services valued at $1,231,1152019 were $1,373,099 and $164,794, respectively, were released from restriction.$1,020,589, respectively. Revenue in excess of billing at June 30, 20172020 and 20162019 were $80,705$8,163 and $86,385,$110,827, respectively. DuringUnder the yearequity method of accounting, the Company recorded its share of net loss of $589,150 and $838,610 for the years ended June 30, 2017, NetSol PK paid $550,000 to WRLD3D to buy out a portion of the services requirement.

At June 30, 2017, the Company has determined that there is no impairment.2020 and 2019, respectively.

 

F-28F-31

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

The following table reflects the above investments at June 30, 2020.

  Drivemate  WRLD3D  Total 
Gross investment $344,500  $3,888,889  $4,233,389 
Cumulative net loss on investment  (19,940)  (1,401,142)  (1,421,082)
Cumulative other comprehensive income (loss)  -   (424,615)  (424,615)
Net investment $324,560  $2,063,132  $2,387,692 

 

NOTE 11 –12 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
          
Product Licenses - Cost $47,244,997  $47,244,997  $47,244,997  $47,244,997 
Effect of Translation Adjustment (3,134,488) (3,323,518)  (16,045,322)  (15,343,727)
Accumulated Amortization  (27,067,358)  (24,247,446)  (25,808,598)  (24,568,320)
Net Balance $17,043,151 $19,674,033  $5,391,077  $7,332,950 

 

(A)Product Licenses

 

Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $17,043,151$5,391,077 will be amortized over the next 6.753.25 years. Amortization expense for the years ended June 30, 20172020 and 20162019 was $2,776,473$1,828,314 and $2,765,018,$2,138,432, respectively.

 

(B)Future Amortization

 

Estimated amortization expense of intangible assets over the next five years is as follows:

 

Year ended:    
June 30, 2018  $2,778,585 
June 30, 2019   2,778,585 
June 30, 2020   2,778,585 
June 30, 2021   2,778,585 
June 30, 2022   2,778,585 
Thereafter   3,150,226 
   $17,043,151 
Year ended:   
June 30, 2021 $1,730,911 
June 30, 2022  1,730,911 
June 30, 2023  1,730,911 
June 30, 2024  198,344 
  $5,391,077 

 

F-29F-32

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

NOTE 1213 – GOODWILL

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period business combinations. Goodwill was comprised of the following amounts:

 

  As of June 30,  As of June 30, 
  2017  2016 
NetSol PK $1,166,610  $1,166,610 
NTE  3,471,814   3,471,814 
VLS  214,044   214,044 
NTA  4,664,100   4,664,100 
Total $9,516,568  $9,516,568 

The Company tests for goodwill impairment at each reporting unit. There was no goodwill impairment for the years ended June 30, 2017 and 2016.

  As of June 30,  As of June 30, 
  2020  2019 
NetSol PK (Asia - Pacific) $1,166,610  $1,166,610 
NTE (Europe)  3,471,814   3,471,814 
VLS (Europe)  214,044   214,044 
NTA (North America)  4,664,100   4,664,100 
Total $9,516,568  $9,516,568 

 

NOTE 13 –14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
          
Accounts Payable $1,466,265  $1,346,532  $1,351,158  $1,156,498 
Accrued Liabilities  4,498,958   4,171,058   3,349,624   5,055,358 
Accrued Payroll & Taxes  520,719   231,881   537,888   793,503 
Taxes Payable  174,485   66,437   303,996   326,386 
Other Payable  219,767   146,862   138,171   144,815 
Total $6,880,194  $5,962,770  $5,680,837  $7,476,560 

 

F-30F-33

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

NOTE 1415 – DEBTS

 

Notes payable and capital leases payable consisted of the following:

 

  As of June 30, 2017    As of June 30, 2020 
    Current Long-Term      Current Long-Term 
Name  Total Maturities Maturities    Total Maturities Maturities 
                 
D&O Insurance(1) $87,485  $87,485  $-   (1) $81,728  $81,728  $- 
Paycheck Protection Program Loans  (2)  469,721   182,669   287,052 
Bank Overdraft Facility(2)  221,379   221,379   -   (3)  -   -   - 
HSBC Loan(3)  -   -   - 
Term Finance Facility  (4)  1,380,878   354,337   1,026,541 
Loan Payable Bank - Export Refinance(4)  4,776,461   4,776,461   -   (5)  2,975,482   2,975,482   - 
Loan Payable Bank - Running Finance  (6)  -   -   - 
Loan Payable Bank - Export Refinance II(5)  1,910,585   1,910,585   -   (7)  2,261,365   2,261,365   - 
Loan Payable Bank - Running Finance(6)  2,865,877   2,865,877   - 
Loan Payable Bank - Running Finance II  (8)  -   -   - 
Loan Payable Bank - Export Refinance III  (9)  2,975,483   2,975,483   - 
Term Finance Facility  (10)  65,473   16,423   49,050 
   9,861,787   9,861,787   -       10,210,130   8,847,487   1,362,643 
Subsidiary Capital Leases(7)  727,770   361,008   366,762 
Subsidiary Finance Leases  (11)  469,406   292,074   177,332 
  $10,589,557  $10,222,795  $366,762      $10,679,536  $9,139,561  $1,539,975 

 

   As of June 30, 2016 
      Current  Long-Term 
Name  Total  Maturities  Maturities 
           
