NetSol(NTWK) - 2022 Q4 - Annual Report

Note About Forward-Looking Statements This section cautions readers that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from projections. Readers are cautioned not to place undue reliance on such statements[10] PART I Item 1 Business NETSOL Technologies, Inc. is a global provider of IT and enterprise software solutions for the finance and leasing industry, specializing in auto equipment finance, with primary revenue from its NFS Ascent suite - NETSOL is a worldwide provider of 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[13] - The company serves blue chip organizations, Fortune 500 companies, financial institutions, global vehicle manufacturers (auto captives), and equipment finance/leasing companies[14] General Business Overview NETSOL Technologies, Inc. is a global IT and enterprise software provider for the finance and leasing industry, primarily offering the NFS Ascent suite - NETSOL Technologies, Inc. (Nasdaq CM: NTWK) is a global provider of IT and enterprise software solutions for the finance and leasing industry, headquartered in Calabasas, California[12][15] - The company's solutions, primarily the NFS Ascent suite, are mission-critical applications that encapsulate end-to-end business processes, facilitating faster processing and increased transactions[12][13] - NETSOL has enabled NFS Ascent deployment on the cloud, supporting a shift to subscription-based pricing models for new customers[13] Our Business Model and Focus NETSOL's business model combines cost arbitrage, subject matter expertise, and scalability, specializing in auto equipment finance with a market-leading position - NETSOL's business model combines affordable pricing through cost arbitrage, subject matter expertise, domain experience, scalability, and proximity to global and regional customers[17] - The company specializes in the leasing and financing space, holding a market-leading position in the auto equipment finance segment and a growing presence in general asset finance[18] - NETSOL leverages dual expertise in enterprise technology implementation and financial application development, with a strong presence in the captive asset-finance domain across North America, Asia Pacific, and Europe[19][20] Our Products and Services NETSOL offers the NFS Ascent suite, NFS Digital solutions, Otoz SaaS platform, Flex calculation engine, and various professional IT services - NFS Ascent is NETSOL's premier solution, covering the complete finance and leasing cycle from quotation to contract settlement, designed for multinational, multi-asset environments[23] - NFS Digital offers a suite of digital transformation solutions, including Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, and Mobile Collector, enhancing customer and dealer experience[33][34][35][36][37][38][39][40] - Otoz provides a white-label SaaS platform for digital auto retail and on-demand mobility models (subscriptions, rental, car-sharing) to OEMs, finance companies, and dealers[41] - Flex is a newly developed, API-based, cloud-based SaaS calculation engine that integrates seamlessly into an organization's ecosystem, offering precise calculations across the contract lifecycle[50][52] - NETSOL also offers professional services including IT consulting, solutions development, business intelligence, outsourcing, maintenance, project management, and AI/machine learning solutions[22][53][56][58][59] Implementation Process The implementation process for NETSOL's products typically ranges from three to fifteen months, followed by post-implementation support and maintenance - The implementation process for NETSOL's products can range from three to fifteen months, depending on complexity and scope, and includes configuration, data migration, training, and support[60] - Post-implementation, consultants assist with operations, followed by regular maintenance and support services for agreed subscriptions or fees[61] - Cloud-enabled solutions offer seamless and rapid deployments, providing businesses with increased responsiveness and competitive advantage[62] Pricing and Revenue Streams NETSOL's revenue comes from product licensing, subscription-based pricing, implementation services, and post-implementation support, with a shift towards SaaS models - NETSOL's revenue streams are derived from product licensing, subscription-based pricing, implementation and customization services, and post-implementation support[64] - The company is shifting to SaaS/subscription-based pricing models for cloud-ready products to ensure predictable revenue, decrease initial buy-in costs, and reduce sales cycles[66] - License fees are recognized upon software delivery, while implementation and support services are recognized as performed or ratably over the maintenance period[65] Alliances NETSOL maintains strategic alliances with Daimler Financial Services, Microsoft, and CGI to support its product offerings and cloud-hosting activities - NETSOL has a long-standing Frame Agreement with Daimler Financial Services (DFS) for the Asia Pacific and Africa region, renewed multiple times since 2004[67] - Strategic partnerships with Microsoft and CGI support cloud-hosting activities for NETSOL's cloud-based products, including NFS Ascent deployed on Microsoft Azure[68][69] Technical Affiliations NETSOL holds certifications as a Microsoft Certified Silver Partner and an Oracle Certified Partner - NETSOL is a Microsoft Certified Silver Partner and an Oracle Certified Partner[70] Marketing and Selling NETSOL's marketing strategy focuses on building client preference and loyalty through events, conferences, webinars, and digital media management - NETSOL's marketing program aims to create and sustain preference and loyalty, with activities performed at both corporate and business unit levels[71] - Marketing efforts include client events, targeted conferences, webinars, private briefings, and management of digital mediums like websites and social media[71][72] Growth