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DOCUMENTS INCORPORATED BY REFERENCE
(
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the development of the Company’s products and services and future operation results, including statements regarding the Company that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “anticipate,” “intend,” variations of such words, and similar expressions, identify forward looking statements, but their absence does not mean that the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company’s actual results include the progress and costs of the development of products and services and the timing of the market acceptance. Forward looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risk and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, “NETSOL,” “we”, “our,” and similar terms include NetSol Technologies, Inc. and its subsidiaries, unless the context indicates otherwise.
PART 1
ITEM 1 - BUSINESS
GENERAL
NetSol Technologies, Inc. (Nasdaq CM: NTWK) is a worldwide provider of IT and enterprise software solutions to the global finance and leasing industry. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.
NETSOL’s primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of its suite of financial applications, under the brand name NFS Ascent® to leading businesses in the global finance and leasing space. With constant innovation being a major part of NETSOL’s DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing model rather than the traditional licensing model.
NETSOL’s clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 companies, financial institutions, global vehicle manufacturers through their captive finance companies (“auto captives”), unrelated automotive finance companies (“non-captives”), equipment finance and leasing companies, and banks. All of which are serviced by NETSOL’s strategically placed support and delivery locations around the globe.
Founded in 1997, NETSOL is headquartered in Encino, California. NETSOL follows a global strategy for sales and delivery of its portfolio of solutions and services through its offices in the following locations:
■ | North America | Encino, California and Austin, Texas | ||
■ | Europe | London Metropolitan Area, Horsham, Flintshire | ||
■ | Asia Pacific | Lahore, Karachi, Bangkok, Beijing, Shanghai, Tianjin, Jakarta and Sydney | ||
■ | Middle East | Dubai |
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OUR BUSINESS
Company Business Model
We believe that our technology solutions offer our customers a return on their investment and allow us to thrive in a hyper competitive and mature global marketplace. Our solutions are bolstered by our people. We believe that people are the drivers of success; therefore, we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for us and a unique value for our customers. We continue to underpin our proven and effective business model which is a combination of affordable pricing through effective cost arbitrage, subject matter expertise, domain experience, scalability and proximity with our global and regional customers.
Niche Market Focus
Through our specialization in the leasing and financing space, we have gained a strong foothold in several global locations and a market leading position in the auto equipment finance segment. We have a significantly growing presence in the general asset finance space, including equipment and the big-ticket financing industry together with startups and banks.
Subject Matter Expertise
Our dual expertise in enterprise technology implementation and financial application development has helped us emerge as a global player in the finance and leasing industry and secure a broad footprint across the major markets of North America, Asia Pacific and Europe. The Asia Pacific region has particularly benefitted from the organic growth in the fast-developing leasing automation industry, which is still nascent per Western standards.
Domain Experience
We have a strong presence in the captive asset-finance domain. With a collective experience of over two decades in Asia Pacific and Europe and of nearly four decades in North America, we are one of the few players in this niche industry with a global presence.
Proximity with Global and Regional Customers
We have offices across the world, located strategically to maintain close contact and proximity with our customers in various key markets. This has not only helped us strengthen our customer relationships but also build a deeper understanding of local market dynamics. Simultaneously, we are able to extend services and even support development through a combination of onsite and off-site resources. This approach has allowed us to offer blended rates to our customers by employing a unique and cost-effective global development model.
While our business model is built around the development, implementation and maintenance of our suite of financial applications, we employ the same facilities and competencies to extend our offerings into related segments, including but not limited to:
■ | IT consulting and services | |
■ | Solutions development and implementation | |
■ | Business intelligence | |
■ | Outsourcing services and software process improvement consulting | |
■ | Maintenance and support of existing systems | |
■ | Project management | |
■ | Technology/start-up incubation | |
■ | White labelled digital retailing for auto-captives |
Our global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational asset finance companies, leveraging of the centralized marketing and pre-sales organization, and a network of employees connected across the globe to support local and global customers and partners.
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OUR PRODUCTS AND SERVICES
NFS Ascent®
Covering the complete finance and leasing cycle starting from quotation origination through contract settlements, NFS Ascent® is designed and developed for a highly flexible setting and is capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. The solution fully automates the entire financing/leasing cycle for companies of any size, including those with multi-billion-dollar portfolios. NFS Ascent® empowers financial institutions to effectively manage their complex lending portfolios, enabling them to thrive in hyper-competitive global markets.
NFS Ascent® is built on cutting-edge, modern technology that enables auto, equipment and big-ticket finance companies, alongside banks, to run their retail and wholesale finance business with ease. With comprehensive domain coverage and powerful configuration engines, it is well architected to empower finance and leasing companies with a platform that supports their growth in terms of business volume and transactions.
NETSOL’s next generation platform offers a technologically advanced solution for the asset finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on NETSOL’s collective experience with blue chip organizations and global Fortune 500 companies over the past 40 years combined with modern UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment.
At the core of the NFS Ascent® platform is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios in compliance with various regulatory standards. NFS Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment.
Our premier solution has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. NFS Ascent® empowers users with:
● | Improvement in overall productivity within the delivery organization: |
○ | The features of the integrated Business Process Manager, Workflow Engine, Business Rule Engine and Integration Hub provide flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization. | |
○ | The NFS Ascent® platform and the SOA architecture allow us to develop portals and mobile applications quickly by utilizing our existing services. | |
○ | The n-tier architecture allows us to intelligently distribute processing and eases application maintenance. The loose coupling between various modules and layers reduces the risk of regression in other parts of the system as a result of changes made in one part of the system and follows proven and accepted SOA principles. |
● | Amplified customer satisfaction: |
○ | NFS Ascent® and NFS Digital empower not only the finance company and dealerships, but the end customer as well with self-service digital tools allowing a seamless customer experience throughout the customer journey from origination through contract maturity. |
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NFS ASCENT® CONSTITUENT APPLICATIONS
Omni Point of Sale (Omni POS)
A highly agile, easy-to-use, web-based application - also accessible through mobile devices - Ascent’s Omni POS system delivers an intuitive user experience, with features that enable rapid data capture. Information captured at the point of sale can be made available to anyone in an organization at any point in the lifecycle of each transaction.
Contract Management System (CMS)
Ascent’s Contract Management System (CMS) is a powerful, highly agile, functionally rich application for managing and maintaining detailed credit contracts throughout their lifecycle – from pre-activation and activation through customer management, asset financial management, billing and collections, finance and accounting, restructuring and maturity.
Wholesale Finance System (WFS)
The Ascent Wholesale Finance System (WFS) provides a powerful, seamless and efficient system for automating and managing the entire lifecycle of wholesale finance. With floor planning, dealer and inventory financing, it is ideal for a culture of collaboration. Dealers, distributors, partners and anyone in the supply chain are empowered to realize the benefits of financing – and leverage the advantages of real-time business intelligence. The system also supports asset and non-asset-based financing.
