NetSol(NTWK) - 2021 Q4 - Annual Report

Note About Forward-Looking Statements The Annual Report contains forward-looking statements about product development and future operations, subject to risks and uncertainties, with no obligation for revision unless legally required Forward-Looking Statements Disclosure The Annual Report contains forward-looking statements about product development and future operations, subject to risks and uncertainties, with no obligation for revision unless legally required - The report contains forward-looking statements about product development and future operations, subject to risks and uncertainties[10] - Readers are cautioned not to place undue reliance on these statements, and the Company is not obligated to revise them unless required by law[10] PART I NETSOL Technologies provides global IT and software solutions for finance and leasing, emphasizing mission-critical applications and digital transformation ITEM 1 - Business NETSOL Technologies provides global IT and software solutions for finance and leasing, emphasizing mission-critical applications and digital transformation - NETSOL Technologies, Inc. (Nasdaq CM: NTWK) provides IT and enterprise software solutions to the global finance and leasing industry, with solutions considered mission-critical for clients[12] - Primary revenue sources include licensing, subscriptions, modification, enhancement, and support of its NFS Ascent financial applications suite[13] - The company is shifting to a subscription-based pricing model for cloud-deployed NFS Ascent, moving away from traditional licensing[13] General Business Overview NETSOL Technologies offers mission-critical IT and software for global finance and leasing, with revenue from its NFS Ascent suite - NETSOL Technologies, Inc. (Nasdaq CM: NTWK) provides IT and enterprise software solutions to the global finance and leasing industry, with solutions considered mission-critical for clients[12] - The company's primary revenue streams are licensing, subscriptions, modification, enhancement, and support of its NFS Ascent financial applications suite[13] - NETSOL serves blue-chip organizations, Fortune 500 manufacturers, financial institutions, and global vehicle manufacturers, with headquarters in Calabasas, California, and regional offices globally[14][15] Our Business Model NETSOL's business model combines strong technology, global presence, and dual expertise for specialized leasing and finance solutions - NETSOL's business model is built on strong technology solutions, investment in top-notch staff, and a 'selling and attentive servicing' approach to create distinctive advantages and value for customers[16] - The company specializes in leasing and financing solutions, holding a strong foothold in captive auto-finance and a growing presence in general asset finance[17] - Dual expertise in enterprise technology implementation and financial application development has established NETSOL as a global player, particularly benefiting from organic growth in Asia Pacific's leasing automation industry[18] - NETSOL maintains global offices to ensure proximity with customers, strengthening relationships, understanding local market dynamics, and offering cost-effective global development models[20] - Beyond financial applications, offerings extend to IT consulting, business intelligence, outsourcing, maintenance, project management, technology incubation, white-label digital retailing, and 3D mapping[21] Our Solutions NETSOL's solutions include NFS Ascent, a comprehensive cloud-based finance and leasing platform, and NFS Digital and Otoz mobility - NFS Ascent is NETSOL's premier solution, covering the complete finance and leasing cycle, designed for multinational, multi-asset, multi-lingual environments, and capable of managing multi-billion-dollar portfolios[22] - NFS Ascent is built on modern technology, enabling auto, equipment, and big-ticket finance companies, as well as banks, to manage retail and wholesale finance with ease, supporting business volume and transaction growth[23] - The platform's architecture allows rapid transformation of legacy technology into state-of-the-art IT and business process environments, improving productivity, talent acquisition, and customer satisfaction through self-service digital tools[24][26] - NFS Ascent constituent applications include Omni POS for rapid data capture, Contract Management System (CMS) for credit contract lifecycle management, Wholesale Finance System (WFS) for automating wholesale finance, and Dealer Auditor Access System (DAAS) for wholesale financing arrangements[27][28][29][30] - NFS Ascent is available on the cloud via SaaS/subscription-based pricing, offering swift deployments and scalability without upfront license fees[31] - NFS Digital offers robust digital transformation solutions, including Self-Point of Sale for online buying/financing, Mobile Account for customer self-service, Mobile Point of Sale for dealer origination, Mobile Dealer for inventory control, Mobile Auditor for real-time audits, Mobile Collector for field teams, and Mobile Field Investigator for detailed verifications[32][33][34][35][36][37][38][39] - Otoz Inc. provides a white-labeled SaaS platform for OEMs, auto-captives, dealers, and startups to launch on-demand mobility models (car-share, subscription) and digital retail, offering an end-to-end online car buying experience[40][41] - The Otoz platform features an API-based architecture for integration with ecosystem partners (finance, insurance, CRM, payments) and includes smart lead generation and product analytics capabilities[42][43][44] Implementation Process Product implementation takes 9 to 18 months, but cloud solutions offer rapid deployment and quicker time-to-value - Product implementation can take 9 to 18 months, involving configuration, data migration, training, and third-party interfaces, with post-implementation enhancements charged at a man-day rate[48] - Cloud-enabled solutions offer seamless and rapid deployments, providing businesses with quicker time-to-value and competitive advantages[50] Pricing and Revenue Streams Revenue streams are from product licensing, subscriptions, implementation, and support, with a shift to SaaS models for lower upfront costs - Revenue streams are derived from product licensing, subscription-based pricing, implementation/customization services, and post-contract support[51][58] - Traditional license fees can be