D&O Insurance(1) $65,114  $65,114  $- 
HSBC Loan(3)  93,704   93,704   - 
Loan Payable Bank(4)  3,792,907   3,792,907   - 
    3,951,725   3,951,725   - 
Subsidiary Capital Leases(7)  966,051   488,359   477,692 
   $4,917,776  $4,440,084  $477,692 
     As of June 30, 2019 
        Current  Long-Term 
Name    Total  Maturities  Maturities 
             
D&O Insurance  (1) $67,671  $67,671  $- 
Paycheck Protection Program Loans  (2)  -   -   - 
Bank Overdraft Facility  (3)  -   -   - 
Term Finance Facility  (4)  -   -   - 
Loan Payable Bank - Export Refinance  (5)  3,066,355   3,066,355   - 
Loan Payable Bank - Running Finance  (6)  325,034   325,034   - 
Loan Payable Bank - Export Refinance II  (7)  2,330,431   2,330,431   - 
Loan Payable Bank - Running Finance II  (8)  735,925   735,925   - 
Loan Payable Bank - Export Refinance III  (9)  -   -   - 
Term Finance Facility  (10)  82,969   15,838   67,131 
       6,608,385   6,541,254   67,131 
Subsidiary Finance Leases  (11)  861,784   364,343   497,441 
      $7,470,169  $6,905,597  $564,572 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well asand Errors and Omissions (“E&O”) liability insurance, for which the totalD&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings range from 4.8%5.0% to 7.69% and from 4.25% to 5.89%7.0% as of June 30, 20172020 and 2016, respectively.6.0% and 7.0% as of June 30, 2019.

 

(2) The Company and its subsidiary, NTA, received Paycheck Protection Program loans of $469,721 introduced by the U.S. Government during the COVID-19 Pandemic. This loan is forgivable if the Company meets the criteria set by the U.S. Government. The loans carry an interest rate of 1% and have a maturity date of two years from the date of the disbursement of the loan. As of June 30, 2020, the Company has not applied for the loan forgiveness.

F-34

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

(3) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $389,610.$370,370. The annual interest rate was 4.75%5.1% as of June 30, 2017.2020. Total outstanding balance as of June 30, 20172020 and 2019 was £170,462 or approximately $221,379. Interest expense for year ended June 30, 2017 was $9,077.£nil.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of June 30, 2017,2020, NTE was in compliance with this covenant.

 

F-31

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes(4) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to Consolidated Financial Statements

protect the employment situation during Pandemic COVID-19. This is a term loan payable in three years. The availed facility amount is Rs. 232,042,664 or $1,380,878, at June 30, 20172020, of which $354,337 is show as current and 2016

(3) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of a controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,298,701 for a period of 5 years with monthly payments of £18,420, or approximately $23,922.remaining $1,026,541 is shown as long term. The interest rate was 4% which is 3.5% above the bank sterling base rate. The loan is securitized against debenture comprising of fixed and floating charges over all the assets and undertakings of NTE including all present and future freehold and leasehold property, book and other debts, chattels, goodwill and uncalled capital, both present and future. Interest expense for the years endedloan was 3% at June 30, 2017 and 2016 was $2,243 and $12,846, respectively. NTE paid this loan in full during the year ended June 30, 2017.2020.

 

(4)(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 500,000,000 or $4,776,461$2,975,482 and Rs. 400,000,000500,000,000 or $3,792,907,$3,066,355 at June 30, 2020 and 2019, respectively. The interest rate for the loansloan was 3% and 4.5% at June 30, 20172020 and 2016,2019.

(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $446,322 and Rs. 75,000,000 or $459,953, at June 30, 2020 and 2019, respectively. Interest expenseNetSol PK used Rs. 53,000,000 or $325,034, at June 30, 2019. The interest rate for the year endedloan was 7.2% and 13.0% at June 30, 20172020 and 2016 was $121,306 and $148,475,2019, respectively.

 

This facility requiresThese facilities require NetSol PK to maintain a long termlong-term debt equity ratio of 60:40 and the current ratio of 1:1. As of June 30, 2017,2020, NetSol PK was in compliance with this covenant.

 

(5) During the fiscal year, the(7) The Company’s subsidiary, NetSol PK, availedhas an export refinance facility with Samba Bank Limited, of Rs. 200,000,000 or $1,910,585, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 380,000,000 or $2,261,366 and Rs. 380,000,000 or $2,330,431, at June 30, 2020 and 2019, respectively. The interest rate for the loansloan was 3% at June 30, 2017. Interest expense for the year ended June 30, 2017 was $2,511.2020 and 2019.

 

(6) During the fiscal year, the(8) The Company’s subsidiary, NetSol PK, availedhas a running finance facility of Rs. 300,000,000 or $2,865,877 fromwith Samba Bank Limited.Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 120,000,000 or $714,116 and Rs. 120,000,000 or $735,925, at June 30, 2020 and 2019, respectively. The interest rate for the loansloan was 8.13%7.7% and 14.3% at June 30, 2017. Interest expense for the year ended June 30, 2017 was $78,251.2020 and 2019, respectively.

 

TheDuring the loan tenure, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum ofa current ratio of 1:1, Interestan interest coverage ratio of 4 times, Leveragea leverage ratio of 2 times, and Debt Service Coverage Ratioa debt service coverage ratio of 4 times during the tenure of loan.times. As of June 30, 2017,2020, NetSol PK was in compliance with these covenants.

 

(7)(9) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. Total facility amount is Rs. 900,000,000 or $5,355,868 and NetSol PK used Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at June 30, 2020.

