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, 20172021
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)
| NEVADA | 95-4627685 | |
| (State or other jurisdiction of | | (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 class | Trading Symbol(s) | Name of exchange on which registered | ||
| Common Stock, $0.01 par value per share | NTWK | NASDAQ |
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”, “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 | ||
| 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$39,499,442 based upon the closing price of the stock as reported on NASDAQ Capital Market ($5.23.8 per share) on December 31, 2016,2020, the last business day of the registrant’s second quarter. As of September 25, 2017,16, 2021, there were 11,114,59911,265,064 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
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.
GENERAL
NetSol Technologies, Inc. (NasdaqCM:(Nasdaq CM: NTWK) is a worldwide provider of IT and enterprise software solutions.solutions to the global finance and leasing industry. 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’sNETSOL’s primary sourcesources of revenue is therevenues have been licensing, customization,subscriptions, modification, enhancement and maintenancesupport 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 finance industry.leasing space. With constant innovation being a major part of NETSOL’s DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing model rather than the traditional licensing model.
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’s strategically placed support and 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 America | Los Angeles Area | ||
| ● | Europe | London Metropolitan | ||
| ● | Asia Pacific | Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney |
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The Company continues to maintain services, solutions and/or sales specific offices in the USA, England, Pakistan, Thailand, China, Indonesia and Australia.
OUR BUSINESS
Company Business ModelOUR BUSINESS
NetSolCompany Business Model
NETSOL believes that our strong technology solutions with provable returnsoffer our customers a return on their investment are requiredand allows us to sell to its globallythrive in a hyper competitive and mature global marketplace. NetSolOur solutions are bolstered by our people. NETSOL believes that people are the drivers of success andsuccess; therefore, we invest heavily in our hiring, training and retainingretention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for NetSolNETSOL and a unique value for its customers. NetSolNETSOL continues to underpin thisits proven and effective business model withwhich is 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 footholdsa strong foothold in several global locations and a market leading position in the captive auto-finance segment andsegment. NETSOL has a significantly growing presence in the general asset finance space.space, including equipment and the big ticket financing industry together with startups and banks.
Subject Matter Expertise
NetSol’sOur dual expertise in enterprise technology implementation and financial application development has helped itus emerge as a global contenderplayer in the leasefinance and financeleasing industry and secure a broad footprint throughoutacross 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 byper 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 threeEurope and of nearly four decades in North America, and Europe, NetSolNETSOL is one of athe few global competitorsplayers in this niche industry.industry with a global presence.
Proximity with Global and Regional Customers
The Company hasWe have offices across the world, located strategically to maintain close contact and proximity with itsour customers in various key markets. ItThis has not only helped us in strengthening our customer relationships andbut also in building a deeper understanding of local market dynamics. Simultaneously, the Company iswe are able to extend services and even support development support through a combination of local/onsite and central/off-site resources. This approach allows the Companyhas allowed us to offer blended rates to itsour 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™, NetSol haswe have employed the same facilities and competencies to extend itsour offerings into related segments, including:including but not limited to:
| ● | IT consulting | |
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | White label digital retailing for auto-captives | |
| ● | 3D mapping |
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.
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OUR SOLUTIONS
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. NFS Ascent® empowers financial institutions to effectively manage their complex lending and leasing portfolios, enabling them to thrive in hyper-competitive global markets.
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, alongside banks, 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™, the Company’sbusiness volume and transactions.
NETSOL’s next generation platform offeringoffers a technologically advanced solution for the auto and equipmentasset finance and leasing industry. NFS Ascent’s™ Ascent’s® architecture and user interfaces were designed based on the Company’sNETSOL’s collective experience with blue chip organizations and global Fortune 500 companies over the past 40 years combined with modern UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment.
At the core of the NFS Ascent™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™Our premier solution has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. We believe thatNFS Ascent® empowers users with:
● Improvement in overall productivity throughout the transition from NFS™ to NFS Ascent™ allows:delivery organization:
| The features of the integrated Business Process Manager, Workflow Engine, | ||
| The NFS | ||
| 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 |
● Amplified customer satisfaction:
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 informationNFS Ascent®deployed 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 Mobilitythe cloud
Our premier, next generation solution NFS mobility enables a sales forceAscent® is now also available on the cloud via SaaS/subscription-based pricing. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for athe global finance and leasing companyindustry. This cloud-version of NFS Ascent® is offered via flexible, value-driven subscription-based pricing options without the need to access different channels like point of sale, field investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application.
Mobile Account
The powerfulmAccount 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 Salepay any upfront license fees.
The applicationmPOS 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.NFS Digital
Mobile Dealer
Mobile PlatformmDealer provides more visibilityNFS Digital is a combination of our core strengths, domain, and control over inventories –technology. Our insight into the evolving landscape along with minimal effort. Dealers can view their use of floor plan facility, stock statusour valuable experience enables us to define sound digital transformation strategies and financial conditions, while entering settlement requests or relocating assets.
Mobile Auditor
ThemAuditor schedules visits, records audit exceptionscompliment them with smart digital solutions so our customers always remain competitive 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™ 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. LeasePak streamlines the lease management lifecycle, enabling superior lease and loan portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reducing operating costs and improve profits. It is scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and varying complexity of operations. It is part of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, 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 and asset disposition. It is also integrated with important partners in the asset-finance ecosystem, such as Vertex Series O.
LeasePak-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 accessrelevant to the internetdynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to use the software. With an elastic cloud price, revenue stream predictabilityeffectively augment 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™ to the Europe market, NTE has some regional offerings, including:enhance our customer’s ecosystem.
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| Our Self POS portal allows customers to go through the complete buying and financing process online and on their mobile devices including car configuration, generating quotations, and filling out applications. It is the ultimate origination application that enables users to compare, select and configure an asset using a | ||
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| mAccount is a powerful, self-service mobile solution. It empowers the dealer with a powerful backend system and allows the customer to |
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| Mobile Point of Sale | ||
| The mPOS application is a web and mobile-enabled platform featuring a customizable dashboard along with menu selling, application submission, loan calculator, work queues and detailed reporting. mPOS empowers the dealer to make the origination process quick and seamless, increasing overall productivity and system-wide efficiency. | ||
| ● | Mobile Dealer | |
| mDealer provides more visibility and control over inventories – with minimal effort. Dealers can view their use of floor plan facility, stock status and financial conditions, while entering settlement requests or relocating assets. | ||
| ● | Mobile Auditor | |
| mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency. It also enables the auditor to conduct audits and submit results in real-time through quick audit processing tools, providing visibility and saving significant time. | ||
| ● | Mobile Collector | |
| mCollector empowers collections teams to do more, with an easy-to-use interface and intelligent architecture. The tool exponentially increases the productivity of field teams by enabling them to carry out all collection related tasks on the go. | ||
| ● | Mobile Field Investigator | |
| By using Mobile Field Investigator (mFI), the applicant has access to powerful features that permit detailed verifications on the go. The application features a reporting dashboard that displays progress stats, action items and the latest notifications, enabling the client to achieve daily goals while tracking performance. |
OTOZ INC.
OtozTM Digital Auto Retail
OtozTM provides a white-labelled SaaS platform to OEMs, auto-captives, dealers and start-ups that helps them launch short and long-term on-demand mobility models (car-share and car subscription) and digital retail in minimum time.
Our white-label, turn-key platform helps dealers to make the move into digital era by offering an end-to-end car buying experience completely online.
Digital auto-retail is not a one-size-fits-all. OtozTM will provide a flexible, configurable and scalable turn-key platform that helps define, launch and scale a variety of retail products (finance, lease, buy, etc.). OtozTM platform will empower dealers to compete in digital era by addressing a range of customer segments with varied needs.
Implementation ProcessOtozTM Ecosystem
The OtozTM powerful API-based architecture allows OEMs, auto-captives and dealerships to integrate with a plethora of providers to offer an end-to-end Omni-channel digital car finance and lease experience.
Out-of-the-box APIs by OtozTM help dealers and auto-captives connect with ecosystem partners which are crucial for running their auto retail business. It includes, finance and insurance products, trade-in tools, fraud checks, CRM system, websites (Tier 1 – Tier 3), marketing toolkit, inventory feeds, KYCs, payment processors, vehicle delivery providers etc.
In addition, OtozTM is equipped with smart lead generation and product analytics capabilities. It empowers dealers with the capability to convert qualified leads and never lose contact with customers. The product analytics capability allows us to improve the customer journey by addressing friction points, herein improving customer experience and conversions – a win-win scenario for dealers and customers.
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OtozTM Platform
A fully digital, white label platform for lease, finance, and cash transactions that delivers a frictionless customer experience.
OtozTMplatform consists of two portals:
| - | Dealer Tool | |
| - | Customer App |
Dealer Tool
| ● | Account creation | |
| ● | Order management work queue | |
| ● | User roles and rights | |
| ● | Tax configurator | |
| ● | Customer KYC reports | |
| ● | Vehicle delivery scheduling | |
| ● | Payment gateways | |
| ● | Inventory management | |
| ● | Finance and insurance products feed and prioritization | |
| ● | Accessories / add-on management and association | |
| ● | Dealer fee management | |
| ● | Ecosystem APIs |
Customer App
| ● | Get vehicles via cash, finance and lease | |
| ● | Vehicle delivery and pick-up scheduling | |
| ● | Buy finance and insurance products | |
| ● | Buy accessories | |
| ● | License checks (paperless) | |
| ● | Personalized pricing | |
| ● | Vehicle options and finance and insurance products | |
| ● | Trade-in valuation | |
| ● | Credit application and decision | |
| ● | Paperless contracts and e-signing | |
| ● | Digital payments | |
| ● | Deal builder |
IMPLEMENTATION PROCESS
The implementation process of our products can span from threenine to eighteen months depending upon the methodology, 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. NetSol chargesWe charge these efforts in a man-day rate.
Post implementation, NetSolour 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 relatedtransportation-related expenses, boarding of the consultants, and a living allowance. NetSol’sOur involvement in all of the above steps is priced to bring value to our customers and increase our profitability fromprofitability.
Cloud-enabled solutions are offered via seamless and rapid deployments. The swift speed of implementations for our interactions.cloud-ready products enables businesses to be more responsive and attain a competitive advantage.
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Pricing and Revenue StreamsPRICING AND REVENUE STREAMS
The Company’scompany’s revenue streams occur throughare the outcome of the following threefour main areas:
| ● | Product licensing | |
| ● | Subscription-based pricing | |
| ● | Implementation | |
| ● |
License fees can vary generally between $100,000range to a multi-million-dollar fee for SaaS minimal modules to more than $2,000,000 for more robustsingle or multiple module implementations. License revenue is realized with traditional, non-SaaS-based agreements, whereas SaaS-based agreements do not contain license fees and are offered via flexible, value-driven, subscription-based pricing. 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
We recognize 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. Implementation relatedcustomer. Implementation-related services, including configuration, data migration and third partythird-party interfaces are recognized in accordance withas the percentage of completion method. Maintenance andservices are performed. Post customer support related services are then provided on a continued basis. The annual maintenancesupport 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.performed.
InitiatedAdditionally, in order to avoid lumpiness in our 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 a 10-person outsourcing team in Lahore in February 2005,affordable prices/payment schedules is expected to lead the business towards volume-based selling. Moreover, this arrangement has extendedvalue-driven pricing plan is intended to 156 persons withdecrease the additional resources cateringinitial buy-in cost for new customers by eliminating heavy license fees and provides an alternative to the increased influx of outsourcing of configurationcurrent customers seeking lower software usage and testing assignments from 1insurer. Currently, prominent 1insurer’s customers being serviced from Lahore include GuideOne USA, Homesite USA, UPC USA and MDU UK.maintenance costs.
Virtual Lease ServicesALLIANCES
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.
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 Companycompany 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 AffiliationsWe have strategic partnerships with Microsoft and CGI pertaining to cloud-hosting activities for our cloud-based products. NETSOL hosts its cloud version of Ascent, NFS Ascent® deployed 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.
The Company isNETSOL and CGI agreed to promote each other for their respective products and services amongst their respective existing customers across various regions. We also utilize CGI for managed services and cloud hosting-related activities for our engagements with their customers in Europe particularly.
TECHNICAL AFFILIATIONS
We are a Microsoft Certified Silver Partner and an Oracle Certified Partner.
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Marketing and Selling
MARKETING AND SELLING
NetSol management continues itsWe continue our optimism that the Companywe will experience ever increasing opportunities for itsour product and services offerings in 20172021 and beyond. The objective of the Company’sour 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.management of all digital owned and paid mediums including website, social media channels and collaboration with industry partners. 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, webinars 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 MarketsGROWTH PROSPECTS FOR NFS ASCENT®
Growth prospects for NFS Ascent® are linked to the constant innovation in the product and its growing customer base across different geographic and product markets. NETSOL is eyeing key international markets for growth in sales. Its sales strategy not only focuses on expansion into new geographic markets, including the Americas, Europe, and further penetration of our leading position in Asia Pacific, but also within existing markets into new verticals with targeting of Tier 2 and Tier 3 prospects as well.
NetSol provides
Growth in North America is expected to come from the potential market for replacement of legacy systems as well as acquisition of new customers. NFS Ascent® is aimed at providing a highly flexible and robust solution based on the latest technology and advanced architecture for North American customers looking to replace their legacy systems. We believe that NFS 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 support revenues by offering business process optimization, customization and upgrade services. With a market ready product with successful implementation, the prospects for NFS Ascent® in the region are positive.
Further traction in Europe will come from NFS Ascent® deployed on the cloud, which will continue to allow the Europe division to support not only larger organizations, but also small and medium sized organizations including startups.
Growth in NETSOL’s 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 support revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS Ascent® in Asia Pacific in the form of existing customers who are looking for replacement of their current system.
In China, NETSOL is a leader in the leasing and finance enterprise solution domain. With this position, NETSOL continues to enjoy demand for the current NFS™ solution, as well as NFS Ascent®. NETSOL will continue strengthening its position within existing multinational auto manufacturers, as well as local Chinese captive finance and leasing companies.
THE MARKETS
We provide our services primarily to clients in global commercial industries. In the global commercial area, the Company’sour 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.
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People and Culture
The Company believes it hasPEOPLE AND CULTURE
We believe we have developed a strong corporate culture that is critical to itsour success. ItsOur 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 almostwas under 20% in 2014 to less than 15% today2021 with a goal is to improvemaintain the turnover level to under 10% in this20% during the 2022 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. NetSol isWe are 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 subsidiaries of our subsidiariesours 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:are as follows:
| ● | Humanitarian | |
| ● | Literacy | |
| ● | 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 | |
| ● | Day Care | |
| ● | Preventative Health Care |
There is significant competition for employees with the skills required to perform the services we offer. The Company runsWe run an elaborate training program for different cadrecadres of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. The Company believesWe believe that it haswe have been successful in itsour 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, 2017,2021, we had approximately 1,4611,447 employees; comprised of 1,082 IT project77% technical staff and technical personnel; and 38023% non-IT personnel. The IT project and technical personnel include 766 employees dedicated to NFS and NFS Ascent™, 151 employees dedicated to the joint venture with 1insurer and 165 employees supporting the regional offerings as well as IT consulting and services. None of our employees are subject to a collective bargaining agreement.
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CompetitionCOMPETITION
Neither a single company, nor a small number of companies, dominate the IT market in the space in which the Company competes.we compete. 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 basedIT-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 of the competitors of NetSol have longer operating history, larger client bases, and longer relationships with clients, greater brand or name recognition and significantly greater financial, technical, and public relations resources than NetSol. Existing or future competitors may develop or offer services that are comparable or superior to ours at a lower price, which could have a material adverse effect on our business, financial condition and results of operations.
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’s 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 21.0% and 13.0%, respectively, of our revenue.revenue for our fiscal year ended June 30, 2021. Other globally renowned auto captives that are customers of the company include Toyota, Nissan, Ford, and FIAT.
Other customers of the company include equipment finance and leasing companies and banks worldwide such as GAC Sofinco, Paccar, Mololease, SCI, and BMO Harris, etc.
Global Operations and Geographic DataGLOBAL OPERATIONS AND GEOGRAPHIC DATA
The CompanyNETSOL 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, acts as President. Mr. Bilbreyis responsible for the entire portion of NTA’s business operations. He brings 24 yearsover three decades of software product management, consulting services delivery and technology business operations leadership to NTA. His focus is to expand the presence of NetSolinternational experience in the Americas region while assuring elevated service levels to all existing clients.
Operations and head of sales continuefinancial services industry holding various senior leadership roles with Daimler Financial Services. Peter continues to be ledsupported by Mr. Farooq Ghauri. HeDoug Jones as Vice President - Operations for NTA. Doug is a visionary, focused, and driven technology industryleader credited with shaping team performance to deliver best-in-class, leading web-based and domain expert with a 13 year proven track record in drivingembedded software applications for 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, Thailandfinance and US offices providing him with the complete understanding of NetSol’s global operations in an industry that is rapidly expanding and changing.leasing industry.
EuropeOtozTM CEO and Co-founder, Mr. Naeem Ghauri, also recently appointed as NETSOL’s President for the parent group NetSol Technologies, Inc., is based out of our Pakistan office in Lahore, Pakistan. OtozTM Co-founder and Chief Product Officer, Murad Baig is based out of our London office.
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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 experiencestrong management team in the Company, including a tenure as a boardU.K. comprised of director member,Chris Mobley, Chris Tobey and vast experience in leading our Asia Pacific unit. We believe this experience will be utilized to lead growth in Europe. The NTE entity is led by Mr. Tim O’Sullivan as Managing Director. Mr. O’Sullivan has the necessary industry expertise and domain knowledge to service the needs of the European Market.
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.Johannes Riedl.
Due to the demand for our premier solution NFS Ascent’s® Wholesale Platform in Europe, we appointed Chris Mobley as Head 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 wholesale finance space.