multi-million dollars, while SaaS/subscription models eliminate upfront license fees, aiming for volume-based selling and lower initial costs for new customers[51][53] - Revenue from license contracts is recognized upon software delivery, implementation services as performed, and annual support fees on an ongoing basis[52] Alliances NETSOL maintains strategic alliances with Daimler Financial Services for regional agreements and with Microsoft and CGI for cloud hosting - NETSOL has a long-standing Frame Agreement with Daimler Financial Services (DFS) for the Asia Pacific and Africa region, renewed multiple times since 2004[54] - Strategic partnerships with Microsoft and CGI support cloud-hosting activities for NETSOL's cloud-based products, utilizing Microsoft Azure for high performance and cost-effectiveness[55][56] Technical Affiliations NETSOL holds technical affiliations as a Microsoft Certified Silver Partner and an Oracle Certified Partner - NETSOL is a Microsoft Certified Silver Partner and an Oracle Certified Partner[57] Marketing and Selling NETSOL's marketing program builds preference and loyalty through corporate communications and regional client engagement - The marketing program aims to create and sustain preference and loyalty for NETSOL, with corporate marketing overseeing communications, advertising, public relations, and digital channels[59] - Regional marketing personnel engage in client events, conferences, webinars, and private briefings to demonstrate skills and products, leveraging industry-focused sales professionals[60] Growth Prospects for NFS Ascent NFS Ascent's growth is driven by innovation and market expansion across North America, Europe, and Asia Pacific - Growth for NFS Ascent is tied to continuous product innovation and an expanding customer base across various geographic and product markets[61] - Sales strategy focuses on expanding into new geographic markets (Americas, Europe, Asia Pacific) and penetrating existing markets by targeting Tier 2 and Tier 3 prospects[61] - North American growth is expected from replacing legacy systems and acquiring new customers, with NFS Ascent offering a flexible, robust solution[62] - European growth will be driven by NFS Ascent deployed on the cloud, enabling support for larger, small, and medium-sized organizations[63] - Asia Pacific growth is anticipated through diversification into banking and commercial lending, enhanced service/support for existing customers, and replacements of current systems[64] - In China, NETSOL is a leader in leasing and finance enterprise solutions, continuing to meet demand for NFS™ and NFS Ascent, strengthening its position with multinational auto manufacturers and local captive finance companies[65] The Markets NETSOL serves global commercial industries, including automotive and financial services, with marketing managed regionally - NETSOL primarily serves clients in global commercial industries, including automotive, software, banks, higher education, and financial services[66] - Marketing for core offerings is managed regionally: Asia Pacific (including Australia and New Zealand) from Bangkok, Beijing, Jakarta, Lahore, Shanghai, and Sydney; Americas and Europe from Los Angeles Area and London Metropolitan Area offices, respectively[67] People and Culture NETSOL fosters a strong corporate culture focused on quality, client delivery, and employee growth, supported by diversity and training - NETSOL fosters a strong corporate culture focused on world-class quality software, client-focused delivery, leadership, long-term relationships, creativity, openness, transparency, and professional growth[69] - Employee turnover was under 20% in 2021, with a goal to maintain this level, while also committing to improving efficiency, productivity, and revenue per employee[70] - The company supports gender diversity, is an equal opportunity employer, and invests in elaborate training programs for technical skills, business domain knowledge, and leadership[71][72] - As of June 30, 2021, NETSOL had approximately 1,447 employees, with 77% technical staff and 23% non-IT personnel[73] - NETSOL engages in community support programs, including humanitarian relief, literacy programs, contributions to higher education, a Noble Cause Fund for employee medical/education expenses, and a children's day care facility[73] Competition NETSOL operates in a competitive IT market, facing numerous global and local firms in asset finance, leasing, and IT services - The IT market in which NETSOL competes is not dominated by a single company; it faces competition from numerous companies, including large computer manufacturers and consulting firms with greater financial resources[74] - Key competitors in the global asset finance and leasing industry include White Clarke Group, Alfa, Cassiopae, LineData, FIS, International Decision Systems (IDS), and Data Scan[75] - In IT-based business services, NETSOL competes with smaller local firms and global IT service providers like Wipro, InfoSys, Satyam Infoway, HCL, and TCS[75] Customers NETSOL serves diverse finance and leasing businesses, including major automotive captives like Daimler and BMW, representing significant revenue - NETSOL's solutions and services cater to a broad range of finance and leasing businesses, including automotive captive finance companies, equipment finance/leasing companies, and large regional banks[76] - Major customers include Daimler and BMW (through their finance arms), accounting for approximately 21.0% and 13.0% of revenue, respectively, for the fiscal year ended June 30, 2021[77] - Other globally renowned auto captives and financial institutions served include Toyota, Nissan, Ford, FIAT, GAC Sofinco, Paccar, Mololease, SCI, and BMO Harris[77][78] Global Operations and Geographic Data NETSOL operates globally across the Americas, Europe, and Asia Pacific, with regional management and significant revenue from Asia-Pacific - NETSOL divides its operations into three regions: the Americas, Europe, and Asia Pacific, with individual subsidiaries managed regionally[79] - The Americas operations are led by Peter Minshall as Executive Vice President, with support from Doug Jones as VP - Operations[80] - Europe operations are headed by Asad Ghauri, who is also Group Managing Director, supported by a strong management team in the U.K. and the recently acquired Banking Works (formerly Virtual Lease Services)[82][84] - The Asia Pacific