(10) In March 2020, the Company’s subsidiary, VLS, entered into a loan agreement with Investec Bank PLC. The loan amount was £69,549, or $85,863, for a period of 5 years with monthly payments of £1,349, or $1,665. As of June 30, 2020, the subsidiary has used this facility up to $65,473, of which $49,050 was shown as long-term and $16,311 as current. The interest rate was 6.14% at June 30, 2020.

(11) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2022.2024. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the years ended June 30, 20172020 and 2016.2019.

 

F-32F-35

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

Following is the aggregate minimum future lease payments under capital leases for the year endedas of June 30, 2017:2020:

 

  Amount 
Minimum Lease Payments    
Due FYE 6/30/18 $401,605 
Due FYE 6/30/19  294,536 
Due FYE 6/30/20  84,419 
Due FYE 6/30/21  6,570 
Due FYE 6/30/22  2,190 
Total Minimum Lease Payments  789,320 
Interest Expense relating to future periods  (61,550)
Present Value of minimum lease payments  727,770 
Less:Current portion  (361,008)
Non-Current portion $366,762 
  Amount 
Minimum Lease Payments    
Within year 1 $326,556 
Within year 2  152,975 
Within year 3  19,852 
Within year 4  13,235 
Total Minimum Lease Payments  512,618 
Interest Expense relating to future periods  (43,212)
Present Value of minimum lease payments  469,406 
Less: Current portion  (292,074)
Non-Current portion $177,332 

Following is the aggregate future long term debt payments as of June 30, 2020:

  Amount 
Loan Payments    
Within year 1 $553,429 
Within year 2  988,874 
Within year 3  360,745 
Within year 4  13,024 
Total Loan Payments  1,916,072 
Less: Current portion  (553,429)
Non-Current portion $1,362,643 


 

NOTE 1516 – INCOME TAXES

 

The Company is incorporated in the State of Nevada and registered to do business in the State of California. The following is a breakdown of income before the provision for income taxes:

 

Consolidated pre-tax income (loss) consists of the following:

 

 Years Ended June 30,  Years Ended June 30, 
 2017 2016  2020 2019 
US operations $(5,255,124) $(2,527,545) $417,885  $(1,941,611)
Foreign operations  4,450,639   8,237,232   1,915,206   15,016,935 
 $(804,485) $5,709,687  $2,333,091  $13,075,324 

F-36

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

The components of the provision for income taxes are as follows:

 

  Years Ended June 30, 
  2017  2016 
Current:      
Federal $-  $- 
State and Local  -   - 
Foreign  931,951   652,546 
         
Deferred:        
Federal  -   - 
State and Local  -   - 
Foreign  -   - 
Provision for income taxes $931,951  $652,546 

F-33

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

  Years Ended June 30, 
  2020  2019 
Current:        
Federal $-  $- 
State and Local  2,275   - 
Foreign  1,138,793   1,057,784 
         
Deferred:        
Federal  -   - 
State and Local  -   - 
Foreign  -   - 
Provision for income taxes $1,141,068  $1,057,784 

 

A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows:

 

Reconciliation of effective income tax rate         
 Years Ended June 30,    Years Ended June 30,    
 2017   2016    2020   2019   
Income tax (benefit) provision at statutory rate $(281,570) 35.0% $1,998,390 35.0% $489,949   21.0% $2,745,818   21.0%
State income (benefit) taxes, net of federal tax benefit (46,258) 5.8% 328,307 5.7%  162,850   7.0%  912,658   7.0%
Foreign earnings taxed at different rates (625,773) 77.8% (2,026,031) -35.5%  602,918   25.8%  (3,143,954)  -24.0%
Change in valuation allowance for deferred tax assets 

1,340,938

 -167% 476,646 8.3%  (120,739)  -5%  356,905   2.7%
Other  544,614 -67.7%  (124,766) -2.2%  6,090   0.3%  186,357   1.4%
Provision for income taxes $931,951 -115.8% $652,546 11.4% $1,141,068   48.9% $1,057,784   8.1%

 

Deferred income tax assets and liabilities as of June 30, 20162020 and 20152019 consist of tax effects of temporary differences related to the following:

 

Components of deferred tax asset     
 Years Ended June 30,  Years Ended June 30, 
 2017 2016  2020 2019 
Net operating loss carry forwards $16,365,908  $14,862,607  $7,318,282  $6,994,268 
Other  397,429   559,792   115,253   257,337 
Net deferred tax assets  16,763,337   15,422,399   7,433,535   7,251,605 
Valuation allowance for deferred tax assets  (16,763,337)  (15,422,399)  (7,433,535)  (7,251,605)
Net deferred tax assets $-  $-  $-  $- 

 

The Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future. The valuation allowance increaseddecreased by 1,340,938$181,930 for the year ended June 30, 2017 mainly due to adjusting the Company’s net operating loss carry forwards for the current year operating losses in certain subsidiaries.2020.

 

At June 30, 2017,2020, federal and state net operating loss carry forwards in the United States of America were $40,582,869$30,196,241 and $4,556,581,$7,347,063, respectively. Federal net operating loss carry forwards begin to expire in 2020,2028, while state net operating loss carry forwards are expiring each year. Due to both historical and recent changes in the capitalization structure of the Company, the utilization of net operating losses may be limited pursuant to section 382 of the Internal Revenue Code. Net operating losses related to foreign entities were $6,701,192$1,330,673 at June 30, 2017.2020.