At the starting of the previous financial year, NETSOL acquired the remaining stake in Virtual Lease Services (VLS) rebranded as Banking Works. Previously limited to being a UK-based portfolio and risk management servicing partner for business and consumer finance providers, Banking Works will now focus on supporting financial services businesses to achieve their own transformation ambitions. By acquiring the remaining stake, NETSOL became the outright owner of the organization. Banking Works recently announced the appointment of Mark Cawood, an industry veteran, as the company’s new Managing Director. Mark Cawood will pick up the baton passed by Louise Ikonomides, who left Banking Works after over 20 years to pursue new ventures. While Mr. Cawood is going through the Financial Conduct Authority’s approval process, Diane Roberts, Finance Director, will serve as the interim Managing Director.
Asia Pacific Region
NetSol 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-founderCo-founder of NetSol TechnologiesPK and has been with the Companycompany since 1996. NetSol is the “Center of Excellence” and a state-of-the-art facility for programming, R&D, global implementations and 24-hour support to our customers worldwide.
NetSol BeijingTechnologies (Beijing) Co. Ltd. (“NetSol Beijing”) is headed by Mr. Umar QadriAmanda Li as President. Mr. Qadri has been with NetSolMs. Li previously worked as a managing director for over five yearsSopra Banking Software where he has gained valuable experienceshe was instrumental in both technologydeveloping business and management.driving sales.
The Global Sales Division is headed by Mr. NaeemAsad Ghauri as President of Sales from the NetSol Thai offices located in Bangkok, Thailand.PK 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 are 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’sNETSOL’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%72.7% of our revenues in 2017 and our North America and European regions together accounted for approximately 19% of our revenues in 2017.2021. 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.
Intellectual PropertyINTELLECTUAL PROPERTY
The Company relies upon a combination of nondisclosurenon-disclosure 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 applicationNFS 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.
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Governmental Approval and RegulationGOVERNMENTAL 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 maintainswe maintain subsidiaries and conductsconduct 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.govthat 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.
Not Applicable
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not Applicable.None
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.
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.Not applicable.
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 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.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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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 2021 | High | Low | ||||||||||||||
| First Quarter | $ | 7.00 | $ | 5.64 | $ | 3.29 | $ | 2.52 | ||||||||
| Second Quarter | $ | 6.65 | $ | 5.00 | $ | 4.07 | $ | 2.35 | ||||||||
| Third Quarter | $ | 5.55 | $ | 4.35 | $ | 5.30 | $ | 3.80 | ||||||||
| Fourth Quarter | $ | 5.60 | $ | 3.80 | $ | 6.12 | $ | 3.71 | ||||||||
| Fiscal Year 2020 | High | Low | ||||||||||||||
| First Quarter | $ | 6.45 | $ | 4.95 | ||||||||||||
| Second Quarter | $ | 5.85 | $ | 3.50 | ||||||||||||
| Third Quarter | $ | 4.50 | $ | 2.00 | ||||||||||||
| Fourth Quarter | $ | 3.65 | $ | 2.05 | ||||||||||||
| Fiscal Year 2016 | High | Low | ||||||
| First Quarter | $ | 5.96 | $ | 4.20 | ||||
| Second Quarter | $ | 9.50 | $ | 5.02 | ||||
| Third Quarter | $ | 8.20 | $ | 6.02 | ||||
| Fourth Quarter | $ | 7.46 | $ | 5.40 |
RECORD HOLDERS - As of September 25, 2017,16, 2021, the number of holders of record of the Company’s common stock was 162.144.
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, 2017:2021:
| 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 column (a) | ||||||||||
| Equity Compensation Plans approved by Security holders | 475,133 | (1) | $ | 4.20 | (2) | 474,111 | (3) | |||||
| Equity Compensation Plans not approved by Security holders | None | None | None | |||||||||
| Total | 475,133 | $ | 4.20 | 474,111 | ||||||||
| 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 | None | None | 425,004(1) | |||
| Equity Compensation Plans not approved by Security holders | None | None | None | |||
| Total | None | None | 425,004 |
| (1) | ||
As of June 30, 2021, 6,985 shares of common stock have been granted as compensation, but have not yet vested.
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(b) RECENT SALES OF UNREGISTERED SECURITIES
None.
(c) ISSUER PURCHASES OF EQUITY SECURITIES
The repurchases provided in the table below were made through the year ended June 30, 2021:
| 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-20 | 21,940 | $ | 3.02 | 21,940 | - | |||||||||||
| Aug-20 | 125,112 | $ | 3.18 | 147,052 | - | |||||||||||
| Oct-20 | 102,023 | $ | 2.94 | 249,075 | - | |||||||||||
| Nov-20 | 124,715 | $ | 3.00 | 373,790 | - | |||||||||||
| Dec-20 | 73,206 | $ | 3.47 | 446,996 | - | |||||||||||
| Jan-21 | 92,440 | $ | 4.03 | 539,436 | - | |||||||||||
| Feb-21 | 30,021 | $ | 4.87 | 569,457 | - | |||||||||||
| Mar-21 | 34,231 | $ | 4.49 | 603,688 | - | |||||||||||
| Apr-21 | 45 | $ | 4.58 | 603,733 | - | |||||||||||
| May-21 | 30,078 | $ | 4.44 | 633,811 | - | |||||||||||
| Jun-21 | 35,207 | $ | 4.72 | 669,018 | - | |||||||||||
| Total | 669,018 | 669,018 | 849,256 | |||||||||||||
(1) The Board of Directors approved a repurchase of shares up to $2,000,000 on July 30, 2020. All shares permitted to be purchased under this July 2020 plan were purchased during the plan’s original date and prior to the conclusion of the extension of the plan. On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to $2,000,000 worth of shares of common stock. The plan was authorized commencing May 21, 2021 through November 20, 2021 subject to an additional six months extension at the discretion of management. As of June 30, 2021, the total number of shares that could be purchased under both plans was 849,256. The actual maximum number of shares will vary depending on the actual price paid per share purchased. The Company purchased a cumulative 669,018 shares of its common stock from the open market for cash proceeds of $2,364,781 at an average price of $3.53 per share during fiscal year ended June 30, 2021 from both repurchase plans.
ITEM 6 – SELECTED FINANCIAL DATA[Reserved]
Not applicable.
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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, 2017.2021. 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, 2021 were:
| ● | ||
| ● | ||
| ● | A | |
| ● | ||
| ● | ||
| ● | We entered into an agreement with an existing tier one finance company in China for them to upgrade to our NFS Ascent® Retail and Wholesale platforms. The contract is expected to generate approximately $9,000,000 during the contract term. | |
| ● | A Captive auto finance company of a leading German Auto manufacturer based in China went successfully live with our NFS Ascent® Retail Platform. | |
| ● | NETSOL and WRLD3D introduced NXT - a smart workplace platform to support companies to return to work safely. | |
| ● | A rapidly growing U.K. bank serving small and medium-sized enterprises has successfully gone live with the NFS Ascent® Retail Platform. This is our first go live of an NFS Ascent® Retail client in the U.K. | |
| ● | We entered into an agreement with a renowned financial services company in the U.S. to implement LeasePak, one of our legacy solutions. The contract is expected to generate approximately $1,000,000 over the life of the contract. | |
| ● | The leasing division of a mid-sized regional bank in the U.S. went live with the SaaS version of our LeasePak solution. | |
| ● | We started the NFS Ascent® Retail implementation process for the subsidiary of a leading German Auto Manufacturer based in South Korea. | |
| ● | We signed an agreement with | |
| ● | We generated approximately $2,100,000 of license revenue with the renewal of our NFS CAP and CMS legacy solutions with an existing customer in Thailand. | |
| ● | We generated approximately $1,400,000 of license revenue from an existing customer due to the increase in contracts being serviced on their system. | |
| ● | We effectively executed the share buyback plan with the purchase of 669,018 shares during the 2021 Fiscal Year. |
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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 professional teams in each key location to execute our long-term strategy. | |
| ● | Develop, groom and | |
| ● | ||
| ● | Strengthen the | |
| ● | ||
| Maintain the quality of our delivery, after delivery support, and client relationships. | ||
| ● | Further penetration of NFS | |
| ● | 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 |
| Offer a cloud enabled NFS Ascent® at subscription-based pricing models to generate additional interest from prospects. |
| ● | Continue investing in OtozTM 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.
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 OtozTM. 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.
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MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | Growing | |
| ● | ||
| ● | ||
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| ● | China’s auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience. |
Negative trends:
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| ● | The | |
| ● | Due to travel restrictions caused by COVID-19, it is increasingly difficult to conduct face to face meetings for global clients and new prospects removing the personal connection essential to some decision making. | |
| ● | The COVID-19 pandemic has adversely affected live industry conferences and events, such as those held by the Equipment Leasing and Finance Association (ELFA), reducing leads and market exposure. | |
| ● | Working from the office poses its own risk of virus spread until it vanishes completely. | |
| ● | Political actions, including trade protection and national security policies of the U.S. and Chinese governments, such as tariffs or bans could in the |
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.
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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,subscription and support, 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.
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 post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.
Subscription
Subscription revenue is 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.
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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.
Post 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.Support
Revenue from consultingsupport services is recognizedand product updates, referred to as the services are performed for time-and-materials contracts. Revenue from trainingsubscription and development services is recognized as the services are performed.
Revenue from maintenance agreementssupport revenue, 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.
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 (2) the method of recognizing revenue for installation/customization, and other services.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.
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The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.
Revenue is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.
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.
Unearned 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-cancellable license and development.services starting in future periods are included in accounts receivable and unearned revenue.
Vendor specific objective evidence (“VSOE”)Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of fair valuerevenue recognition and the Company’s disclosures. The Company has applied the following practical expedients:
● 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 VSOE of fair value of each element based on historical evidence ofamount to which it has the Company’s stand-alone sales of these elementsright to third-parties or from the stated renewal rateinvoice 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 exceptionservices performed (applies 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 REVENUEStime-and-material engagements).
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.
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ALLOWANCE FOR DOUBTFUL ACCOUNTS
Costs 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.
SHARE-BASEDSTOCK-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 businessesbusiness 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 goodwillIn conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it 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 doesmore likely than not need to be performed. Ifthat 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 ofamount. If factors indicate that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit inis less than its carrying amount, the Company performs a manner similar to a purchase price allocation. The residual fair value after this allocation isquantitative assessment and the implied fair value of the reporting unit goodwill.
The sourceis determined by analyzing the expected present value of future cash flows. If the carrying value of the Company’sreporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill relatesis calculated and an impairment loss equal 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.excess is recorded.
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Recent Accounting Pronouncement
See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 20172021 COMPARED TO THE YEAR ENDED JUNE 30, 20162020
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 20172021 and 20162020 as a percentage of revenues.
| For the Years | ||||||||||||||||||||||||||||||||
| Ended June 30, | ||||||||||||||||||||||||||||||||
| 2017 | % | 2016 | % | 2021 | % | 2020 | % | |||||||||||||||||||||||||
| Net Revenues: | ||||||||||||||||||||||||||||||||
| License fees | $ | 18,218,912 | 27.87 | % | $ | 8,352,441 | 12.94 | % | $ | 6,249,924 | 11.4 | % | $ | 3,260,891 | 5.8 | % | ||||||||||||||||
| Maintenance fees | 14,157,367 | 21.66 | % | 13,310,591 | 20.62 | % | ||||||||||||||||||||||||||
| Subscription and support | 22,173,745 | 40.4 | % | 20,254,917 | 35.9 | % | ||||||||||||||||||||||||||
| Services | 24,798,899 | 37.94 | % | 30,037,459 | 46.53 | % | 26,448,171 | 48.2 | % | 32,555,690 | 57.8 | % | ||||||||||||||||||||
| 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 | % | 48,775 | 0.1 | % | 300,821 | 0.5 | % | ||||||||||||||||||||
| Total net revenues | 65,366,268 | 100.00 | % | 64,550,193 | 100.00 | % | 54,920,615 | 100.0 | % | 56,372,319 | 100.0 | % | ||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||||||||
| Salaries and consultants | 24,645,223 | 37.70 | % | 21,789,329 | 33.76 | % | 20,969,298 | 38.2 | % | 18,821,738 | 33.4 | % | ||||||||||||||||||||
| Travel | 3,137,671 | 4.80 | % | 2,334,019 | 3.62 | % | 663,403 | 1.2 | % | 4,181,742 | 7.4 | % | ||||||||||||||||||||
| Depreciation and amortization | 5,448,059 | 8.33 | % | 5,926,969 | 9.18 | % | 2,990,689 | 5.4 | % | 2,897,371 | 5.1 | % | ||||||||||||||||||||
| Other | 3,727,379 | 5.70 | % | 3,698,290 | 5.73 | % | 3,944,197 | 7.2 | % | 3,508,098 | 6.2 | % | ||||||||||||||||||||
| Total cost of revenues | 36,958,332 | 56.54 | % | 33,748,607 | 52.28 | % | 28,567,587 | 52.0 | % | 29,408,949 | 52.2 | % | ||||||||||||||||||||
| Gross profit | 28,407,936 | 43.46 | % | 30,801,586 | 47.72 | % | 26,353,028 | 48.0 | % | 26,963,370 | 47.8 | % | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling and marketing | 9,746,229 | 14.91 | % | 7,823,916 | 12.12 | % | 6,555,004 | 11.9 | % | 6,450,663 | 11.4 | % | ||||||||||||||||||||
| Depreciation and amortization | 1,114,275 | 1.70 | % | 1,225,170 | 1.90 | % | 965,625 | 1.8 | % | 834,583 | 1.5 | % | ||||||||||||||||||||
| 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 | % | 15,437,382 | 28.1 | % | 17,138,832 | 30.4 | % | ||||||||||||||||||||
| Research and development cost | 393,345 | 0.60 | % | 485,783 | 0.75 | % | 674,168 | 1.2 | % | 1,468,954 | 2.6 | % | ||||||||||||||||||||
| Total operating expenses | 29,409,150 | 44.99 | % | 24,499,885 | 37.95 | % | 23,632,179 | 43.0 | % | 25,893,032 | 45.9 | % | ||||||||||||||||||||
| Income from (loss) operations | (1,001,214 | ) | -1.53 | % | 6,301,701 | 9.76 | % | |||||||||||||||||||||||||
| Income from operations | 2,720,849 | 5.0 | % | 1,070,338 | 1.9 | % | ||||||||||||||||||||||||||
| Other income and (expenses) | ||||||||||||||||||||||||||||||||
| Gain (loss) on sale of assets | (30,147 | ) | -0.05 | % | 23,930 | 0.04 | % | (191,935 | ) | -0.3 | % | 23,103 | 0.0 | % | ||||||||||||||||||
| Interest expense | (310,044 | ) | -0.47 | % | (264,511 | ) | -0.41 | % | (394,289 | ) | -0.7 | % | (346,856 | ) | -0.6 | % | ||||||||||||||||
| Interest income | 179,723 | 0.27 | % | 161,794 | 0.25 | % | 1,017,432 | 1.9 | % | 1,569,536 | 2.8 | % | ||||||||||||||||||||
| Gain (loss) on foreign currency exchange transactions | 306,819 | 0.47 | % | (738,158 | ) | -1.14 | % | (597,433 | ) | -1.1 | % | 398,610 | 0.7 | % | ||||||||||||||||||
| Other income (expense) | 50,378 | 0.08 | % | 224,931 | 0.35 | % | ||||||||||||||||||||||||||
| Share of net loss from equity investment | (253,819 | ) | -0.5 | % | (605,864 | ) | -1.1 | % | ||||||||||||||||||||||||
| Other income | 987,444 | 1.8 | % | 224,224 | 0.4 | % | ||||||||||||||||||||||||||
| Total other income (expenses) | 196,729 | 0.30 | % | (592,014 | ) | -0.92 | % | 567,400 | 1.0 | % | 1,262,753 | 2.2 | % | |||||||||||||||||||
| Net income (loss) before income taxes | (804,485 | ) | -1.23 | % | 5,709,687 | 8.85 | % | |||||||||||||||||||||||||
| Net income before income taxes | 3,288,249 | 6.0 | % | 2,333,091 | 4.1 | % | ||||||||||||||||||||||||||
| Income tax provision | (931,951 | ) | -1.43 | % | (652,546 | ) | -1.01 | % | (1,026,617 | ) | -1.9 | % | (1,141,068 | ) | -2.0 | % | ||||||||||||||||
| Net income (loss) | (1,736,436 | ) | -2.66 | % | 5,057,141 | 7.83 | % | |||||||||||||||||||||||||
| Net income | 2,261,632 | 4.1 | % | 1,192,023 | 2.1 | % | ||||||||||||||||||||||||||
| Non-controlling interest | (3,241,594 | ) | -4.96 | % | (1,654,380 | ) | -2.56 | % | (483,375 | ) | -0.9 | % | (254,942 | ) | -0.5 | % | ||||||||||||||||
| Net income (loss) attributable to NetSol | $ | (4,978,030 | ) | -7.62 | % | $ | 3,402,761 | 5.27 | % | |||||||||||||||||||||||
| Net income attributable to NetSol | $ | 1,778,257 | 3.2 | % | $ | 937,081 | 1.7 | % | ||||||||||||||||||||||||
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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 | Favorable | Favorable | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Unfavorable) | Change due | Favorable | (Unfavorable) | (Unfavorable) | Favorable | |||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Year | Change in | to | (Unfavorable) | For the Years | Change in | Change due | (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Ended June 30, | Constant | Currency | Change as | Ended June 30, | Constant | to Currency | Change as | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | % | 2016 | % | Currency | Fluctuation | Reported | 2021 | % | 2020 | % | Currency | Fluctuation | Reported | |||||||||||||||||||||||||||||||||||||||||||
| Net Revenues: | 65,366,268 | 100.00 | % | 64,550,193 | 100.00 | % | 2,166,632 | (1,350,557 | ) | 816,075 | $ | 54,920,615 | 100.0 | % | $ | 56,372,319 | 100.0 | % | $ | (2,351,850 | ) | $ | 900,146 | $ | (1,451,704 | ) | ||||||||||||||||||||||||||||||
| Cost of revenues: | 36,958,332 | 56.54 | % | 33,748,607 | 52.28 | % | (3,878,280 | ) | 668,555 | (3,209,725 | ) | 28,567,587 | 52.0 | % | 29,408,949 | 52.2 | % | 1,039,764 | (198,402 | ) | 841,362 | |||||||||||||||||||||||||||||||||||
| Gross profit | 28,407,936 | 43.46 | % | 30,801,586 | 47.72 | % | (1,711,648 | ) | (682,002 | ) | (2,393,650 | ) | 26,353,028 | 48.0 | % | 26,963,370 | 47.8 | % | (1,312,086 | ) | 701,744 | (610,342 | ) | |||||||||||||||||||||||||||||||||
| Operating expenses: | 29,409,150 | 44.99 | % | 24,499,885 | 37.95 | % | (5,855,816 | ) | 946,551 | (4,909,265 | ) | 23,632,179 | 43.0 | % | 25,893,032 | 45.9 | % | 2,298,574 | (37,721 | ) | 2,260,853 | |||||||||||||||||||||||||||||||||||
| Income (loss) from operations | (1,001,214 | ) | -1.53 | % | 6,301,701 | 9.76 | % | (7,567,464 | ) | 264,549 | (7,302,915 | ) | $ | 2,720,849 | 5.0 | % | $ | 1,070,338 | 1.9 | % | $ | 986,488 | $ | 664,023 | $ | 1,650,511 | ||||||||||||||||||||||||||||||
Net revenues for the years ended June 30, 20172021 and 20162020 by segment are as follows:
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| 2017 | 2016 | Revenue | % | Revenue | % | |||||||||||||||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||||||||||||||||||
| North America | $ | 5,624,434 | 8.60 | % | $ | 5,464,740 | 8.47 | % | $ | 3,724,547 | 6.8 | % | $ | 4,444,862 | 7.9 | % | ||||||||||||||||
| Europe | 6,850,320 | 10.48 | % | 10,670,117 | 16.53 | % | 11,283,499 | 20.5 | % | 11,914,071 | 21.1 | % | ||||||||||||||||||||
| Asia-Pacific | 52,891,514 | 80.92 | % | 48,415,336 | 75.00 | % | 39,912,569 | 72.7 | % | 40,013,386 | 71.0 | % | ||||||||||||||||||||
| Total | $ | 65,366,268 | 100.00 | % | $ | 64,550,193 | 100.00 | % | $ | 54,920,615 | 100.0 | % | $ | 56,372,319 | 100.0 | % | ||||||||||||||||
Revenues
License feesFees
License fees for the year ended June 30, 20172021 were $18,218,912$6,249,924 compared to $8,352,441$3,260,891 for the year ended June 30, 20162020 reflecting an increase of $9,866,471$2,989,033 with a change in constant currency of $9,933,367.$2,633,782. The increase in license revenue for the fiscal year ended June 30, 20172021 compared to 20162020 is primarily due to the $16,345,000 ofincrease in license revenue recognized for the GAC, TIL and BMW contracts to implement our NFS Ascent® Retail Platform. In the fiscal year ended June 30, 2021, we recorded $2,400,000 of license revenue for the GAC NFS Ascent® contract, $2,100,000 for the TIL NFS Ascent® contract, and $1,400,000 for the BMW NFS Ascent® contract. In fiscal year ended June 30, 2020, we recorded $2,500,000 of license revenue for the DFS, 12 country NFS Ascent contract. We also had® 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.