region, including Australia/New Zealand and the Middle East, is supported from offices in Sydney, Beijing, Shanghai, Bangkok, Indonesia, Lahore, and Karachi, with Lahore, Pakistan, serving as a nucleus for delivery and R&D[85][87] Revenue by Geographic Region (FY2021) | Region | Revenue (USD) | Percentage of Total Revenue | | :------------- | :-------------- | :-------------------------- | | North America | $3,724,547 | 6.8% | | Europe | $11,283,499 | 20.5% | | Asia-Pacific | $39,912,569 | 72.7% | | Total | $54,920,615 | 100.0% | Intellectual Property The company protects its proprietary rights through non-disclosure agreements, trade secret, copyright, and trademark laws, with key brands registered - The Company protects its proprietary rights through non-disclosure agreements, trade secret, copyright, and trademark laws[89] - The NETSOL 'N' logo and name, NFS logo and product name are copyrighted and trademark registered in Pakistan, with the NETSOL 'N' logo and NFS Ascent also registered with the U.S. Patent and Trademark Office[89] Governmental Approval and Regulation Company operations are subject to local laws, with Pakistan providing a tax exemption on IT service and product exports until 2025 - Current company operations do not require specific governmental approvals, but are subject to laws of countries where subsidiaries operate[90] - Pakistani law provides a tax exemption on income from IT services and product exports until 2025[90] Available Information Company filings and financial performance news are available on its investor relations website and the SEC's website - Company filings (10-K, 10-Q, 8-K, Proxy Statements) are available on its investor relations website (http://ir.netsoltech.com) and the SEC's website (www.sec.gov)[91](index=91&type=chunk) - The company webcasts earnings calls and investor events, and provides notifications of financial performance news via its investor relations website[92] ITEM 1A - Risk Factors This section states that there are no applicable risk factors to report - The company indicates 'Not Applicable' for Item 1A, suggesting no specific risk factors are being reported in this section[93] ITEM 1B – Unresolved Staff Comments This section indicates that there are no unresolved staff comments - The company reports 'None' for Item 1B, indicating no unresolved staff comments[93] ITEM 2 - Properties NETSOL's corporate headquarters are leased in Calabasas, California, while it owns a large Lahore Technology Campus in Pakistan, with other leased offices globally - Corporate headquarters are in Calabasas, California (5,000 sq ft leased office space)[93] - The company owns its Lahore Technology Campus in Pakistan, comprising approximately 140,000 sq ft of computer and general office space, with capacity for about 1,000 resources[93] - Additional leased office spaces are maintained in the UK, China, Australia, Thailand, and a shared office in Indonesia[93] ITEM 3 - Legal Proceedings This section states that there are no applicable legal proceedings to report - The company indicates 'Not applicable' for Item 3, suggesting no legal proceedings are being reported[94] ITEM 4 – Mine Safety Disclosures This section states that there are no applicable mine safety disclosures - The company indicates 'Not applicable' for Item 4, suggesting no mine safety disclosures are being reported[95] PART II NETSOL's common stock trades on NASDAQ, with no dividends paid in the last two fiscal years, and a recent share repurchase program ITEM 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Security NETSOL's common stock is traded on NASDAQ Capital Market under 'NTWK', with no dividends paid in the past two fiscal years, and a recent share repurchase program - NETSOL Technologies, Inc. common stock is listed and traded on NASDAQ Capital Market under the ticker symbol 'NTWK'[96] - The company has not paid dividends on its Common Stock in the past two fiscal years[99] - As of September 16, 2021, there were 144 record holders of common stock and 11,265,064 shares outstanding[4][98] Common Stock Price Range (Fiscal Years 2020-2021) | Fiscal Year 2021 | High | Low | | :--------------- | :--- | :-- | | First Quarter | $3.29 | $2.52 | | Second Quarter | $4.07 | $2.35 | | Third Quarter | $5.30 | $3.80 | | Fourth Quarter | $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 | Equity Compensation Plan Summary (as of June 30, 2021) | Category | 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 | | :-------------------------------- | :----------------------------------------------------------------------- | :------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------- | | Equity Compensation Plans approved by Security holders | None | None | 425,004 | | Equity Compensation Plans not approved by Security holders | None | None | None | | Total | None | None | 425,004 | - The company repurchased a cumulative 669,018 shares of its common stock for $2.36 million at an average price of $3.53 per share during fiscal year ended June 30, 2021, under board-approved plans[102] ITEM 6 – [Reserved] This item is reserved and contains no information ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on NETSOL's financial performance and condition for the fiscal year ended June 30, 2021, compared to 2020, highlighting product implementations, strategic appointments, and new contract agreements, with a focus on market expansion, brand strengthening, and investment in cloud and digital solutions, showing increased license and subscription revenue, decreased service revenue, and improved income from operations, despite foreign currency fluctuations, while maintaining strong liquidity and compliance with financial covenants Highlights for Fiscal Year Ended June 30, 2021 Key highlights for FY2021 include successful NFS Ascent and Otoz platform launches, significant contract agreements, and a share buyback plan - SCI Lease Corp, NETSOL's first North American Ascent™ customer, successfully went live with NFS Ascent[106] - Otoz, NETSOL's U.S. based mobility startup, launched its digital automotive retail platform for BMW Group Financial Services in the U.S. for Mini Anywhere[106] - Daimler Financial Services went live with NFS Ascent Retail Platform in Singapore and Thailand, and began implementation in New Zealand and Australia[106] - An agreement with a Tier 1 finance company in China for NFS Ascent Retail and Wholesale platforms is expected to generate approximately $9 