F-37

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

As of June 30, 2017,2020, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

F-34

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 

The Company is subject to U.S. federal income tax, as well as various state and foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending June 30, 20142017 through 2016.2019. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months.

 

The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently invest and upon which no deferred US income taxes have been provided is $29,645,863$31,046,118 as of June 30, 2017.2020. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed. The Company determined that it is not practicable to determine unrecognized deferred tax liability associated with the unremitted earnings attributable to the foreign subsidiaries.

 

Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2018.2025. The aggregate effect of the tax holiday for June 30, 20172020 and 20162019 is $876,058$47,477 and $1,096,200,$2,771,078, respectively. The effect on basic and diluted earnings per share is $0.08$0.004, for June 30, 20172020 and $0.11$0.19 and $0.10, respectively$0.18 for June 30, 2016.2019.

 

NOTE 16 –17 - STOCKHOLDERS’ EQUITY

 

During the years ended June 30, 20172020 and 2016,2019, the Company issued 121,85855,044 and 54,31841,482 shares of common stock, respectively, for services rendered by officers of the Company. These shares were valued at the fair market value of $727,095$312,090 and $304,138,$252,655, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.

 

During the years ended June 30, 20172020 and 2016,2019, the Company issued 52,25173,667 and 33,00035,723 shares of common stock respectively, for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $294,531$261,622 and $167,974,$201,246, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.

 

During the years ended June 30, 20172020 and 2016,2019, the Company issued 253,06681,696 and 141,204112,992 shares of common stock, respectively, to employees pursuant to the terms of their employment agreements. These shares were valued at the fair market value of $1,500,532$416,738 and $792,506,$686,109, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.

 

During the years ended June 30, 2017 and 2016, the Company collected subscription receivable of $485,661 and $356,500, respectively, related to the exercise of stock options in previous years.

During the year ended June 30, 2017 and 2016,2019, the Company received $380,770 and $780,980, respectively$85,000 pursuant to a stock option agreement for the exercise of 84,838 and 177,02413,076 shares of common stock respectively at prices ranging from $3.88 to $4.75 and $3.88 to $4.92$6.50 per share, respectively.

F-35

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016share.

 

During the yearyears ended June 30, 2017,2019, the Company purchased 7,50041,650 shares of its common stock from the open market at an average price of $5.18$6.03 per share pursuant to the Company’s stock buy-back plan.

 

NOTE 17 –18 - INCENTIVE AND NON-STATUTORY STOCK BASED COMPENSATIONOPTION PLAN

 

The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the boardBoard of directorsDirectors specifically determines otherwise, as provided.

 

Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.

F-38

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

The Plans provide for the grant of equity-based awards, including options, stock appreciation rights, restricted stock awards or performance share awards or any other right or interest relating to shares or cash, to eligible participants. The Plans contemplate the issuance of common stock upon exercise of options or other awards granted to eligible persons under the Plans. Shares issued under the Plans may be both authorized and unissued shares or previously issued shares acquired by the Company. Upon termination or expiration of an unexercised option, stock appreciation right or other stock-based award under the Plans, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the Plans. Any shares of restricted stock forfeited as described below will become available for grant. The maximum number of shares that may be granted to any one participant in any calendar year may not exceed 50,000 shares. All options issued pursuant to the PlansPlan are nontransferable and subject to forfeiture.

 

Options granted under the Plans are not generally transferable and must be exercised within 10 years, subject to earlier termination upon termination of the option holder’s employment, but in no event later than the expiration of the option’s term. The exercise price of each option may not be less than the fair market value of a share of the Company’s common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended.

Incentive stock options granted to any participant who owns 10% or more of the Company’s outstanding common stock (a “Ten Percent Shareholder”) must have an exercise price equal to or exceeding 110% of the fair market value of a share of our common stock on the date of the grant and must not be exercisable for longer than five years. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee.Board of Directors. The maximum term of any option granted under the Plans2015 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years.

F-36

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 

Under the Plans, a participant may also be awarded a “performance award,” which means that the participant may receive cash, stock or other awards contingent upon achieving performance goals established by the Committee.Board of Directors. The CommitteeBoard of Directors may also make “deferred share” awards, which entitle the participant to receive the Company’s stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with the Company. A participant who is granted a “stock appreciation right” under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the CommitteeBoard of Directors (but in no event less than the fair market value of the stock on the date of grant). Finally, the CommitteeBoard of Directors may make “restricted stock” awards under the Plans, which are subject to such terms and conditions as the CommitteeBoard of Directors determines and as are set forth in the award agreement related to the restricted stock. As of June 30, 2017,2020, the remaining shares to be granted are 130,00040,386 under the 20112005 Plan, 2,59598,196 under the 2013 Plan and 341,516306,422 under the 2015 Plan.