Prospects for NFS Ascent Growth for NFS Ascent is driven by continuous innovation, expanding into new geographic markets, and deeper penetration in existing regions like Asia Pacific - Growth for NFS Ascent is driven by continuous product innovation and expanding customer base across new geographic markets (Americas, Europe) and deeper penetration in Asia Pacific[73] - North America and Europe growth is expected from replacing legacy systems and acquiring new customers, with NFS Ascent offering a flexible, robust, and technologically advanced solution[74][75] - In Asia Pacific, growth is anticipated through diversification into banking and commercial lending, enhanced features for existing customers, and replacements of current systems[76][77] The Markets NETSOL primarily serves global commercial industries, including automotive, banks, and financial lending services, with regional marketing offices worldwide - NETSOL primarily serves clients in global commercial industries, including automotive, banks, and other financial lending service companies[78] - Marketing for core offerings is conducted from regional offices: Asia Pacific (Bangkok, Beijing, Jakarta, Lahore, Shanghai, Tianjin, Sydney) and Americas/Europe (Los Angeles Area, London Metropolitan Area, Horsham)[79] People and Culture NETSOL fosters a culture of quality, client-focused delivery, and professional growth, investing in employee training and community support programs - NETSOL emphasizes a strong corporate culture focused on world-class quality, client-focused delivery, leadership, long-term relationships, creativity, transparency, and professional growth[80] - The company invests in training programs for technical skills, business domain knowledge, and soft skills to attract and retain talent, with an employee turnover rate under 16.04% in 2022[82][84] - As of June 30, 2022, NETSOL had approximately 1,781 employees, with 80.4% technical staff and 19.6% non-IT personnel[85] - NETSOL engages in community support programs, including literacy, higher education endowments, a noble cause fund for employees, and a day care facility (temporarily closed due to COVID-19)[84] Competition NETSOL competes with leading IT solution suppliers in global asset finance and leasing, as well as local and global IT services providers - NETSOL competes with leading IT solution suppliers in the global asset finance and leasing industry, including White Clarke Group, Alfa, Cassiopae, LineData, FIS, International Decision Systems (IDS), and Data Scan[86] - In IT-based business services, the company competes with both smaller local firms and global IT services providers such as Wipro, InfoSys, Satyam Infoway, HCL, and TCS[87] Customers NETSOL's customer base includes automotive captive finance companies, equipment finance firms, and large regional banks, with major clients like Daimler and BMW - NETSOL's customer base spans automotive captive finance companies, equipment finance and leasing companies, and large regional banks[88] - Major customers include Daimler and BMW, accounting for approximately 31.6% and 7.5% of revenue, respectively, for the fiscal year ended June 30, 2022[89] - Other globally renowned auto captives and equipment finance clients include Toyota, Nissan, Ford, FIAT, Motorcycle Group, SCI Lease Corp, Maple Commercial Finance, and Yamaha Motor Finance[89][90] Global Operations and Geographic Data NETSOL operates across the Americas, Europe, and Asia Pacific, with the Asia Pacific region accounting for approximately 75.1% of its 2022 revenues - NETSOL's operations are divided into three regions: the Americas, Europe, and Asia Pacific, with subsidiaries managed autonomously on a regional basis[91] - The Asia Pacific region accounted for approximately 75.1% of NETSOL's revenues in 2022, with Pakistan serving as a nucleus for delivery and R&D[102][103] - Key leadership is in place across regions, including Peter Minshall (EVP, Americas), Asad Ghauri (President APAC & Group MD Europe), and Salim Ghauri (CEO, NetSol PK)[92][95][97] Intellectual Property NETSOL protects its proprietary rights through non-disclosure agreements, trade secret, copyright, and trademark laws for its products and brand - NETSOL protects its proprietary rights through non-disclosure agreements, trade secret, copyright, and trademark laws[104] - The NETSOL 'N' logo and name, NFS logo, and NFS Ascent product name are copyrighted and trademark registered in Pakistan and/or with the U.S. Patent and Trademark Office[104] Governmental Approval and Regulation NETSOL's operations are subject to the laws of countries where it operates, with a tax exemption on IT service exports from Pakistan until 2025 - Current company operations do not require specific governmental approvals, but NETSOL is subject to laws of countries where it maintains subsidiaries and operates[106] - Pakistani law provides a tax exemption on income from exports of IT services and products until 2025[106] Available Information NETSOL provides access to SEC filings, earnings call webcasts, and corporate governance information on its official and investor relations websites - NETSOL's website (www.netsoltech.com) and investor relations website (http://ir.netsoltech.com) provide access to SEC filings, earnings call webcasts, and corporate governance information[107][108] Item 1A Risk Factors This section is marked as 'Not Applicable', indicating that the company does not have specific risk factors to disclose under this item - The company states 'Not Applicable' for Item 1A, indicating no specific risk factors are being disclosed[109] Item 1B Unresolved Staff Comments This section states 'None', indicating there are no unresolved staff comments from the SEC - The company reports 'None' for unresolved staff comments[109] Item 2 Properties NETSOL's corporate headquarters are in Calabasas, California, with owned and leased offices globally, including a large campus in Lahore, Pakistan - Corporate headquarters are in Calabasas, California (5,000 sq ft leased)[109] - Owns Lahore Technology Campus in Pakistan (approx. 