Dealer Auditor Access System (DAAS)
DAAS is a web-based solution that can be used in conjunction with WFS or any third-party wholesale finance system. It addresses the needs of dealer, distributor, and auditor access in a wholesale financing arrangement.
NFS Ascent® deployed on the cloud
Our premier, next generation solution NFS Ascent® is also available on the cloud. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent® is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees. Clients further benefit from a rapid deployment process and the ability to scale on demand.
NFS Digital
NETSOL is the pioneer in the global finance and leasing industry providing a full suite of digital transformation solutions. NFS Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape together with our valuable experience led us to define sound digital transformation strategies and compliment them with smart digital solutions so that our customers always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to effectively augment and enhance our customer’s ecosystem.
■ | Self-Point of Sale | |
Our Self POS portal allows customers to go through the complete buying and financing process online and on their mobile devices including car configuration, generating quotations, and filling out applications. It is the ultimate origination application that enables users to compare, select and configure an asset using a mobile device anywhere, at any time and submit an accompanying financial product application. | ||
■ | Mobile Account | |
mAccount is a powerful, self-service mobile solution. It empowers the dealer with a powerful backend system and allows the customer to setup a secure account and view information 24/7 to keep track of contract status, resolve queries and make payments, reducing inbound calls for customer queries and improving turnaround time for repayments. |
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■ | Mobile Point of Sale | |
The mPOS application is a web and mobile-enabled platform featuring a customizable dashboard along with menu selling, application submission, loan calculator, work queues and detailed reporting. mPOS empowers the dealer to make the origination process quick and seamless, increasing overall productivity and system-wide efficiency. | ||
■ | Mobile Dealer | |
mDealer provides more visibility and control over inventories – with minimal effort. Dealers can view their use of floor plan facility, stock status and financial conditions, while entering settlement requests or relocating assets. | ||
■ | Mobile Auditor | |
mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency. It also enables the auditor to conduct audits and submit results in real-time through quick audit processing tools, providing visibility and saving significant time. | ||
■ | Mobile Collector | |
mCollector empowers collections teams to do more, with an easy-to-use interface and intelligent architecture. The tool exponentially increases the productivity of field teams by enabling them to carry out all collection related tasks on the go. | ||
■ | Mobile Field Investigator | |
By using Mobile Field Investigator (mFI), the applicant has access to powerful features that permit detailed applicant field verifications on the go. The application features a reporting dashboard that displays progress stats, action items and the latest notifications, enabling the client to achieve daily goals while tracking performance. |
OtozTM Digital Auto Retail and Mobility Orchestration
OtozTM provides a white-label SaaS platform to OEMs, finance companies, dealers, and start-ups that enables short and long-term on-demand mobility models (subscriptions, rental and car-sharing) and digital retail.
Our turn-key platform helps automotive companies make a move into the digital era, addressing a range of customer segments with evolving needs by offering them a seamless, omni-channel, end-to-end car buying and usage experience. It enables both direct-to-consumer transactions as well as traditional dealer models with the option to add peer-to-peer market place functionalities for the future of EV pay-per-use and mobility orchestration.
Digital auto-retail is not a one-size-fits-all. OtozTM offers a flexible, configurable, and scalable platform along with a proven launch strategy framework for auto companies that intend to launch and grow digital retail and mobility businesses quickly and seamlessly.
OtozTM Ecosystem
OtozTM is built on state-of-the-art technology, offering open Application Programming Interfaces (APIs) and ecosystem partner integrations that are crucial to digital retail and mobility operations including finance and insurance providers, trade-in tools, KYC and fraud detection tools, CRM systems, website providers (Tier 1 – Tier 3), marketing toolkits, inventory feeds, pricing engines, tax engine, payment processors, an insurance marketplace and vehicle delivery logistics providers.
In addition, OtozTM is equipped with intelligent lead generation and product analytics capabilities, empowering dealerships with the tools to track customer journeys, personalize customer engagements, and convert qualified leads.
OtozTM Platform
A fully digital, white-label platform for digital auto retail and mobility orchestration that delivers an intuitive and elegant user experience, both online and offline.
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OtozTM expands into a comprehensive in-life subscription and rental platform that empowers in-life and end-of-life management of such contracts. The platform’s seamless handling of complex tax rules and contract management processes are compliant with local and state standards for jurisdictions it operates in across the U.S.
OtozTM platform consists of two portals:
● | Dealer/Admin Tool | |
● | Customer Portal |
Dealer/Admin Tool
■ | Account creation | |
■ | Order management work queue | |
■ | User roles and rights | |
■ | Tax configurator | |
■ | Customer KYC reports | |
■ | Vehicle delivery scheduling | |
■ | Payment gateways | |
■ | Inventory management | |
■ | Finance and insurance products feed and prioritization | |
■ | Accessories/add-on management and association | |
■ | Dealer fee management | |
■ | Ecosystem APIs | |
■ | DMS integrations | |
■ | Send referral | |
■ | Deal builder |
Customer Portal
■ | Inventory search and selection | |
■ | Multi-lender capabilities | |
■ | Deal builder and personalized pricing for purchase, lease, finance, subscription, and rentals | |
■ | Dealer-Customer-Chat tool | |
■ | Buy finance and insurance products including collision & liability insurance via integrated provider marketplaces | |
■ | Buy accessories | |
■ | License checks (paperless) | |
■ | Vehicle options and finance and insurance products | |
■ | Trade-in valuation | |
■ | Credit application and decision | |
■ | Paperless contracts and e-signing | |
■ | Digital payments | |
■ | Vehicle delivery and pick-up scheduling |
AppexNow
NETSOL introduced AppexNow - the first marketplace for API-first products specifically for the global credit, finance and leasing industry. Two products have been launched under the umbrella of the AppexNow marketplace until now i.e. Flex and Hubex. NETSOL will introduce and launch further products and services under this marketplace in the future.
AppexNow: Flex
The first product offering from the AppexNow marketplace, Flex is an API-based, ready-to-use calculation engine. It is a pure play SaaS product that is cloud-based and can be integrated seamlessly into an organization’s products, services and ecosystem. The calculation engine intelligently adapts to demand by monitoring usage to maintain reliable and predictable performance at desired costs. It is a one-stop solution that guarantees precise calculations at all stages of the contract lifecycle through various calculation types.
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It is a comprehensive solution which creates an ecosystem of value across multiple functions, systems and industries to fuel growth and propel businesses into the future by increasing delivery efficiency and product management, centralization through a connected ecosystem resulting in a higher ROI and a larger market share.
Flex proves versatility by covering all the calculation aspects ranging from the pricing for the end customer at inception, in-life financial modifications, the re-creation of the repayment plan, termination, amortizations/re-amortizations, among other calculation types. All the calculations are parameter-driven, which helps perform simple, multi-dimensional, or complex calculations based on the needs.
AppexNow: Hubex
Hubex is an API library that enables companies to standardize all their API integration procedures across multiple API services through a single integration. Hubex is NETSOL’s second product offering from the AppexNow marketplace following Flex.
