NetSol(NTWK) - 2023 Q4 - Annual Report

FORM 10-K Filing Information This section provides key filing details for NETSOL TECHNOLOGIES, INC.'s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 Filing Details This is an Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed by NETSOL TECHNOLOGIES, INC. (NTWK) with the SEC. The company is registered in Nevada, headquartered in Encino, CA, and its common stock is traded on NASDAQ. It is classified as a Non-accelerated Filer and a Smaller Reporting Company - NETSOL TECHNOLOGIES, INC. (NTWK) filed its Annual Report on Form 10-K for the fiscal year ended June 30, 2023[2] Common Stock High and Low Prices (Fiscal Years 2022-2023) | Indicator | Value | | :--- | :--- | | Trading Symbol | NTWK | | Exchange | NASDAQ | | Well-known seasoned issuer | No | | Required to file reports | Yes | | Filed all reports in past 12 months | Yes | | Submitted Interactive Data File | Yes | | Large Accelerated Filer | No | | Accelerated Filer | No | | Non-accelerated Filer | Yes | | Smaller reporting company | Yes | Market Value and Shares Outstanding As of December 31, 2022, the aggregate market value of common stock held by non-affiliates was approximately $28.2 million. As of September 15, 2023, there were 12.28 million shares issued and 11.35 million shares outstanding Market Value and Shares Outstanding | Metric | Value | | :--- | :--- | | Aggregate market value (non-affiliates, Dec 31, 2022) | $28,197,710 | | Closing price (Dec 31, 2022) | $2.89 per share | | Shares issued (Sep 15, 2023) | 12,284,887 | | Shares outstanding (Sep 15, 2023) | 11,345,856 | | Preferred Stock outstanding | None | Table of Contents and Cross Reference Sheet This section provides an index and cross-reference for the report's content Note About Forward-Looking Statements This section outlines the disclaimer regarding forward-looking statements and associated risks Forward-Looking Statements Disclaimer This section highlights that the Annual Report contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections. Readers are cautioned not to place undue reliance on these statements, and the company undertakes no obligation to revise them, except as required by law - The report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially from projections[9] - The company uses terms like 'believe,' 'expect,' 'anticipate,' and 'intend' to identify forward-looking statements[9] - The company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law[9] PART I This part covers the company's business operations, risk factors, properties, and legal proceedings Business Overview NETSOL Technologies, Inc. is a global provider of IT and enterprise software solutions for the finance and leasing industry, specializing in auto and equipment finance. The company offers its flagship NFS Ascent platform, digital transformation solutions (NFS Digital), and a white-label SaaS platform (Otoz) for digital auto retail and mobility. NETSOL operates globally with a strong presence in North America, Europe, and Asia Pacific, serving blue-chip clients and focusing on a subscription-based model for its cloud-enabled products - NETSOL Technologies, Inc. provides IT and enterprise software solutions to the global finance and leasing industry, with a focus on mission-critical applications[11] - Primary revenue sources include licensing, subscriptions, modification, enhancement, and support of its NFS Ascent financial applications[12] - The company is shifting towards cloud-enabled, subscription-based pricing models for new customers, moving away from traditional licensing[12][67] General Company Information NETSOL Technologies, Inc. is a global IT and enterprise software provider for the finance and leasing industry, headquartered in California with worldwide operations - NETSOL Technologies, Inc. (Nasdaq CM: NTWK) is a global provider of IT and enterprise software solutions for the finance and leasing industry[11] - The company's solutions, under the brand NFS Ascent, are mission-critical applications for clients, facilitating end-to-end business processes[11][12] - NETSOL was founded in 1997 and is headquartered in Encino, California, with global offices in North America, Europe, Asia Pacific, and the Middle East[14][15] Business Model and Strategy NETSOL's business model leverages cost arbitrage, domain expertise, and scalability to deliver specialized leasing and financing solutions globally - NETSOL's business model combines affordable pricing through cost arbitrage, subject matter expertise, domain experience, scalability, and proximity to customers[16] - The company specializes in the leasing and financing space, holding a strong foothold and market-leading position in the auto equipment finance segment[17] - NETSOL's global operations are divided into three regions: North America, Europe, and Asia Pacific, with integrated subsidiaries for global delivery and support[21] Products and Services Portfolio NETSOL offers a comprehensive portfolio including NFS Ascent, NFS Digital, Otoz, and AppexNow, alongside professional and cloud services, with a focus on AI/ML innovation - NFS Ascent is NETSOL's premier solution, covering the complete finance and leasing cycle from origination to contract settlements, designed for multinational and multi-asset environments[22] - NFS Digital offers a suite of digital transformation solutions, including Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, Mobile Collector, and Mobile Field Investigator[32][33][34][35][36][37][38][39] - Otoz provides a white-label SaaS platform for OEMs, finance companies, dealers, and start-ups, enabling on-demand mobility models (subscriptions, rental, car-sharing) and digital retail[40] - AppexNow is a marketplace for API-first