 

F-39

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

Options and Warrants

 

A summary of option and warrant activity for the years ended June 30, 20172020 and 20162019 is presented below:

 

OPTIONS:                  
 # of shares Weighted Ave Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregated Intrinsic Value  # of shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregated Intrinsic Value 
                  
Outstanding and exercisable, June 30, 2015  708,133  $6.84   1.22  $572,352 
Outstanding and exercisable, June 30, 2018  53,462  $6.50   0.61  $- 
Granted  152,024  $4.50           -   -         
Exercised  (177,024) $4.37       368,808   (13,076) $6.50         
Expired / Cancelled  (73,000) $24.08           -   -         
Outstanding and exercisable, June 30, 2016  610,133  $4.90   0.99  $799,030 
Outstanding and exercisable, June 30, 2019  40,386  $6.50   0.61  $     - 
Granted  79,838  $4.53           -   -         
Exercised  (84,838) $4.49       33,474   -   -         
Expired / Cancelled  (130,000) $7.50           (40,386) $6.50         
Outstanding and exercisable, June 30, 2017  475,133  $4.20   1.05  $8,413 
                
WARRANTS:                
Outstanding and exercisable, June 30, 2016  163,124  $7.29   0.23  $9,303 
Granted / adjusted  -   -         
Exercised  -   -         
Expired  (163,124) $7.29         
Outstanding and exercisable, June 30, 2017  -   -   -  $- 
Outstanding and exercisable, June 30, 2020  -   -   -  $- 

 

The aggregate intrinsic value at each fiscalDuring the year end representsended June 30, 2019, the difference betweenCompany extended the Company’s closing stock pricelife of $3.9 and $5.84 on July 30, 2017 and 2016 and the40,386 options with an exercise price of $6.50, for a period of one year. The Company recorded $43,612 in compensation expense for the extension of these options respectively.in the accompanying consolidated financial statements. The Aggregate intrinsicfair market value for exercised options representswas calculated using the difference betweenBlack-Scholes option pricing model with the Company’s stock price at the date of exercise and the exercise price.following assumptions:

 

The following table summarizes information about stock options and warrants outstanding and exercisable at June 30, 2017:

Exercise Price Number
Outstanding
and
Exercisable
  Weighted
Average
Remaining Contractual
Life
  Weighted
Ave
Exercise
Price
 
OPTIONS:            
             
$3.88- $6.50  474,133   1.05  $4.18 
$16.00  1,000   0.06  $16.00 
Totals  475,133   1.05  $4.20 
June 30, 2019
Risk-free interest rate2.56%
Expected life1 year
Expected volatility45%
Expected dividend0%

 

F-37F-40

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 2016

During the years ended June 30, 2017 and 2016, the Company granted 79,838 and 152,024 options to employees. The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model for options granted during the year ended June 30, 2017 and 2016 are as follows:

  June 30, 2017  June 30, 2016 
Risk-free interest rate  0.01% - 0.51%  0.01% - 0.02%
Expected life  1 month - 3 months   3 months - 5 months 
Expected volatility  16.71% - 19.27%  41.65% - 47.89%
Expected dividend  0%  0%

The weighted average grant-date fair value for the options granted during the year ended June 30, 2017 and 2016, was $0.34 and $0.96, respectively. The Company recorded compensation expense of $26,956 and $145,716 for the years ended June 30, 2017 and 2016, respectively.

During 2017, the Company extended the contractual life for one year for 420,671 fully vested share options held by 2 officers and an employee. As a result of that modification, the Company recognized additional compensation expense of$214,209.

During 2016, the Company extended the contractual life for one year for 425,671 fully vested share options held by 2 officers and an employee. As a result of that modification, the Company recognized additional compensation expense of$122,875.2019

 

Stock Grants

 

The following table summarizes stock grants awarded as compensation:

 

 # of shares Weighted Average Grant Date Fair Value ($)  # of shares Weighted Average Grant Date Fair Value ($) 
          
Unvested, June 30, 2015  6,667  $6.00 
Unvested, June 30, 2018  155,648  $6.07 
Granted 864,500 $5.91   122,277  $5.71 
Vested  (240,939) $5.51   (191,450) $5.99 
Unvested, June 30, 2016 630,228 $6.07 
Forfeited / Cancelled  (4,960) $6.05 
Unvested, June 30, 2019  81,515  $5.88 
Granted 222,146 $5.92   200,273  $4.61 
Cancelled (5,000) $5.55 
Vested  (427,175) $5.89   (210,408) $4.71 
Unvested, June 30, 2017  420,199 $6.15 
Forfeited / Cancelled  (4,959) $6.05 
Unvested, June 30, 2020  66,421  $5.75 

 

For the years ended June 30, 20172020 and 2016,2019, the Company recorded compensation expense of $2,522,158$808,458 and $1,264,618,$1,131,013, respectively. The compensation expense related to the unvested stock grants as of June 30, 20172020 was $2,565,438$373,129 which will be recognized during the fiscal years of 2018 to 2019.2021 through 2022.

F-38

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 

NOTE 1819 – COMMITMENTS AND CONTINGENCIES

 

(A)Non-cancellable operating leasesOn or about July 13, 2020, the Company was named as a defendant in a civil lawsuit based on an alleged breach of contract claim filed by Royal News Corp. d/b/a Royal Media Group (“RMG”). The lawsuit is captioned Royal News Corp. d/b/a Royal Media Group v. Netsol Techs., Inc., U.S. District Court Case No. 1:20-cv-05381-PAE (S.D.N.Y.) (the “Lawsuit”). On or about August 24, 2020, the Company and RMG reached an agreement to fully resolve the case and are in the process of documenting the agreement, which includes a release of each other from all obligations, contractual or otherwise, claims, disputes or other matters, in exchange for (i) a payment by the Company to RMG in the amount of $100,000; and (ii) RMG dismissing the Lawsuit, with prejudice, pursuant to Rule 41(a) of the Federal Rules of Civil Procedure. On September 22, 2020, a notice of dismissal with prejudice was filed with the United States District Court Southern District of New York.