In addition to traditional lending companies, Hubex can also streamline the operations of dealerships, vendors and consultants through an API library. With a ready-to-use service, Hubex makes it easy for businesses to seamlessly connect with multiple APIs and achieve their desired outcomes. Pre-integrated services in the Hubex library include, but are not limited to, payment processing, bank account authentication, finance and insurance products, fraud check, KYC service, driver license verification, address validation, vehicle valuation and notification service.
Professional Services
NETSOL offers professional services to organizations in different regions in order to enable them to meet their business objectives. These services primarily consist of technical consultancy, web development, app development, digital marketing, cloud services, outsourcing and co-sourcing.
Pertaining to our professional services offerings, our highly skilled and experienced professionals include skilled software programmers, well-versed business analysists, competent quality assurance engineers, technical and solution architects, project managers, cloud native developers and architects, mobile/web app developers and automation specialists.
We enable businesses to employ the industry’s best talent to help them develop and refine their technology strategy, innovate, execute their roadmap and optimize service quality.
Amazon Web Services
We have expanded our footprint in the cloud services domain by offering services to the AWS community. We aim for our cloud services to be well recognized, expanding our reach to relevant prospects. Since AWS is the most comprehensive and highly adopted cloud offering, we are leveraging its power to ensure lower costs, increased agility, a secure environment, and innovative solutions across all domains.
Our AWS customer offerings include: analytics, data pipeline and big data services; application modernization services; database migration and modernization; development operations; managed services; and, information security services.
Artificial Intelligence
A dedicated team is under the leadership of Dr. Ali Ahmed, Chief Data Scientist at NETSOL, to develop artificial intelligence and machine learning solutions. With experience in machine learning, scientific computing and computer vision, Dr. Ahmed has extensive experience in developing and implementing algorithms for industrial solutions in predictive maintenance.
Our AI team seeks to deploy AI solutions leveraging cutting-edge technologies to enable clients to optimize production, decrease downtime and provide a holistic view of their business processes.
IMPLEMENTATION PROCESS
The implementation process of our products can span from three to fifteen months depending upon the methodology, complexity and scope. The implementation process may also include related software services such as configuration, data migration, training, gaps development and any other additional third-party interfaces. Even after implementation, customers constantly seek enhancements and additions to improve their business processes and have changing requirements addressed at mutually agreed rates.
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Post implementation, our consultants may remain at the client site to assist the customer in smooth operations. After this phase, the regular maintenance and support services phase for the implemented software begins in exchange for agreed subscriptions or support fees. In addition to the daily rate paid by the customer for each consultant engaged, the customer also pays for all visa and transportation-related expenses, boarding of the consultants, and a living allowance. Our involvement in all the above steps is suitably priced to bring value to our customers and increase our profitability.
Cloud-enabled solutions are offered via seamless and rapid deployments. The swift speed of implementations for our cloud-ready products enables businesses to be more responsive and attain a competitive advantage.
PRICING AND REVENUE STREAMS
The company’s revenue streams are the outcome of the following four main areas:
■ | Product licensing | |
■ | Subscription-based pricing | |
■ | Implementation and customization-related services | |
■ | Post implementation, support-related services |
License fees can range up to a multi-million-dollar fee for single or multiple module implementations. License revenue is realized with traditional, non-SaaS-based agreements, whereas SaaS-based agreements do not contain license fees and are offered via flexible, value-driven, subscription-based pricing. There are various attributes which determine the level of pricing complexity, a few of which are: number of contracts; size of the portfolio; IT budgets; business strategy of the customer; internal business processes followed by the customer; number of business users; amount of customization required; complexity of data migration and branch network of the customer.
We recognize revenue from license contracts when the software has been delivered to the customer. Implementation-related services, including customization, configuration, data migration, training and third-party interfaces are recognized as the services are performed. Post implementation support services are then provided on a continued basis. The annual support fee, which typically is an agreed upon percentage of overall monetary value of the license, then becomes an ongoing revenue stream realized on a yearly basis. Revenue from software services includes fixed price and time and materials-based contracts and is recognized as the services are performed.
Additionally, in order to avoid lumpiness in our revenues and to ensure a predictable revenue base over coming years, the business has shifted to a pricing strategy whereby the business is now offering its cloud-ready products at SaaS/subscription-based pricing models. Rapid deployments coupled with affordable prices/payment schedules is expected to lead the business towards volume-based selling. Moreover, this value-driven pricing plan is intended to decrease the initial buy-in cost for new customers by eliminating heavy license fees, reducing the sales cycles and providing an alternative to current customers seeking lower software usage and maintenance costs.
ALLIANCES
Daimler South East Asia Pte. Ltd. (“DSEA”), (through the regional office Daimler Financial Services (“DFS”) Africa Asia Pacific), has established a “Centre of Competence” (“CoC”) in Singapore to facilitate the regional companies in product related matters. The DSEA CoC is powered by highly qualified technical and business personnel. In conjunction with our Asia Pacific region, the CoC supports DFS companies in twelve different countries in Asia and Africa and this list can increase as more DFS companies from other countries opt for NFS Ascent®. In July 2004, the company entered into a Frame Agreement with DFS for the Asia Pacific and Africa region. This agreement was renewed in 2008, 2010, 2013 and most recently in January 2016. The agreement serves as a guideline for managing the business relationship with DFS and the use of licensed products of the company by DFS and its affiliated companies.
We have a partnership with Microsoft to provide cloud-hosting activities for our cloud-based products. NETSOL hosts its cloud version of Ascent, NFS Ascent® deployed on the cloud and LeasePak Cloud - SaaS in the high performance and cost-effective Microsoft Azure cloud environment. A quick start implementation program combined with hassle-free Microsoft Azure™ cloud connectivity ensures new clients see a time-to-value faster than ever before.
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TECHNICAL AFFILIATIONS
We are a Microsoft Certified Silver Partner and an Oracle Certified Partner. For Amazon Web Services (“AWS”), we are a Select Tier Partner, a Well Architected Partner and a Solution Provider under their AWS Partner Programs and Cloud Formation Delivery Service, Lambda Delivery Service and API Gateway Delivery Service under AWS Service Delivery.
MARKETING AND SELLING
We continue our optimism that we will experience ever increasing opportunities for our product and services offerings in fiscal year 2024 and beyond. The objective of our marketing program is to create and sustain preference and loyalty for NETSOL. Marketing is performed at the corporate and business unit levels. The corporate marketing department has overall responsibility for communications, advertising, public relations and management of all digital owned and paid mediums including website, social media channels and collaboration with industry partners. In addition, corporate marketing oversees central marketing and communications programs for use by each of the business units.
Our dedicated marketing personnel, within the regions, undertake a variety of marketing activities, including sponsoring focused client events to demonstrate our skills and products and participating in targeted conferences, webinars and holding private briefings with individual companies. We believe that the industry focus of our sales professionals and our business unit marketing personnel enhances their knowledge and expertise in these industries and will generate additional client engagements.