140,000 sq ft, capacity for 1,000 resources)[109] - Maintains leased offices in the UK, China, Australia, Thailand, and a shared office in Indonesia[109] Item 3 Legal Proceedings This section states 'None', indicating no material legal proceedings - The company reports 'None' for legal proceedings[110] Item 4 Mine Safety Disclosures This section is marked as 'Not applicable', indicating no disclosures related to mine safety - The company states 'Not applicable' for mine safety disclosures[110] PART II Item 5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NETSOL's common stock trades on NASDAQ under 'NTWK', with no dividends paid in the last two fiscal years, and the company repurchased shares in FY2021 and FY2022 - Common stock trades on NASDAQ Capital Market under the ticker symbol 'NTWK'[111] - The company has not paid dividends on its Common Stock in the past two fiscal years[114] Common Stock Market Prices (High/Low) | Fiscal Year | Quarter | High ($) | Low ($) | | :---------- | :------ | :------- | :------ | | 2022 | First | 4.85 | 3.70 | | 2022 | Second | 5.65 | 3.85 | | 2022 | Third | 4.43 | 3.61 | | 2022 | Fourth | 4.04 | 2.74 | | 2021 | First | 3.29 | 2.52 | | 2021 | Second | 4.07 | 2.35 | | 2021 | Third | 5.30 | 3.80 | | 2021 | Fourth | 6.12 | 3.71 | Issuer Purchases of Equity Securities | Month | Total Number of Shares Purchased | Average Price Paid Per Share ($) | | :---------------- | :------------------------------- | :------------------------------- | | As of June 30, 2021 | 669,018 | 3.53 | | Aug-2021 | 22,510 | 4.45 | | Total | 691,528 | | Item 6 [Reserved] This item is explicitly marked as 'Reserved' in the report Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations NETSOL's FY2022 saw total net revenues increase to $57.25 million, driven by subscription fees, but gross profit declined, leading to a net loss of $0.85 million due to higher operating expenses and investment losses Key Financial Highlights (FY2022 vs. FY2021) | Metric | FY2022 ($) | FY2021 ($) | Change ($) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Total Net Revenues | 57,247,979 | 54,920,615 | 2,327,364 | 4.24% | | Gross Profit | 23,737,174 | 26,353,028 | (2,615,854) | -9.93% | | Income (Loss) from Operations | (1,078,323) | 2,720,849 | (3,799,172) | -139.67% | | Net Income (Loss) Attributable to NetSol | (851,156) | 1,778,257 | (2,629,413) | -147.86% | | Basic EPS | (0.08) | 0.15 | (0.23) | -153.33% | - Significant achievements in FY2022 include successful implementations of NFS Ascent and Digital solutions in New Zealand, Japan, Australia, and South Africa, generating over $4 million in revenue from DTFS implementations[121] - Renegotiated support contracts with DFS and BMW in China are expected to generate over $10 million and $400,000 in additional revenues, respectively, over the coming years[121] Fiscal Year 2022 Highlights FY2022 highlights include successful NFS Ascent implementations, significant revenue from Daimler Truck Financial Services, and renegotiated support contracts - Generated approximately $5.5 million from change requests across multiple regions[121] - Went live with NFS Ascent® and NFS Ascent® Digital in New Zealand for a leading Japanese equipment manufacturer, with an additional $1 million statement of work[121] - Successfully implemented NFS Ascent® and NFS solutions with Daimler Truck Financial Services GmbH (DTFS) in Japan, Australia, and South Africa, generating over $4 million in revenues[121] - Renegotiated support contracts with DFS and BMW in China, projected to generate over $10 million and $400,000 in additional revenues, respectively[121] - Signed a $5 million contract with a notable Swedish bank for NFS Ascent® implementation across Nordic countries over five years[121] - Awarded a $2.25 million contract by the Government of Khyber Pakhtunkhwa for a document management system[121] - Successfully delivered cloud-enabled Ascent® front end (POS/CAP) to an Australian commercial finance company, generating approximately $200,000 in subscription-based revenue[121] Marketing and Business Development Activities Management's growth strategy focuses on enhancing competitiveness, strengthening global delivery, and expanding the NETSOL brand and product penetration - Management's growth strategy focuses on increasing competitiveness, enhancing global delivery capabilities, and strengthening financial position in the leasing and finance space[122] - Key initiatives include building strong C-level executive teams, developing next-tier management, upgrading China offices, and strengthening the NETSOL brand in Americas, Europe, and APAC[125] - The strategy also involves further penetration of NFS Ascent into leasing/financing sectors globally, diversifying into complementary verticals, and continued investment in Otoz and innovation labs[125] Growth Prospects for NFS Ascent NFS Ascent's growth is driven by product maturation, expanding customer base in new and existing markets, and diversification into banking and commercial lending - Growth for NFS Ascent is tied to product portfolio maturation and expanding customer base across geographic and product markets, with a balanced sales strategy for new and existing regions[122] - North America's growth is expected from replacing legacy systems with NFS Ascent's flexible and robust solution, while Europe will see traction from NFS Ascent supporting larger and smaller organizations[123][124] - Asia Pacific's growth will come from diversification into banking and commercial lending, offering enhanced features to existing customers, and system replacements[126] - In China, NETSOL aims to strengthen its leadership position within multinational auto manufacturers and local Chinese captive finance/leasing companies[127] Material Trends Affecting NETSOL Positive trends include lifted travel restrictions and growing interest in SaaS and mobility solutions, while negative