 

The Company’s headquarters is located in Calabasas California with approximately 7,210 rentable square feet for $23,812 per month. The term of the lease is for five years and five months and expires October 31, 2017. A $23,821 security deposit is included in other assets in the accompanying consolidated financial statements.
The Australia lease is a three-year lease that expires in June 2018 with a monthly rent of approximately $5,296.
The Beijing lease is a three-year lease that expires in August 2019 with a monthly rent of approximately $32,427.
The Bangkok lease is a three years lease expiring in May 2020 with a monthly rent of approximately $9,303.
The NetSol Europe facilities, located in Horsham, United Kingdom, are leased until June 23, 2021 with a monthly rent of approximately $10,353.
VLS facilities, located in Chester, United Kingdom, are leased until July 2026 with a monthly rent of approximately $3,082.

NOTE 20 – RETIREMENT PLANS

 

Upon expirationThe Company and its subsidiaries have varying defined contribution plans based on country specific laws. Employer contributions vary by subsidiary from 0% up to 8% taking the form in some jurisdictions of the leases, the Company does not anticipate any difficultyemployee matching contributions and in obtaining renewals or alternative space. Rent expense amounted to $1,887,840 and $1,529,618 forothers direct employer contributions mandated by local law. During the years ended June 30, 20172020 and 2016, respectively.

The total annual lease commitment for the next five years is as follows:

FYE 6/30/18 $1,121,034 
FYE 6/30/19  660,466 
FYE 6/30/20  285,563 
FYE 6/30/21  175,391 
FYE 6/30/22  50,770 

(B)Litigation

On October 27, 2015, a shareholder derivative lawsuit was filed in the California state court entitledMcArthur v Ghauri, et al., Case No. BC599020 (Los Angeles, Cty.), naming current and former members of the Company’s board of directors as defendants. The complaint alleges that the defendants breached their fiduciary duties. The Company was named as a nominal defendant only and no damages are sought from it. On March 16, 2016, the parties in the California lawsuit reached an agreement-in-principle providing for the settlement of that case.

On December 30, 2015, a virtually identical shareholder derivative lawsuit was filed in Nevada state court,Paulovits v. Ghauri, et al., Case No. CV15-02470 (Washoe Cty.). The Nevada complaint named the same defendants and was based on the same alleged facts as the earlier-filed California case. On April 29, 2016,2019, the Company filed a motioncontributed $1,135,233 and $1,072,106, respectively, to dismiss or stay the Nevada proceeding on multiple grounds, including that is it duplicative of the first-filed California action. On May 23, 2016, pursuant to the parties’ stipulation, the Nevada court ordered that matter to be stayed for a period of one year.these plans.

F-39

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

On June 15, 2016, the parties in the California and the Nevada cases jointly executed a Stipulation and Agreement of Settlement of Derivative Claims, which is intended to fully resolve both cases. Pursuant to the stipulation and subject to the court’s approval, the Company has agreed to adopt or maintain certain corporate governance measures, and has agreed to cause its insurers to pay plaintiff counsel’s fees and expenses in an aggregate amount not to exceed $175,000. On June 16, 2016, the California plaintiff filed a motion for preliminary approval of the derivative settlement.

On May 30, 2017, Los Angeles Superior Court Judge Kenneth R. Freeman signed the Final Judgment and Order approving settlement and dismissing with prejudice the shareholder derivative litigation involving the Company. The order became effective on June 29, 2017. 

On April 7, 2017, Conister Bank Limited filed a complaint in the High Court of Justice Chancery Division, as claim no HC-2017-001045 against our subsidiary, Virtual Lease Services Limited (“VLS”).  The complaint alleges that VLS was in willful default of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint alleges damages in excess of £200,000 (approximately $260,000).  VLS has responded to the complaint and its expenses are currently covered by available insurance.  VLS denies all claims and intends to vigorously defend the action. 

 

NOTE 1921 – SEGMENT INFORMATION AND GEOGRAPHIC AREAS

 

The Company has identified three global regions or segments for its products and services; North America, Europe and Asia-Pacific. The reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies uniquedue to their particular regional location. We accountThe Company accounts for intercompanyintra-company sales and expenses as if the sales or expenses were to third parties and eliminateeliminates them in the consolidation.

F-41

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

The following table presents a summary of identifiable assets as of June 30, 20172020 and 2016:2019:

 

 As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
Identifiable assets:                
Corporate headquarters $2,922,514  $3,646,160  $4,508,724  $2,947,727 
North America  6,717,366   6,845,444   5,949,653   5,730,928 
Europe  6,056,514   7,857,427   10,856,814   8,399,033 
Asia - Pacific  83,980,936   75,000,384   67,157,898   70,419,331 
Consolidated $99,677,330  $93,349,415  $88,473,089  $87,497,019 

 

The following table presents a summary of investmentinvestments under the equity method as of June 30, 20172020 and 2016:2019:

 

 As of June 30, As of June 30,  As of As of 
 2017 2016  June 30, 2020 June 30, 2019 
Investment in WRLD3D:        
Investment in associates under equity method:        
Corporate headquarters $1,111,111  $555,556  $473,692  $686,504 
Asia - Pacific  1,945,909   164,794   1,914,000   1,967,265 
Consolidated $3,057,020  $720,350  $2,387,692  $2,653,769 

 

F-40F-42

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

 

The following table presents a summary of operating information for the years ended June 30:

 