GROWTH PROSPECTS FOR NFS ASCENT®
Growth prospects for NFS Ascent® are linked to the constant innovation in the product and its growing customer base across different geographic and product markets. We are eyeing key international markets for growth in sales. Our sales strategy not only focuses on expansion into new geographic markets, including the Americas, Europe, and further penetration of our leading position in Asia Pacific, but also within existing markets into new verticals with targeting of Tier 2 and Tier 3 prospects as well.
Growth in North America and Europe is expected to come from the potential market for replacement of legacy systems as well as acquisition of new customers. NFS Ascent® is aimed at providing a highly flexible and robust solution based on the latest technology and advanced architecture for North American and European customers looking to replace their legacy systems. We believe that NFS Ascent® can provide substantial competitive disruption to the market’s lagging technology provided by incumbent vendors. The existing customer base may also represent latent demand for increased service and support revenues by offering business process optimization, customization and upgrade services. With a market ready product with successful implementations, the prospects for NFS Ascent® in the region are positive.
Further traction in Europe will come from NFS Ascent® deployed on the cloud, which will continue to allow the Europe division to support not only larger organizations, but also small and medium sized organizations including startups.
Growth in our traditionally strong base in Asia Pacific is expected through diversification across market segments to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and support revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS Ascent® in Asia Pacific in the form of existing customers who are looking for replacement of their current system.
In China, we are a leader in the leasing and finance enterprise solution domain. With this position, we continue to enjoy demand for the current NFS™ solution, as well as NFS Ascent®. We will continue strengthening its position within existing multinational auto manufacturers, as well as local Chinese captive finance and leasing companies.
THE MARKETS
We provide our services primarily to clients in global commercial industries. In the global commercial area, our service offerings are marketed to clients in a wide array of industries including, automotive, banks and other financial lending service companies.
The Asian continent, including Australia and New Zealand, from the perspective of marketing, are targeted by the Asia Pacific Region from our Bangkok, Beijing, Jakarta, Lahore, Shanghai, Tianjin and Sydney facilities. The marketing for our core offerings in the Americas and Europe is carried out from our Austin, Texas and our London Metropolitan Area and Horsham offices, respectively.
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PEOPLE AND CULTURE
Our strong corporate culture is critical to our success. Our key values are delivering world-class quality solutions, client-focused timely delivery, leadership, long-term relationships, creativity, transparency and professional growth. The services provided by NETSOL require proficiency in many fields, such as software engineering, quality assurance, project management, business analysis, technical writing, sales and marketing, communication and presentation skills.
Due to the growing demand for our core offerings and IT services, retention of quality, proven technical and management personnel is essential. Our employee turnover rate was approximately 19% in 2023 with a goal to maintain the turnover rate under 21% during the 2024 fiscal year and onwards. The turnover rates include employees leaving either voluntarily or involuntarily. In addition, we are committed to improving key performance indicators such as efficiency, productivity and revenue per employee.
To encourage all employees to build on our core values, we reward teamwork and promote individuals that demonstrate these values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. We support diversity on a global basis. We are an equal opportunity employer with the largest concentration of female employees in Lahore, Pakistan and our U.S. headquarters.
We believe we should give back to the community and employees as much as possible. Certain subsidiaries are located in regions where basic services are not readily available. Where possible, we act to not only improve the quality of life of our employees, but also the standard of living in these regions. Examples of such programs are as follows:
■ | Literacy Program: Launched to educate children of our unskilled staff, the main objective of this program is to enable them to acquire basic reading, writing and arithmetic skills. | |
■ | Higher Education and Science and Research Institutions: In order to support higher education in Pakistan, we have contributed endowments to NUST, Forman Christian College, and a few other universities who are focused on science and engineering. | |
■ | Noble Cause Fund: A noble cause fund has been established to meet medical and education expenses of the children of the lower paid employees. Our employees voluntarily contribute a fixed amount every month to the fund and NETSOL matches the employee subscriptions with an equivalent contribution amount. A portion of this fund is also utilized to support social needs of certain institutions and individuals, outside of NETSOL. | |
■ | Day Care Facility: Our human resources are our key assets and thus we take numerous steps to ensure the provision of basic comforts to our employees. In Pakistan, the provision of outside pre-school childcare is a rarity. With this in mind, a children’s day care facility has been created near NETSOL’s office in Lahore, Pakistan providing employees with peace of mind knowing their children are nearby and being taken care of by qualified staff in a child friendly facility. Due to COVID-19 restrictions, the facility is temporarily closed. | |
■ | Preventative Health Care Program: In addition to the comprehensive out-patient and in-patient medical benefits, preventive health care has also been introduced. This phased program focuses on vaccination of our employees against such diseases as Hepatitis – A/B, Tetanus, Typhoid, Flu and COVID-19 on a routine basis. |
There is significant competition for employees with the skills required to perform the services we offer. We run an elaborate training program for different cadres of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. We believe that we have been successful in our efforts to attract and retain the highest level of talent available, in part because of the emphasis on core values, training and professional growth. We intend to continue to recruit, hire and promote employees who share our vision.
As of June 30, 2023, we had approximately 1,770 employees; comprised of 76% technical staff and 24% non-IT personnel.
COMPETITION
No company dominates the IT market in the space in which we compete. A substantial number of companies offer services that overlap and are competitive with those offered by NETSOL.
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We compete chiefly against leading suppliers of IT solutions to the global asset finance and leasing industry, including, but not limited to, Solifi, Alfa, Cassiopae, LineData, FIS, International Decision Systems (IDS) and Data Scan.
In the IT-based business services areas, we compete with both smaller local firms and many global IT services providers, including, but not limited to, Wipro, InfoSys, Satyam Infoway, HCL and TCS (Tata Consulting).
CUSTOMERS
NETSOL’s solutions and services cater to a broad spectrum of finance and leasing businesses, from automotive captive finance companies to equipment finance and leasing companies to large regional banks.
NETSOL’s customers include world renowned auto manufacturers through their finance arms. NETSOL is a strategic business partner for Daimler and BMW (which consists of a group of many companies in different countries), which accounts for approximately 28.6% and 7.9%, respectively, of our revenue for our fiscal year ended June 30, 2023. Other globally renowned auto captives that are customers of the company include Toyota, Nissan, Ford, and FIAT.
Other customers include equipment finance and leasing companies and banks worldwide. Some of these clients include Motorcycle Group, SCI Lease Corp, Maple Commercial Finance and Yamaha Motor Finance.
GLOBAL OPERATIONS AND GEOGRAPHIC DATA
NETSOL divides its operations into three regions: the Americas, Europe, and Asia Pacific. The regions consist of individual subsidiaries which operate as autonomous companies and are strategically managed on a regional basis.
The Americas
Mr. Peter Minshall, Executive Vice President at NetSol Technologies Americas, Inc. (NTA) is responsible for NTA’s business operations. He brings three decades of international experience in the financial services industry holding various senior leadership roles with Daimler Financial Services. Peter continues to be supported by Doug Jones as Vice President - Operations for NTA. Doug is a driven technology leader credited with shaping team performance to deliver best-in-class, leading web-based and embedded software applications for the finance and leasing industry.