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License fees – related partySubscription and Support
LicenseSubscription and support fees from related party for the year ended June 30, 20172021, were $246,957$22,173,745 compared to $1,616,138$20,254,917 for the year ended June 30, 20162020 reflecting a decreasean increase of $1,369,181$1,918,828 with a change in constant currency of $1,326,335.$1,754,369. The decreaseincrease in license revenue for the fiscal year ended June 30, 2017 compared to 2016subscription and support fees is due to unexpected delays in a complex implementation during fiscal year 2017.
Maintenance fees
Maintenance fees forgoing live with several markets related to the year ended June 30, 2017 were $14,157,367 compared to $13,310,591 forDFS contract and going live with the year ended June 30, 2016 reflecting an increase of $846,776 with a change in constant currency of $1,170,153. MaintenanceBMW contract. Subscription and support 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 2016Subscription and into fiscal year 2017. Wesupport fees are recurring in nature, and we anticipate maintenancethese fees to gradually increase as we implement both our NFS legacy productproducts 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, 20172021, was $24,798,899$26,448,171 compared to $30,037,459$32,555,690 for the year ended June 30, 20162020, reflecting a decrease of $5,238,560$6,107,519 with a changedecrease in constant currency of $4,486,525.$6,485,196. The services revenue decrease was due to a decrease in services revenue is due to the decrease in implementation revenue associated with new implementations and change requests.customers who have gone live with our products. 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 partyRelated Party
Services income from related party for the year ended June 30, 20172021 was $7,632,774$48,775 compared to $10,867,792$300,821 for the year ended June 30, 20162020 reflecting a decrease of $3,235,018$252,046 with a changedecrease in constant currency of $3,125,381.$254,805. 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,$26,353,028 for the year ended June 30, 20172021 as compared with $30,801,586$26,963,370 for the year ended June 30, 2016.2020. This is a decrease of $2,393,650$610,342 with a decrease in constant currency of $1,711,648.$1,312,086. The gross profit percentage for the year ended June 30, 2017 also decreased2021 increased to 43.5%48.0% from 47.7%47.8% for the year ended June 30, 2016.2020. The cost of sales was $36,958,332$28,567,587 for the year ended June 30, 20172021 compared to $33,748,607$29,408,949 for the year ended June 30, 2016,2020 for an increasea decrease of $3,209,725$841,362 and on a constant currency basis an increasea decrease of $3,878,280.$1,039,764. As a percentage of sales, cost of sales increaseddecreased from 52.3%52.2% for the year ended June 30, 20162020 to 56.5%52.0% for the year ended June 30, 2017.2021.
Salaries and consultant fees increased by $2,855,894$2,147,560 from $21,789,329$18,821,738 for the year ended June 30, 20162020 to $24,645,223$20,969,298 for the year ended June 30, 20172021 and on a constant currency basis increased $3,253,753.by $1,984,188. The increase in salaries and consultant fees is due to the hiring and trainingincrease 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, 1,234932, 1,009, and 1,0811,036 technical employees as of June 30, 2015, 20162019, 2020 and 2017,2021, respectively. As a percentage of sales, salaries and consultant expense increased from 33.8%33.4% for the year ended June 30, 20162020 to 37.7%38.2% for the year ended June 30, 2017.2021.
Travel decreased by $3,518,339 from $4,181,742 for the year ended June 30, 2020 to $663,403 for the year ended June 30, 2021 and on a constant currency basis decreased by $3,558,950. The decrease in travel is due to the COVID-19 Pandemic. As a percentage of sales, travel expense decreased from 7.4% for year ended June 30, 2020 to 1.2% for the year ended June 30, 2021.
Depreciation and amortization expense decreasedincreased to $5,448,059$2,990,689 compared to $5,926,969$2,897,371 for the year ended June 30, 20162020 or a decreasean increase of $478,910$93,318 and on a constant currency basis a decreasean increase of $504,554. Depreciation and amortization expense decreased as some products became fully amortized.$123,117.
Operating Expenses
Operating expenses were $29,409,150$23,632,179 for the year ended June 30, 20172021 compared to $24,499,885,$25,893,032, for the year ended June 30, 20162020 for a decrease of 8.7% or $2,260,853 and on a constant currency basis a decrease of 9.0% or $2,298,574. As a percentage of sales, it decreased from 45.9% to 43.0%. The decrease in operating expenses was primarily due to decreases in general and administrative expenses and research and development cost offset by an increase of 20.0%in selling and marketing expenses, salaries and wages and depreciation expense.
Selling and marketing expenses increased $104,341 or $4,909,2651.6% and on a constant currency basis an increase of 23.9%$42,010 or $5,855,816. As a percentage of sales, it increased from 38.0% to 45.0%. The increase in operating expenses was primarily due to increases in selling and marketing expenses, provision for bad debt, and general and administrative expenses.
Selling and marketing expenses increased $1,922,313 or 24.6% and on a constant currency basis an increase of $2,228,963 or 28.5%0.7%. The increase in selling and marketing expenses is due to the increase in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ Ascent® globally.
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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$15,437,382 for the year ended June 30, 20172021 compared to $14,727,313$17,138,832 at June 30, 20162020 or an increasea decrease of $2,020,237$1,701,450 or 13.7%9.9% and on a constant currency basis a decrease of $1,641,828 or 9.6%. The decrease is primarily due to a reduction of approximately $795,000 related to a withholding tax on dividends and by customers, approximately $395,000 of reduced travel expenses, approximately $56,000 of reduced professional services, approximately $517,000 related to the decrease in the provision for doubtful accounts and approximately $157,000 reduction in rent expense offset by an increase in salaries of $2,499,144 or 17.0%. Duringapproximately $402,000.
Research and development costs were $674,168 for the year ended June 30, 2017, salaries increased by approximately $2,758,1272021 compared to $1,468,954 at June 30, 2020 or $2,957,980a decrease of $794,786 or 54.1% and on a constant currency basis a decrease of $799,928 or 54.5%. The decrease in research and development costs is due to the increase in the number of employees, annual raises, share grants, cash bonusesless spending on our innovation initiatives with Blockchain, AI, and options, and other general and administrative expenses decreased by approximately $770,208 or $526,883 on a constant currency basis.IoT.
Income/Loss from Operations
LossIncome from operations was $1,001,214$2,720,849 for the year ended June 30, 20172021 compared to income of $6,301,701$1,070,338 for the year ended June 30, 2016.2020. This represents a decreasean increase of $7,302,915$1,650,511 with a decreasean increase of 7,567,464$986,488 on a constant currency basis for the year ended June 30, 20172021 compared with the year ended June 30, 2016.2020. As a percentage of sales, lossincome from operations was 1.53%5.0% for the year ended June 30, 20172021 compared to income of 9.76% %1.9% for the year ended June 30, 2016.2020.
Net Income/LossOther Income and Expense
Net lossOther income was $4,978,030$567,400 for the year ended June 30, 20172021 compared to net income of $3,402,761$1,262,753 for the year ended June 30, 2016.2020. This isrepresents a decrease of $8,380,791$695,353 with a decrease of $8,684,151$893,154 on a constant currency basis. The decrease is primarily due to the interest income and foreign currency exchange transactions. Interest income was $1,017,432 for the year ended June 30, 2021 compared to $1,569,536 for the period ended June 30, 2020. This represent a decrease of $552,104 or a change of $557,829 on constant currency basis. We did not accrue any interest income on the convertible notes receivable for the year ended June 30, 2021 compared to $372,314 for the year ended June 30, 2020. 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, 2021, we recognized a loss of $597,433 in foreign currency exchange transactions compared to a gain of $398,610 for the year ended June 30, 2020. During the year ended June 30, 2021, the value of the U.S. dollar and the Euro decreased 5.9% and 0.5%, respectively, compared to the PKR. 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.
Non-controlling Interest
For the year ended June 30, 2021 and 2020, the net income attributable to non-controlling interest was $483,375 and $254,942, respectively. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK.
Net Income/Loss Attributable to NetSol
Net income was $1,778,257 for the year ended June 30, 2021 compared to $937,081 for the year ended June 30, 2020. This is an increase of $841,176 with a decrease of $9,399 on a constant currency basis, compared to the prior year. For the year ended June 30, 2017,2021, net lossincome per share was $0.46$0.15 for basic and diluted shares. For the year ended June 30, 2016,2020, net income per share was $0.33 and $0.32$0.08 for basic and diluted shares, respectively.shares.
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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 | |
| ● | 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.
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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, 20172021 and 20162020 are as follows:
| Year | Year | For the Year Ended | For the Year Ended | |||||||||||||
| Ended | Ended | June 30, 2021 | June 30, 2020 | |||||||||||||
| June 30, 2017 | June 30, 2016 | |||||||||||||||
| Net Income (loss) before preferred dividend, per GAAP | $ | (4,978,030 | ) | $ | 3,402,761 | |||||||||||
| Net Income (loss) attributable to NetSol | $ | 1,778,257 | $ | 937,081 | ||||||||||||
| Non-controlling interest | 3,241,594 | 1,654,380 | 483,375 | 254,942 | ||||||||||||
| Income taxes | 931,951 | 652,546 | 1,026,617 | 1,141,068 | ||||||||||||
| Depreciation and amortization | 6,562,334 | 7,152,139 | 3,956,314 | 3,731,954 | ||||||||||||
| Interest expense | 310,044 | 264,511 | 394,289 | 346,856 | ||||||||||||
| Interest (income) | (179,723 | ) | (161,794 | ) | (1,017,432 | ) | (1,569,536 | ) | ||||||||
| EBITDA | $ | 5,888,170 | $ | 12,964,543 | $ | 6,621,420 | $ | 4,842,365 | ||||||||
| Add back: | ||||||||||||||||
| Non-cash stock-based compensation | 2,763,323 | 1,533,209 | 342,153 | 808,616 | ||||||||||||
| Adjusted EBITDA, gross | $ | 8,651,493 | $ | 14,497,752 | $ | 6,963,573 | $ | 5,650,981 | ||||||||
| Less non-controlling interest (a) | (5,841,143 | ) | (5,363,326 | ) | (1,588,701 | ) | (1,330,352 | ) | ||||||||
| Adjusted EBITDA, net | $ | 2,810,350 | $ | 9,134,426 | $ | 5,374,872 | $ | 4,320,629 | ||||||||
| Weighted Average number of shares outstanding | ||||||||||||||||
| Basic | 10,912,284 | 10,391,157 | 11,499,983 | 11,734,648 | ||||||||||||
| Diluted | 10,919,169 | 10,584,835 | 11,499,983 | 11,784,414 | ||||||||||||
| Basic adjusted EBITDA | $ | 0.26 | $ | 0.88 | $ | 0.47 | $ | 0.37 | ||||||||
| Diluted adjusted EBITDA | $ | 0.26 | $ | 0.86 | $ | 0.47 | $ | 0.37 | ||||||||
| (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 | ||||||||||||
| Net Income (loss) attributable to non-controlling interest | $ | 483,375 | $ | 254,942 | ||||||||||||
| Income Taxes | 140,499 | 178,689 | 147,688 | 223,675 | ||||||||||||
| Depreciation and amortization | 2,168,249 | 3,442,235 | 1,115,734 | 1,060,605 | ||||||||||||
| Interest expense | 98,331 | 51,023 | 121,740 | 100,373 | ||||||||||||
| Interest (income) | (60,042 | ) | (98,638 | ) | (319,674 | ) | (391,644 | ) | ||||||||
| EBITDA | $ | 5,588,631 | $ | 5,227,689 | $ | 1,548,863 | $ | 1,247,951 | ||||||||
| Add back: | ||||||||||||||||
| Non-cash stock-based compensation | 252,512 | 135,637 | 39,838 | 82,401 | ||||||||||||
| Adjusted EBITDA of non-controlling interest | $ | 5,841,143 | $ | 5,363,326 | $ | 1,588,701 | $ | 1,330,352 | ||||||||
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.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $14,172,954$33,705,154 at June 30, 2017,2021, compared to $11,557,527$20,166,830 at June 30, 2016.2020.
Net cash provided by operating activities was $454,365$15,725,923 for the year ended June 30, 20172021 compared to $1,659,036$3,972,426 for the year ended June 30, 2016.2020. At June 30, 2017,2021, we had current assets of $44,272,075$55,578,774 and current liabilities of $21,117,015.$23,476,561. We had accounts receivable of $8,228,141$4,184,096 at June 30, 20172021 compared to $15,382,407$11,414,257 at June 30, 2016.2020. We had revenues in excess of billings of $24,380,632$15,637,734 at June 30, 20172021 compared to $11,297,264$18,506,733 at June 30, 20162020 of which $5,173,538 is$957,603 and $1,300,289 are shown as long term as of June 30, 2017.2021 and 2020, respectively. The long-term portion was discounted by $310,331$66,779 and $41,286 at June 30, 2021 and 2020, respectively, using the discounted cash flow method with an interest rate of 3.96% which is NetSol PK’s weighted average borrowing rate atrates ranging from 4.65% to 6.25% and 4.35%, for the years ended June 30, 2017.2021 and 2020, respectively. During the year ended June 30, 2017,2021, 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$10,099,160 from $26,679,671$29,920,990 at June 30, 20162020 to $32,608,773$19,821,830 at June 30, 2017. The increase is due to the increase in revenues recognized on the 12 country NFS Ascent contract.2021. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,880,194$6,696,035 and $10,222,795,$11,366,171, respectively at June 30, 2017.2021. The average days sales outstanding for the years ended June 30, 20172021 and 20162020 were 165 and 119200 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$2,518,550 for the year ended June 30, 2017,2021, compared to $3,672,441$2,054,890 for the year ended June 30, 2016.2020. We had net purchases of property and equipment of $1,422,185$2,363,050 compared to $2,349,488$1,270,965 for the comparable period last fiscal year. ForWe did not invest in short-term convertible notes for the year ended June 30, 2017, we invested $200,000 in a short-term convertible note receivable from WRLD3D, Inc. (“WRLD3D”), (formerly “eeGeo, Inc.”). For the year ended June 30, 2017, we invested $2,336,670 in WRLD3D by paying cash of $1,105,555 and providing services valued at $1,231,1152021, compared to cash payments of $555,556$600,000, for the fiscal year ended June 30, 2017. We2020. For the year ended June 30, 2021 and 2020, we invested $155,500 and $94,500, respectively, in DriveMate.
Net cash used $nil and $767,397in financing activities was $1,165,565 compared to net cash provided by financing activities of $1,700,293, for the years ended June 30, 20172021, and 2016, respectively, to purchase shares of NetSol PK on2020, respectively. During the open market.
Net cash provided by financing activities was $4,377,249 and $598,179 for the years ended June 30, 2017, and 2016, respectively. The year ended June 30, 2017 included the cash inflow2021, we purchased 669,018 shares of $866,438our common stock from the exercising of stock options and warrantsopen market for $2,364,781 compared to $1,137,480zero shares of common stock for the year ended June 30, 2016.2020. The Company purchased 7,500year ended June 30, 2021, included cash inflow of its common stock$1,898,013 from bank proceeds compared to $4,221,203 for the open market at an average price of $5.18 per share.same period last year. During the year ended June 30, 2017,2021, we had net proceeds frompayments for bank loans and capital leases of $5,630,587$698,797 compared to $382,877$611,913 for the year ended June 30, 2016.2020. 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, 2017,2021, we havehad approximately $14.17$33.7 million of cash, cash equivalents and marketable securities of which approximately $11.56$31.7 million is held by our foreign subsidiaries. As of June 30, 2016,2020, we hadhave approximately $11.56$20.2 million of cash, cash equivalents and marketable securities of which approximately $7.64$18.2 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.