products for the credit, finance, and leasing industry, with initial offerings including Flex (a calculation engine) and Hubex (an API library)[49][50][53] - NETSOL also offers professional services (IT consulting, solutions development, business intelligence, outsourcing, maintenance, project management) and cloud services leveraging Amazon Web Services (AWS)[55][58][59] - A dedicated team is developing artificial intelligence and machine learning solutions to help clients optimize production, decrease downtime, and gain a holistic view of business processes[60][61] Implementation Process The implementation process for NETSOL's products involves configuration, data migration, training, and support, with cloud solutions enabling rapid deployment - 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[62] - Post-implementation, consultants assist with smooth operations, followed by regular maintenance and support services for agreed-upon subscription or support fees[63] - Cloud-enabled solutions offer seamless and rapid deployments, providing businesses with quicker responsiveness and a competitive advantage[64] Pricing and Revenue Streams NETSOL's revenue is generated from product licensing, subscriptions, implementation, and support services, with a strategic shift towards SaaS/subscription models - NETSOL's revenue streams are derived from product licensing, subscription-based pricing, implementation and customization services, and post-implementation support[65][69] - The company is shifting to SaaS/subscription-based pricing for cloud-ready products to ensure predictable revenue, reduce initial buy-in costs, and shorten sales cycles[67] - License revenue is recognized upon software delivery, while implementation and support services are recognized as performed or ratably over the service period[66] Strategic Alliances NETSOL maintains key alliances with Daimler Financial Services for Asia Pacific and Africa, and Microsoft for 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[68] - The company partners with Microsoft to provide cloud-hosting activities for its cloud-based products, including NFS Ascent and LeasePak Cloud - SaaS, leveraging Microsoft Azure[69] Technical Affiliations NETSOL holds technical affiliations as a Microsoft Certified Silver Partner, Oracle Certified Partner, and AWS Select Tier Partner - NETSOL is a Microsoft Certified Silver Partner and an Oracle Certified Partner[70] - For Amazon Web Services (AWS), NETSOL is a Select Tier Partner, a Well Architected Partner, and a Solution Provider under their AWS Partner Programs[70] Marketing and Sales Strategy NETSOL's marketing and sales strategy focuses on building brand loyalty and expanding market reach through client events, conferences, and industry-focused professionals - NETSOL's marketing program aims to create and sustain preference and loyalty, with activities performed at both corporate and business unit levels[71] - Marketing activities include sponsoring client events, participating in conferences and webinars, and holding private briefings, leveraging industry-focused sales professionals[72] NFS Ascent Growth Prospects Growth for NFS Ascent is driven by continuous innovation and expanding customer bases in North America, Europe, and Asia Pacific, targeting legacy system replacement and new markets - Growth for NFS Ascent is driven by continuous product innovation and an expanding customer base across various geographic and product markets[73] - The sales strategy focuses on expanding into new geographic markets (Americas, Europe) and further penetrating existing Asia Pacific markets, targeting Tier 2 and Tier 3 prospects[73] - In North America and Europe, growth is expected from replacing legacy systems with NFS Ascent's flexible and robust solution, as well as acquiring new customers[74] - Asia Pacific growth is anticipated through diversification into banking and commercial lending, offering enhanced features to existing customers, and replacing current systems[76] Target Markets NETSOL primarily serves global commercial industries, including automotive, banking, and financial lending, with regionally focused marketing efforts - NETSOL primarily serves clients in global commercial industries, including automotive, banks, and other financial lending service companies[78] - Marketing efforts are regionally focused, with Asia Pacific targeted from offices in Bangkok, Beijing, Jakarta, Lahore, Shanghai, Tianjin, and Sydney, and the Americas/Europe from Austin, Texas, and London/Horsham[79] Human Capital and Culture NETSOL fosters a culture of quality and client focus, with a diverse global workforce of approximately 1,770 employees and community engagement programs - NETSOL's corporate culture emphasizes world-class quality, client-focused delivery, leadership, long-term relationships, creativity, transparency, and professional growth[80] - Employee turnover rate was approximately 19% in 2023, with a goal to maintain it under 21% for fiscal year 2024 and beyond[81] - As of June 30, 2023, the company had approximately 1,770 employees, with 76% technical staff and 24% non-IT personnel[84] - The company supports diversity and implements community programs such as literacy programs, higher education endowments, a noble cause fund, and a day care facility[82][83][85] Competitive Landscape NETSOL competes with leading global IT solution providers in asset finance and leasing, as well as broader IT services firms - NETSOL competes with leading IT solution suppliers in the global asset finance and leasing industry, including Solifi, 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 like Wipro, InfoSys, HCL, and TCS[86] Customer Base NETSOL serves a diverse customer base in finance and