Peter is also supported by James Freto, who serves as Vice President – Sales for NTA. Prior to his appointment, Freto worked for Fortune 500 financial product and services provider, FIS, as a Senior Sales Executive, selling origination and credit assessment solutions to mid to large-size financial institutions in the banking and asset finance segments. Freto brings directly applicable sales experience and subject matter expertise in key NETSOL markets.
Peter is further supported by Jay Edwards, who serves as Vice President Sales and Wholesale Product Manager for NetSol Technologies, Inc. Edwards is a dynamic experienced fintech business leader with a highly successful track record in the information technology and financial services industry, with a focus on digital transformation. He possesses strong professional skills in Business Development, Account Management, IT Operations, eCommerce and Business Process Outsourcing.
To augment the AWS team, in the United States, Rajnish Harjika serves as VP Technology, Cloud Services.
OtozTM CEO and Co-founder, Mr. Naeem Ghauri, was recently appointed as Chairman for NetSol Technologies, Ltd., (“NetSol PK”) and is also the President of the parent company, NetSol Technologies, Inc. He is based in our Lahore, Pakistan office.
Europe
Mr. Asad Ghauri is the President of Asia Pacific (APAC) and Group Managing Director of Europe. Mr. Ghauri has a strong management team in the U.K. headed by Darryll Lewis who has served as Managing Director of NetSol Technologies Europe since May 2023. With over twenty years in the receivables and asset finance software industry, Mr. Lewis is a highly experienced and accomplished leader with a track record of driving business growth and creating innovative solutions for clients. Prior to joining NETSOL, Mr. Lewis has held executive roles at several leading asset finance software companies where he led teams responsible for developing and implementing successful software solutions. Mr. Lewis is supported by a seasoned team in finance, IT and client services.
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NetSol had previously acquired the remaining stake in Virtual Lease Services (VLS) - rebranded as Banking Works. Previously limited to being a UK-based portfolio and risk management servicing partner for business and consumer finance providers, Banking Works focuses on supporting financial services businesses to achieve their own transformation ambitions. Mark Cawood, an industry veteran, is the Managing Director, while Diane Roberts serves as Director of Finance.
Asia Pacific Region
NetSol PK, a majority owned subsidiary of the parent company, is located in Lahore, Pakistan and is headed by Mr. Salim Ghauri as its CEO. Mr. Ghauri is a Co-founder of NetSol PK and has been with the company since 1996. NetSol PK is the “Center of Excellence” and a state-of-the-art facility for programming, R&D, global implementations and 24-hour support to our customers worldwide.
NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”) is headed by Amanda Li as President. Ms. Li previously worked as a managing director for Sopra Banking Software where she was instrumental in developing business and driving sales. Prior to Sopra Banking Software, Ms. Li was Vice President of NetSol Beijing.
NETSOL’s Head of Indonesia is Withoon Hardat. During his 12 years at NETSOL, before taking charge of the Indonesia office, he served as Client Partner for the Thailand office as well as Director for Business Development for APAC. He also serves as the Head of Thailand.
Most recently serving as the Managing Director of NetSol Technologies Australia and New Zealand, Farooq Ghauri has newly been appointed as Head of Sales for all Asian Markets (excluding China). He has played a vital role in NETSOL’s global success through his hands-on leadership and unrelenting drive to meet the needs of NETSOL’s growing client base. Since he joined the company in 2004, Mr. Ghauri has worked in NETSOL’s Pakistan, China, Australia, Thailand and U.S. offices.
The Global Sales Division is headed by Mr. Asad Ghauri as President of Sales from the NetSol PK office. Mr. Ghauri has been with NETSOL since 2000 and has over 23 years of experience in business and IT.
The Asia Pacific region including Australia/New Zealand and the Middle East, is supported and clients are serviced from the APAC region offices located in Sydney, Beijing, Shanghai, Tianjin, Bangkok, Indonesia, Lahore and Karachi. Pakistan continues to be a nucleus of NETSOL’s delivery and research and development. With the continued growth of the Chinese market, our Beijing office continues to expand as both a sales and support facility. Finally, the Asia Pacific region maintains and will establish offices through the region as is necessary to support its customers and to explore potential new markets.
Our APAC Region accounted for approximately 67.8% of our revenues in 2023. Information regarding financial data by geographic areas is set forth in Item 7 and Item 8 of this Annual Report on form 10-K. See note 20 of Notes to Consolidated Financial Statements under Item 8.
INTELLECTUAL PROPERTY
NETSOL relies upon a combination of non-disclosure and other contractual arrangements, as well as common law trade secret, copyright and trademark laws to protect its proprietary rights. NETSOL enters into confidentiality agreements with its employees, generally requires its consultants and clients to enter into these agreements, and limits access to and distribution of its proprietary information. The NETSOL “N” logo and name, as well as the NFS logo and product name have been copyrighted and trademark registered in Pakistan. The NETSOL “N” logo has been registered with the U.S. Patent and Trademark Office. NFS Ascent® has been registered with the U.S. Patent and Trademark Office. We filed an application for the OTOZ Name with the U.S. Patent and Trademark Office. The Company intends to trademark and copyright its intellectual property as necessary and in the appropriate jurisdictions.
GOVERNMENTAL APPROVAL AND REGULATION
Current Company operations do not require specific governmental approvals. Like all companies, including those with multinational subsidiaries, we are subject to the laws of the countries in which we maintain subsidiaries and conduct operations. Pakistani law allows a tax exemption on income from exports of IT services and products up to 2025. While foreign based companies may invest in Pakistan, repatriation of their investment, in the form of dividends or other methods, requires approval of the State Bank of Pakistan.
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AVAILABLE INFORMATION
Our website is located at www.netsoltech.com, and our investor relations website is located at http://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http://ir.netsoltech.com/governance-docs. The content of our websites is not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
ITEM 1A - RISK FACTORS
Pakistan
The political and economic environment in Pakistan may negatively affect the business.
The political unsteadiness delays governmental functions. If such unsteadiness continues in the long term, it could result in difficulty in necessary interactions with the government as it relates to government contracts and personnel access to necessary government functions. We anticipate that the political and governmental environment will remain unsteady until new elections are held.
The devaluation of the Pakistan Rupee in comparison to the US Dollars has an impact on the value of our contracts paid in Rupees. This coupled with the higher-than-average inflation rate in Pakistan, may continue to negatively impact our largest subsidiary and accordingly the Company’s financials as a whole.
China
Political tensions between the US and China have resulted in US companies exiting China and moving their supply chain requirements to other countries. Other multinational companies have indicated concerns about transactions with US owned Chinese companies because of this continued tension. Should these tensions result in disparate treatment of US owned subsidiaries, it could negatively impact our operations in China, our ability to gain new business and the ability to transfer funds out of China.