million[106] - The company generated approximately $2.1 million in license revenue from the renewal of NFS CAP and CMS legacy solutions with an existing customer in Thailand[106] - NETSOL effectively executed a share buyback plan, purchasing 669,018 shares during FY2021[106] Marketing and Business Development Activities Management's growth strategy focuses on increasing competitiveness, enhancing global delivery, strengthening the brand, and investing in cloud and digital solutions - Management's growth strategy aims to increase competitiveness, enhance global delivery capabilities, and strengthen financial position to become a leading global IT institution in leasing and finance[107] - Key initiatives include building strong C-level executive teams, developing next-tier management, upgrading regional offices (Bangkok, Beijing), strengthening the NETSOL brand, and further penetrating markets with NFS Ascent[112] - The strategy also involves diversifying into complementary verticals through organic expansion, partnerships, and M&A, implementing new tools (JIRA, Agile), offering cloud-enabled NFS Ascent with subscription pricing, and investing in Otoz and the innovation lab[112] Material Trends Affecting NETSOL Positive trends include increasing SaaS traction and digital transformation, while negative trends involve COVID-19 uncertainty and elongated decision-making - Positive trends include increasing traction for NFS Ascent SaaS, acceleration of mobility and digital transformation, rising demand for cloud solutions, and potential positive financial impact from reduced office/travel costs due to COVID-19[113] - Negative trends include uncertainty regarding the COVID-19 pandemic's impact on business, slowdowns in auto sectors, elongated decision-making for new systems, difficulties in face-to-face meetings, and potential adverse effects from political actions like trade protection[114] Critical Accounting Policies Critical accounting policies encompass revenue recognition, intangible assets, software development costs, and goodwill, requiring significant management estimates - Critical accounting policies include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill[114] - These policies require management to make estimates and assumptions that affect reported financial amounts[114] Revenue Recognition Revenue recognition follows a five-step process, distinguishing between core and non-core streams, with significant judgment in determining standalone selling prices - Revenue recognition follows a five-step process: identifying contracts, performance obligations, transaction price, allocating price to obligations, and recognizing revenue as obligations are satisfied[115][123] - The company has two primary revenue streams: core revenue (software licenses, services, subscription/support) and non-core revenue (BPO, other IT services, internet services)[116][117][118] - Software licenses are recognized upon delivery, subscription revenue ratably over the initial period (typically 12-60 months), and post-contract support ratably over the maintenance period (usually one year)[123][122][124] - Professional services revenue (implementation, development, training) is recognized as services are performed, either on a time-and-materials basis or by costs incurred for fixed-fee arrangements[125] - Significant judgment is required to determine the standalone selling price (SSP) for distinct performance obligations, especially when products are not sold separately[128] - Contract balances include receivables, contract assets (revenues in excess of billings), and contract liabilities (deferred revenue), reflecting timing differences between revenue recognition and invoicing[136] Intangible Assets Intangible assets, including product licenses, are amortized over their estimated useful lives and evaluated annually for impairment - Intangible assets include product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists[143] - Assets with finite lives are amortized over their estimated useful life and evaluated for impairment annually or when circumstances indicate carrying value may not be recoverable[143] Software Development Costs Software development costs are expensed as R&D until technological feasibility is established, then capitalized until product release and amortized thereafter - Costs for internally developing or enhancing software are expensed as R&D until technological feasibility is established, then capitalized until the product is generally released[144] - Capitalized software costs are amortized ratably based on projected revenue or on a straight-line basis and are evaluated for recoverability against estimated net realizable value[145] Stock-Based Compensation Stock-based compensation expense is estimated at the grant date using the Black-Scholes-Merton model and recognized over the service period, requiring judgmental assumptions - Stock-based compensation expense is estimated at the grant date using the Black-Scholes-Merton (BSM) model and recognized over the requisite service period[146] - The BSM model requires judgmental assumptions like expected volatility and term, and the company estimates expected forfeiture rates[146] Goodwill Goodwill represents the excess of purchase price over acquired net assets and is reviewed annually for impairment using qualitative and quantitative assessments - Goodwill represents the excess of purchase price over fair value of net assets acquired in business combinations[147] - Goodwill is reviewed for impairment annually or more frequently if circumstances indicate impairment, using qualitative and quantitative assessments (discounted cash flow methodology)[147] Recent Accounting Pronouncement Refer to Note 2 'Summary of Significant Accounting Policies' for a full description of recent accounting pronouncements - Refer to Note 2 'Summary of Significant Accounting Policies' for a full description of recent accounting pronouncements[149] Results of Operations Total net revenues decreased by $1.45 million in FY2021, but income from operations and net income attributable to NetSol significantly increased Consolidated Statements of Operations (FY2021 vs FY2020) | Metric | FY2021 (USD) | % of Total Revenue (FY2021) | FY2020 (USD) | % of Total Revenue (FY2020) | | :------------------------------------- | :----------- | :---------------------------- | :----------- | :---------------------------- | | Net Revenues: | | | | | | License fees | $6,249,924 | 11.4% | $3,260,891 | 5.8% | | Subscription and support | $22,173,745 | 40.4% | $20,254,917 | 35.9% | | Services | $26,448,171 | 48.2% | $32,555,690 | 57.8% | | Services - related party | $48,775 | 0.1% | $300,821 | 0.5% | | Total net revenues | $54,920,615 | 100.0% | $56,372,319 | 100.0% | | Cost of revenues: | | | | | | Salaries and consultants | $20,969,298 | 38.2% | $18,821,738 | 33.4% | | Travel | $663,403 | 1.2% | $4,181,742 | 7.4% | | Depreciation and amortization | $2,990,689 | 5.4% | $2,897,371 | 5.1% | | Other | $3,944,197 | 7.2% | $3,508,098 | 6.2% | | Total cost of revenues | $28,567,587 | 52.0% | $29,408,949 | 52.2% | | Gross profit | $26,353,028 | 48.0% | $26,963,370 | 47.8% | | Operating expenses: | | | | | | Selling and marketing | $6,555,004 | 11.9% | $6,450,663 | 11.4% | | Depreciation and amortization | $965,625 | 1.8% | $834,583 | 1.5% | | General and administrative | $15,437,382 | 28.1% | $17,138,832 | 30.4% | | Research and development cost | $674,168 | 1.2% | $1,468,954 | 2.6% | | Total operating expenses | $23,632,179 | 43.0% | $25,893,032 | 45.9% | | Income from operations | $2,720,849 | 5.0% | $1,070,338 | 1.9% | | Net income attributable to NetSol | $1,778,257 | 3.2% | $937,081 | 1.7% | - Total net revenues decreased by $1.45 million (2.6%) from $56.37 million in FY2020 to $54.92 million in FY2021, with a constant currency decrease of $2.35 million[151][153] - License fees increased by $2.99 million (91.7%) to $6.25 million in FY2021, primarily due to GAC, TIL, and BMW NFS Ascent contracts[151][154] - Subscription and support fees increased by $1.92 million (9.5%) to $22.17 million in FY2021, driven by DFS and BMW contracts going live[151][155] - Services income decreased by $6.11 million (18.8%) to $26.45 million in FY2021, mainly due to customers going live with products, reducing implementation revenue[151][156] - Gross profit decreased by $0.61 million (2.3%) to $26.35 million in FY2021, but the gross profit percentage increased slightly to 48.0% from 47.8%[151][158] - Income from operations increased by $1.65 million (154.2%) to $2.72 million in FY2021, representing 5.0% of sales compared to 1.9% in FY2020[151][166] - Net income attributable to NetSol increased by $0.84 million (89.8%) to $1.78 million in FY2021, resulting in basic and diluted EPS of $0.15[151][169] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA to evaluate business performance and provide useful information to investors - The company uses non-GAAP measures like Adjusted EBITDA and Adjusted EBITDA per basic/diluted share to evaluate business performance and provide useful information to investors[171][172] - EBITDA is defined as GAAP net income before net interest expense, income tax expense, depreciation, and amortization[176] - Non-GAAP Adjusted EBITDA is EBITDA plus stock-based compensation expense, which is excluded because it does not typically require cash settlement[176][174] Reconciliation of Non-GAAP Financial Measures (FY2021 vs FY2020) | Metric | FY2021 (USD) | FY2020 (USD) | | :------------------------------------ | :----------- | :----------- | | Net Income (loss) attributable to NetSol | $1,778,257 | $937,081 | | Non-controlling interest | $483,375 | $254,942 | | Income taxes | $1,026,617 | $1,141,068 | | Depreciation and amortization | $3,956,314 | $3,731,954 | | Interest expense | $394,289 | $346,856 | | Interest (income) | $(1,017,432) | $(1,569,536) | | EBITDA | $6,621,420 | $4,842,365 | | Add back: Non-cash stock-based compensation | $342,153 | $808,616 | | Adjusted EBITDA, gross | $6,963,573 | $5,650,981 | | Less non-controlling interest (a) | $(1,588,701) | $(1,330,352) | | Adjusted EBITDA, net | $5,374,872 | $4,320,629 | | Basic adjusted EBITDA per share | $0.47 | $0.37 | | Diluted adjusted EBITDA per share | $0.47 | $0.37 | Liquidity and Capital Resources NETSOL's cash position significantly increased to $33.71 million in FY2021, driven by strong operating cash flow, while managing investing and financing activities - Cash position increased significantly to $33.71 million at June 30, 2021, from $20.17 million at June 30, 2020[178] - Net cash provided by operating activities was $15.73 million for FY2021, a substantial increase from $3.97 million in FY2020[179] - Current assets were $55.58 million and current liabilities were $23.48 million at June 30, 2021[179] - The combined total of accounts receivable and revenues in excess of billings decreased by $10.10 million to $19.82 million at June 30, 2021[179] - Net cash used in investing activities was $2.52 million in FY2021, primarily due to purchases of property and equipment[180] - Net cash used in financing activities was $1.17 million in FY2021, compared to net cash provided of $1.70 million in FY2020, largely due to share repurchases[181] - Approximately $31.7 million of cash, cash equivalents, and marketable securities are held by foreign subsidiaries as of June 30, 2021[182] - The company anticipates needing $2 to $3 million in working capital for APAC, U.S., and European new business development and infrastructure enhancements over the next 12 months[184] Financial Covenants NETSOL's subsidiaries are subject to various financial covenants, including debt-equity and current ratios, with the company reporting full compliance - NETSOL's UK subsidiary (NTE) has an overdraft facility requiring trade debtors (not exceeding 90 days old) to be at least 200% of the facility[187] - The Pakistani subsidiary (NetSol PK) has export refinance and running finance facilities requiring a long-term debt-equity ratio of 60:40 and a current ratio of 1:1[187] - NetSol PK's Samba Bank facilities require a minimum current ratio of 1:1, interest coverage ratio of 4 times, leverage ratio of 2 times, and debt service coverage ratio of 4 times[187] - As of the report date, the company is in compliance with all financial covenants[188] Dividends and Redemption The company's policy is to invest earnings in growth rather than distribute them as common stock dividends, a policy subject to Board review - The company's policy is to invest earnings in growth rather than distribute them as common stock dividends, a policy that has been in place since inception and is subject to Board review[189] Contractual Obligations NETSOL's contractual obligations totaled $13.49 million as of June 30, 2021, with the majority due within one year Contractual Obligations (as of June 30, 2021) | Contractual Obligation | Total (USD) | 0 - 1 year (USD) | 1-3 Years (USD) | 3-5 Years (USD) | More than 5 years (USD) | | :--------------------- | :---------- | :--------------- | :-------------- | :-------------- | :---------------------- | | D&O Insurance | $73,143 | $73,143 | $- | $- | $- | | Term Finance Facility | $1,648,818 | $1,090,259 | $558,559 | $- | $- | | Loan Payable Bank - Export Refinance | $3,162,555 | $3,162,555 | $- | $- | $- | | 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 | | Total | $13,487,998 | $12,233,450 | $1,250,577 | $1,589 | $2,382 | Off-Balance Sheet Arrangements The company does not maintain any off-balance sheet arrangements that would materially affect its financial condition or results of operations - The company does not maintain any off-balance sheet arrangements, transactions, obligations, or relationships with unconsolidated entities that would materially affect its financial condition or results of operations[191] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk NETSOL is exposed to financial market risks, primarily foreign currency exchange risk due to international revenues and costs, and does not hedge its Pakistan Rupee exposure - The company is exposed to financial market risks, including changes in currency exchange rates and interest rates[193] - Significant international revenues and costs denominated in foreign currencies expose the company to foreign currency exchange rate fluctuations[194] - The company does not hedge its exposure to the Pakistan Rupee, as its devaluation against the US Dollar generally results in foreign exchange gains[194][195] ITEM 8. Financial Statements and Supplementary Data This section indicates that the Consolidated Financial Statements are included at the end of the report, starting on page F-1 - The Consolidated Financial Statements are located at the end of the report, starting on page F-1[196] ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NETSOL's financial statements for fiscal years 2021 and 2020 did not contain adverse opinions or disclaimers, and there were no disagreements with BF Borgers CPA PC - NETSOL's financial statements for FY2021 and FY2020 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified[197] - There were no disagreements, disputes, or differences of opinion with BF Borgers CPA PC regarding accounting principles, financial statement disclosure, or auditing scope and procedures[198] ITEM 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of June 30, 2021, with no material changes during Q4 FY2021 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2021[200] - Management assessed the effectiveness of internal controls over financial reporting based on the COSO framework (2013) and determined them to be effective as of June 30, 2021[203] - There were no material changes in internal controls over financial reporting during the fourth quarter of fiscal year 2021[204] ITEM 9B. Other Information This section states that there is no other information to report - The company reports 'NONE' for Item 9B, indicating no other information is being reported[205] ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section states that there are no disclosures regarding foreign jurisdictions that prevent inspections - The company reports 'NONE' for Item 9C, indicating no disclosures regarding foreign jurisdictions that prevent inspections[205] PART III This section details NETSOL's directors, executive officers, corporate governance, executive compensation, and related party transactions ITEM 10. Directors, Executive Officers and Corporate Governance This section details the company's directors, executive officers, and corporate governance practices, confirming Section 16(a) compliance, outlining Board committees, and identifying an Audit Committee financial expert - All Section 16(a) filing requirements for executive officers, directors, and 10%+ beneficial owners were complied with for the fiscal year ended June 30, 2021[208] - The Board of Directors consists of five members: Najeeb U. Ghauri (Chairman), Mark Caton, Malea Farsai, Kausar Kazmi, and Henry Tolentino[209] - Key executive officers include Najeeb Ghauri (CEO & Chairman), Naeem Ghauri (President), Roger Almond (CFO), and Patti L. W. McGlasson (Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel)[214] - The Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee are comprised of independent directors[210][212] - Mr. Kausar Kazmi is identified as the Audit Committee financial expert, possessing over 40 years of banking industry expertise[235] - The company adopted its Code of Business Conduct & Ethics, applicable to all officers, directors, and employees, and available on its investor relations website[233] ITEM 11-Executive Compensation NETSOL's executive compensation philosophy aims for competitive total compensation, rewarding performance and aligning executive interests with shareholders through base salary, performance-based cash bonuses, and long-term equity incentives - Shareholders expressed strong support for executive compensation programs at the June 14, 2021, annual meeting, with 95.72% of votes cast in favor[238] - The compensation philosophy aims for competitive total compensation, rewarding executives for achieving individual and corporate performance objectives, and attracting/retaining leaders who drive shareholder value[248] - Executive compensation components for 2021 included base salary, cash awards (discretionary or performance-based), long-term equity (time-based or performance-based restricted stock), and participation in health/welfare/retirement plans[244][245] - The Compensation Committee, comprised of independent directors, makes all executive compensation decisions, with the CEO's compensation determined solely by the committee[246] - Mr. Najeeb Ghauri's bonus for FY2021 was $67,500, based on a graduated structure tied to total revenues and income from operations, paid 60% in cash and 40% in stock[259][264] Summary Compensation Table (FY2019-FY2021) | Name and Principle Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) (1) | Option Awards ($) | All Other Compensation ($) | Total ($) | | :-------------------------- | :---------------- | :--------- | :-------- | :------------------- | :---------------- | :------------------------- | :-------- | | Najeeb Ghauri, CEO & Chairman | 2021 | $667,000 | $67,500 | $- | $- | $180,383 | $914,883 | | | 2020 | $689,000 | $- | $- | $- | $156,586 | $845,586 | | | 