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Financial Covenants
Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($389,610)416,667) 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 requires3,162,555) and a running finance facility of Rupees 75 million ($474,383). NetSol PK has an approved facility for export refinance from Habib Metro Bank Limited amounting to Rupees 900 million ($5,692,600). 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)2,403,542) and a running finance facility of Rs. 300120 million ($2,865,877)759,013) 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 | Payment due by period | |||||||||||||||||||||||||||||||||||||||
| Contractual Obligation | Total | Less than 1 year | 1-3 Years | 3-5 Years | years | Total | 0 - 1 year | 1-3 Years | 3-5 Years | More than 5 years | ||||||||||||||||||||||||||||||
| Debt Obligations | ||||||||||||||||||||||||||||||||||||||||
| D&O Insurance | $ | 87,485 | $ | 87,485 | $ | - | $ | - | $ | - | $ | 73,143 | $ | 73,143 | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Bank Overdraft Facility | 221,379 | 221,379 | - | - | - | |||||||||||||||||||||||||||||||||||
| Term Finance Facility | 1,648,818 | 1,090,259 | 558,559 | - | ||||||||||||||||||||||||||||||||||||
| Loan Payable Bank - Export Refinance | 4,776,461 | 4,776,461 | - | - | - | 3,162,555 | 3,162,555 | - | - | - | ||||||||||||||||||||||||||||||
| 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 | - | - | |||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||
| Loan Payable Bank - Export Refinance II | 2,403,542 | 2,403,542 | - | - | - | |||||||||||||||||||||||||||||||||||
| Loan Payable Bank - Export Refinance III | 4,427,578 | 4,427,578 | - | - | - | |||||||||||||||||||||||||||||||||||
| Term Finance Facility | 55,182 | 19,644 | 35,538 | - | - | |||||||||||||||||||||||||||||||||||
| Sale and Leaseback Financing | 85,313 | 28,183 | 57,130 | - | - | |||||||||||||||||||||||||||||||||||
| Insurance financing | 41,774 | 41,774 | - | - | - | |||||||||||||||||||||||||||||||||||
| Subsidiary Finance Leases | 168,107 | 119,493 | 48,614 | - | - | |||||||||||||||||||||||||||||||||||
| Operating Lease Obligations | - | 1,421,986 | 867,279 | 550,736 | 1,589 | 2,382 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 13,487,998 | $ | 12,233,450 | $ | 1,250,577 | $ | 1,589 | $ | 2,382 | ||||||||||||||||||||
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.
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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.
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 NETSOL’s financial statements for the fiscal years ended June 30, 20172021 and June 30, 2016,2020, 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’sNETSOL’s financial statements for the fiscal yearsyear ended June 30, 20172021 and June 30, 2016,2020, there were no disagreements, disputes, or differences of opinion with KSP Group, Inc.BF Borgers CPA PC. (“KSP”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 KSPBF Borgers would have caused KSPBF Borgers to make reference to the matter in its report.
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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, 2017.2021. 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, 2017,2021, 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.
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 2017,2021, 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)).
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
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
NONE
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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, 2017,2021, 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 20172020 Annual Shareholders Meeting held in June 2021, a five-member board stood for election. The members were elected and, according to the bylaws of the companyCompany 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 2017.2021.
| Nominating | and | |||||||||||
| Audit | Compensation | |||||||||||
| Director | ||||||||||||
| Committee | Committee | |||||||||||
| Najeeb Ghauri | ||||||||||||
| Malea Farsai | ||||||||||||
| X | X (C) | X | ||||||||||
| Kausar Kazmi (I) | X (C) | X | X | |||||||||
| X | X | X | (C) | |||||||||
(I) Denotes an Independent Director.
(C) Denotes the Chairperson of the Committee.
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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 | 67 | Chief Executive Officer, Chairman and Director | Brother of Naeem Ghauri | ||||||||
| Naeem Ghauri | 2020 | 64 | President | Brother of Najeeb Ghauri | ||||||||||||
| Roger Almond | 2013 | 52 | Chief Financial Officer | None | 2013 | 56 | Chief Financial Officer | None | ||||||||
| Patti L. W. McGlasson | 2004 | 52 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | 2004 | 56 | 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 | 72 | Director | None | ||||||||
| Malea Farsai | 2018 | 52 | Director; Corporate Counsel | None | ||||||||||||
| Henry Tolentino | 2018 | 72 | Director | None | ||||||||||||
| Syed Kausar Kazmi | 2019 | 68 | Director | None | ||||||||||||
Business Experience of Officers and Directors:
NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol.NETSOL. He has been a Directorthe Co-founder and 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 NetSolNETSOL listing on NASDAQ in 1999 the NetSoland NETSOL Pakistan subsidiary listing on KSE (Karachithe Karachi Stock Exchange)Exchange in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008.2005. 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. Under his watch, NETSOL has become a leading player in China with innovation and a cutting-edge technology.
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In September 2020, Mr. Ghauri was presented with the highest civilian award in Pakistan, “Sitar e Imtiaz”, a medal of pride, in recognition for his work in IT and charitable causes in Pakistan. This medal was conferred by the President of Pakistan at the President House in Islamabad, Pakistan. 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 ain 1977-78 for Bachelor of Science degree in Management/Economics in 1978.Economics. He also receivedearned an M.B.A. in Marketing Management from Claremont GraduatePeter F. Drucker School inof Management, Claremont, 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, 2015 and 2009.2020.
Skills and Qualifications: Mr. Ghauri has an extensive executive, operational and strategic leadership experience in a global setting and substantial experience in establishing management performance objective and establishing goals.
NAEEM GHAURI was a Director of the Company from 1999 through 2020 and was the Company’s Chief Executive Officer from August 2001 to October 2006. Mr. Ghauri is also a co-founder of the Company. Currently, Mr. Ghauri serves as the President and Director of Global Sales of NETSOL as well as the director of NETSOL (UK) Ltd., a wholly owned subsidiary of the Company located in London. While instrumental in numerous transactions, his most significant 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. More recently, Mr. Ghauri headed the sales team that signed a contract valued in excess of $35 million. Mr. Ghauri has spearheaded the Innovation practice of the Company while located in Thailand with an eye towards working with rideshare platforms as sustainable business models for the Company as the CEO of OTOZ, Inc. 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, analysts and users in nine European Countries. Mr. Ghauri is a board member of Drivemate Co., Ltd., the Company’s partner in Thailand, as a representative of NetSol. Mr. Ghauri earned his degree in computer science from Brighton University in England.
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 NetSolNETSOL 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’sNETSOL’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 2530 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. PriorImmediately prior to joining NetSol,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.
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MARK CATON joined the boardBoard of directorsDirectors in 2007. Mr. Caton is currently President of Ciena Financial,Centela Capital, Inc. a diversified financial services company, a position he has held since 2003.2006. Prior to joining Ciena,Centela Capital, Mr. Caton was President of NetSolNETSOL 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 NetSolNETSOL 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.
CORPORATESkills and Qualifications: Mr. Caton has over 35 years of experience in sales, marketing and management in the financial leasing and software industries.
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 Horwitz and Beam where she represented both domestic and international private and public clients from technology to apparel in various transactions from 1996-2000. She has also worked on the formation of business startups and IPOs. Ms. Farsai was on the team that took NETSOL 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 the Company, Ms. Farsai continues to work part-time as Corporate Counsel overseeing the Company’s insurance as well as day to day corporate legal needs. She has also obtained many of NETSOL’s various trademarks. Ms. Farsai has been actively updating and overseeing the Company’s Corporate and Social Responsibilities (CSR) globally and has effectively established a 501(c)(3) foundation for NETSOL to continue its charitable work internationally. 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.
HENRY TOLENTINO joined the Board of Directors for the first time 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 is 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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COPORATE 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.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 2021 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 2021.
Shareholder Approval of Compensation
At the last annual general meeting held on June 14, 2021, shareholders expressed support for our executive compensation programs, with 95.72% 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 14, 2021 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 2021, 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 are2021, 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.
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 Alignment | ● | Our 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 based | ● | Long-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 Risk | ● | Our 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 markets | ● | Our executive compensation programs are designed to be competitive within the relevant markets. |
| Simple and transparent | ● | Our 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 Systems | Data 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.
20172021 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.
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 2021 are reflected in the summary of compensation discussed below starting on page 43. For 2021, based on structured KPI’s by the compensation committee, Mr. Ghauri earned a bonus of $67,500. See bonus structure as discussed below on page 41. The Compensation Committee determined that Gross Revenue and Income from Operations structure used in fiscal 2021 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. Najeeb 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. Najeeb Ghauri’s bonus for fiscal year 2021 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, 2021. Total net revenues and income from operations are based on those values reported for the year ending June 30, 2021 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 2022 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’sNETSOL’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 $1,000,000 that is paid to certain individuals. We believeThe Compensation Committee is aware of the limitations imposed by Section 162(m) and considers the issue of deductibility when and if circumstances warrant. The committee reviews proposed compensation plans in light of applicable tax deductions, and generally seeks to maximize the deductibility for tax purposes of all elements of compensation. However, the committee may approve compensation that compensation paid underdoes not qualify for deductibility, including stock option and time-based restricted stock awards, if and when the management incentive plans is generally fully deductible for federal income tax purposes.committee deems it to be in the best interests of the Company and our shareholders.
Accounting for Stock-Based Compensation
Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718,Compensation – Stock Compensation.
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Summary Compensation
The following table shows the compensation for the fiscal year ended June 30, 2017, June 30, 2016,2021, 2020, and June 30, 2015,2019, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.
| Name and Principle Position | Fiscal Year Ended | Salary ($) | 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 | 2021 | $ | 667,000 | $ | 67,500 | (2) | $ | - | $ | - | $ | 180,383 | (4) | $ | 914,883 | ||||||||||||||||||||||||
| CEO & Chairman | 2016 | $ | 497,700 | $ | - | $ | - | $ | 44,937 | (2) | $ | 65,745 | (3) | $ | 608,382 | 2020 | $ | 689,000 | $ | - | $ | - | $ | - | $ | 156,586 | (4) | $ | 845,586 | |||||||||||||||||||||||||
| 2015 | $ | 497,700 | $ | - | $ | - | $ | - | (2) | $ | 65,724 | (3) | $ | 563,424 | 2019 | $ | 675,000 | $ | 432,488 | (2) | $ | - | $ | 21,598 | (3) | $ | 200,000 | (4) | $ | 1,329,086 | ||||||||||||||||||||||||
| Naeem Ghauri President | 2021 | $ | 767,768 | (5) | $ | - | $ | - | $ | - | $ | 77,045 | (6) | $ | 844,813 | |||||||||||||||||||||||||||||||||||||||
| Roger K Almond | 2017 | $ | 189,263 | $ | 10,000 | $ | - | $ | 16,360 | (4) | $ | 215,623 | 2021 | $ | 186,515 | $ | - | $ | - | $ | - | $ | 32,872 | (7) | $ | 219,387 | ||||||||||||||||||||||||||||
| Chief Financial Officer | 2016 | $ | 181,563 | $ | 32,550 | $ | 100,400 | $ | 11,725 | (4) | $ | 326,238 | 2020 | $ | 217,111 | $ | 20,000 | $ | 56,900 | $ | - | $ | 10,639 | (7) | $ | 304,650 | ||||||||||||||||||||||||||||
| 2019 | $ | 221,520 | $ | 20,000 | $ | 55,500 | $ | - | $ | 10,191 | (7) | $ | 307,211 | |||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 128,433 | $ | - | $ | 60,000 | $ | - | $ | 3,485 | (4) | $ | 191,918 | |||||||||||||||||||||||||||||||||||||||||
| Patti L. W. McGlasson | 2017 | $ | 211,087 | $ | - | $ | - | $ | 9,795 | (5) | $ | 220,882 | 2021 | $ | 202,271 | $ | - | $ | - | $ | - | $ | 9,784 | (8) | $ | 212,055 | ||||||||||||||||||||||||||||
| Secretary, General Counsel | 2016 | $ | 215,049 | $ | - | $ | 100,400 | $ | 10,393 | (5) | $ | 325,842 | 2020 | $ | 219,481 | $ | - | $ | 42,675 | $ | - | $ | 10,019 | (8) | $ | 272,175 | ||||||||||||||||||||||||||||
| 2015 | $ | 188,180 | $ | - | $ | - | $ | - | $ | 17,616 | (5) | $ | 205,796 | 2019 | $ | 226,113 | $ | - | $ | 55,500 | $ | - | $ | 10,378 | (8) | $ | 291,991 | |||||||||||||||||||||||||||
(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. 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 based on Mr. Ghauri’s bonus structure as detailed on page 41.
(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 $180,383, $156,586 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, 20162021, 2020 and 2015,2019, respectively.
(4)(5) Consists of $16,360, $11,725$400,000 base salary and $3,485$367,768 commission for the fiscal year ended June 30, 2021.
(6) Per Mr. Naeem Ghauri’s compensation agreement, he received $77,045 in allowances, perquisites and benefits for the fiscal year ended June 30, 2021.
(7) Consists of $8,872, $10,639 and $10,191 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2017, 20162021, 2020 and 2015, respectively.2019, respectively, and $24,000 paid as car allowance for the year ended June 30, 2021.
(5)(8) Consists of $nil, $nil$9,784, $10,019 and $4,855 paid for automobile allowance and $9,795, $10,393 and $12,761$9,935 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively.
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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 vestvested 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.
In September, 2015,July 2018, 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 AlmondAugust 2019, Ms. Patti McGlasson was granted 10,0007,500 shares of the Company’s common stock, which vest quarterly.quarterly over the period of two years. 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.
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 2021, 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.Item 11 under Executive Compensation beginning on page 39. As previously discussed, the $900,000 was temporarily reduced to $851,000 in response to the COVID-19 pandemic. Effective July 1, 2021, Mr. Ghauri earned 12,500 shares of common stock for each quarter of service commencing with the first quarter ended September 30, 2014 through June 30, 2015. Mr. GhauriGhauri’s salary, including allowances, was granted 82,644 shares of common stock for services commencing from September 2016increased to June 2021, he earned 49,586 shares of common stock for 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.$900,000. 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.
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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.
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. Effective July 1, 2021, Mr. Almond’s salary, was increased to $221,041. 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. Effective July 1, 2021, Ms. McGlasson’s salary, was increased to $212,384. 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.
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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.
Outstanding Equity Awards at Fiscal Year-End
The following table shows grantsAs of June 30, 2021, there are no outstanding stock options andor grants of unvested stock awards outstanding on June 30, 2017, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.awards.
| 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 | |||||||||||
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.
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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, 2017,2021, 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 | $ | 2,668,000 | $ | 111,167 | $ | 2,668,000 | ||||||
| Health Related Benefits | 65,232 | - | 65,232 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 1,994,330 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 549,206 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 5,276,768 | $ | 111,167 | $ | 2,733,232 | ||||||
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”).
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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, 2017,2021, 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 | $ | 186,515 | $ | 31,086 | $ | 186,515 | ||||||||||||
| Health related benefits | 16,356 | - | 16,356 | 8,868 | - | 8,868 | ||||||||||||||||||
| Bonus | - | - | - | - | - | - | ||||||||||||||||||
| Salary Multiple Pay-out | 595,795 | - | - | 557,680 | - | - | ||||||||||||||||||
| Bonus or Revenue One-time Pay-Out | 326,831 | - | - | 274,603 | - | - | ||||||||||||||||||
| Net Cash Value of Options | - | - | - | - | - | - | ||||||||||||||||||
| Total | $ | 1,138,245 | $ | 33,210 | $ | 215,619 | $ | 1,027,666 | $ | 31,086 | $ | 195,383 | ||||||||||||
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, 20172021, 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 | $ | 422,174 | $ | 35,181 | $ | 422,174 | ||||||
| Health related benefits | 19,584 | - | 19,584 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 631,150 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 326,831 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 1,399,739 | $ | 35,181 | $ | 441,758 | ||||||
| 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 | $ | 404,542 | $ | 33,712 | $ | 404,542 | ||||||
| Health related benefits | 19,560 | - | 19,560 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 604,790 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 274,603 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 1,303,495 | $ | 33,712 | $ | 424,102 | ||||||
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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, 2017,2021, other than Najeeb Ghauri and Naeem GhauriMalea 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 ($) | TOTAL ($) | ||||||||||||||||||
| Eugen Beckert | 42,209 | 98,177 | 140,386 | |||||||||||||||||||||
| Shahid Javed Burki | 49,245 | 98,177 | 147,422 | |||||||||||||||||||||
| Mark Caton | 45,725 | 98,177 | 143,902 | 80,000 | 11,997 | 91,997 | ||||||||||||||||||
| Henry Tolentino | 80,000 | - | 80,000 | |||||||||||||||||||||
| Kausar Kazmi | 80,000 | - | 80,000 | |||||||||||||||||||||
| 137,179 | 294,531 | 431,710 | 240,000 | 11,997 | 251,997 | |||||||||||||||||||
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, 2017.2021.
| BOARD ACTIVITY | CASH PAYMENTS | CASH PAYMENTS | ||||||
| Board Member Fee | $ | 105,525 | $ | 240,000 | ||||
| Chairperson for Audit Committee | $ | 14,070 | $ | - | ||||
| Chairperson for Compensation Committee | $ | 10,550 | $ | - | ||||
| Chairperson for Nominating and Corporate Governance Committee | $ | 7,035 | $ | - | ||||
| $ | 137,180 | $ | 240,000 | |||||
��
MembersIn previous years, the committee chairs have received additional compensation, but was eliminated as part of the Company’s Covid-19 mitigation measures. Independent 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”.
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.
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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, 2017,2021, 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 2005 stock option plan | 500,000 | 479,614 | - | 20,386 | - | |||||||||||||||
| The 2013 stock option plan | 1,250,000 | 1,151,804 | - | 98,196 | - | |||||||||||||||
| The 2015 stock option plan | 1,250,000 | 943,578 | - | 306,422 | - | |||||||||||||||
| 3,700,000 | 3,274,996 | - | 425,004 | - | ||||||||||||||||
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.