General Economic Conditions
General economic conditions in our geographic markets; inflation, geopolitical tensions, including trade wars, tariffs and/or sanctions in geographic areas; Global pandemics, including COVID-19; and global conflicts or disasters that impact the global economy or one or more sectors of the global economy have negative impacts on our ability to acquire new business to and deliver on new business when contracted.
Continued interest rate increases by the U.S. Federal Reserve Board in 2023 restrict buying power for consumers and companies which may negatively affect our customers profits and ability to acquire new or additional services.
Inflation and higher interest rates globally have greatly increased the cost of doing business, including salaries and benefits worldwide, affecting our profitability. If inflation does not stabilize, our profitability can be impacted. .
The decline by over 20% in 2022 of the U.S. markets including the NASDAQ index and the Russell 2000 index, and any continued decline in our stock price may limit access to capital markets.
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Working from the office might not return to pre-pandemic levels which may affect employee collaboration potentially lessening efficiency. Should we fail to navigate this challenge, it could negatively affect productivity.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None
ITEM 1C – Cybersecurity
Not applicable
ITEM 2 - PROPERTIES
Our corporate headquarters are located in Encino, California where we lease approximately 2,400 square feet of office space. We own our Lahore Technology Campus which consists of approximately 140,000 square feet of computer and general office space. This includes two adjacent five story buildings having a covered area of approximately 90,000 square feet with the capacity to house approximately 1,000 resources. In addition, we maintain leased office spaces in the UK, China, Australia, Thailand and a shared office in Indonesia. Our NTA office is located in Austin, Texas. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY
(a) MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on NASDAQ Capital Market under the ticker symbol “NTWK”.
The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the NASDAQ for each quarter during the last two fiscal years.
Fiscal Year 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 |
RECORD HOLDERS - As of September 15, 2023, the number of holders of record of the Company’s common stock was 133.
DIVIDENDS - The Company has not paid dividends on its Common Stock in the past two fiscal years.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The table shows information related to our equity compensation plans as of June 30, 2023:
Number
of securities |
Weighted
average |
Number
of | ||||
Equity Compensation Plans approved by Security holders |
None | None | 363,687(1) | |||
Equity Compensation Plans not approved by Security holders |
None | None | None | |||
Total | None | None | 363,687 |
(1) | Represents 141 available for issuance under the 2005 Incentive and Nonstatutory Stock Option Plan, 57,124 under the 2013 Incentive and Nonstatutory Stock Option Plan and 306,422 under the 2015 Incentive and Nonstatutory Stock Option Plan. |
(b) RECENT SALES OF UNREGISTERED SECURITIES
None.
(c) ISSUER PURCHASES OF EQUITY SECURITIES
None
ITEM 6 – [Reserved]
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ITEM 7- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our financial position and results of operations for the year ended June 30, 2023. It should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.
A few of our highlights for the fiscal year ended June 30, 2023 were:
● | We partnered with Amazon Web Services to offer cloud computing services, providing an innovative transformation of our cloud-based solutions. Since this launch, we have successfully signed our first customer, a leading software house based in the U.S. We achieved the status of API Gateway Delivery Partner with Amazon Web Services (AWS). With this extended APN partnership, we will have access to AWS API Gateway, a fully managed service that makes it easy for developers to create, publish, maintain, monitor, and secure APIs (application programming interfaces) at any scale. This partnership is expected to help the business generate new sales for this growth vertical. | |
● | We signed a contract with a tier 1 automotive company in the U.S. for our mobility solution which will manage the back-office operations for vehicle subscriptions. | |
● | We launched a new product offering – Flex, which is a cloud-based ready-to-use calculation engine that guarantees precise calculations at all stages of the contract lifecycle. We successfully signed our first Flex contract with European Merchant Bank. | |
● | We launched Hubex, an API library that enables companies to standardize their API integration procedures across multiple API services through a single integration. Hubex is our second product offering from the AppexNow marketplace following Flex, an API-based, ready-to-use calculation engine. Pre-integrated services in the Hubex library include but are not limited to payment processing, bank account authentication, finance and insurance products, fraud check, KYC service, driver license verification, address validation, vehicle valuation and notification service. | |
● | Otoz™ went live with its 55th dealer and is, now with dealers in 36 states. The onboarding of these new dealers will help the business generate approximately $1.1 million in annual recurring revenues. | |
● | We effectively generated approximately $7.0 million by successfully implementing change requests from various customers across multiple regions. | |
● | We successfully re-negotiated the extension of the contract with one of our existing bank customers in the UK. This extension is expected to generate nearly $2 million in revenues over the next few quarters. | |
● | We successfully renegotiated an existing maintenance contract with a leading finance company of a U.S. based auto manufacturer in China increasing the annual maintenance fees to $500K from $280K. | |
● | NetSol achieved the first Go-Live milestone for the finance company of a leading Swedish bank by effectively implementing its invoice factoring system. | |
● | We signed a new agreement with Kubota Australia Pty Ltd (“Kubota”) to implement our NFS Ascent® product. The contract relates to its operations in Australia and is expected to generate revenues of $5 million over 5 years. | |
● | We established a new subsidiary in Dubai. This new company is strategically important for the business to penetrate into MENA (Middle East and North Africa) region. We expect the Dubai entity to serve as a regional sales and delivery office in medium to long run. | |
● | We opened up a development and support center in Austin, Texas to support growth in North America partnering with consultants and system integrators like Amazon AWS to efficiently scale U.S. operations. | |
● | We continued our successful implementations with DFS by going live in Japan with our NFS Ascent® CMS system. |
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Marketing and Business Development Activities
Management has developed a growth strategy aimed at increasing competitiveness, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space.
The growth strategy contemplates the following enhanced activities and initiatives to accomplish these goals:
● | Build strong C-level executive professional teams in each key location to execute our long-term strategy. | |
● | Develop and retain the next tier level management for leadership to navigate long term growth. | |
● | Upgraded our offices in China to support the growing and existing client relationships and new client acquisitions in the region. | |
● | Strengthen the NETSOL brand in the Americas and Europe and further penetrate the APAC markets such as China, Thailand, Indonesia, Japan, Australia and New Zealand. | |
● | Maintain the quality of our delivery, after delivery support, and client relationships. | |
● | Further penetration of NFS Ascent® into the leasing and financing sectors in China, APAC, Europe and North America by focusing on multi-national auto captive Fortune 500 companies. | |
● | Pursue a well thought out strategy to diversify into complimentary verticals by way of organic expansion, partnerships and synergistic M&A. | |
● | Continue to implement new tools, systems and processes, such as JIRA, and the Agile framework to further enhance productivity, efficiencies and operating margins. | |
● | Offer a cloud enabled NFS Ascent® at subscription-based pricing models to generate additional interest from prospects. | |
● | Continue investing in our innovation lab to generate new verticals for the business. |
Growth Prospects for NFS Ascent®
Growth prospects for NFS Ascent® are linked to the maturing of the product portfolio and its growing customer base across different geographic and product markets. We are eyeing key international markets for growth in sales. Our sales strategy now carefully balances expansion into new geographic markets, including the Americas, Europe, and further penetration of our leading position in Asia Pacific.