2019 | $675,000 | $432,488 | $- | $21,598 | $200,000 | $1,329,086 | | Naeem Ghauri, President | 2021 | $767,768 | $- | $- | $- | $77,045 | $844,813 | | Roger K Almond, Chief Financial Officer | 2021 | $186,515 | $- | $- | $- | $32,872 | $219,387 | | | 2020 | $217,111 | $20,000 | $56,900 | $- | $10,639 | $304,650 | | | 2019 | $221,520 | $20,000 | $55,500 | $- | $10,191 | $307,211 | | Patti L. W. McGlasson, Secretary, General Counsel | 2021 | $202,271 | $- | $- | $- | $9,784 | $212,055 | | | 2020 | $219,481 | $- | $42,675 | $- | $10,019 | $272,175 | | | 2019 | $226,113 | $- | $55,500 | $- | $10,378 | $291,991 | - Employment agreements for named executive officers include severance provisions upon termination without cause or for good reason, entitling them to salary continuance and health benefits for specified periods, and immediate vesting of options/restricted stock[269][270][271] Director Compensation Table (FY2021) | NAME | FEES EARNED OR PAID IN CASH ($) | SHARE AWARDS ($) | TOTAL ($) | | :------------ | :------------------------------ | :--------------- | :-------- | | Mark Caton | 80,000 | 11,997 | 91,997 | | Henry Tolentino | 80,000 | - | 80,000 | | Kausar Kazmi | 80,000 | - | 80,000 | | Total | 240,000 | 11,997 | 251,997 | ITEM 12- Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on the beneficial ownership of NETSOL's common stock as of September 16, 2021, for major shareholders, directors, and executive officers Beneficial Ownership of Common Stock (as of September 16, 2021) | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage | | :----------------------- | :---------------------------------- | :--------- | | Najeeb Ghauri | 794,701 | 7.05% | | Naeem Ghauri | 450,689 | 4.00% | | Mark Caton | 101,580 | * | | Henry Tolentino | 27,313 | * | | Patti McGlasson | 81,050 | * | | Roger Almond | 30,000 | * | | Kausar Kazmi | 11,445 | * | | Malea Farsai | 39,811 | * | | Renaissance Technologies Holdings Corp. | 793,360 | 7.04% | | All officers and directors as a group (eight persons) | 1,536,589 | 13.64% | - As of September 16, 2021, there were 11,265,064 shares of common stock issued and outstanding[324] - Beneficial ownership includes shares from grants that will vest or options exercisable within 60 days[322] ITEM 13. Certain Relationships and Related Transactions, and Director Independence. This section discloses related party transactions, primarily involving convertible promissory notes issued to WRLD3D, a company where Faizaan Ghauri (son of CEO Najeeb Ghauri) is CEO and both Najeeb and Naeem Ghauri have financial interests - Faizaan Ghauri, son of CEO Najeeb Ghauri and a company employee, was appointed CEO of WRLD3D[326] - The company issued multiple convertible promissory notes to WRLD3D, with principal amounts up to $0.75 million, $2.5 million, $0.6 million, and $0.4 million, bearing interest rates from 5% to 10%[327][329][330][331] - Najeeb Ghauri (CEO) and Naeem Ghauri (Director) have a financial interest in G-Force, LLC, which purchased a 4.9% investment in WRLD3D for $1.11 million[332] ITEM 14. Principal Accountant Fees and Services This section details the fees paid to BF Borgers CPA PC for audit and tax services for fiscal years 2021 and 2020, and outlines the Audit Committee's pre-approval procedures Principal Accountant Fees (FY2021 vs FY2020) | Fee Type | FY2021 (USD) | FY2020 (USD) | | :------------ | :----------- | :----------- | | Audit Fees | $250,000 | $250,000 | | Tax Fees | $13,000 | $15,000 | | All Other Fees | $- | $- | - The Audit Committee is responsible for engaging independent auditors and pre-approving all auditing and permitted non-audit services to ensure auditor independence[336] - The Audit Committee's policy evaluates whether services, compensation, and related factors are consistent with auditor independence guidelines, considering potential impairment, management role, and audit quality enhancement[338][339] PART IV This section lists all exhibits filed as part of the Form 10-K, including corporate governance documents, employment agreements, and certifications ITEM 15 – Exhibits, Financial Statement Schedules and Reports on Form 8-K This section lists all exhibits filed as part of the Form 10-K, including articles of incorporation, bylaws, employment agreements, equity plans, and certifications - The section provides a comprehensive list of exhibits, including corporate governance documents (Articles of Incorporation, Bylaws), employment agreements, equity incentive plans, and certifications (Sarbanes-Oxley Act)[340][341][342] - Exhibits include a list of all subsidiaries of the Company (21.1) and certifications pursuant to Section 302 and 906 of the Sarbanes-Oxley Act (31.1, 31.2, 32.1, 32.2)[342] SIGNATURES This section contains the signatures of the Registrant's authorized officers and Board of Directors, certifying the filing of the amended report Signatures of Registrant and Directors This section contains the signatures of the Registrant's authorized officers, including the Chief Executive Officer and Chief Financial Officer, and the Board of Directors, certifying the filing of the amended report - The report is signed by Najeeb Ghauri (Chief Executive Officer, Director, Chairman) and Roger K. Almond (Chief Financial Officer, Principal Accounting Officer) on September 28, 2021[345][347] - Additional directors, including Mark Caton, Malea Farsai, Henry Tolentino, and Kausar Kazmi, also signed the report[347] Index to Consolidated Financial Statements This section provides an index to the consolidated financial statements, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Statement of Equity, Statements of Cash Flows, and Notes to Consolidated Financial Statements Financial Statements Index This section provides an index to the consolidated financial statements, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Statement of Equity, Statements of Cash Flows, and Notes to Consolidated Financial Statements - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income (Loss), Consolidated Statement of Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[349] Report of Independent Registered Public Accounting Firm BF Borgers CPA PC issued an unqualified opinion on NETSOL's consolidated financial statements, which present fairly the company's financial position, results of operations, and cash flows in conformity with U.S. GAAP Opinion on the Financial Statements BF Borgers CPA PC, the independent registered public