trends involve economic conditions and geopolitical tensions - Positive trends include lifted COVID-19 travel restrictions, increasing traction for NFS Ascent SaaS in North American and European mid-size auto captives, and growing interest in mobility/digital solutions in auto and banking sectors[129] - Otoz platform is showing steady growth of interest, and there's increased traction in the UK and Scandinavian region, along with existing customers upgrading to Ascent[129] - Negative trends include general economic conditions, geopolitical tensions (e.g., Russia-Ukraine war), fear of global recession, high inflation impacting employee compensation and turnover in Pakistan, and China's travel restrictions[130][134] Critical Accounting Policies Key accounting policies include revenue recognition, intangible assets, software development costs, and goodwill, all requiring significant management judgment - Critical accounting policies include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill[131] Revenue Recognition Revenue recognition follows a five-step process for software licenses, services, and subscriptions, requiring significant judgment for standalone selling prices and project estimates - Revenue recognition follows a five-step process: identifying contracts, performance obligations, transaction price, allocating price to obligations, and recognizing revenue upon satisfaction of obligations[135] - Core revenue streams are software licenses (on-premises or subscription), services (implementation, consulting), and subscription/support (post-contract support). Non-core revenue comes from BPO, other IT, and internet services[133][134][136] - Significant judgment is required to determine standalone selling prices (SSP) for distinct performance obligations and to estimate project status and costs for professional services[145][148][149] - Subscription revenue is recognized ratably over the initial 12-60 month period, software licenses upon delivery, and post-contract support ratably over the maintenance period (typically one year)[140][141] Intangible Assets (MD&A) Intangible assets, including product licenses and copyrights, are amortized over their useful lives and evaluated for impairment annually - Intangible assets include product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists[158] - 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[158] Software Development Costs Costs for internally developed software are expensed as R&D until technological feasibility, then capitalized and amortized upon general release - Costs for internally developing or enhancing software are expensed as R&D until technological feasibility is established, then capitalized until general release[160] - Capitalized software costs are reported at the lower of unamortized cost or net realizable value and amortized ratably based on projected revenue or straight-line[160][161] Stock-Based Compensation Stock-based compensation expense is estimated at grant date using the Black-Scholes-Merton model and recognized over the requisite service period - Stock-based compensation expense is estimated at grant date using the Black-Scholes-Merton model and recognized over the requisite service period[162] - Assumptions for the BSM model include expected volatility and expected term, and the forfeiture rate is estimated based on historical experience[162] Goodwill (MD&A) Goodwill is reviewed for impairment annually or more frequently, involving qualitative and quantitative assessments to compare carrying value to fair value - Goodwill is reviewed for impairment annually or more frequently if circumstances indicate impairment[163] - Impairment testing involves a qualitative assessment, followed by a quantitative assessment using discounted cash flows if necessary, to determine if carrying value exceeds fair value[163] Recent Accounting Pronouncement For a full description of recent accounting pronouncements, refer to Note 2 'Summary of Significant Accounting Policies' in the Consolidated Financial Statements - Refer to Note 2 'Summary of Significant Accounting Policies' in the Consolidated Financial Statements for a full description of recent accounting pronouncements[164] Results of Operations (FY2022 vs. FY2021) In FY2022, total net revenues increased, but gross profit and operating income declined, leading to a net loss primarily due to increased expenses and equity investment losses Consolidated Statement of Operations (Percentage of Revenues) | Item | 2022 (%) | 2021 (%) | | :-------------------------------------- | :------- | :------- | | License fees | 7.9% | 11.4% | | Subscription and support | 49.4% | 40.4% | | Services | 42.7% | 48.2% | | Services - related party | 0.0% | 0.1% | | Total net revenues | 100.0% | 100.0% | | Cost of revenues | 58.5% | 52.0% | | Gross profit | 41.5% | 48.0% | | Total operating expenses | 43.3% | 43.0% | | Income (loss) from operations | -1.9% | 5.0% | | Total other income (expenses) | 5.5% | 1.0% | | Net income before income taxes | 3.7% | 6.0% | | Income tax provision | -1.7% | -1.9% | | Net income | 1.9% | 4.1% | | Non-controlling interest | -3.4% | -0.9% | | Net income (loss) attributable to NetSol | -1.5% | 3.2% | Net Revenues by Segment (FY2022 vs. FY2021) | Segment | 2022 Revenue ($) | 2022 (%) | 2021 Revenue ($) | 2021 (%) | | :----------- | :--------------- | :------- | :--------------- | :------- | | North America | 4,288,008 | 7.5% | 3,724,547 | 6.8% | | Europe | 10,428,203 | 18.2% | 11,283,499 | 20.5% | | Asia-Pacific | 42,531,768 | 74.3% | 39,912,569 | 72.7% | | Total | 57,247,979 | 100.0% | 54,920,615 | 100.0% | Revenue Stream Changes (FY2022 vs. FY2021) | Revenue Stream | FY2022 ($) | FY2021 ($) | Change ($) | Change (Constant Currency $) | | :---------------------- | :----------- | :----------- | :----------- | :--------------------------- | | License fees | 4,539,260 | 6,249,924 | (1,710,664) | (1,152,220) | | Subscription and support | 28,284,759 | 22,173,745 | 6,111,014 | 7,861,490 | | Services | 24,423,960 | 26,448,171 | (2,024,211) | (1,587,028) | | Services – Related Party | - | 48,775 | (48,775) | (48,775) | - Gross profit decreased by $2.62 million (9.93%) to $23.74 million in FY2022, with the gross profit percentage declining from 48.0% to 41.5%, primarily due to increased cost of sales[174] - Operating expenses increased by $1.18 million (5.0%) to $24.82 million in FY2022, driven by increases in selling and marketing, general and administrative, and research and development costs[179] - The company reported a loss from operations of $1.08 million in FY2022, a significant decrease from an income of $2.72 million in FY2021[183] - Other income increased by $2.60 million to $3.17 million in FY2022, primarily due to a $4.33 million gain on foreign currency exchange transactions, partially offset by a $2.02 million share of net loss from equity investments (including impairments in WRLD3D and DriveMate) and $214,000 goodwill impairment related to VLS[184][186][187][188] Adjusted EBITDA Reconciliation (FY2022 vs. FY2021) | Metric | FY2022 ($) | FY2021 ($) | | :-------------------------------------- | :----------- | :----------- | | Net Income (loss) attributable to NetSol | (851,156) | 1,778,257 | | Non-controlling interest | 1,951,959 | 483,375 | | Income taxes | 988,938 | 1,026,617 | | Depreciation and amortization | 3,812,273 | 3,956,314 | | Interest expense | 369,801 | 394,289 | | Interest (income) | (1,655,883) | (1,017,432) | | EBITDA | 4,615,932 | 6,621,420 | | Add back: Non-cash stock-based compensation | 104,347 | 342,153 | | Adjusted EBITDA, gross | 4,720,279 | 6,963,573 | | Less non-controlling interest (a) | (2,903,457) | (1,588,701) | | Adjusted EBITDA, net | 1,816,822 | 5,374,872 | | Basic adjusted EBITDA per common share | 0.16 | 0.47 | | Diluted adjusted EBITDA per common share | 0.16 | 0.47 | Liquidity and Capital Resources NETSOL's cash position decreased in FY2022, with reduced operating cash flow and increased contractual obligations, while maintaining compliance with loan covenants - Cash position decreased to $23.96 million at June 30, 2022, from $33.71 million at June 30, 2021[198] Cash Flow Summary (FY2022 vs. FY2021) | Cash Flow Activity | FY2022 ($) | FY2021 ($) | | :------------------------ | :----------- | :----------- | | Operating Activities | 3,060,622 | 15,725,923 | | Investing Activities | (2,260,147) | (2,518,550) | | Financing Activities | (1,378,721) | (1,165,565) | | Effect of exchange rate changes | (9,163,111) | 1,496,516 | | Net Increase (Decrease) | (9,741,357) | 13,538,324 | | Cash & Equivalents (End) | 23,963,797 | 33,705,154 | - The combined total for accounts receivable and revenues in excess of billings increased by $4.27 million to $24.09 million at June 30, 2022[199] - The company anticipates needing $2 to $3 million in working capital for APAC, U.S., and European new business development and infrastructure enhancements over the next 12 months[204] - NETSOL's UK and Pakistani subsidiaries have various loan facilities with financial covenants, which the company was in compliance with as of the report date[207][208] - The company has a policy of investing earnings in growth rather than distributing common stock dividends, a policy expected to continue[209] Contractual Obligations as of June 30, 2022 | Contractual Obligation | Total ($) | 0 - 1 year ($) | 1-3 Years ($) | 3-5 Years ($) | More than 5 years ($) | | :-------------------------- | :----------- | :------------- | :------------ | :------------ | :-------------------- | | D&O Insurance | 89,552 | 89,552 | - | - | - | | Term Finance Facility | 423,101 | 423,101 | - | - | - | | Loan Payable Bank - Export Refinance | 2,434,749 | 2,434,749 | - | - | - | | Loan Payable Bank - Export Refinance II | 1,850,409 | 1,850,409 | - | - | - | | Loan Payable Bank - Export Refinance III | 3,408,648 | 3,408,648 | - | - | - | | Term Finance Facility | 31,204 | 18,339 | 12,865 | - | - | | Sale and Leaseback Financing | 619,108 | 189,226 | 429,882 | - | - | | Insurance financing | 118,026 | 118,026 | - | - | - | | Subsidiary Finance Leases | 68,571 | 35,095 | 33,476 | - | - | | Operating Lease Obligations | 995,938 | 548,678 | 271,220 | 174,815 | 1,225 | | Total | 10,039,306 | 9,115,823 | 747,443 | 174,815 | 1,225 | Item 7A Quantitative and Qualitative Disclosures about Market Risk NETSOL is exposed to foreign currency exchange rate fluctuations due to international operations but does not hedge against Pakistan Rupee devaluation due to resulting gains - The company is exposed to financial market risks, including changes in currency exchange rates and interest rates[213] - Foreign currency exchange risk arises from international revenues and costs denominated in foreign currencies, particularly the Euro, Yuan, Baht, and Pakistan Rupee[214][215] - NETSOL believes it is counter-productive to hedge its exposure to the Pakistan Rupee's devaluation, as it results in foreign exchange gains and the company has no imports[214][215] Item 8 Financial Statements and Supplementary Data This section indicates that the Consolidated Financial Statements, which constitute Item 8, 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[216] Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NETSOL reported no adverse opinions or disagreements with its independent registered public accounting firm, BF Borgers CPA PC, for fiscal years 2022 and 2021 - No adverse opinion or disclaimer of opinion, and no qualification or modification as to uncertainty, audit scope, or accounting principles in financial statements for FY2022 and FY2021[217] - No disagreements, disputes, or differences of opinion with BF Borgers CPA PC on accounting principles, financial statement disclosure, or auditing scope/procedures[218] Item 9A Controls and Procedures Management concluded that NETSOL's disclosure controls and internal controls over financial reporting were effective as of June 30, 2022, with no material changes - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2022[220] - Management's assessment of internal controls over financial reporting, based on the COSO framework, concluded they were effective as of June 30, 2022[221][223] - No material changes in internal controls over financial reporting occurred during the fourth quarter of fiscal year 2022[224] Item 9B Other Information This section states 'NONE', indicating no other information to disclose under this item - The company reports 'NONE' for other information[225] Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section states 'NONE', indicating no disclosures regarding foreign jurisdictions that prevent inspections - The company reports 'NONE' for disclosures regarding foreign jurisdictions that prevent inspections[225] PART III Item 10 Directors, Executive Officers and Corporate Governance NETSOL's Board of Directors comprises five members, with key executive officers including Najeeb Ghauri (CEO), and the company maintains a Code of Business Conduct & Ethics - The Board of Directors comprises five members: Najeeb U. Ghauri (Chairman), Mark Caton, Malea Farsai, Kausar Kazmi, and Henry Tolentino[229] - 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)[235] - Kausar Kazmi serves as the Chairman of the Audit Committee and is identified as the Audit Committee financial expert, possessing over 40 years of banking industry expertise[230][259][260] - The company has adopted a Code of Business Conduct & Ethics applicable to all officers, directors, and employees[258] Item 11 Executive Compensation Executive compensation at NETSOL aims to attract and retain leaders through competitive base salaries, performance-based cash awards, and long-term equity incentives - Executive compensation philosophy focuses on competitive total compensation, rewarding performance, and aligning executive interests with shareholder value[274] - Compensation for executive officers includes base salary, short-term cash awards based on objective performance targets, and long-term equity in the form of time and objective performance targets[272] - The Compensation Committee engages an independent compensation consultant to evaluate CEO and director compensation against a peer group[267][273] - CEO Najeeb Ghauri's bonus for fiscal year 2022 was $69,922, based on a graduated structure tied to total revenues and income from operations, paid 60% in cash and 40% in stock[286][291] Summary Compensation Table (FY2022-2020) | Name and Principle Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :-------------------------- | :---------- | :--------- | :-------- | :--------------- | :------------------------- | :-------- | | Najeeb Ghauri, CEO & Chairman | 2022 | 700,000 | 69,922 | - | 200,000 | 969,922 | | | 2021 | 667,000 | 67,500 | - | 180,383 | 914,883 | | | 2020 | 689,000 | - | - | 156,586 | 845,586 | | Naeem Ghauri, President | 2022 | 793,428 | - | - | 45,830 | 839,258 | | | 2021 | 767,768 | - | - | 77,045 | 844,813 | | Roger K Almond, CFO | 2022 | 197,041 | 20,000 | - | 34,066 | 251,107 | | | 2021 | 186,515 | - | - | 32,872 | 219,387 | | | 2020 | 217,111 | 20,000 | 56,900 | 10,639 | 304,650 | | Patti L. W. McGlasson, Secretary, General Counsel | 2022 | 212,384 | - | - | 10,426 | 222,810 | | | 2021 | 202,271 | - | - | 9,784 | 212,055 | | | 2020 | 219,481 | - | 42,675 | 10,019 | 272,175 | - In the event of termination without cause or for good reason, executive officers are entitled to severance payments, including salary continuance and health benefits for specified periods (e.g., 48 months for CEO, 12 months for CFO, 24 months for General Counsel)[296][297][298] Director Compensation Table (FY2022) | NAME | FEES EARNED OR PAID IN CASH ($) | SHARE AWARDS ($) | TOTAL ($) | | :-------------- | :------------------------------ | :--------------- | :-------- | | Mark Caton | 87,500 | 12,009 | 99,509 | | Henry Tolentino | 87,500 | - | 87,500 | | Kausar Kazmi | 87,500 | - | 87,500 | | Total | 262,500 | 12,009 | 274,509 | Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of September 20, 2022, Najeeb Ghauri was the largest individual beneficial owner, and all officers and directors as a group beneficially owned 13.33% of common stock Beneficial Ownership of Common Stock (as of Sep 20, 2022) | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage | | :----------------------------------- | :---------------------------------- | :--------- | | Najeeb Ghauri | 808,656 | 7.18% | | Naeem Ghauri | 400,689 | 3.56% | | Mark Caton | 101,582 | * | | Henry Tolentino | 27,313 | * | | Patti McGlasson | 81,050 | * | | Roger Almond | 30,000 | * | | Kausar Kazmi | 11,445 | * | | Malea Farsai | 39,811 | * | | Renaissance Technologies Holdings Corp. | 579,401 | 5.15% | | Topline Capital Management LLC | 570,493 | 5.07% | | All officers and directors as a group (eight persons) | 1,500,546 | 13.33% | - As of September 19, 2022, there were 11,257,539 shares issued and outstanding[4][347] Item 13 Certain Relationships and Related Transactions, and Director Independence NETSOL has convertible promissory note agreements with WRLD3D, a related party where the CEO's son serves as CEO, and the CEO also has an interest in G-Force, LLC - Faizaan Ghauri, son of CEO Najeeb Ghauri and a company employee, was appointed CEO of WRLD3D on May 31, 2017[348] - NETSOL entered into multiple convertible promissory note agreements with WRLD3D, with principal amounts totaling $4.25 million across several notes (May 2017, Feb 2018, April 2019, Aug 2019)[349][350][351][352][496] - Najeeb Ghauri and Naeem Ghauri have a financial interest in G-Force, LLC, which purchased a 4.9% investment in WRLD3D for $1,111,111[353] Item 14 Principal Accountant Fees and Services BF Borgers CPA PC served as NETSOL's principal accountant, with audit and tax fees totaling $263,000 in both FY2022 and FY2021, all pre-approved by the Audit Committee - BF Borgers CPA PC audited financial statements for FY2022 and FY2021[354] Principal Accountant Fees (FY2022 vs. FY2021) | Fee Type | FY2022 ($) | FY2021 ($) | | :--------- | :--------- | :--------- | | Audit Fees | 250,000 | 250,000 | | Tax Fees | 13,000 | 13,000 | | Other Fees | 0 | 0 | - The Audit Committee is responsible for engaging independent auditors and pre-approving all auditing and permitted non-audit services to ensure auditor independence[357] PART IV Item 15 Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the 10-K report, including articles of incorporation, employment agreements, stock option plans, and certifications - The report includes a comprehensive list of exhibits, such as Articles of Incorporation, Amendments, Bylaws, Stock Purchase Agreements, Employment Agreements, Stock Option Plans, and various certifications (e.g., Sarbanes-Oxley Act)[361] - Exhibits are categorized by whether they are filed with the current report or were previously filed[362] Financial Statements The Financial Statements section includes the independent auditor's report, consolidated financial statements, and detailed notes explaining accounting policies and financial performance - The company's consolidated financial statements include accounts of wholly-owned and majority-owned subsidiaries, prepared in accordance with US GAAP[403][404][405] - Significant estimates are made for doubtful accounts, taxation, useful lives of assets, contingencies, and contract costs[407] - The company has two primary revenue streams: core revenue (software licenses, services, subscription/support) and non-core revenue (BPO, IT, internet services)[453][454][455] - Major customers, Daimler Financial Services (DFS) and BMW Financial (BMW), accounted for 31.6% and 7.5% of revenues, respectively, in FY2022[491] - Goodwill impairment of $214,044 was recorded at June 30, 2022, related to VLS due to a decline in revenue from customer losses[529] - The company has established a full valuation allowance for deferred tax assets, as management believes they are unlikely to be realized in the future[545] - Income from export of computer software and related services developed in Pakistan is tax-exempt through June 30, 2025, with an aggregate effect of $1,260,502 on income tax for FY2022[550] Report of Independent Registered Public Accounting Firm BF Borgers CPA PC issued an unqualified opinion on NETSOL's consolidated financial statements, highlighting revenue recognition and goodwill impairment as critical audit matters - BF Borgers CPA PC issued an unqualified opinion, stating the financial statements present fairly, in all material respects, the consolidated financial positions and results of operations[371] - Critical audit matters identified were revenue recognition (identification of contractual terms in customer arrangements) and goodwill/intangible asset impairment[377][380] - Auditing these critical matters involved significant judgment and effort, including testing controls, examining customer arrangements, and evaluating management's estimates with the assistance of fair value specialists[378][379][381] Consolidated Balance Sheets NETSOL's consolidated balance sheet shows a decrease in total assets from $86.61 million in FY2021 to $72.61 million in FY2022, driven by reductions in cash, property, and intangible assets, alongside a decline in total stockholders' equity Consolidated Balance Sheet Summary (FY2022 vs. FY2021) | Item | June 30, 2022 ($) | June 30, 2021 ($) | | :-------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | 23,963,797 | 33,705,154 | | Total current assets | 49,428,136 | 55,578,774 | | Property and equipment, net | 9,382,624 | 12,091,812 | | Intangible assets, net | 1,587,670 | 3,904,656 | | Goodwill | 9,302,524 | 9,516,568 | | Total assets | 72,608,632 | 86,606,261 | | Total current liabilities | 20,830,926 | 23,476,561 | | Total liabilities | 21,754,409 | 24,740,659 | | Total NetSol stockholders' equity | 45,403,834 | 54,650,129 | | Non-controlling interest | 5,450,389 | 7,215,473 | | Total stockholders' equity | 50,854,223 | 61,865,602 | - Cash and cash equivalents decreased by $9.74 million (28.9%) from $33.71 million in FY2021 to $23.96 million in FY2022[384] - Accounts receivable, net, increased by $4.49 million (107.3%) from $4.18 million in FY2021 to $8.67 million in FY2022[384] Consolidated Statements of Operations and Comprehensive Income (Loss) NETSOL reported a net income of $1.10 million in FY2022, a decrease from FY2021, driven by increased subscription revenue but offset by higher costs and a negative translation adjustment, resulting in a net loss attributable to NetSol of $0.85 million Consolidated Statements of Operations (FY2022 vs. FY2021) | Item | FY2022 ($) | FY2021 ($) | | :-------------------------------------- | :----------- | :----------- | | License fees | 4,539,260 | 6,249,924 | | Subscription and support | 28,284,759 | 22,173,745 | | Services | 24,423,960 | 26,448,171 | | Services - related party | - | 48,775 | | Total net revenues | 57,247,979 | 54,920,615 | | Total cost of revenues | 33,510,805 | 28,567,587 | | Gross profit | 23,737,174 | 26,353,028 | | Total operating expenses | 24,815,497 | 23,632,179 | | Income (loss) from operations | (1,078,323) | 2,720,849 | | Total other income (expenses) | 3,168,064 | 567,400 | | Net income before income taxes | 2,089,741 | 3,288,249 | | Income tax provision | (988,938) | (1,026,617) | | Net income | 1,100,803 | 2,261,632 | | Non-controlling interest | (1,951,959) | (483,375) | | Net income (loss) attributable to NetSol | (851,156) | 1,778,257 | | Basic EPS | (0.08) | 0.15 | | Diluted EPS | (0.08) | 0.15 | Consolidated Statements of Comprehensive Income (Loss) (FY2022 vs. FY2021) | Item | FY2022 ($) | FY2021 ($) | | :-------------------------------------- | :------------ | :----------- | | Net income (loss) | (851,156) | 1,778,257 | | Translation adjustment | (11,175,077) | 2,933,964 | | Translation adjustment attributable to non-controlling interest | 3,680,473 | (717,398) | | Net translation adjustment | (7,494,604) | 2,216,566 | | Comprehensive income (loss) attributable