leasing, including major automotive captives like Daimler and BMW - NETSOL serves a broad spectrum of finance and leasing businesses, including automotive captive finance companies, equipment finance and leasing companies, and large regional banks[87] - Major customers include Daimler (28.6% of FY2023 revenue) and BMW (7.9% of FY2023 revenue), along with Toyota, Nissan, Ford, FIAT, Motorcycle Group, SCI Lease Corp, Maple Commercial Finance, and Yamaha Motor Finance[88][89] Global Operations and Geographic Data NETSOL operates across the Americas, Europe, and Asia Pacific, with Pakistan serving as a key 'Center of Excellence' for R&D and support - NETSOL's operations are divided into three regions: the Americas, Europe, and Asia Pacific, with individual subsidiaries managed regionally[90] - The Asia Pacific region accounted for approximately 67.8% of total revenues in 2023[103] - Pakistan serves as NETSOL's 'Center of Excellence' for programming, R&D, global implementations, and 24-hour customer support[97] Intellectual Property NETSOL protects its proprietary rights through non-disclosure agreements, trade secrets, copyrights, and trademarks for its brand and products - 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 product name, and NFS Ascent are copyrighted and/or trademark registered in Pakistan and/or the U.S. Patent and Trademark Office[104] - An application for the OTOZ Name has been filed with the U.S. Patent and Trademark Office[104] Governmental Approval and Regulation NETSOL's operations are subject to local laws, with Pakistan offering tax exemptions for IT exports and requiring State Bank approval for investment repatriation - Current company operations do not require specific governmental approvals, but NETSOL is subject to laws of countries where it maintains subsidiaries and operates[105] - Pakistani law provides a tax exemption on income from exports of IT services and products until 2025[105] - Repatriation of investment from foreign-based companies in Pakistan requires approval from the State Bank of Pakistan[105] Available Information NETSOL provides public access to SEC filings, earnings webcasts, and corporate governance information through 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[106][107] - SEC filings, including 10-K, 10-Q, and 8-K reports, are available for download free of charge on the investor relations website and the SEC's website[106] Risk Factors NETSOL faces various risks, including political and economic instability in Pakistan (devaluation of Rupee, high inflation), geopolitical tensions between the US and China impacting operations and fund transfers, and general economic conditions such as global recession fears, rising interest rates, and inflation affecting profitability and consumer buying power - Political and economic instability in Pakistan, including Rupee devaluation and high inflation, may negatively affect the business, particularly its largest subsidiary[108][109] - US-China political tensions could impact operations in China, new business acquisition, and the ability to transfer funds out of China[110] - General economic conditions, including inflation, geopolitical tensions, global pandemics, and rising interest rates, restrict buying power and increase operating costs, potentially affecting profitability[111][112] - Declines in U.S. markets and the company's stock price may limit access to capital markets[113] Unresolved Staff Comments There are no unresolved staff comments - The company has no unresolved staff comments[115] Cybersecurity This item is not applicable to the company - The cybersecurity disclosure item is not applicable[115] Properties NETSOL's corporate headquarters are leased in Encino, California, while it owns its Lahore Technology Campus in Pakistan, which is a significant computer and office space facility. The company also maintains leased offices in the UK, China, Australia, Thailand, Indonesia, and Austin, Texas - Corporate headquarters are leased in Encino, California (approx. 2,400 sq ft)[115] - The Lahore Technology Campus in Pakistan is owned, comprising approximately 140,000 sq ft of computer and general office space, with capacity for about 1,000 resources[115] - Additional leased office spaces are maintained in the UK, China, Australia, Thailand, and a shared office in Indonesia, along with an NTA office in Austin, Texas[115] Legal Proceedings There are no legal proceedings to report - The company has no legal proceedings to disclose[116] Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable[116] PART II This part details market information, financial condition, results of operations, and controls and procedures Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Security NETSOL's common stock trades on NASDAQ Capital Market under 'NTWK'. The stock experienced price fluctuations in fiscal years 2022 and 2023. As of September 15, 2023, there were 133 record holders. The company has not paid dividends in the past two fiscal years and has no outstanding preferred stock. Equity compensation plans have 363,687 securities available for future issuance - NETSOL Technologies, Inc. common stock is listed and traded on NASDAQ Capital Market under the ticker symbol 'NTWK'[118] Common Stock High and Low Prices (Fiscal Years 2022-2023) | Fiscal Year 2023 | High | Low | | :--- | :--- | :--- | | First Quarter | $3.80 | $2.75 | | Second Quarter | $3.23 | $2.82 | | Third Quarter | $3.25 | $2.53 | | Fourth Quarter | $3.30 | $2.11 | | Fiscal Year 2022 | High | Low | | First Quarter | $4.85 | $3.70 | | Second Quarter | $5.65 | $3.85 | | Third Quarter | $4.43 | $3.61 | | Fourth Quarter | $4.04 | $2.74 | Equity Compensation Plan Summary (as of June 30, 2023) | 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 | | :--- | :--- | :--- | :--- | | Equity Compensation Plans approved by Security holders | None | None | 363,687 | | Equity Compensation Plans not approved by Security holders | None | None | None | | Total | None | None | 363,687 | - The company has not paid dividends on its Common Stock in the past two fiscal years[121] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations NETSOL's financial performance for FY2023 saw a decrease in total net revenues to $52.39 million from $57.25 million in FY2022, primarily due to lower license fees and subscription/support revenue, despite an increase in services revenue on a constant currency basis. The company reported a net loss of $5.24 million in FY2023, a significant increase from the $0.85 million net loss in FY2022, driven by decreased gross profit and increased operating expenses, partially offset by foreign currency exchange gains. Strategic initiatives included new product launches (Flex, Hubex), AWS partnership, and expansion into new geographic markets Key Financial Highlights (FY2023 vs. FY2022) | Metric | FY2023 (USD) | FY2022 (USD) | Change (USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $52,393,215 | $57,247,979 | $(4,854,764) | -8.48% | | Gross Profit | $16,915,563 | $23,737,174 | $(6,821,611) | -28.74% | | Loss from Operations | $(8,779,958) | $(1,078,323) | $(7,701,635) | 714.23% | | Net Income (Loss) Attributable to NetSol | $(5,243,748) | $(851,156) | $(4,392,592) | 516.07% | | Basic EPS | $(0.46) | $(0.08) | $(0.38) | 475.00% | | Diluted EPS | $(0.46) | $(0.08) | $(0.38) | 475.00% | - Key achievements in FY2023 include partnering with Amazon Web Services, launching new products Flex and Hubex, signing a mobility solution contract with a Tier 1 automotive company in the U.S., and expanding geographically with a new subsidiary in Dubai and a development center in Austin, Texas[126] - The company successfully implemented change requests generating approximately $7.0 million and renegotiated existing contracts, increasing annual maintenance fees for a U.S. auto manufacturer's finance company in China to $500K from $280K[126] Fiscal Year 2023 Highlights This section summarizes key achievements and strategic developments for NETSOL during the fiscal year ended June 30, 2023 - Partnered with Amazon Web Services (AWS) to offer cloud computing services and achieved API Gateway Delivery Partner status, signing the first customer[126] - Launched new products: Flex (cloud-based calculation engine) and Hubex (API library), securing the first Flex contract with European Merchant Bank[126] - Otoz went live with its 55th dealer, now operating in 36 states, expected to generate approximately $1.1 million in annual recurring revenues[126] - Successfully implemented change requests from various customers, generating approximately $7.0 million[126] - Signed a new agreement with Kubota Australia Pty Ltd for NFS Ascent, expected to generate $5 million over 5 years[126] - Established a new subsidiary in Dubai to penetrate the MENA region and opened a development and support center in Austin, Texas, for North American growth[126] Marketing and Business Development Activities This section outlines NETSOL's strategies for market expansion, enhancing global delivery, and strengthening its financial position within the leasing and finance industry - Management's growth strategy focuses on increasing competitiveness, enhancing global delivery capabilities, and strengthening financial position in the leasing and finance space[127] - 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[131] - The strategy also involves diversifying into complementary verticals through organic expansion, partnerships, and M&A, and continuing investment in the innovation lab[131] NFS Ascent Growth Prospects (MD&A) This section discusses the growth opportunities for NFS Ascent, driven by product maturation and expanding customer bases across various geographic and product markets - Growth for NFS Ascent is tied to product portfolio maturation and expanding customer base across geographic and product markets[127] - Sales strategy balances expansion into new markets (Americas, Europe) with further penetration in Asia Pacific[127] - North America growth is expected from replacing legacy systems, while Europe will see traction from NFS Ascent deployed on the cloud, supporting larger and smaller organizations[128][129] - Asia Pacific growth is anticipated through diversification into banking and commercial lending, and increased service/maintenance revenues from existing customers[130] Material Trends Affecting NETSOL This section identifies both positive and negative macroeconomic and industry trends impacting NETSOL's business, including vehicle sales, inflation, interest rates, and geopolitical factors - Positive trends include expected global new vehicle sales increase (5.6% in 2023), reduction of U.S. inflation to ~5%, strong U.S. market for team building, and increasing traction for NFS Ascent SaaS offerings[132] - The auto and banking sectors show momentum towards increased mobility and digital solutions, with the global automotive finance market projected to more than double by 2035 (CAGR of 7.4%)[132] - Negative trends include global recession fears, continued U.S. interest rate increases restricting buying power, negative currency impact from Pakistan Rupee devaluation, and political/economic challenges in Pakistan[132] - Ongoing war in Ukraine, U.S. market decline in 2022, and U.S.