accounting firm, issued an unqualified opinion, stating that NETSOL's consolidated financial statements for June 30, 2021, and 2020, present fairly, in all material respects, the company's financial position, results of operations, and cash flows in conformity with U.S. GAAP - BF Borgers CPA PC issued an unqualified opinion, stating that the consolidated financial statements for June 30, 2021, and 2020, present fairly in all material respects[350] - The financial statements conform with accounting principles generally accepted in the United States of America (U.S. GAAP)[350] Basis for Opinion The audit was conducted in accordance with PCAOB standards, involving procedures to assess risks of material misstatement and evaluate accounting principles and estimates, with the firm being independent and registered with the PCAOB - The audit was conducted in accordance with PCAOB standards, requiring reasonable assurance that financial statements are free of material misstatement[352] - The auditors are independent and registered with the PCAOB, but were not engaged to perform an audit of internal control over financial reporting[351][352] Critical Audit Matters Critical audit matters include revenue recognition in customized customer arrangements and the annual impairment testing of goodwill and intangible assets, both involving significant management estimates and auditor judgment - Critical audit matters include revenue recognition, specifically identifying contractual terms in customized customer arrangements due to significant management judgment and volume[355][356] - Another critical audit matter is the annual impairment testing of goodwill and intangible assets, which relies on significant management estimates and assumptions for projected revenue growth, discount rates, and EBITDA[358][359] - Audit procedures for goodwill and intangible assets included testing internal controls, retrospective reviews of forecasts, evaluating consistency of estimates, and benchmarking against peer groups with fair value specialists' assistance[362] Consolidated Financial Statements The consolidated financial statements show NETSOL's financial position, performance, and cash flows, with key changes including increased cash, decreased total assets, and a decrease in total stockholders' equity Consolidated Balance Sheets The Consolidated Balance Sheets present the financial position of NETSOL Technologies, Inc. and its subsidiaries as of June 30, 2021, and 2020, showing an increase in cash and cash equivalents, a decrease in accounts receivable and revenues in excess of billings, and a decrease in total stockholders' equity Consolidated Balance Sheets (as of June 30, 2021 and 2020) | ASSETS | June 30, 2021 (USD) | June 30, 2020 (USD) | | :----------------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $33,705,154 | $20,166,830 | | Accounts receivable, net | $4,184,096 | $10,131,752 | | Revenues in excess of billings, net | $14,680,131 | $17,198,281 | | Total current assets | $55,578,774 | $51,895,711 | | Property and equipment, net | $12,091,812 | $11,329,631 | | Intangible assets, net | $3,904,656 | $5,391,077 | | Goodwill | $9,516,568 | $9,516,568 | | Total assets | $86,606,261 | $88,473,089 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable and accrued expenses | $6,696,035 | $5,769,161 | | Current portion of loans and obligations under finance leases | $11,366,171 | $9,139,561 | | Unearned revenue | $4,556,626 | $4,095,472 | | Total current liabilities | $23,476,561 | $20,116,106 | | Total liabilities | $24,740,659 | $22,996,046 | | Total NetSol stockholders' equity | $54,650,129 | $58,988,143 | | Non-controlling interest | $7,215,473 | $6,488,900 | | Total stockholders' equity | $61,865,602 | $65,477,043 | - Cash and cash equivalents increased by $13.54 million (67.1%) from $20.17 million in FY2020 to $33.71 million in FY2021[365] - Total assets decreased by $1.87 million (2.1%) from $88.47 million in FY2020 to $86.61 million in FY2021[365] - Total stockholders' equity decreased by $3.61 million (5.5%) from $65.48 million in FY2020 to $61.87 million in FY2021[365] Consolidated Statements of Operations The Consolidated Statements of Operations show a slight decrease in total net revenues but a significant increase in net income attributable to NetSol, driven by higher license and subscription fees and improved operating efficiency Consolidated Statements of Operations (FY2021 vs FY2020) | Metric | FY2021 (USD) | FY2020 (USD) | | :------------------------------------- | :----------- | :----------- | | Total net revenues | $54,920,615 | $56,372,319 | | Gross profit | $26,353,028 | $26,963,370 | | Income from operations | $2,720,849 | $1,070,338 | | Net income | $2,261,632 | $1,192,023 | | Net income attributable to NetSol | $1,778,257 | $937,081 | | Basic net income per common share | $0.15 | $0.08 | | Diluted net income per common share | $0.15 | $0.08 | - Total net revenues decreased by $1.45 million (2.6%) from $56.37 million in FY2020 to $54.92 million in FY2021[367] - Income from operations increased by $1.65 million (154.2%) from $1.07 million in FY2020 to $2.72 million in FY2021[367] - Net income attributable to NetSol increased by $0.84 million (89.8%) from $0.94 million in FY2020 to $1.78 million in FY2021[367] - Basic and diluted net income per common share increased from $0.08 in FY2020 to $0.15 in FY2021[367] Consolidated Statements of Comprehensive Income (Loss) The Consolidated Statements of Comprehensive Income (Loss) show that NETSOL's comprehensive income attributable to NetSol significantly increased in fiscal year 2021, primarily due to a positive translation adjustment, contrasting with a loss in the prior year Consolidated Statements of Comprehensive Income (Loss) (FY2021 vs FY2020) | Metric | FY2021 (USD) | FY2020 (USD) | | :---------------------------------------- | :----------- | :----------- | | Net income | $1,778,257 | $937,081 | | Net translation adjustment | $2,216,566 | $(960,041) | | Comprehensive income (loss) attributable to NetSol | $3,994,823 | $(22,960) | - Comprehensive income attributable to NetSol increased from a loss of $0.023 million in FY2020 to an income of $3.99 million in FY2021[369] - This change was largely driven by a positive translation adjustment of $2.22 million in FY2021, compared to a negative adjustment of $0.96 million in FY2020[369] Consolidated Statement of Stockholders' Equity The Consolidated Statement of Stockholders' E