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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, 2017,16 2021, 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 | ||||||||||||||
| Najeeb Ghauri | (3) | 791,080 | 6.56 | % | (3) | 794,701 | 7.05 | % | ||||||||||
| Naeem Ghauri | (3) | 459,769 | 3.92 | % | (3) | 450,689 | 4.00 | % | ||||||||||
| Eugen Beckert | (3) | 57,617 | * | |||||||||||||||
| Shahid Javed Burki | (3) | 87,167 | * | |||||||||||||||
| Mark Caton | (3) | 59,853 | * | (3) | 101,580 | * | ||||||||||||
| Henry Tolentino | (3) | 27,313 | * | |||||||||||||||
| Patti McGlasson | (3) | 67,050 | * | (3) | 81,050 | * | ||||||||||||
| Roger Almond | (3) | 32,500 | * | (3) | 30,000 | * | ||||||||||||
| All officers and directors as a group (ten persons) | 1,555,036 | 13.17 | % | |||||||||||||||
| Kausar Kazmi | (3) | 11,445 | * | |||||||||||||||
| Malea Farsai | (3) | 39,811 | * | |||||||||||||||
| Renaissance Technologies Holdings Corp. | (5) | 793,360 | 7.04 | % | ||||||||||||||
| All officers and directors as a group (eight persons) | 1,536,589 | 13.64 | % | |||||||||||||||
* 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, 2017,16, 2021, 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, 201716, 2021 were 11,114,599.11,265,064.
(5) 5% or greater shareholder based on Schedule 13G filing on February 10, 2021.
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.
| 51 |
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, 20172021 and June 30, 2016.2020. 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 was $250,000 for the yearyears ended June 30, 2017 was $365,6352021 and for the year ended June 30, 2016 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.2020.
Tax Fees
Tax fees for fiscal year 20172021 were $15,000$13,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2016.2020. Tax fees for fiscal year 20162020 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2015.2019.
All Other Fees
No other fees were paid to principal accountant during the fiscal year 20172021 and 2016.2020.
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.
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.
| 52 |
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
*Previously Filed
(1) Filed Herewith
| 54 |
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, | BY: | / |
| Najeeb Ghauri | ||
| Chief Executive Officer | ||
| Date: September 28, | BY: | /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, | BY: | /S/ NAJEEB U. GHAURI |
| Najeeb U. Ghauri | ||
| Chief Executive Officer | ||
| Director, Chairman | ||
| Date: September 28, | BY: | /S/ ROGER K. ALMOND |
| Roger K. Almond | ||
| Chief Financial Officer | ||
| Principal Accounting Officer | ||
| Date: September 28, | ||
| BY: | /S/ MARK CATON | |
| Mark Caton | ||
| Director |
| Date: September 28, 2021 | BY: | /S/ MALEA FARSAI |
| Malea Farsai | ||
| Director |
| Date: September 28, 2021 | BY: | /S/ HENRY TOLENTINO |
| Henry Tolentino | ||
| Director |
| Date: September 28, 2021 | BY: | /S/ KAUSAR KAZMI |
| Kausar Kazmi | ||
| Director |
| 56 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 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 sheets of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows 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, 2021 and 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
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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition — identification of contractual terms in certain customer arrangements
Critical Audit Matter Description
As described in Note 3 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition.
| F-2 |
How the Critical Audit Matter Was Addressed in the Audit
The principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements. This in turn led to significant effort in performing our audit procedures which were designed to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition were appropriately identified and determined by management and to evaluate the reasonableness of management’s estimates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including those related to the identification of contractual terms in customer arrangements that impact the determination of the transaction price and revenue recognition. These procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining customer arrangements on a test basis, and (ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the customer arrangements.
Goodwill and Intangible asset- Refer to Note 12 and Note 13 to the financial statements
Critical Audit Matter Description
The Company tests goodwill and intangible assets for impairment annually (in the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, which requires management to make significant estimates and assumptions related to projected revenue growth rates, discount rates, and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Changes in these assumptions could have a significant impact on the fair value of the reporting unit and the amount of any goodwill impairment charge. As of June 30, 2021, the Company has four reporting units, but only three of which have goodwill.
Given the significant judgments made by management to estimate the fair value of the reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin required a high degree of auditor judgment and an increased extent of effort, including the assistance of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
| ● | Our audit procedures related to management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin for the reporting units included the following, among other procedures: |
| ● | We tested the effectiveness of internal controls over the goodwill impairment evaluation, including controls over the selection of the discount rates and over forecasts of future revenue growth rates, EBITDA, and EBITDA margin. |
| ● | We performed a retrospective review comparing actual revenue and EBITDA results of the reporting unit for 2021 to the forecasted results from 2020. |
| ● | We performed a retrospective review comparing management’s estimates and assumptions relating to revenue, EBITDA, and EBITDA margin projections for the reporting unit used for the purpose of current year’s annual impairment test to the projections previously used in connection with the prior year annual impairment test. |
| ● | We evaluated the consistency of estimates and assumptions relating to revenue and EBITDA growth inherent in the discounted cash flow model for the reporting unit to those used by management in other annual forecasting activities. |
| ● | With the assistance of our fair value specialists, we performed a benchmarking exercise comparing management’s estimates and assumptions related to revenue growth, EBITDA and EBITDA margin for the reporting unit as of the measurement date to the revenue growth, EBITDA and EBITDA margins of a peer group of public companies for the most recent three years and the projection period. |
| ● | With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term revenue growth and the discount rates by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management. |
/s/ BF Borgers CPA PC.
CERTIFIED PUBLIC ACCOUNTANTS
We have served as the Company’s auditor since 2020.
Lakewood, CO
September 28, 2021
| F-3 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance SheetsAs of June 30,
| As of | As of | |||||||||||||||
| 2017 | 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 14,172,954 | $ | 11,557,527 | $ | 33,705,154 | $ | 20,166,830 | ||||||||
| 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 | ||||||||||||||
| Accounts receivable, net of allowance of $166,231 and $435,611 | 4,184,096 | 10,131,752 | ||||||||||||||
| Accounts receivable - related party, net of allowance of $1,373,099 and $90,594 | - | 1,282,505 | ||||||||||||||
| Revenues in excess of billings, net of allowance of $136,976 and $188,914 | 14,680,131 | 17,198,281 | ||||||||||||||
| Revenues in excess of billings - related party, net of allowance of $8,163 and $0 | - | 8,163 | ||||||||||||||
| Other current assets, net of allowance of $1,243,633 and $0 | 3,009,393 | 3,108,180 | ||||||||||||||
| Total current assets | 44,272,075 | 40,451,826 | 55,578,774 | 51,895,711 | ||||||||||||
| Restricted cash | 90,000 | 90,000 | ||||||||||||||
| Revenues in excess of billings, net - long term | 5,173,538 | - | 957,603 | 1,300,289 | ||||||||||||
| Convertible note receivable - related party, net of allowance of $4,250,000 and $0 | - | 4,250,000 | ||||||||||||||
| Property and equipment, net | 20,370,703 | 22,774,435 | 12,091,812 | 11,329,631 | ||||||||||||
| Right of use of assets - operating leases | 1,345,869 | 2,360,129 | ||||||||||||||
| Long term investment | 3,155,852 | 2,387,692 | ||||||||||||||
| Other assets | 3,211,295 | 842,553 | 55,127 | 41,992 | ||||||||||||
| Intangible assets, net | 17,043,151 | 19,674,033 | 3,904,656 | 5,391,077 | ||||||||||||
| Goodwill | 9,516,568 | 9,516,568 | 9,516,568 | 9,516,568 | ||||||||||||
| Total assets | $ | 99,677,330 | $ | 93,349,415 | $ | 86,606,261 | $ | 88,473,089 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 6,880,194 | $ | 5,962,770 | $ | 6,696,035 | $ | 5,769,161 | ||||||||
| 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 | ||||||||||||||
| Current portion of loans and obligations under finance leases | 11,366,171 | 9,139,561 | ||||||||||||||
| Current portion of operating lease obligations | 857,729 | 1,111,912 | ||||||||||||||
| Unearned revenue | 4,556,626 | 4,095,472 | ||||||||||||||
| Total current liabilities | 21,117,015 | 15,230,392 | 23,476,561 | 20,116,106 | ||||||||||||
| Loans and obligations under capitalized leases; less current maturities | 366,762 | 477,692 | ||||||||||||||
| Loans and obligations under finance leases; less current maturities | 699,841 | 1,539,975 | ||||||||||||||
| Operating lease obligations; less current maturities | 564,257 | 1,339,965 | ||||||||||||||
| Total liabilities | 21,483,777 | 15,708,084 | 24,740,659 | 22,996,046 | ||||||||||||
| 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 | ||||||||||||||
| Common stock, $.01 par value; 14,500,000 shares authorized; 12,181,585 shares issued and 11,265,064 outstanding as of June 30, 2021 and 12,122,149 shares issued and 11,874,646 outstanding as of June 30, 2020 | 121,816 | 121,222 | ||||||||||||||
| Additional paid-in-capital | 124,409,998 | 121,448,946 | 129,018,826 | 128,677,754 | ||||||||||||
| 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 | ) | ||||||||||||
| Treasury stock (at cost, 916,521 shares and 247,503 shares as of June 30, 2021 and June 30, 2020, respectively) | (3,820,750 | ) | (1,455,969 | ) | ||||||||||||
| Accumulated deficit | (42,301,390 | ) | (37,323,360 | ) | (38,801,282 | ) | (34,269,817 | ) | ||||||||
| Stock subscription receivable | (297,511 | ) | (783,172 | ) | ||||||||||||
| Other comprehensive loss | (18,074,570 | ) | (18,730,494 | ) | (31,868,481 | ) | (34,085,047 | ) | ||||||||
| Total NetSol stockholders’ equity | 63,394,471 | 64,303,629 | 54,650,129 | 58,988,143 | ||||||||||||
| Non-controlling interest | 14,799,082 | 13,337,702 | 7,215,473 | 6,488,900 | ||||||||||||
| Total stockholders’ equity | 78,193,553 | 77,641,331 | 61,865,602 | 65,477,043 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 99,677,330 | $ | 93,349,415 | $ | 86,606,261 | $ | 88,473,089 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30,
| For the Year | For the Years | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2017 | 2016 | 2021 | 2020 | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 18,218,912 | $ | 8,352,441 | $ | 6,249,924 | $ | 3,260,891 | ||||||||
| Maintenance fees | 14,157,367 | 13,310,591 | ||||||||||||||
| Subscription and support | 22,173,745 | 20,254,917 | ||||||||||||||
| Services | 24,798,899 | 30,037,459 | 26,448,171 | 32,555,690 | ||||||||||||
| 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 | 48,775 | 300,821 | ||||||||||||
| Total net revenues | 65,366,268 | 64,550,193 | 54,920,615 | 56,372,319 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 24,645,223 | 21,789,329 | 20,969,298 | 18,821,738 | ||||||||||||
| Travel | 3,137,671 | 2,334,019 | 663,403 | 4,181,742 | ||||||||||||
| Depreciation and amortization | 5,448,059 | 5,926,969 | 2,990,689 | 2,897,371 | ||||||||||||
| Other | 3,727,379 | 3,698,290 | 3,944,197 | 3,508,098 | ||||||||||||
| Total cost of revenues | 36,958,332 | 33,748,607 | 28,567,587 | 29,408,949 | ||||||||||||
| Gross profit | 28,407,936 | 30,801,586 | 26,353,028 | 26,963,370 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 9,746,229 | 7,823,916 | 6,555,004 | 6,450,663 | ||||||||||||
| Depreciation and amortization | 1,114,275 | 1,225,170 | 965,625 | 834,583 | ||||||||||||
| Provision for bad debts | 1,407,751 | 237,703 | ||||||||||||||
| General and administrative | 16,747,550 | 14,727,313 | 15,437,382 | 17,138,832 | ||||||||||||
| Research and development cost | 393,345 | 485,783 | 674,168 | 1,468,954 | ||||||||||||
| Total operating expenses | 29,409,150 | 24,499,885 | 23,632,179 | 25,893,032 | ||||||||||||
| Income (loss) from operations | (1,001,214 | ) | 6,301,701 | |||||||||||||
| Income from operations | 2,720,849 | 1,070,338 | ||||||||||||||
| Other income and (expenses) | ||||||||||||||||
| Gain (loss) on sale of assets | (30,147 | ) | 23,930 | (191,935 | ) | 23,103 | ||||||||||
| Interest expense | (310,044 | ) | (264,511 | ) | (394,289 | ) | (346,856 | ) | ||||||||
| Interest income | 179,723 | 161,794 | 1,017,432 | 1,569,536 | ||||||||||||
| Gain (loss) on foreign currency exchange transactions | 306,819 | (738,158 | ) | (597,433 | ) | 398,610 | ||||||||||
| Other income (expense) | 50,378 | 224,931 | ||||||||||||||
| Share of net loss from equity investment | (253,819 | ) | (605,864 | ) | ||||||||||||
| Other income | 987,444 | 224,224 | ||||||||||||||
| Total other income (expenses) | 196,729 | (592,014 | ) | 567,400 | 1,262,753 | |||||||||||
| Net income (loss) before income taxes | (804,485 | ) | 5,709,687 | |||||||||||||
| Net income before income taxes | 3,288,249 | 2,333,091 | ||||||||||||||
| Income tax provision | (931,951 | ) | (652,546 | ) | (1,026,617 | ) | (1,141,068 | ) | ||||||||
| Net income (loss) | (1,736,436 | ) | 5,057,141 | |||||||||||||
| Net income | 2,261,632 | 1,192,023 | ||||||||||||||
| Non-controlling interest | (3,241,594 | ) | (1,654,380 | ) | (483,375 | ) | (254,942 | ) | ||||||||
| Net income (loss) attributable to NetSol | $ | (4,978,030 | ) | $ | 3,402,761 | |||||||||||
| Net income attributable to NetSol | $ | 1,778,257 | $ | 937,081 | ||||||||||||
| Net income (loss) per share: | ||||||||||||||||
| Net income (loss) per common share | ||||||||||||||||
| Net income per share: | ||||||||||||||||
| Net income per common share | ||||||||||||||||
| Basic | $ | (0.46 | ) | $ | 0.33 | $ | 0.15 | $ | 0.08 | |||||||
| Diluted | $ | (0.46 | ) | $ | 0.32 | $ | 0.15 | $ | 0.08 | |||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | 10,912,284 | 10,391,157 | 11,499,983 | 11,734,648 | ||||||||||||
| Diluted | 10,912,284 | 10,584,835 | 11,499,983 | 11,784,414 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | 1,778,257 | $ | 937,081 | ||||
| Other comprehensive income (loss): | ||||||||
| Translation adjustment | 2,933,964 | (1,229,927 | ) | |||||
| Translation adjustment attributable to non-controlling interest | (717,398 | ) | 269,886 | |||||
| Net translation adjustment | 2,216,566 | (960,041 | ) | |||||
| Comprehensive income (loss) attributable to NetSol | $ | 3,994,823 | $ | (22,960 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated StatementsStatement of Comprehensive Income (Loss)Stockholders’ Equity
For the Years Ended June 30, 2021 and 2020
| Additional | Other | Non | Total | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Comprehensive | 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 | ||||||||||||||||||||||||
| 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.
| F-7 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
For the Years Ended June 30, 2021 and 2020
| 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 | |||
| Additional | Other | Non | Total | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Comprehensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
| 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 | ||||||||||||||
| Cumulative effect adjustment (1) | - | - | - | - | (6,309,722 | ) | - | (474,578 | ) | (6,784,300 | ) | |||||||||||||||||||||
| Subsidiary common stock issued for: | ||||||||||||||||||||||||||||||||
| -Services | - | - | - | - | - | - | 378 | 378 | ||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||
| Services | 59,436 | 594 | 341,072 | - | - | - | - | 341,666 | ||||||||||||||||||||||||
| Purchase of treasury shares | - | - | - | (2,364,781 | ) | - | - | - | (2,364,781 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | 2,216,566 | 717,398 | 2,933,964 | ||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 1,778,257 | - | 483,375 | 2,261,632 | ||||||||||||||||||||||||
| Balance at June 30, 2021 | 12,181,585 | $ | 121,816 | $ | 129,018,826 | $ | (3,820,750 | ) | $ | (38,801,282 | ) | $ | (31,868,481 | ) | $ | 7,215,473 | $ | 61,865,602 | ||||||||||||||
(1) Cumulative effect adjustment relates to the adoption of Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Refer to Note 2 – Accounting Policies for more information.