-China tensions are also identified as negative trends[132] Critical Accounting Policies This section outlines NETSOL's critical accounting policies, including revenue recognition, intangible assets, software development costs, and goodwill, which require significant management estimates and assumptions - Critical accounting policies include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill[133] - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions[133] Revenue Recognition This section details NETSOL's revenue recognition process under ASC 606, covering core and non-core revenue streams, and the significant judgments involved in determining standalone selling prices and measuring service progress - Revenue recognition follows a five-step process: identifying contracts, performance obligations, transaction price, allocating price to obligations, and recognizing revenue upon satisfaction of obligations[134][139] - Core revenue streams are software licenses, services (implementation/consulting), and subscription/support (post-contract support) for enterprise software solutions[136] - Non-core revenue comes from business process outsourcing (BPO), other IT services, and internet services[137] - The company offers software via traditional on-premises licensing and a subscription model (hosted as a service)[136] - Significant judgments are required for determining Standalone Selling Price (SSP) for distinct performance obligations and for recognizing revenue from implementation/customization services based on estimated 'man-days'[148][151] - The company applies practical expedients, such as not evaluating significant financing components if payment is expected within one year and expensing sales commissions when incurred if the amortization period is one year or less[157][158] Intangible Assets (MD&A) This section describes NETSOL's intangible assets, including product licenses, copyrights, and trademarks, and the company's policy for amortization and impairment evaluation - Intangible assets include product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists[161] - 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[161] Software Development Costs (MD&A) This section outlines NETSOL's accounting policy for software development costs, distinguishing between expensed R&D and capitalized costs, and their subsequent amortization - Costs for internally developing or enhancing software are expensed as R&D until technological feasibility is established, then capitalized[162] - Capitalization ceases when the product is available for general release, and capitalized costs are amortized based on projected revenue or a straight-line basis[162][163] Stock-Based Compensation (MD&A) This section details NETSOL's accounting for stock-based compensation, including the use of the Black-Scholes-Merton model and the judgmental assumptions required for valuation - Stock-based compensation expense is estimated at the grant date using the Black-Scholes-Merton (BSM) option pricing model and recognized over the requisite service period[164] - The BSM model requires judgmental assumptions like expected volatility and expected term, and the forfeiture rate is estimated based on historical experience[164] Goodwill (MD&A) This section explains NETSOL's accounting for goodwill, representing the excess of purchase price over acquired net assets, and the annual impairment review process - Goodwill represents the excess of purchase price over fair value of net assets acquired in business combinations[165] - Goodwill is reviewed for impairment annually, or more frequently if circumstances indicate impairment, using qualitative and quantitative assessments (expected present value of future cash flows)[165] Recent Accounting Pronouncements (MD&A) This section directs readers to Note 2 of the Consolidated Financial Statements for a comprehensive overview of recent accounting pronouncements and their adoption status - Refer to Note 2 'Summary of Significant Accounting Policies' in the Consolidated Financial Statements for a full description of recent accounting pronouncements and their expected adoption dates[167] Results of Operations (FY2023 vs. FY2022) This section provides a detailed analysis of NETSOL's financial performance for fiscal years 2023 and 2022, highlighting changes in revenues, gross profit, operating expenses, and net income Consolidated Statements of Operations (FY2023 vs. FY2022) | Metric | FY2023 (USD) | % of Revenue (FY2023) | FY2022 (USD) | % of Revenue (FY2022) | | :--- | :--- | :--- | :--- | :--- | | Net Revenues: | | | | | | License fees | $2,269,564 | 4.3% | $4,539,260 | 7.9% | | Subscription and support | $25,980,661 | 49.6% | $28,284,759 | 49.4% | | Services | $24,142,990 | 46.1% | $24,423,960 | 42.7% | | Total net revenues | $52,393,215 | 100.0% | $57,247,979 | 100.0% | | Cost of revenues | $35,477,652 | 67.7% | $33,510,805 | 58.5% | | Gross profit | $16,915,563 | 32.3% | $23,737,174 | 41.5% | | Operating expenses: | | | | | | Selling, general and administrative | $24,093,908 | 46.0% | $23,473,343 | 41.0% | | Research and development cost | $1,601,613 | 3.1% | $1,342,154 | 2.3% | | Total operating expenses | $25,695,521 | 49.0% | $24,815,497 | 43.3% | | Loss from operations | $(8,779,958) | -16.8% | $(1,078,323) | -1.9% | | Other income and (expenses): | | | | | | Interest expense | $(765,030) | -1.5% | $(369,801) | -0.6% | | Interest income | $1,217,850 | 2.3% | $1,655,883 | 2.9% | | Gain (loss) on foreign currency exchange transactions | $6,748,038 | 12.9% | $4,327,590 | 7.6% | | Share of net loss from equity investment | $(1,033,243) | -2.0% | $(2,021,480) | -3.5% | | Other income (expense) | $(605,570) | -1.2% | $(424,128) | -0.7% | | Total other income (expenses) | $5,562,045 | 10.6% | $3,168,064 | 5.5% | | Net income (loss) before income taxes | $(3,217,913) | -6.1% | $2,089,741 | 3.7% | | Income tax provision | $(926,560) | -1.8% | $(988,938) | -1.7% | | Net income (loss) | $(4,144,473) | -7.9% | $1,100,803 | 1.9% | | Non-controlling interest | $(1,099,275) | -2.1% | $(1,951,959) | -3.4% | | Net income (loss) attributable to NetSol | $(5,243,748) | -10.0% | $(851,156) | -1.5% | | Net income (loss) per common share: | | | | | | Basic | $(0.46) | | $(0.08) | | | Diluted | $(0.46) | | $(0.08) | | | Weighted average number of shares outstanding (Basic) | 11,279,966 | | 11,250,219 | | | Weighted average number of shares outstanding (Diluted) | 11,279,966 | | 11,250,219 | | Net Revenues by Segment (FY2023 vs. FY2022) | Segment | FY2023 Revenue (USD) | % of Total (FY2023) | FY2022 Revenue (USD) | % of Total (FY2022) | | :--- | :--- | :--- | :--- | :--- | | North America | $6,117,282 | 11.7% | $4,288,008 | 7.5% | | Europe | $10,758,444 | 20.5% | $10,428,203 | 18.2% | | Asia-Pacific | $35,517,489 | 67.8% | $42,531,768 | 74.3% | | Total | $52,393,215 | 100.0% | $57,247,979 | 100.0% | - License fees decreased by $2.27 million (50.0%) in FY2023, primarily due to lower new agreements compared to FY2022[172] - Subscription and support fees decreased by $2.30 million (8.1%) in FY2023, mainly due to a one-time revenue recognition in FY2022, but are anticipated to gradually increase[173] - Services income decreased by $0.28 million (1.1%) in FY2023, but increased by $1.17 million (4.8%) on a constant currency basis due to higher change requests, enhancements, and reimbursable costs[174] - Gross profit decreased by $6.82 million (28.7%) in FY2023, with the gross profit percentage falling to 32.3% from 41.5%, driven by increased cost of sales[175] - Operating expenses increased by $0.88 million (3.6%) in FY2023, or $5.60 million (22.6%) on a constant currency basis, mainly due to increases in selling, general and administrative expenses, and R&D costs[181] - Loss from operations increased significantly to $8.78 million in FY2023 from $1.08 million in FY2022, an increase of $7.70 million[185] - Other income increased by $2.39 million (75.5%) in FY2023, primarily due to a higher gain on foreign currency exchange transactions ($6.75 million in FY2023 vs. $4.33 million in FY2022), partially offset by an impairment in Drivemate investment and other comprehensive loss[186][188][189][190] Adjusted EBITDA (FY2023 vs. FY2022) | Metric | FY2023 (USD) | FY2022 (USD) | | :--- | :--- | :--- | | Net Income (loss) attributable to NetSol | $(5,243,748) | $(851,156) | | Non-controlling interest | $1,099,275 | $1,951,959 | | Income taxes | $926,560 | $988,938 | | Depreciation and amortization | $3,244,538 | $3,812,273 | | Interest expense | $765,030 | $369,801 | | Interest (income) | $(1,217,850) | $(1,655,883) | | EBITDA | $(426,195) | $4,615,932 | | Add back: Non-cash stock-based compensation | $317,451 | $104,347 | | Adjusted EBITDA, gross | $(108,744) | $4,720,279 | | Less non-controlling interest (a) | $(2,154,850) | $(2,903,457) | | Adjusted EBITDA, net | $(2,263,594) | $1,816,822 | | Basic adjusted EBITDA | $(0.20) | $0.16 | | Diluted adjusted EBITDA | $(0.20) | $0.16 | Liquidity and Capital Resources This section analyzes NETSOL's cash position, operating and investing activities, and financing arrangements, highlighting the company's ability to meet its short-term and long-term financial obligations Cash Position (FY2023 vs. FY2022) | Metric | June 30, 2023 (USD) | June 30, 2022 (USD) | | :--- | :--- | :--- | | Cash position | $15,533,254 | $23,963,797 | | Net cash provided by operating activities | $2,009,571 | $3,060,622 | | Net cash used by investing activities | $1,399,231 | $2,260,147 | | Net cash used in financing activities | $718,992 | $1,378,721 | | Current assets | $41,603,867 | $49,428,136 | | Current liabilities | $20,769,234 | $20,830,926 | | Average days sales outstanding | 168 days | 140 days | - Approximately $13.5 million of cash was held by foreign subsidiaries as of June 30, 2023, down from $22.8 million in 2022[203] - 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[205] - Subsidiaries have various financial arrangements and are in compliance with covenants, with no default leading to early payment obligations[207][208] - The company's policy is to invest earnings in growth rather than distribute common stock dividends, a policy subject to regular Board review[209] Contractual Obligations (as of June 30, 2023) | Contractual Obligation | Total (USD) | 0 - 1 year (USD) | 1-3 Years (USD) | 3-5 Years (USD) | More than 5 years (USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt Obligations | | | | | | | D&O Insurance | $89,823 | $89,823 | $- | $- | $- | | Loan Payable Bank - Export Refinance | $1,741,493 | $1,741,493 | $- | $- | $- | | Loan Payable Bank - Export Refinance II | $1,323,535 | $1,323,535 | $- | $- | $- | | Loan Payable Bank - Export Refinance III | $2,438,089 | $2,438,089 | $- | $- | $- | | Term Finance Facility | $13,356 | $13,356 | $- | $- | $- | | Sale and Leaseback Financing | $321,113 | $148,264 | $172,849 | $- | $- | | Subsidiary Finance Leases | $28,330 | $24,950 | $3,380 | $- | $- | | Operating Lease Obligations | $1,157,431 | $505,237 | $589,025 | $62,733 | $436 | | Total | $7,113,170 | $6,284,747 | $765,254 | $62,733 | $436 | - The company does not maintain any off-balance sheet arrangements[210] Quantitative and Qualitative Disclosures about Market Risk NETSOL is exposed to financial market risks, primarily foreign currency exchange rate fluctuations. The company's significant operations in the Asia Pacific region, where the Pakistan Rupee continuously devalues against the U.S. Dollar, result in foreign exchange gains. The company does not hedge this exposure, believing it to be counter-productive due to the lack of imports - NETSOL is exposed to financial market risks, including changes in currency exchange rates and interest