 For the Year  For the Years 
 Ended June 30,  Ended June 30, 
 2017 2016  2020 2019 
Revenues from unaffiliated customers:                
North America $5,624,434  $5,464,740  $4,444,862  $3,947,407 
Europe  5,550,536   5,981,430   11,914,071   9,148,165 
Asia - Pacific  46,000,208   40,254,321   39,712,565   54,019,594 
  57,175,178   51,700,491   56,071,498   67,115,166 
Revenue from affiliated customers                
Europe  1,299,784   4,688,687 
Asia - Pacific  6,891,306   8,161,015   300,821   704,017 
  8,191,090   12,849,702   300,821   704,017 
Consolidated $65,366,268  $64,550,193  $56,372,319  $67,819,183 
                
Intercompany revenue                
Europe $509,328  $558,645  $585,250  $574,517 
Asia - Pacific  2,599,243   4,807,276   7,045,640   7,511,236 
Eliminated $3,108,571  $5,365,921  $7,630,890  $8,085,753 
                
Net income (loss) after taxes and before non-controlling interest:                
Corporate headquarters $(5,084,078) $(2,611,696) $(408,016) $(2,296,409)
North America  (454,297)  171,628   (241,444)  (756,510)
Europe  (1,956,137)  1,081,057   1,766,434   1,473,274 
Asia - Pacific  5,758,076   6,416,152   75,049   13,597,185 
Consolidated $(1,736,436) $5,057,141  $1,192,023  $12,017,540 
                
Depreciation and amortization:                
North America $47,583  $35,268  $11,828  $26,275 
Europe  206,407   172,755   353,862   329,671 
Asia - Pacific  6,308,344   6,944,116   3,366,264   4,067,711 
Consolidated $6,562,334  $7,152,139  $3,731,954  $4,423,657 
                
Interest expense:                
Corporate headquarters $8,576  $6,236  $33,710  $14,074 
North America  138   117 
Europe  17,462   40,302   9,905   6,876 
Asia - Pacific  283,868   217,856   303,241   290,848 
Consolidated $310,044  $264,511  $346,856  $311,798 
                
Income tax expense:                
Corporate headquarters $1,075  $1,837 
North America  1,200   - 
Europe $-  $46,691   326,524   320,263 
Asia - Pacific  931,951   605,855   812,269   735,684 
Consolidated $931,951  $652,546  $1,141,068  $1,057,784 

F-43

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

The following table presents a summary of capital expenditures for the years ended June 30:

 

 For the Years 
 Ended June 30, 
 2017 2016  2020 2019 
Capital expenditures:                
Corporate headquarters $-  $- 
North America  41,340   66,764  $3,904  $1,384 
Europe  520,920   417,861   763,308   502,823 
Asia - Pacific  1,640,943   2,851,296   609,933   2,222,351 
Consolidated $2,203,203  $3,335,921  $1,377,145  $2,726,558 

Geographic Information

Disclosed in the table below is the geographic information of total revenues by country for the years ended June 30, 2020 and 2019.

  June 30, 2020  June 30, 2019 
  Revenue  Long-lived Assets  Revenue  Long-lived Assets 
             
China $20,065,572  $843,694  $31,622,024  $58,058 
Thailand  3,807,648   900,514   3,304,119   771,992 
USA  3,457,676   5,689,067   2,911,195   5,385,230 
UK  12,275,903   5,528,801   9,852,180   4,549,676 
Pakistan & India  2,008,907   19,103,687   2,006,934   22,125,464 
Australia & New Zealand  3,149,715   261,615   5,684,487   14,783 
Mexico  987,190   -   1,036,213   - 
Indonesia  5,611,454   -   3,909,304   - 
South Africa  496,480   -   2,135,027   - 
Other Countries  4,511,774   -   5,357,700   - 
Total $56,372,319  $32,327,378  $67,819,183  $32,905,203 

 

F-41F-44

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 20172020 and 20162019

Geographic Information

Disclosed in the table below is geographic information for each country that comprised greater than five percent of total revenues for the years ended June 30 2017 and 2016.

  June 30, 2017  June 30, 2016 
  Revenue  Long-lived Assets  Revenue  Long-lived Assets 
             
China $22,737,967  $341,238  $17,276,250  $19,851 
Thailand  3,887,089   211,892   6,428,041   309,498 
USA  4,378,433   5,975,412   5,843,204   5,450,684 
UK  13,152,380   4,350,199   16,894,973   4,036,925 
Pakistan & India  1,653,393   44,501,157   1,842,046   43,047,590 
Australia & New Zealand  6,618,930   25,357   4,308,784   30,259 
Mexico  1,835,251   -   1,542,530   - 
Indonesia  3,265,412   -   6,201,642   - 
South Africa  3,451,931   -   387,220   - 
Other Countries  4,385,482   -   3,825,503   2,782 
Total $65,366,268  $55,405,255  $64,550,193  $52,897,589 

 

Disclosed in the table below is the reconciliation of revenue by each entity and country disclosed above for the years ended June 30, 20172020 and 2016.2019.