The accompanying notes are an integral part of these consolidated financial statements
| F-8 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ EquityFor the Years Ended June 30, 2017 and 2016Cash Flows
| 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, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 2,261,632 | $ | 1,192,023 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,956,314 | 3,731,954 | ||||||
| Provision for bad debts | (332,325 | ) | 184,944 | |||||
| Share of net loss from investment under equity method | 253,819 | 605,864 | ||||||
| (Gain) loss on sale of assets | 191,935 | (23,103 | ) | |||||
| Gain on forgiveness of loan | (469,721 | ) | - | |||||
| Stock based compensation | 342,153 | 808,616 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 6,861,454 | 2,035,843 | ||||||
| Accounts receivable - related party | - | 1,957,864 | ||||||
| Revenues in excess of billing | 2,839,709 | (3,252,704 | ) | |||||
| Revenues in excess of billing - related party | - | 105,441 | ||||||
| Other current assets | (857,708 | ) | (132,175 | ) | ||||
| Accounts payable and accrued expenses | 474,098 | (1,399,828 | ) | |||||
| Unearned revenue | 204,563 | (1,842,313 | ) | |||||
| Net cash provided by operating activities | 15,725,923 | 3,972,426 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (2,551,283 | ) | (1,377,145 | ) | ||||
| Sales of property and equipment | 188,233 | 106,180 | ||||||
| Convertible note receivable - related party | - | (600,000 | ) | |||||
| Investment in associates | (155,500 | ) | (94,500 | ) | ||||
| Purchase of subsidiary shares | - | (89,425 | ) | |||||
| Net cash used in investing activities | (2,518,550 | ) | (2,054,890 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of subsidiary options | - | 11,621 | ||||||
| Purchase of treasury stock | (2,364,781 | ) | - | |||||
| Dividend paid by subsidiary to non-controlling interest | - | (1,920,618 | ) | |||||
| Proceeds from bank loans | 1,898,013 | 4,221,203 | ||||||
| Payments on finance lease obligations and loans - net | (698,797 | ) | (611,913 | ) | ||||
| Net cash provided by (used in) financing activities | (1,165,565 | ) | 1,700,293 | |||||
| Effect of exchange rate changes | 1,496,516 | (817,363 | ) | |||||
| Net increase in cash and cash equivalents | 13,538,324 | 2,800,466 | ||||||
| Cash and cash equivalents at beginning of the period | 20,166,830 | 17,366,364 | ||||||
| Cash and cash equivalents at end of period | $ | 33,705,154 | $ | 20,166,830 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-9 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ EquityFor the Years Ended June 30, 2017 and 2016Cash Flows (Continued)
| 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 | |||||||||||||||||
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 455,647 | $ | 355,927 | ||||
| Taxes | $ | 601,703 | $ | 1,027,950 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Assets acquired under finance lease | $ | 222,391 | $ | - | ||||
| Drivemate shares acquired for services rendered | $ | 1,300,000 | $ | - | ||||
| 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. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsFor the Years Ended June 30,
| 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 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Statements of Cash FlowsFor 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 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
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-11 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
(B) Reclassifications
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 Years ended | ||||||||
| June 30, 2020 | ||||||||
| Originally reported | Reclassified | |||||||
| REVENUES | ||||||||
| License fees | $ | 4,564,560 | $ | 3,260,891 | ||||
| Subscription and support | 19,019,646 | 20,254,917 | ||||||
| Services | 32,487,292 | 32,555,690 | ||||||
| Services - related party | 300,821 | 300,821 | ||||||
| Total net revenues | $ | 56,372,319 | $ | 56,372,319 | ||||
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 ($77,399) in each bank and in the UK for GBP 85,000 ($118,056) in each bank. The Company maintains two bank accounts in China and six bank accounts in the UK. As of June 30, 20172021 and 2016,2020, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $11,564,343$31,662,035 and $7,640,095,$18,210,378, respectively. The Company has not experienced any losses in such accounts.
| F-12 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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 |
(J) NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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 | 3 to 5 Years | |
| Office furniture and | 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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, 2021 and 2020
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 goodwillIn conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it 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 doesmore likely than not need to be performed. Ifthat 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 ofamount. If factors indicate that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit inis less than its carrying amount, the Company performs a manner similar to a purchase price allocation. The residual fair value after this allocation isquantitative assessment and the implied fair value of the reporting unit goodwill.is determined by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded.
(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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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, 2021 and 2020
Our financial assets that are measured at fair value on a recurring basis as of June 30, 2017,2021 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 | $ | - | $ | - | $ | 957,603 | $ | 957,603 | ||||||||||||||||||||||||
| Total | $ | - | $ | - | $ | 5,173,538 | $ | 5,173,538 | $ | - | $ | - | $ | 957,603 | $ | 957,603 | ||||||||||||||||
Our financial assets that are measured at fair value on a recurring basis as of June 30, 2020, are as follows:
| Level 1 | Level 2 | Level 3 | Total Assets | |||||||||||||
| Revenues in excess of billings - long term | $ | - | $ | - | $ | 1,300,289 | $ | 1,300,289 | ||||||||
| Total | $ | - | $ | - | $ | 1,300,289 | $ | 1,300,289 | ||||||||
The reconciliation for the years ended June 30, 2021 and 2020 is as follows:
| Revenues in excess of billings - long term | Fair value discount | Total | ||||||||||
| 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 | |||||
| Additions | 1,023,634 | (78,124 | ) | 945,510 | ||||||||
| Amortization during the period | - | 53,119 | 53,119 | |||||||||
| Transfers to short term | (1,341,575 | ) | - | (1,341,575 | ) | |||||||
| Effect of Translation Adjustment | 748 | (488 | ) | 260 | ||||||||
| Balance at June 30, 2021 | $ | 1,024,382 | $ | (66,779 | ) | $ | 957,603 | |||||
The Company appliedused the discounted cash flow method with interest rates ranging from 4.65% to calculate6.25% and 4.35% for the fair value and used NetSol PK’s weighted average borrowing rate, which was 3.96% as ofyears ended June 30, 2017.2021 and 2020, respectively.
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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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$4,556,626 and $4,739,214 as of$4,095,472 at June 30, 20172021 and 2016,2020, 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, 2021 and 2020
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 20172021 and 20162020 were $237,221$224,933 and $293,683,$285,964, respectively.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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, 20172021 and 20162020
(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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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 ASU No. 2015-16,Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments.”ASU No. 2015-06 simplifies the accounting for measurement-period adjustments attributable 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 with a corresponding adjustment to goodwill. The amended guidance requires an acquirer to record adjustments to provisional amounts made during the measurement period 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. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
In March 2016, the FASB issued Accounting Standards Update 2016-07,Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early application is permitted. The Company adopted this guidance with respect to its investment in WRLD3D and applied the equity method of accounting prospectively.
Accounting Standards Recently Issued But 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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 applyadopted this guidance to applicable impairment tests afterstandard on July 1, 2020 and the adoption date.did not have a material effect on our consolidated financial statements.
In May 2017,June 2016, the FASB issued ASU 2017-09,2016-13, Compensation-Stock CompensationFinancial Instruments—Credit Losses (Topic 718)326): ScopeMeasurement of Modification Accounting,Credit Losses on Financial Instruments. ASU 2016-13 introduced a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables, contract assets and held-to-maturity debt securities, which clarifies whenrequires the Company to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also expands disclosure requirements.
The Company adopted the standard on July 1, 2020 using the modified retrospective approach. The adoption of ASU 2016-13 resulted in changes to the terms or conditionsCompany’s accounting policies for trade and other receivables, contract assets and convertible notes receivable. Based on the results of the Company’s evaluation, the adoption of ASU 2016-13 resulted in a share-basedone-time cumulative-effect adjustment through retained earnings of $6,784,300 to increase its allowance for credit losses related to the convertible notes receivable, interest receivable, accounts receivable, revenues in excess of billings, and other receivables.
The following table presents the impact of adopting ASC Topic 326 as of July 1, 2020:
| Adjustment | ||||
| to Adopt | ||||
| Asset Classification | ASC Topic 326 | |||
| Allowance for credit losses - accounts receivable | $ | 109,486 | ||
| Allowance for credit losses - accounts receivable - related party | 1,282,505 | |||
| Allowance for credit losses - revenue in excess of billings - related party | 8,163 | |||
| Allowance for credit losses - convertible notes receivable - related party | 4,250,000 | |||
| Allowance for credit losses - other current assets | 1,134,146 | |||
| $ | 6,784,300 | |||
Accounts receivable includes trade accounts receivables from the Company’s customers, net of an allowance for credit risk. Accounts receivable are recorded at the invoiced amount and do not bear interest. 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 award must be accountedpatterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for as modifications. The new guidance will reduce diversityrecovery is considered remote.
| F-18 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
Revenue in practice and result in fewer changesexcess of billings, relates to services performed which were not billed, net of an allowance for credit risk. As customers are billed under the terms of an award being accountedthe contract, the corresponding amount is transferred to accounts receivable. In establishing the required allowance, management regularly reviews the composition of and analyzes customer credit worthiness, customer concentrations, current economic trends, changes in customer payment patterns, the project status and assesses individual unbilled contract assets over a specific aging and amount. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for asrecovery is considered remote.
The convertible notes receivable represents loans provided to WRLD3D. The allowance for credit risk for the convertible notes is established based on various quantitative and qualitative factors including customer credit worthiness, current economic trends and changes in payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Accounting Standards Recently Issued but Not Yet Adopted by the Company:
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a modification. The standardconsolidated group. This ASU is effective for fiscal years beginning after December 15, 2017, including(and interim periods within those fiscal years. The new standard will be effective prospectivelyyears) beginning after December 15, 2020, which for the Company foris the first quarter of fiscal year beginning July 1, 2018.2022. Early adoption is permitted. The Company is currently evaluating thedoes not expect this update to have a material impact of the adoption of the new standard on its consolidated financial statements and related disclosures.Consolidated Financial Statements.
In July 2017,August 2020, the FASB issued ASU No. 2017-11,“Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging (Topic 815)Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): (Part I) Accounting for Certain FinancialConvertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and results in fewer instruments with Down Round Features, (Part II) Replacementembedded conversion features being separately recognized from the host contract as compared with current standards. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. Additionally, the ASU amends the calculation of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entitiesshare dilution impact related to a conversion feature 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 needtreasury method as an option. For instruments that do not have a component mandatorily settled in cash, the change will likely result in a higher amount of share dilution in the calculation of earnings per share. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of fiscal 2023, with early adoption permitted beginning in the first quarter of fiscal 2022. The Company is currently assessing the impact and timing of adoption of this ASU.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to consider the effects of down round features when analyzing convertible debt, warrantscontracts, hedging relationships, and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer wouldtransactions affected by reference rate reform if certain criteria are met. The elective amendments provide expedients to contract modification, affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be accounted for as a derivative liability at fair valuediscontinued as a result of the existence of a down round feature. The amendments are effective for fiscal years beginningreference rate reform. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 15, 2018, and should31, 2022. The guidance can be applied retrospectively. Early adoptionimmediately through December 31, 2022. The Company will adopt this standard when LIBOR is permitted, including adoption in an interim period. The Companydiscontinued and does not expect a material impact to its financial condition, results of operations or disclosures based on 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.current debt portfolio and capital structure.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
| F-19 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
NOTE 3 – REVENUE RECOGNITION
The Company determines revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.
The Company has two primary revenue streams: core revenue and non-core revenue.
Core Revenue
The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.
Non-Core Revenue
The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.
Software Licenses
Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.
| F-20 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Post Contract Support
Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, 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.
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.
| F-21 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
The Company’s disaggregated revenue by category is as follows:
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Core: | ||||||||
| License | $ | 6,249,924 | $ | 3,260,891 | ||||
| Subscription and support | 22,173,745 | 20,254,917 | ||||||
| Services | 20,139,320 | 25,713,554 | ||||||
| Services - related party | 48,775 | 300,821 | ||||||
| Total core revenue, net | 48,611,764 | 49,530,183 | ||||||
| Non-Core: | ||||||||
| Services | 6,308,851 | 6,842,136 | ||||||
| Total non-core revenue, net | 6,308,851 | 6,842,136 | ||||||
| Total net revenue | $ | 54,920,615 | $ | 56,372,319 | ||||
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.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.
The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.
| F-22 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
Revenue is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.
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.
The Company’s revenues in excess of billings and unearned revenue are as follows:
| As of | As of | |||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Revenues in excess of billings | $ | 15,637,734 | $ | 18,506,733 | ||||
| Unearned revenue | $ | 4,556,626 | $ | 4,095,472 | ||||
During the year ended June 30, 2021, the Company recognized revenue of $4,087,373, 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.
| F-23 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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 $48,314,683 as of June 30, 2021, of which the Company estimates to recognize approximately $15,603,135 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.
Unearned Revenue
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and unearned revenue.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients:
● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.
● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).
Costs to Obtain a Contract
The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts.
| F-24 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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, 2021 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| Basic income per share: | ||||||||||||
| Net income available to common shareholders | $ | 1,778,257 | 11,499,983 | $ | 0.15 | |||||||
| Effect of dilutive securities | ||||||||||||
| Share grants | - | - | - | |||||||||
| Diluted income per share | $ | 1,778,257 | 11,499,983 | $ | 0.15 | |||||||
| 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 | - | |||||||
NOTE 4 – RELATED PARTY TRANSACTIONS
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 years ended June 30, 2017 and 2016, NetSol Innovation provided services of $5,665,872 and $8,161,015, respectively. Accounts receivable at June 30, 2017 and 2016 were $1,462,078 and $4,689,322, respectively.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
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”
| 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 | |||||||
NOTE 5 – MAJOR CUSTOMERS
The Company is a strategic business partner forDuring the year ended June 30, 2021, revenues from Daimler Financial Services (which consists(“DFS”) and BMW Financial (“BMW”) were $11,522,694 and $7,137,653, respectively representing 21.0% and 13.0%, respectively 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 forrevenues. During the fiscal yearsyear ended June 30, 20172020, revenues from Daimler Financial Services (“DFS”) and 2016, respectively.BMW Financial (“BMW”) were $14,869,030 and $8,904,809, respectively representing 26.4% and 15.8%, respectively of revenues. The revenue from these two customers isare shown in the Asia – Pacific segment.
Accounts receivable from DFS and BMW at June 30, 2017 for these customers2021, were $1,620,717$462,861 and $1,462,078,$35,063, respectively. Accounts receivable from DFS and BMW at June 30, 2016 for these customers2020, were $5,306,166$4,821,468 and $4,689,322,$474,271, respectively. RevenueRevenues in excess of billingbillings at June 30, 2017 for these customers was $18,579,5402021 were $2,041,750 and $nil,$4,453,299, respectively. Revenues in excess of billings at June 30, 2020 were $5,709,226 and $6,977,375, respectively. Included in this amount was $5,173,538$1,300,289 shown as long term. Revenue in excess of billingterm 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.
2020.
NOTE 6 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY
The Company has entered into an agreementmultiple convertible note receivable agreements with WRLD3D, wherebyWRLD3D. The convertible notes bear interest ranging from 5% to 10% with various maturity dates. The convertible notes have conversion features which allow the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amountto convert the notes into shares of the Convertible Note is $750,000, and as of June 30, 2017, the Company had disbursed $200,000. 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. 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 anyWRLD3D stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Convertible Note). The Convertible Note is convertible upon the occurrence of certain events. 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 following events:proceeds thereof.
| F-25 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
The following table summarizes the convertible notes receivable from WRLD3D.
| Convertible | ||||||||||||||
| Agreement | Interest | Maturity | Note | Accrued | ||||||||||
| Date | Rate | Date | Amount | Interest | ||||||||||
| May 25, 2017 | 5 | % | March 2, 2018 | $ | 750,000 | $ | 110,202 | |||||||
| February 9, 2018 | 10 | % | March 31, 2019 | 2,500,000 | 500,773 | |||||||||
| April 1, 2019 | 10 | % | March 31, 2020 | 600,000 | 57,648 | |||||||||
| August 19, 2019 | 10 | % | March 31, 2020 | 400,000 | 32,439 | |||||||||
| 4,250,000 | 701,062 | |||||||||||||
| Less allowance for doubtful account | (4,250,000 | ) | (701,062 | ) | ||||||||||
| Net Balance | $ | - | $ | - | ||||||||||
Subsequent toThe Company has accrued interest of $701,062 at June 30, 2017, the2021 and 2020, which is included in “Other current assets”. The Company loaned an additional $500,000 to WRLD3D pursuant to the Convertible Promissory Note agreement. (See Note 21).has not been accruing interest since July 1, 2020.
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, 2021 | June 30, 2020 | |||||||||||||
| Prepaid Expenses | $ | 597,687 | $ | 386,578 | $ | 1,987,556 | $ | 1,035,415 | ||||||||
| Advance Income Tax | 1,052,935 | 968,334 | 344,699 | 355,482 | ||||||||||||
| Employee Advances | 128,100 | 83,978 | 28,816 | 44,415 | ||||||||||||
| Security Deposits | 103,255 | 72,985 | 281,464 | 270,403 | ||||||||||||
| Other Receivables | 252,590 | 486,562 | 143,258 | 101,451 | ||||||||||||
| Other Assets | 329,319 | 216,191 | 223,600 | 57,381 | ||||||||||||
| Total | $ | 2,463,886 | $ | 2,214,628 | ||||||||||||
| Due From Related Party | 1,243,633 | 1,243,633 | ||||||||||||||
| 4,253,026 | 3,108,180 | |||||||||||||||
| Less allowance for doubtful account | (1,243,633 | ) | - | |||||||||||||
| Net Balance | $ | 3,009,393 | $ | 3,108,180 | ||||||||||||
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, 2021 | June 30, 2020 | ||||||||||
| Revenue in excess of billing - long term | $ | 5,483,869 | ||||||||||
| Revenues in excess of billings - long term | $ | 1,024,382 | $ | 1,341,575 | ||||||||
| Present value discount | (310,331 | ) | (66,779 | ) | (41,286 | ) | ||||||
| Net Balance | $ | 5,173,538 | $ | 957,603 | $ | 1,300,289 | ||||||
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, 2021 and 2020, the Company accreted $53,119 and $55,344, respectively, which was recorded in interest income for that period. The fair value ofCompany used the paymentsdiscounted cash flow method with interest rates ranging from 4.65% to be received after one6.25% for the year has been estimated at $5,173,538. The fair value adjustment of $310,331 will be accreted in subsequent periods.ended June 30, 2021 and 4.35% during the year ended June 30, 2020.
| F-26 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
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, 2021 | June 30, 2020 | |||||||||||||
| Office Furniture and Equipment | $ | 3,755,710 | $ | 3,346,156 | $ | 3,440,501 | $ | 3,143,833 | ||||||||
| Computer Equipment | 26,693,730 | 25,935,620 | 18,681,991 | 19,256,543 | ||||||||||||
| Assets Under Capital Leases | 1,965,650 | 2,409,074 | 1,136,128 | 1,443,423 | ||||||||||||
| Building | 9,243,866 | 9,185,570 | 6,205,210 | 5,848,813 | ||||||||||||
| Land | 2,428,626 | 2,410,664 | 1,608,024 | 1,512,905 | ||||||||||||
| Capital Work In Progress | - | 27,648 | ||||||||||||||
| Autos | 1,270,339 | 1,073,447 | 1,770,147 | 1,348,405 | ||||||||||||
| Improvements | 592,652 | 385,135 | 35,592 | 36,929 | ||||||||||||
| Subtotal | 45,950,573 | 44,745,666 | 32,877,593 | 32,618,499 | ||||||||||||
| Accumulated Depreciation | (25,579,870 | ) | (21,971,231 | ) | (20,785,781 | ) | (21,288,868 | ) | ||||||||
| Property and Equipment, Net | $ | 20,370,703 | $ | 22,774,435 | $ | 12,091,812 | $ | 11,329,631 | ||||||||
For the years ended June 30, 20172021 and 2016,2020, depreciation expense totaled $3,785,334$2,148,578 and $4,387,121,$1,903,640, respectively. Of these amounts, $2,671,586$1,182,953 and $3,161,951$1,069,057, 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, 2021 and 2020:
| As of June 30, | As of June 30, | As of | As of | |||||||||||||
| 2017 | 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Computers and Other Equipment | $ | 309,863 | $ | 503,926 | $ | 169,487 | $ | 328,621 | ||||||||
| Furniture and Fixtures | 227,914 | 408,200 | 57,509 | 51,119 | ||||||||||||
| Vehicles | 1,427,873 | 1,496,948 | 909,132 | 1,063,683 | ||||||||||||
| Total | 1,965,650 | 2,409,074 | 1,136,128 | 1,443,423 | ||||||||||||
| Less: Accumulated Depreciation - Net | (711,622 | ) | (713,248 | ) | (627,119 | ) | (667,096 | ) | ||||||||
| $ | 1,254,028 | $ | 1,695,826 | $ | 509,009 | $ | 776,327 | |||||||||
Finance lease term and discount rate were as follows:
| As of | As of | |||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Weighted average remaining lease term - Finance leases | 0.55 Years | 1.38 Years | ||||||
| Weighted average discount rate - Finance leases | 5.6 | % | 11.7 | % | ||||
| F-27 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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.