rates[212] - The company's significant operations in the Asia Pacific region, where the Pakistan Rupee is continuously losing value against the US Dollar, result in foreign exchange gains[212] - NETSOL believes it is counter-productive to hedge foreign currency exposure due to the devaluation of the Pakistan Rupee and the lack of imports[212][213] Financial Statements and Supplementary Data The consolidated financial statements and supplementary data are included at the end of this report, starting on page F-1 - The Consolidated Financial Statements are located at the end of the report, starting on page F-1[214] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NETSOL's financial statements for fiscal years 2023 and 2022 did not contain adverse opinions or disclaimers, nor were they qualified or modified. There were no disagreements with BF Borgers CPA PC on accounting principles, financial disclosure, or auditing scope - NETSOL's financial statements for FY2023 and FY2022 did not contain an adverse opinion or disclaimer, nor were they qualified or modified[215] - 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[216] Controls and Procedures Management, including the CEO and CFO, concluded that NETSOL's disclosure controls and procedures were effective as of June 30, 2023. The company's internal controls over financial reporting were also assessed as effective based on the COSO framework. No material changes in internal controls were reported during Q4 FY2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2023[217] - Management assessed the effectiveness of internal controls over financial reporting as effective as of June 30, 2023, based on the COSO Internal Control-Integrated Framework (2013)[218][220] - No changes in internal controls over financial reporting materially affected or are reasonably likely to materially affect the company's internal control during the fourth quarter of fiscal year 2023[221] Other Information There is no other information to report under this item - No other information is reported under this item[222] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections There are no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[222] PART III This part addresses corporate governance, executive compensation, security ownership, and principal accountant fees Directors, Executive Officers and Corporate Governance This section details NETSOL's corporate governance, including compliance with Section 16(a) reporting, changes to the Board of Directors and its committees, and the business experience of current directors and executive officers. It also outlines the company's Code of Business Conduct & Ethics and the composition of the Audit Committee, identifying Mr. Kausar Kazmi as the Audit Committee financial expert - All Section 16(a) filing requirements for executive officers, directors, and beneficial owners were complied with for the fiscal year ended June 30, 2023[224] - Mr. Michael Francis was elected to the Board of Directors in June 2023, replacing Mr. Henry Tolentino, and was appointed Chair of the Nominating and Corporate Governance Committee and a member of the Audit and Compensation Committees in September 2023[225][226] Current Directors and Executive Officers | Name | Age | Position Held with the Registrant | Family Relationship | | :--- | :--- | :--- | :--- | | Najeeb Ghauri | 69 | Chief Executive Officer, Chairman and Director | Brother of Naeem Ghauri | | Naeem Ghauri | 66 | President | Brother of Najeeb Ghauri | | Roger Almond | 58 | Chief Financial Officer | None | | Patti L. W. McGlasson | 58 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | | Mark Caton | 74 | Director | None | | Malea Farsai | 54 | Director; Corporate Counsel | None | | Syed Kausar Kazmi | 70 | Director | None | | Michael Francis | 57 | Director | None | - Mr. Kausar Kazmi is identified as the Audit Committee financial expert, possessing over 40 years of banking industry experience[258] Executive Compensation NETSOL's executive compensation philosophy aims to attract, motivate, and retain leaders by tying compensation to individual and corporate performance, aligning executive interests with shareholder value. Compensation for named executive officers includes base salary, performance-based cash bonuses, and long-term equity incentives. The Compensation Committee, advised by an independent consultant, sets compensation, with the CEO's bonus tied to total revenues and income from operations. The company also details potential payments upon termination or change of control for its named executive officers and outlines director compensation - Shareholders expressed support for executive compensation programs at the June 7, 2023 annual meeting, with 75% of votes cast in favor[262] - The compensation program for the CEO ties a significant portion of compensation to financial results (total revenues and income from operations) on a graduated basis, with bonuses paid 60% in cash and 40% in stock[263][268][286] - The Compensation Committee engages an independent compensation consultant (Compensation Resources, Inc.) to evaluate executive and director compensation practices against a peer group[265][270] - Executive compensation components for 2023 included base salary, cash awards at the discretion of the Compensation Committee, and long-term equity in the form of time-based restricted stock[269] Summary Compensation Table (FY2023 vs. FY2022) | Name and Principle Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Najeeb Ghauri, CEO & Chairman | 2023 | $700,000 | $- | $- | $- | $200,000 | $900,000 | | | 2022 | $700,000 | $69,922 | $- | $- | $200,000 | $969,922 | | Naeem Ghauri, President | 2023 | $802,883 | $- | $- | $- | $47,220 | $850,103 | | | 2022 | $793,428 | $- | $- | $- | $45,830 | $839,258 | | Roger K Almond, Chief Financial Officer | 2023 | $226,000 | $10,000 | $- | $- | $36,871 | $272,871 | | | 2022 | $197,041 | $20,000 | $- | $- | $34,066 | $251,107 | | Patti L. W. McGlasson, Secretary, General Counsel | 2023 | $233,622 | $- | $- | $- | $11,719 | $245,341 | | | 2022 | $212,384 | $- | $- | $- | $10,426 | $222,810 | - As of June 30, 2023, there are no outstanding stock options or grants of unvested stock awards[315] Potential Payments to Najeeb Ghauri upon Termination/Change of Control (as of June 30, 2023) | Benefits and Payments | Termination After Change of Control ($) | Termination Upon Death or Disability ($) | Termination by Us Without Cause or by Executive for Good Reason ($) | | :--- | :--- | :--- | :--- | | Base Salary Continuance | $2,800,000 | $116,667 | $2,800,000 | | Health Related Benefits | $69,744 | $- | $69,744 | | Bonus | $- | $- | $- | | Salary Multiple Pay-out | $2,093,000 | $- | $- | | Bonus or Revenue One-time Pay-Out | $523,932 | $- | $- | | Net Cash Value of Options | $- | $- | $- | | Total | $5,486,676 | $116,667 | $2,869,744 | Director Compensation Table (FY2023) | Name | Fees Earned or Paid in Cash ($) | Share Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Mark Caton | 53,000 | 53,000 | 106,000 | | Henry Tolentino | 53,000 | 53,000 | 106,000 | | Kausar Kazmi | 53,000 | 53,000 | 106,000 | | Total | 159,000 | 159,000 | 318,000 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on the beneficial ownership of NETSOL's common stock as of September 15, 2023. Najeeb Ghauri is the largest individual beneficial owner among management with 7.26% ownership, while Todd M Felte and The Vanguard Group are significant institutional shareholders with 6.09% and 5.20% respectively. All officers and directors as a group beneficially own 14.01% of the common stock Beneficial Ownership of Common Stock (as of September 15, 2023) | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Najeeb Ghauri | 823,656 | 7.26% | | Naeem Ghauri | 416,697 | 3.67% | | Mark Caton | 121,021 | 1.07% | | Henry Tolentino | 46,752 | * | | Kausar Kazmi | 30,884 | * | | Michael Francis | - | * | | Patti McGlasson | 81,050 | * | | Roger Almond | 30,000 | * | | Malea Farsai | 39,811 | * | | Todd M Felte | 690,847 | 6.09% | | The Vanguard Group | 589,481 | 5.20% | | All officers and directors as a group (nine persons) | 1,589,871 | 14.01% | * Less than one percent - Shares issued and outstanding as of September 15, 2023, were 11,345,856[339] Certain Relationships and Related Transactions, and Director Independence NETSOL reported no material related party transactions exceeding $120,000 since July 1, 2022, other than executive and director compensation. The Board of Directors has determined that Mark Caton, Kausar Kazmi, and Michael Francis are independent directors, satisfying Nasdaq listing requirements - No transactions with related persons exceeding $120,000 occurred since July 1, 2022, other than compensation arrangements for executive officers and directors[341] - The Board of Directors determined that Mark Caton, Kausar Kazmi, and Michael Francis are 'independent directors' as defined by Nasdaq Listing Rules[342] Principal Accountant Fees and Services BF Borgers CPA PC served as NETSOL's principal accountant, billing $262,500 for audit fees in FY2023 and $250,000 in FY2022. Tax fees were $16,000 for both fiscal years, covering federal and state tax return preparation. No other fees were paid. The Audit Committee pre-approves all auditing and permitted non-audit services to maintain auditor independence Principal Accountant Fees (FY2023 vs. FY2022) | Fee Type | FY2023 (USD) | FY2022 (USD) | | :--- | :--- | :--- | | Audit Fees | $262,500 | $250,000 | | Tax Fees | $16,000 | $16,000 | | 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[346] PART IV This part lists exhibits, financial statement schedules, and reports on Form 8-K Exhibits, Financial Statement Schedules and Reports on Form 8-K This section lists all exhibits filed as part of the 10-K report, including articles of incorporation, employment agreements, stock option plans, and certifications (e.g., Sarbanes-Oxley Act). It also includes a list of all subsidiaries of the company and XBRL taxonomy documents - The report includes various exhibits such as Articles of Incorporation, Employment Agreements, and Stock Option Plans[350] - Certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 for the CEO and CFO are included[351] - A list of all subsidiaries of the Company and Inline XBRL documents are also part of the exhibits[351] Signatures This section contains the official signatures of NETSOL Technologies, Inc.'s authorized representatives, including executive officers and directors Signatures of Authorized Persons The report is signed by authorized representatives of NetSol Technologies, Inc., including the Chief Executive Officer, Chief Financial Officer, and members of the Board of Directors, affirming its submission in accordance with the Exchange Act - The report is signed by Najeeb Ghauri (Chief Executive Officer, Chairman, Director) and Roger K. Almond (Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer)[354][356] - Other directors, including Mark Caton, Malea Farsai, Michael Francis, and Kausar Kazmi, also signed the report[356] Index to Consolidated Financial Statements This section provides an index to the company's consolidated financial statements, including auditor's report, balance sheets, statements of operations, equity, cash flows, and notes Financial Statements Listing 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 and 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[358] [Report of Independent Registered Public Accounting