Growth in North America is expected to come from the potential market for replacement of legacy systems. NFS Ascent® is aimed at providing a highly flexible and robust solution based on the latest technology and advanced architecture for the North American customers looking to replace their legacy systems. We believe that NFS Ascent® can provide substantial competitive disruption to the market’s lagging technology provided by incumbent vendors. The existing customer base may also represent latent demand for increased service and maintenance revenues by offering business process optimization, customization and upgrade services.
Growth in Europe will come from the introduction of NFS Ascent®, which will allow NTE to support larger organizations than those typically selecting the existing LeaseSoft product set, and opens the door for European expansion. This is designed to attract larger license and professional services revenues across a wider geography. In addition, leveraging the core strengths of NFS Ascent® will increasingly provide opportunities in the automotive sector where NTE is currently underrepresented.
Growth in our traditionally strong base in Asia Pacific is expected through diversification across market segments to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and maintenance revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS Ascent® in Asia Pacific in the form of existing customers who are looking for replacement of their current system.
In China, we are a de facto leader in the leasing and finance enterprise solution domain. With this position, we continue to enjoy demand for the current NFS™ solution, as well as NFS Ascent®. We will continue strengthening our position within existing multinational auto manufacturers, as well as, local Chinese captive finance and leasing companies.
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MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
● | According to S&P Global Mobility, new vehicles sales globally are expected to reach 84 million units in 2023 for a 5.6% increase. U.S. sales volumes are expected to reach approximately 15 million units, an estimated increase of 8% from the projected 2022 levels. | |
● | Reduction of the U.S. inflation rate over the last few months to approximately 5% annually. | |
● | The U.S. market remains strong and resilient for NetSol to continue investing in building local teams for its core offerings. | |
● | NFS Ascent® SaaS offerings and major on-premise license offerings are gaining traction in both mid and large size auto captives in the North American and European markets. | |
● | The auto and banking sectors continue momentum towards increased mobility and digital solutions according to Forbes and Insider Intelligence 2022. | |
● | The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $65 billion investment, from the originally planned $46 billion, in Pakistan energy and infrastructure sectors. Last June, China authorized a new $2.3 billion loan at a discounted rate to Pakistan as a short-term loan. | |
● | China’s auto sector remains steady with government year-end incentives and customers requesting additional services reflecting the resilience of our offerings. | |
● | Chinese auto sales rose 8.8% over a year earlier over the first half of 2023 as electric vehicle purchases surged. Total vehicle sales including trucks and buses rose 9.8% to 13.2 million (ABCnews.com July 2023). | |
● | The overall size of the mobility market in the Europe and the United States is projected to increase over $425 billion combined, by 2035 or a compound CAGR of 5%from 2022. * source – Deloitte Global Automotive Mobility Market Simulation Tool. | |
● | The global automotive finance market accounted for $245 Billion in 2022 and is expected to more than double by 2035 at a CAGR of 7.4%. source: www.precedenceresearch.com |
Negative trends:
● | General economic conditions in our geographic markets; inflation, geopolitical tensions, including trade wars, tariffs and/or sanctions in geographic areas; Global pandemics, including COVID-19; and, global conflicts or disasters that impact the global economy or one or more sectors of the global economy. | |
● | A global recession fear impacts the future expansions and budgets in every country and every sector. | |
● | Continued interest rate increases by the U.S. Federal Reserve Board in 2023 restricting buying power for consumers. | |
● | The negative currency impact on our financial statements due to the devaluation of the Pakistan Rupee in comparison to the US Dollar. | |
● | Political, monetary and economic challenges and higher inflation rate than other regional countries impacting Pakistan exports. | |
● | Inflation and higher interest rates globally have greatly increased the cost of doing business, including salaries and benefits worldwide, affecting profitability. |
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● | War and hostility between Russia and Ukraine continue to foster global uncertainty. | |
● | The decline by over 20% in 2022 of the U.S. markets including the NASDAQ index and the Russell 2000 index limiting access to capital markets. | |
● | Working from the office might not return to pre-pandemic levels which may affect employee collaboration potentially lessening efficiency. | |
● | The Pakistan political and economic environment will likely remain unsteady until new elections are called. | |
● | Continued tensions between the U.S. and China are causing some American companies to pull out of China and move their supply chain elsewhere. (Business Insider, Aug. 28, 2023). |
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill.
REVENUE RECOGNITION
The Company determines revenue recognition through the following steps:
● | Identification of the contract, or contracts, with a customer; |
● | Identification of the performance obligations in the contract; |
● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.
The Company has two primary revenue streams: core revenue and non-core revenue.
Core Revenue
The Company generates its core revenue from the following sources: (1) software licenses; (2) services, which include implementation and consulting services; and (3) subscription and support, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.
Non-Core Revenue
The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
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The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Software Licenses
Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.
Post Contract Support
Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.
BPO and Internet Services
Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.
Significant Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
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Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and (2) the method of recognizing revenue for installation/customization, and other services.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.
The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.
Revenue is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.
If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (unearned revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records unearned revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.
Unearned Revenue
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancellable license and services starting in future periods are included in accounts receivable and unearned revenue.
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Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients:
● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.
● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).
Costs to Obtain a Contract
The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, we incur few direct incremental costs of obtaining new customer contracts. We rarely incur incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, our sales personnel receive fees that we refer to as commissions, but that are based on more than simply signing up new customers. Our sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts.
INTANGIBLE ASSETS
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.
STOCK-BASED COMPENSATION
Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly.
GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. In conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the Company performs a quantitative assessment and the fair value of the reporting unit is determined by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded.
Recent Accounting Pronouncement
See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption.
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RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2023 COMPARED TO THE YEAR ENDED JUNE 30, 2022
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2023 and 2022 as a percentage of revenues.
For the Years | ||||||||||||||||
Ended June 30, | ||||||||||||||||
2023 | % | 2022 | % | |||||||||||||
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 share: | ||||||||||||||||
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 | ||||||||||||||
Diluted | 11,279,966 | 11,250,219 |
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A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 20 “Segment Information and Geographic Areas” within the Notes to the Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.