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 | As of | |||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Assets | ||||||||
| Operating lease assets, net | $ | 1,345,869 | $ | 2,360,129 | ||||
| Liabilities | ||||||||
| Current | ||||||||
| Operating | $ | 857,729 | $ | 1,111,912 | ||||
| Non-current | ||||||||
| Operating | 564,257 | 1,339,965 | ||||||
| Total Lease Liabilities | $ | 1,421,986 | $ | 2,451,877 | ||||
| F-28 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
The components of lease cost were as follows:
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Amortization of finance lease assets | $ | 186,721 | $ | 253,071 | ||||
| Interest on finance lease obligation | 32,675 | 81,907 | ||||||
| Operating lease cost | 1,271,947 | 1,258,102 | ||||||
| Short term lease cost | 91,705 | 282,806 | ||||||
| Sub lease income | (35,740 | ) | (33,426 | ) | ||||
| Total lease cost | $ | 1,547,308 | $ | 1,842,460 | ||||
Lease term and discount rate were as follows:
| As of | As of | |||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Weighted average remaining lease term - Operating leases | 1.78 Years | 2.45 Years | ||||||
| Weighted average discount rate - Operating leases | 5.7 | % | 5.6 | % | ||||
Supplemental disclosures of cash flow information related to leases were as follows:
| For the Years | ||||||||
| Ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Cash flows related to lease liabilities | ||||||||
| Operating cash flows related to operating leases | $ | 1,182,028 | $ | 1,263,089 | ||||
| Operating cash flows from finance leases | $ | 25,338 | $ | 72,999 | ||||
| Financing cash flows from finance leases | $ | 334,939 | $ | 324,723 | ||||
| F-29 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
Maturities of operating lease liabilities were as follows as of June 30, 2021:
| Amount | ||||
| Within year 1 | $ | 911,760 | ||
| Within year 2 | 496,700 | |||
| Within year 3 | 82,282 | |||
| Within year 4 | 835 | |||
| Within year 5 | 835 | |||
| Thereafter | 2,505 | |||
| Total Lease Payments | 1,494,917 | |||
| Less: Imputed interest | (72,931 | ) | ||
| Present Value of lease liabilities | 1,421,986 | |||
| Less: Current portion | (857,729 | ) | ||
| Non-Current portion | $ | 564,257 | ||
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 years ended June 30, 2021 and 2020, the Company received $35,740 and $33,426, respectively, of lease income.
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 purchased an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company purchased 5,469 preferred shares for $1,800,000 consisting of $500,000 cash to be paid over a two-year period and $1,300,000 to be provided in services. The Company has paid the $500,000 in cash and has provided services of $1,300,000. Pursuant to the agreement, the number of shares to be issued is adjusted as necessary to result in an equity ownership equal to 30% of the issued and outstanding shares at the final payment date. As of June 30, 2021, the Company has been issued 8,178 shares equal to 30% 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 owns 30% of Drivemate; therefore, the Company accounts for the investment using the equity method of accounting.
During the years ended June 30, 2021 and 2020, the Company performed services of $18,006 and $1,054,372, respectively.
Under the equity method of accounting, the Company recorded its share of net loss of $20,001 and $16,714 for the years ended June 30, 2021 and 2020, respectively.
| F-30 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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, the investment earned by NetSol PK is $1,945,909.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 20172021, 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:warrants expired on March 2, 2020.
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, 20172021 and 2016,2020, NetSol PK provided services valued at $1,225,434$48,775 and $250,770,$300,821, 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 ended June 30, 2017 and 2016, NetSol PK services valued at $1,231,115 and $164,794, respectively, were released from restriction. Revenuerevenue in excess of billing were $1,373,099 and $8,163 at June 30, 20172020, respectively. Upon adoption of ASC 326, an allowance was established for the full amounts of these accounts. Under the equity method of accounting, the Company recorded its share of net loss of $233,818 and 2016 were $80,705 and $86,385, respectively. During$589,150 for the yearyears ended June 30, 2017, NetSol PK paid $550,000 to WRLD3D to buy out a portion of the services requirement.2021 and 2020, respectively.
AtThe following table reflects the above investments at June 30, 2017, the Company has determined that there is no impairment.2021.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
| Drivemate | WRLD3D | Total | ||||||||||
| Gross investment | $ | 1,800,000 | $ | 3,888,889 | $ | 5,688,889 | ||||||
| Cumulative net loss on investment | (38,853 | ) | (1,924,134 | ) | (1,962,987 | ) | ||||||
| Cumulative other comprehensive income (loss) | - | (570,050 | ) | (570,050 | ) | |||||||
| Net investment | $ | 1,761,147 | $ | 1,394,705 | $ | 3,155,852 | ||||||
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, 2021 | June 30, 2020 | |||||||||||||
| 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 | ) | (14,440,001 | ) | (16,045,322 | ) | ||||||||
| Accumulated Amortization | (27,067,358 | ) | (24,247,446 | ) | (28,900,340 | ) | (25,808,598 | ) | ||||||||
| Net Balance | $ | 17,043,151 | $ | 19,674,033 | $ | 3,904,656 | $ | 5,391,077 | ||||||||
(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$3,904,656 will be amortized over the next 6.752.25 years. Amortization expense for the years ended June 30, 20172021 and 20162020 was $2,776,473$1,807,736 and $2,765,018,$1,828,314, respectively.
| F-31 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
(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 | ||||
| Years ended: | ||||
| June 30, 2022 | $ | 1,839,736 | ||
| June 30, 2023 | 1,839,736 | |||
| June 30, 2024 | 225,184 | |||
| $ | 3,904,656 | |||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
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, | |||||||
| 2021 | 2020 | |||||||
| 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, 2021 | June 30, 2020 | |||||||||||||
| Accounts Payable | $ | 1,466,265 | $ | 1,346,532 | $ | 1,067,937 | $ | 1,351,158 | ||||||||
| Accrued Liabilities | 4,498,958 | 4,171,058 | 4,512,499 | 3,349,624 | ||||||||||||
| Accrued Payroll & Taxes | 520,719 | 231,881 | 228,028 | 537,888 | ||||||||||||
| Taxes Payable | 174,485 | 66,437 | 608,121 | 303,996 | ||||||||||||
| Other Payable | 219,767 | 146,862 | 279,450 | 138,171 | ||||||||||||
| Total | $ | 6,880,194 | $ | 5,962,770 | $ | 6,696,035 | $ | 5,680,837 | ||||||||
| F-32 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
��
NOTE 1415 – DEBTS
Notes payable and capital leases payable consisted of the following:
| As of June 30, 2017 | As of June 30, 2021 | ||||||||||||||||||||||||||
| Current | Long-Term | Current | Long-Term | ||||||||||||||||||||||||
| Name | Total | Maturities | Maturities | Total | Maturities | Maturities | |||||||||||||||||||||
| D&O Insurance | (1) | $ | 87,485 | $ | 87,485 | $ | - | (1) | $ | 73,143 | $ | 73,143 | $ | - | |||||||||||||
| Paycheck Protection Program Loans | (2) | - | - | - | |||||||||||||||||||||||
| Bank Overdraft Facility | (2) | 221,379 | 221,379 | - | (3) | - | - | - | |||||||||||||||||||
| HSBC Loan | (3) | - | - | - | |||||||||||||||||||||||
| Term Finance Facility | (4) | 1,648,818 | 1,090,259 | 558,559 | |||||||||||||||||||||||
| Loan Payable Bank - Export Refinance | (4) | 4,776,461 | 4,776,461 | - | (5) | 3,162,555 | 3,162,555 | - | |||||||||||||||||||
| Loan Payable Bank - Running Finance | (6) | - | - | - | |||||||||||||||||||||||
| Loan Payable Bank - Export Refinance II | (5) | 1,910,585 | 1,910,585 | - | (7) | 2,403,542 | 2,403,542 | - | |||||||||||||||||||
| 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) | 4,427,578 | 4,427,578 | - | |||||||||||||||||||||||
| Sale and Leaseback Financing | (10) | 85,313 | 28,183 | 57,130 | |||||||||||||||||||||||
| Term Finance Facility | (11) | 55,182 | 19,644 | 35,538 | |||||||||||||||||||||||
| Insurance Financing | (12) | 41,774 | 41,774 | - | |||||||||||||||||||||||
| 9,861,787 | 9,861,787 | - | 11,897,905 | 11,246,678 | 651,227 | ||||||||||||||||||||||
| Subsidiary Capital Leases | (7) | 727,770 | 361,008 | 366,762 | |||||||||||||||||||||||
| Subsidiary Finance Leases | (13) | 168,107 | 119,493 | 48,614 | |||||||||||||||||||||||
| $ | 10,589,557 | $ | 10,222,795 | $ | 366,762 | $ | 12,066,012 | $ | 11,366,171 | $ | 699,841 | ||||||||||||||||
| 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, 2020 | ||||||||||||||
| Current | Long-Term | |||||||||||||
| Name | Total | Maturities | Maturities | |||||||||||
| D&O Insurance | (1) | $ | 81,728 | $ | 81,728 | $ | - | |||||||
| Paycheck Protection Program Loans | (2) | 469,721 | 182,669 | 287,052 | ||||||||||
| Bank Overdraft Facility | (3) | - | - | - | ||||||||||
| Term Finance Facility | (4) | 1,380,878 | 354,337 | 1,026,541 | ||||||||||
| Loan Payable Bank - Export Refinance | (5) | 2,975,482 | 2,975,482 | - | ||||||||||
| Loan Payable Bank - Running Finance | (6) | - | - | - | ||||||||||
| Loan Payable Bank - Export Refinance II | (7) | 2,261,365 | 2,261,365 | - | ||||||||||
| Loan Payable Bank - Running Finance II | (8) | - | - | - | ||||||||||
| Loan Payable Bank - Export Refinance III | (9) | 2,975,483 | 2,975,483 | - | ||||||||||
| Term Finance Facility | (11) | 65,473 | 16,423 | 49,050 | ||||||||||
| Insurance Financing | (12) | - | - | - | ||||||||||
| 10,210,130 | 8,847,487 | 1,362,643 | ||||||||||||
| Subsidiary Finance Leases | (13) | 469,406 | 292,074 | 177,332 | ||||||||||
| $ | 10,679,536 | $ | 9,139,561 | $ | 1,539,975 | |||||||||
(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, 20172021 and 2016,2020, respectively.
| F-33 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
(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. 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. This loan is forgivable if the Company meets the criteria set by the U.S. Government. During the year ended June 30, 2021, the Company applied for the loan forgiveness, which was approved by the U.S. Government.
(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.$416,667. The annual interest rate was 4.75%5.1% as of June 30, 2017.2021 and 2020. Total outstanding balance as of June 30, 20172021 and 2020 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, 2017,2021, NTE was in compliance with this covenant.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes(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 the COVID-19 Pandemic. This is a term loan payable in three years. The availed facility amount is Rs. 260,678,180 or $1,648,818, at June 30, 20172021, of which $1,090,259 is shown as current and 2016
(3) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to financeremaining $558,559 is shown as long term. The availed facility amount is Rs. 232,042,664 or $1,380,878, at June 30, 2020, of which $354,337 is shown as current and 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, 20172021 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$3,162,555 and Rs. 400,000,000500,000,000 or $3,792,907,$2,975,482 at June 30, 2021 and 2020, respectively. The interest rate for the loansloan was 3% and 4.5% at June 30, 20172021 and 2016,2020.
(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 $474,383 and Rs. 75,000,000 or $446,322, at June 30, 2021 and 2020, respectively. Interest expenseThe balance outstanding at June 30, 2021 and 2020 was Rs. Nil. The interest rate for the year endedloan was 9.5% and 7.2% at June 30, 20172021 and 2016 was $121,306 and $148,475,2020, 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, 2017,2021, 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 $2,403,542 and Rs. 380,000,000 or $2,261,365, at June 30, 2021 and 2020, respectively. The interest rate for the loansloan was 3% at June 30, 2017. Interest expense for the year ended June 30, 2017 was $2,511.2021 and 2020.
(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 $759,013 and Rs. 120,000,000 or $714,116, at June 30, 2021 and 2020, respectively. The interest rate for the loansloan was 8.13%9.0% and 7.7% at June 30, 2017. Interest expense for the year ended2021 and 2020, respectively. Total outstanding balance at June 30, 20172021 and 2020 was $78,251.$nil.
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, 2017,2021, 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 $5,692,600 and Rs. 900,000,000 or $5,355,868, at June 30, 2021 and 2020, respectively. NetSol PK used Rs. 700,000,000 or $4,427,578 and Rs. 500,000,000 or $2,975,482, at June 30, 2021 and 2020, respectively. The interest rate for the loan was 3% at June 30, 2021 and 2020.
| F-34 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
(10) The Company’s subsidiary, NetSol PK, availed sale and leaseback financing from First Habib Modaraba secured by the transfer of the vehicles’ title. As of June 30, 2021, NetSol PK used Rs. 13,487,949 or $85,313 of which $57,130 was shown as long term and $28,183 as current. The interest rate for the loan was 9.0% at June 30, 2021.
(11) In March 2020, the Company’s subsidiary, VLS, entered into a loan agreement with Investec Bank PLC. The loan amount was £69,549, or $96,596, for a period of 5 years with monthly payments of £1,349, or $1,874. As of June 30, 2021, the subsidiary has used this facility up to $55,182, of which $35,538 was shown as long-term and $19,644 as current. The interest rate was 6.14% at June 30, 2021.
(12) The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $41,774 is recorded in current maturities. The interest rate on this financing was 4.5% as of June 30, 2021.
(13) 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, 20172021 and 2016.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 20162020.
Following is the aggregate minimum future lease payments under capital leases for the year endedas of June 30, 2017:2021:
| 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 | $ | 126,586 | ||
| Within year 2 | 31,386 | |||
| Within year 3 | 20,170 | |||
| Total Minimum Lease Payments | 178,142 | |||
| Interest Expense relating to future periods | (10,035 | ) | ||
| Present Value of minimum lease payments | 168,107 | |||
| Less: Current portion | (119,493 | ) | ||
| Non-Current portion | $ | 48,614 | ||
Following is the aggregate future long term debt payments as of June 30, 2021:
| Amount | ||||
| Loan Payments | ||||
| Within year 1 | $ | 1,138,086 | ||
| Within year 2 | 610,253 | |||
| Within year 3 | 40,974 | |||
| Total Loan Payments | 1,789,313 | |||
| Less: Current portion | (1,138,086 | ) | ||
| Non-Current portion | $ | 651,227 | ||
| F-35 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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 | 2021 | 2020 | |||||||||||||
| US operations | $ | (5,255,124 | ) | $ | (2,527,545 | ) | $ | 1,944,974 | $ | 417,885 | ||||||
| Foreign operations | 4,450,639 | 8,237,232 | 1,343,275 | 1,915,206 | ||||||||||||
| $ | (804,485 | ) | $ | 5,709,687 | $ | 3,288,249 | $ | 2,333,091 | ||||||||
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 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
| Years Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State and Local | 113,152 | 2,275 | ||||||
| Foreign | 912,663 | 1,138,793 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State and Local | 802 | - | ||||||
| Foreign | - | - | ||||||
| Provision for income taxes | $ | 1,026,617 | $ | 1,141,068 | ||||
A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows:
| Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Income tax (benefit) provision at statutory rate | $ | (281,570 | ) | 35.0 | % | $ | 1,998,390 | 35.0 | % | $ | 690,532 | 21.0 | % | $ | 489,949 | 21.0 | % | |||||||||||||||
| State income (benefit) taxes, net of federal tax benefit | (46,258 | ) | 5.8 | % | 328,307 | 5.7 | % | 229,520 | 7.0 | % | 162,850 | 7.0 | % | |||||||||||||||||||
| Foreign earnings taxed at different rates | (625,773 | ) | 77.8 | % | (2,026,031 | ) | -35.5 | % | 72,358 | 2.2 | % | 602,918 | 25.8 | % | ||||||||||||||||||
| Change in valuation allowance for deferred tax assets | 1,340,938 | -167 | % | 476,646 | 8.3 | % | 129,758 | 4 | % | (120,739 | ) | -5.2 | % | |||||||||||||||||||
| Other | 544,614 | -67.7 | % | (124,766 | ) | -2.2 | % | (95,551 | ) | -2.9 | % | 6,090 | 0.3 | % | ||||||||||||||||||
| Provision for income taxes | $ | 931,951 | -115.8 | % | $ | 652,546 | 11.4 | % | $ | 1,026,617 | 31.2 | % | $ | 1,141,068 | 48.9 | % | ||||||||||||||||
| F-36 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
Deferred income tax assets and liabilities as of June 30, 20162021 and 20152020 consist of tax effects of temporary differences related to the following:
| Years Ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Net operating loss carry forwards | $ | 16,365,908 | $ | 14,862,607 | ||||
| Other | 397,429 | 559,792 | ||||||
| Net deferred tax assets | 16,763,337 | 15,422,399 | ||||||
| Valuation allowance for deferred tax assets | (16,763,337 | ) | (15,422,399 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
Components of deferred tax asset
| Years Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net operating loss carry forwards | $ | 7,483,618 | $ | 7,318,282 | ||||
| Other | 79,675 | 115,253 | ||||||
| Net deferred tax assets | 7,563,293 | 7,433,535 | ||||||
| Valuation allowance for deferred tax assets | (7,563,293 | ) | (7,433,535 | ) | ||||
| 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 increased by 1,340,938$129,758 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.2021.