 

 Revenues 2017  Revenues 2020 
 Total China Thailand USA UK Pakistan & India Australia & New Zealand Mexico Indonesia South Africa Other Countries  Total China Thailand USA UK Pakistan & India Australia & New Zealand Mexico Indonesia South Africa Other Countries 
                                              
North America: $5,624,434  $-  $-  $3,789,183  $-  $-  $-  $1,835,251  $-  $-  $-  $4,444,863  $-  $-  $3,457,673  $-  $-  $-  $987,190  $-  $-  $- 
Europe:  6,850,320   -   -   -   6,850,320   -   -   -   -   -   -   11,914,070   -   -   -   11,914,070   -   -   -   -   -   - 
Asia-Pacific:  52,891,514   27,170,305   3,524,911   589,250   6,302,060   1,653,393   4,796,631   -   3,020,990   3,176,885   2,657,089   40,013,386   20,065,572   3,807,648   -   361,833   2,008,910   3,149,715   -   5,611,454   496,480   4,511,774 
                                            
Total $65,366,268  $27,170,305  $3,524,911  $4,378,433  $13,152,380  $1,653,393  $4,796,631  $1,835,251  $3,020,990  $3,176,885  $2,657,089  $56,372,319  $20,065,572  $3,807,648  $

3,457,673

  $12,275,903  $2,008,910  $3,149,715  $987,190  $5,611,454  $496,480  $4,511,774 

 

  Revenues 2016 
  Total  China  Thailand  USA  UK  Pakistan & India  Australia & New Zealand  Mexico  Indonesia  South Africa  Other Countries 
                                  
North America: $5,464,740  $-  $-  $3,922,210  $-  $-  $-  $1,542,530  $-  $-  $- 
Europe:  10,670,117   -   -   -   10,446,098   -   -   -   -       224,019 
Asia-Pacific:  48,415,336   17,276,250   6,428,041   1,920,994   6,448,875   1,842,046   4,308,784   -   6,201,642   387,220   3,601,484 
Total $64,550,193  $17,276,250  $6,428,041  $5,843,204  $16,894,973  $1,842,046  $4,308,784  $1,542,530  $6,201,642  $387,220  $3,825,503 

F-42

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

June 30, 2017 and 2016

  Revenues 2019 
  Total  China  Thailand  USA  UK  Pakistan & India  Australia & New Zealand  Mexico  Indonesia  South Africa  Other Countries 
                                  
North America: $3,947,408  $-  $-  $2,911,195  $-  $-  $-  $1,036,213  $-  $-  $- 
Europe:  9,148,164   -   -   -   9,148,164   -   -   -   -   -   - 
Asia-Pacific:  54,723,611   31,622,024   3,304,119   -   704,016   2,006,934   5,684,487   -   3,909,304   2,135,027   5,357,700 
                                             
Total $67,819,183  $31,622,024  $3,304,119  $2,911,195  $9,852,180  $2,006,934  $5,684,487  $1,036,213  $3,909,304  $2,135,027  $5,357,700 

 

NOTE 2022 – NON-CONTROLLING INTEREST IN SUBSIDIARY

 

The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest as of June 30, 2017 and 2016 was as follows:

 

SUBSIDIARY Non-Controlling Interest % Non-Controlling
Interest at
June 30, 2017
  Non-Controlling Interest % 

Non-Controlling Interest at

June 30, 2020

 
          
NetSol PK  33.80% $12,887,938   33.88% $6,361,747 
NetSol-Innovation  49.90%  1,599,734   33.88%  128,514 
VLS, VLSH & VLSIL Combined  49.00%  311,502 
NetSol Thai  0.006%  (92)  0.006%  (39)
OTOZ Thai  0.006%  4 
OTOZ  5.00%  (1,326)
Total     $14,799,082      $6,488,900 

 

SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at
June 30, 2016
  Non-Controlling Interest % 

Non-Controlling Interest at

June 30, 2019

 
          
NetSol PK  33.40% $10,292,495   33.80% $6,993,491 
NetSol-Innovation  49.90%  2,735,998   49.90%  1,421,528 
VLS, VLHS & VLSIL Combined  49.00%  309,213 
NetSol Thai  0.006%  (4)  0.006%  (32)
Total     $13,337,702      $8,414,987 

F-45

NETSOL TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2020 and 2019

 

NetSol PK

 

During the yearyears ended June 30, 2017,2020 and 2019, employees of NetSol PK exercised 481,500 of114,000 and 20,000 options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $75,382 resulting in an increase in$11,261 and $2,650, respectively. Due to the exercise of options, the non-controlling interest increased from 33.40%33.80% at June 30, 2019 to 33.80%.33.88% at June 30, 2020.

 

During the yearyears ended June 30, 2017,2020 and 2019, NetSol PK paid a cash dividend of $425,988.$1,610,909 and $1,675,936, respectively.

 

NetSol-InnovationNetSol Innovation

 

During the year ended June, 30, 2017 and 2016, NetSol-Innovation2020, the Company’s subsidiary NetSol PK purchased NetSol Innovation, from 1insurer for $89,425. Due to this purchase, the non-controlling interest decreased from 49.90% at June 30, 2019 to 33.88% at June 30, 2020.

During the year ended June 30, 2020, NetSol Innovation paid a cash dividend of $4,061,943 and $2,028,805, respectively.$2,778,453.

 

NOTE 2123 – SUBSEQUENT EVENTS

 

SubsequentEffective July 30, the Company’s, Board of Directors authorized the repurchase of up to Junetwo million dollars’ worth of the Company’s issued and outstanding common shares. The repurchase plan is authorized commencing July 30, 2017,2020, and ending December 24, 2020, subject to an additional six-month extension at the discretion of management. Although no shares were repurchased during fiscal year 2020, the Company loaned an additional $500,000 to WRLD3D pursuant to the Convertible Promissory Note agreement. (See Note 6)

Pursuant to the Company’s stock buyback plan, the Company repurchased 111,780purchased 147,052 shares of our common stock from the open market at an average price of $4.48$3.16 per share.share subsequent to the fiscal year ended June 30, 2020.

 

F-43F-46