to NetSol | (8,345,760) | 3,994,823 | - Subscription and support revenue increased by $6.11 million (27.6%) in FY2022, while license fees decreased by $1.71 million (27.4%) and services revenue decreased by $2.02 million (7.6%)[386] Consolidated Statement of Stockholders' Equity Total stockholders' equity decreased in FY2022 due to a net loss attributable to NetSol and a significant negative foreign currency translation adjustment Consolidated Statement of Stockholders' Equity (FY2022 vs. FY2021) | Item | June 30, 2022 ($) | June 30, 2021 ($) | | :-------------------------------------- | :---------------- | :---------------- | | Common Stock Amount | 121,966 | 121,816 | | Additional Paid-in Capital | 128,218,247 | 129,018,826 | | Treasury Shares | (3,920,856) | (3,820,750) | | Accumulated Deficit | (39,652,438) | (38,801,282) | | Other Comprehensive Loss | (39,363,085) | (31,868,481) | | Non-Controlling Interest | 5,450,389 | 7,215,473 |\ | Total Stockholders' Equity | 50,854,223 | 61,865,602 | - Net loss attributable to NetSol was $851,156 in FY2022, contributing to the decrease in accumulated deficit[394] - Foreign currency translation adjustment resulted in a negative impact of $7.49 million in FY2022, significantly increasing other comprehensive loss[394] - The purchase of subsidiary treasury shares (NetSol PK) for $950,352 decreased non-controlling interest and additional paid-in capital[394][579] Consolidated Statements of Cash Flows NETSOL experienced a net decrease in cash and cash equivalents of $9.74 million in FY2022, primarily due to reduced operating cash flow, increased financing activities, and a negative effect from exchange rate changes Consolidated Statements of Cash Flows (FY2022 vs. FY2021) | Cash Flow Activity | FY2022 ($) | FY2021 ($) | | :------------------------ | :----------- | :----------- | | Net income | 1,100,803 | 2,261,632 | | Net cash provided by operating activities | 3,060,622 | 15,725,923 | | Net cash used in investing activities | (2,260,147) | (2,518,550) | | Net cash used in financing activities | (1,378,721) | (1,165,565) | | Effect of exchange rate changes | (9,163,111) | 1,496,516 | | Net increase (decrease) in cash and cash equivalents | (9,741,357) | 13,538,324 | | Cash and cash equivalents at end of period | 23,963,797 | 33,705,154 | - Net cash provided by operating activities decreased significantly from $15.73 million in FY2021 to $3.06 million in FY2022, largely due to changes in accounts receivable and revenues in excess of billings[396] - Net cash used in financing activities increased to $1.38 million in FY2022, including $950,352 for the purchase of subsidiary treasury stock[396][201] - The effect of exchange rate changes resulted in a negative impact of $9.16 million on cash flows in FY2022, compared to a positive impact of $1.50 million in FY2021[396] Notes to Consolidated Financial Statements These notes provide detailed explanations of NETSOL's accounting policies, financial statement line items, and significant transactions, including revenue recognition and segment information NOTE 1 - Organization and Description of Business NetSol Technologies, Inc. designs, develops, markets, and exports proprietary software products and provides IT services to the automobile financing and leasing, banking, and financial services industries - NetSol Technologies, Inc. was incorporated in Nevada on March 18, 1997[402] - The company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide[402] - It also provides system integration, consulting, and IT products and services[402] NOTE 2 - Summary of Significant Accounting Policies This note outlines NETSOL's accounting policies for consolidation, US GAAP compliance, significant estimates, credit risk, investments, goodwill, and recent accounting pronouncements - The consolidated financial statements include wholly-owned and majority-owned subsidiaries, with inter-company accounts eliminated[403][404] - Financial statements are prepared in accordance with US GAAP and SEC rules[405] - Significant estimates are made for doubtful accounts, taxation, useful lives of assets, contingencies, and estimated contract costs[407] - The company is exposed to concentration of credit risk in cash balances, with approximately $22.76 million uninsured in foreign entities as of June 30, 2022[409] - Investments are accounted for using the equity method for significant influence or cost method otherwise, with impairment losses recorded when applicable[414][415][416] - Goodwill is reviewed for impairment annually, using qualitative and quantitative assessments (discounted cash flow methodology)[424] - The company adopted ASU No. 2019-12 (Income Taxes) on July 1, 2021, with no material impact, and does not expect material effects from ASU 2020-06 (Convertible Instruments) or ASU 2021-08 (Business Combinations) upon adoption[445][446][448][449] NOTE 3 – Revenue Recognition This note details NETSOL's five-step revenue recognition process for core and non-core streams, including software licenses, services, and subscriptions, and disaggregated revenue data - Revenue recognition follows a five-step process: identifying contracts, performance obligations, transaction price, allocating price, and recognizing revenue upon satisfaction[452] - Core revenue streams are software licenses, services (implementation, consulting), and subscription/support. Non-core revenue includes BPO, other IT, and internet services[454][455] Disaggregated Revenue by Category (FY2022 vs. FY2021) | Category | FY2022 ($) | FY2021 ($) | | :---------------------- | :----------- | :----------- | | Core Revenue, net: | | | | License | 4,539,260 | 6,249,924 | | Subscription and support | 28,284,759 | 22,173,745 | | Services | 19,519,508 | 20,139,320 | | Services - related party | - | 48,775 | | Total core revenue, net | 52,343,527 | 48,611,764 | | Non-Core Revenue, net: | | | | Services | 4,904,452 | 6,308,851 | | Total non-core revenue, net | 4,904,452 | 6,308,851 | | **Total net reve