At June 30, 2017,2021, federal and state net operating loss carry forwards in the United States of America were $40,582,869$28,678,045 and $4,556,581,$7,935,883, 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. California has suspended the net operating loss carryover deduction for taxable years 2020, 2021 and 2022. Net operating losses related to foreign entities were $6,701,192$3,506,583 at June 30, 2017.2021.
As of June 30, 2017,2021, 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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, 20142018 through 2016.2020. 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$33,349,743 as of June 30, 2017.2021. 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, 20172021 and 20162020 is $876,058$202,918 and $1,096,200,$47,477, respectively. The effect on basic and diluted earnings per share is $0.08$0.018 and $0.004 for June 30, 20172021 and $0.11 and $0.10, respectively for 2020, respectively.
| F-37 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2016.2021 and 2020
NOTE 16 –17 - STOCKHOLDERS’ EQUITY
During the years ended June 30, 20172021 and 2016,2020, the Company issued 121,85820,353 and 54,31855,044 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$118,316 and $304,138,$312,090, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 20172021 and 2016,2020, the Company issued 52,2511,983 and 33,00073,667 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$11,997 and $167,974,$261,622, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 20172021 and 2016,2020, the Company issued 253,06637,100 and 141,20481,696 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$211,353 and $792,506,$416,738, 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, the Company received $380,770 and $780,980, respectively pursuant to a stock option agreement for the exercise of 84,838 and 177,024 shares of common stock, respectively at prices ranging from $3.88 to $4.75 and $3.88 to $4.92 per share, respectively.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
During the year ended June 30, 2017,2021, the Company purchased 7,500669,018 shares of its common stock from the open market for cash proceeds of $2,364,781 at an average price of $5.18$3.53 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 ismay be 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.
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.
| F-38 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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, 2017,2021, the remaining shares to be granted are 130,00020,386 under the 20112005 Plan, 2,59598,196 under the 2013 Plan and 341,516306,422 under the 2015 Plan.
Options and Warrants
A summary of option and warrant activity for the years ended June 30, 2017 and 2016 is presented below:
| OPTIONS: | ||||||||||||||||
| # of shares | Weighted Ave 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 | ||||||||||
| Granted | 152,024 | $ | 4.50 | |||||||||||||
| Exercised | (177,024 | ) | $ | 4.37 | 368,808 | |||||||||||
| Expired / Cancelled | (73,000 | ) | $ | 24.08 | ||||||||||||
| Outstanding and exercisable, June 30, 2016 | 610,133 | $ | 4.90 | 0.99 | $ | 799,030 | ||||||||||
| Granted | 79,838 | $ | 4.53 | |||||||||||||
| Exercised | (84,838 | ) | $ | 4.49 | 33,474 | |||||||||||
| Expired / Cancelled | (130,000 | ) | $ | 7.50 | ||||||||||||
| 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 | - | - | - | $ | - | |||||||||||
The aggregate intrinsic value at each fiscal year end represents the difference between the Company’s closing stock price of $3.9 and $5.84 on July 30, 2017 and 2016 and the exercise price of the options, respectively. The Aggregate intrinsic value for exercised options represents the difference between the Company’s stock price at the date of exercise and the exercise price.
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 | ||||||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 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$122,875.
Stock Grants
The following table summarizes stock grants awarded as compensation:
| # of shares | Weighted Average Grant Date Fair Value ($) | # of shares | Weighted Average Grant Date Fair Value ($) | |||||||||||||
| Unvested, June 30, 2015 | 6,667 | $ | 6.00 | |||||||||||||
| Unvested, June 30, 2019 | 81,515 | $ | 5.88 | |||||||||||||
| Granted | 864,500 | $ | 5.91 | 200,273 | $ | 4.61 | ||||||||||
| Vested | (240,939 | ) | $ | 5.51 | (210,408 | ) | $ | 4.71 | ||||||||
| Unvested, June 30, 2016 | 630,228 | $ | 6.07 | |||||||||||||
| Forfeited / Cancelled | (4,959 | ) | $ | 6.05 | ||||||||||||
| Unvested, June 30, 2020 | 66,421 | $ | 5.75 | |||||||||||||
| Granted | 222,146 | $ | 5.92 | - | $ | - | ||||||||||
| Cancelled | (5,000 | ) | $ | 5.55 | ||||||||||||
| Vested | (427,175 | ) | $ | 5.89 | (59,436 | ) | $ | 5.75 | ||||||||
| Unvested, June 30, 2017 | 420,199 | $ | 6.15 | |||||||||||||
| Forfeited / Cancelled | - | $ | - | |||||||||||||
| Unvested, June 30, 2021 | 6,985 | $ | 5.79 | |||||||||||||
For the years ended June 30, 20172021 and 2016,2020, the Company recorded compensation expense of $2,522,158$341,773 and $1,264,618,$808,458, respectively. The compensation expense related to the unvested stock grants as of June 30, 20172021 was $2,565,438$31,455 which will be recognized during the fiscal years of 2018 to 2019.year 2022.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
NOTE 1819 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. The Company defends itself vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, the Company records the estimated loss. The Company provides disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. The Company bases accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
| F-39 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
(A)Non-cancellable operating leasesNOTE 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, 20172021 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, 2016,2020, the Company filed a motioncontributed $1,237,677 and $1,135,233, 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes 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 maintenancepost contract support 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.
The following table presents a summary of identifiable assets as of June 30, 20172021 and 2016:2020:
| As of | As of | |||||||||||||||
| 2017 | 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Identifiable assets: | ||||||||||||||||
| Corporate headquarters | $ | 2,922,514 | $ | 3,646,160 | $ | 2,067,474 | $ | 4,508,724 | ||||||||
| North America | 6,717,366 | 6,845,444 | 6,073,616 | 5,949,653 | ||||||||||||
| Europe | 6,056,514 | 7,857,427 | 10,363,611 | 10,856,814 | ||||||||||||
| Asia - Pacific | 83,980,936 | 75,000,384 | 68,101,560 | 67,157,898 | ||||||||||||
| Consolidated | $ | 99,677,330 | $ | 93,349,415 | $ | 86,606,261 | $ | 88,473,089 | ||||||||
The following table presents a summary of investmentinvestments under the equity method as of June 30, 20172021 and 2016:2020:
| As of June 30, | As of June 30, | As of | As of | |||||||||||||
| 2017 | 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Investment in WRLD3D: | ||||||||||||||||
| Investment in associates under equity method: | ||||||||||||||||
| Corporate headquarters | $ | 1,111,111 | $ | 555,556 | $ | 396,403 | $ | 473,692 | ||||||||
| Asia - Pacific | 1,945,909 | 164,794 | 2,759,449 | 1,914,000 | ||||||||||||
| Consolidated | $ | 3,057,020 | $ | 720,350 | $ | 3,155,852 | $ | 2,387,692 | ||||||||
| F-40 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20172021 and 20162020
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 | 2021 | 2020 | |||||||||||||
| Revenues from unaffiliated customers: | ||||||||||||||||
| North America | $ | 5,624,434 | $ | 5,464,740 | $ | 3,724,547 | $ | 4,444,862 | ||||||||
| Europe | 5,550,536 | 5,981,430 | 11,283,499 | 11,914,071 | ||||||||||||
| Asia - Pacific | 46,000,208 | 40,254,321 | 39,863,794 | 39,712,565 | ||||||||||||
| 57,175,178 | 51,700,491 | 54,871,840 | 56,071,498 | |||||||||||||
| Revenue from affiliated customers | ||||||||||||||||
| Europe | 1,299,784 | 4,688,687 | ||||||||||||||
| Asia - Pacific | 6,891,306 | 8,161,015 | 48,775 | 300,821 | ||||||||||||
| 8,191,090 | 12,849,702 | 48,775 | 300,821 | |||||||||||||
| Consolidated | $ | 65,366,268 | $ | 64,550,193 | $ | 54,920,615 | $ | 56,372,319 | ||||||||
| Intercompany revenue | ||||||||||||||||
| Europe | $ | 509,328 | $ | 558,645 | $ | 549,031 | $ | 585,250 | ||||||||
| Asia - Pacific | 2,599,243 | 4,807,276 | 11,678,429 | 7,045,640 | ||||||||||||
| Eliminated | $ | 3,108,571 | $ | 5,365,921 | $ | 12,227,460 | $ | 7,630,890 | ||||||||
| Net income (loss) after taxes and before non-controlling interest: | ||||||||||||||||
| Corporate headquarters | $ | (5,084,078 | ) | $ | (2,611,696 | ) | $ | 1,992,218 | $ | (408,016 | ) | |||||
| North America | (454,297 | ) | 171,628 | (161,198 | ) | (241,444 | ) | |||||||||
| Europe | (1,956,137 | ) | 1,081,057 | (74,146 | ) | 1,766,434 | ||||||||||
| Asia - Pacific | 5,758,076 | 6,416,152 | 504,758 | 75,049 | ||||||||||||
| Consolidated | $ | (1,736,436 | ) | $ | 5,057,141 | $ | 2,261,632 | $ | 1,192,023 | |||||||
| Depreciation and amortization: | ||||||||||||||||
| North America | $ | 47,583 | $ | 35,268 | $ | 4,310 | $ | 11,828 | ||||||||
| Europe | 206,407 | 172,755 | 465,825 | 353,862 | ||||||||||||
| Asia - Pacific | 6,308,344 | 6,944,116 | 3,486,179 | 3,366,264 | ||||||||||||
| Consolidated | $ | 6,562,334 | $ | 7,152,139 | $ | 3,956,314 | $ | 3,731,954 | ||||||||
| Interest expense: | ||||||||||||||||
| Corporate headquarters | $ | 8,576 | $ | 6,236 | $ | 17,418 | $ | 33,710 | ||||||||
| North America | 138 | 117 | ||||||||||||||
| Europe | 17,462 | 40,302 | 11,426 | 9,905 | ||||||||||||
| Asia - Pacific | 283,868 | 217,856 | 365,445 | 303,241 | ||||||||||||
| Consolidated | $ | 310,044 | $ | 264,511 | $ | 394,289 | $ | 346,856 | ||||||||
| Income tax expense: | ||||||||||||||||
| Corporate headquarters | $ | 69,350 | $ | 1,075 | ||||||||||||
| North America | 44,604 | 1,200 | ||||||||||||||
| Europe | $ | - | $ | 46,691 | 190,730 | 326,524 | ||||||||||
| Asia - Pacific | 931,951 | 605,855 | 721,933 | 812,269 | ||||||||||||
| Consolidated | $ | 931,951 | $ | 652,546 | $ | 1,026,617 | $ | 1,141,068 | ||||||||
| F-41 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
The following table presents a summary of capital expenditures for the years ended June 30:
| 2017 | 2016 | |||||||
| Capital expenditures: | ||||||||
| Corporate headquarters | $ | - | $ | - | ||||
| North America | 41,340 | 66,764 | ||||||
| Europe | 520,920 | 417,861 | ||||||
| Asia - Pacific | 1,640,943 | 2,851,296 | ||||||
| Consolidated | $ | 2,203,203 | $ | 3,335,921 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Capital expenditures: | ||||||||
| North America | $ | 1,521 | $ | 3,904 | ||||
| Europe | 441,672 | 763,308 | ||||||
| Asia - Pacific | 2,108,090 | 609,933 | ||||||
| Consolidated | $ | 2,551,283 | $ | 1,377,145 | ||||
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, 20172021 and 2016.2020.
| June 30, 2017 | June 30, 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
| Revenue | Long-lived Assets | Revenue | Long-lived Assets | Revenue | Long-lived Assets | Revenue | Long-lived Assets | |||||||||||||||||||||||||
| China | $ | 22,737,967 | $ | 341,238 | $ | 17,276,250 | $ | 19,851 | $ | 22,716,598 | $ | 509,935 | $ | 20,065,572 | $ | 843,694 | ||||||||||||||||
| Thailand | 3,887,089 | 211,892 | 6,428,041 | 309,498 | 4,518,145 | 2,033,628 | 3,807,648 | 900,514 | ||||||||||||||||||||||||
| USA | 4,378,433 | 5,975,412 | 5,843,204 | 5,450,684 | 2,691,811 | 5,440,078 | 3,457,676 | 5,689,067 | ||||||||||||||||||||||||
| UK | 13,152,380 | 4,350,199 | 16,894,973 | 4,036,925 | 11,283,500 | 5,217,594 | 12,275,903 | 5,528,801 | ||||||||||||||||||||||||
| Pakistan & India | 1,653,393 | 44,501,157 | 1,842,046 | 43,047,590 | 1,478,071 | 17,618,325 | 2,008,907 | 19,103,687 | ||||||||||||||||||||||||
| Australia & New Zealand | 6,618,930 | 25,357 | 4,308,784 | 30,259 | 4,771,216 | 207,927 | 3,149,715 | 261,615 | ||||||||||||||||||||||||
| Mexico | 1,835,251 | - | 1,542,530 | - | 1,032,736 | - | 987,190 | - | ||||||||||||||||||||||||
| Indonesia | 3,265,412 | - | 6,201,642 | - | 3,221,342 | - | 5,611,454 | - | ||||||||||||||||||||||||
| South Africa | 3,451,931 | - | 387,220 | - | 924,316 | - | 496,480 | - | ||||||||||||||||||||||||
| Other Countries | 4,385,482 | - | 3,825,503 | 2,782 | 2,282,880 | - | 4,511,774 | - | ||||||||||||||||||||||||
| Total | $ | 65,366,268 | $ | 55,405,255 | $ | 64,550,193 | $ | 52,897,589 | $ | 54,920,615 | $ | 31,027,487 | $ | 56,372,319 | $ | 32,327,378 | ||||||||||||||||
| F-42 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
Disclosed in the table below is the reconciliationgeographic information of revenuetotal revenues by each entity and country disclosed above for the years ended June 30, 20172021 and 2016.2020.
| Revenues 2017 | Revenues 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | - | $ | - | $ | - | $ | 3,724,547 | $ | - | $ | - | $ | 2,691,811 | $ | - | $ | - | $ | - | $ | 1,032,736 | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||||||||||
| Europe: | 6,850,320 | - | - | - | 6,850,320 | - | - | - | - | - | - | 11,283,500 | - | - | - | 11,283,500 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | 39,912,568 | 22,716,598 | 4,518,145 | - | - | 1,478,071 | 4,771,216 | - | 3,221,342 | 924,316 | 2,282,880 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 54,920,615 | $ | 22,716,598 | $ | 4,518,145 | $ | 2,691,811 | $ | 11,283,500 | $ | 1,478,071 | $ | 4,771,216 | $ | 1,032,736 | $ | 3,221,342 | $ | 924,316 | $ | 2,282,880 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
June 30, 2017 and 2016
| Revenues 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Indonesia | South Africa | Other Countries | ||||||||||||||||||||||||||||||||||
| North America: | $ | 4,444,863 | $ | - | $ | - | $ | 3,457,673 | $ | - | $ | - | $ | - | $ | 987,190 | $ | - | $ | - | $ | - | ||||||||||||||||||||||
| Europe: | 11,914,070 | - | - | - | 11,914,070 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Asia-Pacific: | 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 | $ | 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 | ||||||||||||||||||||||
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, 2021 | ||||||||||||
| NetSol PK | 33.80 | % | $ | 12,887,938 | 33.88 | % | $ | 7,101,883 | ||||||||
| NetSol-Innovation | 49.90 | % | 1,599,734 | 33.88 | % | 136,611 | ||||||||||
| VLS, VLSH & VLSIL Combined | 49.00 | % | 311,502 | |||||||||||||
| NetSol Thai | 0.006 | % | (92 | ) | 0.006 | % | (208 | ) | ||||||||
| OTOZ Thai | 0.006 | % | (52 | ) | ||||||||||||
| OTOZ | 5.00 | % | (22,761 | ) | ||||||||||||
| Total | $ | 14,799,082 | $ | 7,215,473 | ||||||||||||
| SUBSIDIARY | Non-Controlling Interest % | Non-Controlling Interest at June 30, 2016 | Non-Controlling Interest % | Non-Controlling Interest at June 30, 2020 | ||||||||||||
| NetSol PK | 33.40 | % | $ | 10,292,495 | 33.88 | % | $ | 6,361,747 | ||||||||
| NetSol-Innovation | 49.90 | % | 2,735,998 | 33.88 | % | 128,514 | ||||||||||
| VLS, VLHS & VLSIL Combined | 49.00 | % | 309,213 | |||||||||||||
| NetSol Thai | 0.006 | % | (4 | ) | 0.006 | % | (39 | ) | ||||||||
| OTOZ Thai | 0.006 | % | 4 | |||||||||||||
| OTOZ | 5.00 | % | (1,326 | ) | ||||||||||||
| Total | $ | 13,337,702 | $ | 6,488,900 | ||||||||||||
| F-43 |
NETSOL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
NetSol PK
During the year ended June 30, 2017,2020, employees of NetSol PK exercised 481,500 ofand 114,000 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, 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 year ended June 30, 2017,2020, NetSol PK paid a cash dividend of $425,988.$1,610,909.
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
Subsequent to June 30, 2017,year end, the Company loaned an additional $500,000 to WRLD3Dpurchased 22,510 shares of the Company’s common stock for $100,106 pursuant to the Convertible Promissory Note agreement. (See Note 6)
Pursuant to the Company’s stock buyback plan, the Company repurchased 111,780 shares of our common stock from the open market at an average price of $4.48 per share.repurchase plan.
| F-44 |