Favorable | Favorable | Total | ||||||||||||||||||||||||||
(Unfavorable) | (Unfavorable) | Favorable | ||||||||||||||||||||||||||
For the Years | Change in | Change due | (Unfavorable) | |||||||||||||||||||||||||
Ended June 30, | Constant | to Currency | Change as | |||||||||||||||||||||||||
2023 | % | 2022 | % | Currency | Fluctuation | Reported | ||||||||||||||||||||||
Net Revenues: | $ | 52,393,215 | 100.0 | % | $ | 57,247,979 | 100.0 | % | $ | (2,589,689 | ) | $ | (2,265,075 | ) | $ | (4,854,764 | ) | |||||||||||
Cost of revenues: | 35,477,652 | 67.7 | % | 33,510,805 | 58.5 | % | (11,939,512 | ) | 9,972,665 | (1,966,847 | ) | |||||||||||||||||
Gross profit | 16,915,563 | 32.3 | % | 23,737,174 | 41.5 | % | (14,529,201 | ) | 7,707,590 | (6,821,611 | ) | |||||||||||||||||
Operating expenses: | 25,695,521 | 49.0 | % | 24,815,497 | 43.3 | % | (5,603,576 | ) | 4,723,552 | (880,024 | ) | |||||||||||||||||
Income (loss) from operations | $ | (8,779,958 | ) | -16.8 | % | $ | (1,078,323 | ) | -1.9 | % | $ | (20,132,777 | ) | $ | 12,431,142 | $ | (7,701,635 | ) |
Net revenues for the years ended June 30, 2023 and 2022 by segment are as follows:
2023 | 2022 | |||||||||||||||
Revenue | % | Revenue | % | |||||||||||||
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 | % |
Revenues
License Fees
License fees for the year ended June 30, 2023 were $2,269,564 compared to $4,539,260 for the year ended June 30, 2022 reflecting a decrease of $2,269,696 with a change in constant currency of $2,144,206. In the fiscal year ended June 30, 2023, we recognized approximately $1,918,000 related to a new NFS Ascent® agreement with Kubota in Australia and approximately $188,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent® product. In the fiscal year ended June 30, 2022, we recognized approximately $3,000,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for their new business segment in the Japanese, Australian and South African markets and $465,000 from the DFS contract. We also recognized approximately $720,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent product®.
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Subscription and Support
Subscription and support fees for the year ended June 30, 2023, were $25,980,661 compared to $28,284,759 for the year ended June 30, 2022 reflecting a decrease of $2,304,098 with a decrease in constant currency of $1,613,325. The decrease was due to the recognition of a one-time post contract support revenue of approximately $3,480,000 using the catch-up approach during the year ended June 30, 2022. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent®.
Services
Services income for the year ended June 30, 2023, was $24,142,990 compared to $24,423,960 for the year ended June 30, 2022, reflecting a decrease of $280,970 with an increase in constant currency of $1,167,842. The increase in services revenue on a constant currency basis is due to the increase in change requests, enhancements and reimbursable costs. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process.
Gross Profit
The gross profit was $16,915,563 for the year ended June 30, 2023 compared with $23,737,174 for the year ended June 30, 2022. This is a decrease of $6,821,611 with a decrease in constant currency of $14,529,201. The gross profit percentage for the year ended June 30, 2023 decreased to 32.3% from 41.5% for the year ended June 30, 2022. The cost of sales was $35,477,652 for the year ended June 30, 2023 compared to $33,510,805 for the year ended June 30, 2022 for an increase of $1,966,847 and on a constant currency basis an increase of $11,939,512. As a percentage of sales, cost of sales increased from 58.5% for the year ended June 30, 2022 to 67.7% for the year ended June 30, 2023.
Salaries and consultant fees increased by $1,501,361 from $24,528,155 for the year ended June 30, 2022 to $26,029,516 for the year ended June 30, 2023 and on a constant currency basis increased by $8,625,137. The increase is due to increases in salaries and personnel. For fiscal years 2023 and 2022, we had an average of 1,505 and 1,225 technical employees, respectively. As of June 30, 2023, our total number of technical employees decreased to 1,415 from a maximum of 1,579. As a percentage of sales, salaries and consultant expense increased from 42.9% for the year ended June 30, 2022 to 49.7% for the year ended June 30, 2023.
Travel increased by $1,373,418 from $1,036,623 for the year ended June 30, 2022 to $2,410,041 for the year ended June 30, 2023 and on a constant currency basis increased by $2,052,110. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions. As a percentage of sales, travel expense increased from 1.8% for year ended June 30, 2022 to 4.6% for the year ended June 30, 2023.
Depreciation and amortization expense decreased to $2,504,046 compared to $2,949,093 for the year ended June 30, 2022 or a decrease of $445,057 and on a constant currency basis an increase of $517,294.
Other cost decreased to $4,534,049 for the year ended June 30, 2023 compared to $4,996,934 for the year ended June 30, 2022 or a decrease of $462,885 and on a constant currency basis an increase of $744,971. The increase in constant currency is mainly due to increase in computer cost of approximately $503,000, connectivity charges of approximately $186,000, utilities and communication costs of approximately $293,000 off set by the reversal of royalty fee of approximately $162,000, and a decrease in repair and maintenance cost of approximately $140,000.
25 |
Operating Expenses
Operating expenses were $25,695,521 for the year ended June 30, 2023 compared to $24,815,497, for the year ended June 30, 2022 for an increase of 3.6% or $880,024 and on a constant currency basis an increase of 22.6% or $5,603,576. As a percentage of sales, it increased from 43.4% to 49.0%. The increase in operating expenses was primarily due to increases in selling expenses, general and administrative expenses and research and development costs.
Selling and marketing expenses decreased by $111,542 or 1.6% and on a constant currency basis increased by $1,333,881 or 18.5%. The increase in constant currency is mainly due to increases in salaries of approximately $928,000, travel of approximately $271,000 and other selling expenses of approximately $133,000.
General and administrative expenses were $16,244,936 for the year ended June 30, 2023, compared to $15,390,141 at June 30, 2022 or an increase of $854,795 or 5.6%, and on a constant currency basis an increase of $3,359,080 or 21.8%. During the year ended June 30, 2023, salaries decreased by approximately $237,675 or increased by approximately $1,310,485 on a constant currency basis, due to increases in salaries, medical costs and subsidiary options granted to staff in NetSol PK. The provision for doubtful accounts increased by approximately $1,700,000 and on constant currency basis increased by approximately $1,800,000 primarily due to non-payment from one of our Chinese customers.
Research and development costs were $1,601,613 for the year ended June 30, 2023 compared to $1,342,154 for the year ended June 30, 2022 or an increase of $259,459 or 19.3% and on constant currency basis an increase of $854,083 or 63.6%.
Income/Loss from Operations
Loss from operations was $8,779,958 for the year ended June 30, 2023 compared to a loss of $1,078,323 for the year ended June 30, 2022. This represents an increase in loss of $7,701,635 with an increase of $20,132,777 on a constant currency basis for the year ended June 30, 2023 compared with the year ended June 30, 2022. As a percentage of sales, loss from operations was 16.8% for the year ended June 30, 2023 compared to 1.9% for the year ended June 30, 2022.
Other Income and Expense
Other income was $5,562,045 for the year ended June 30, 2023 compared to $3,168,064 for the year ended June 30, 2022. This represents an increase of $2,393,981 with an increase of $5,469,614 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions off set by recording other comprehensive loss and an impairment in our Drivemate investment and an increase in interest expense.
Interest income was $1,217,850 for the year ended June 30, 2023 compared to $1,655,883 for the period ended June 30, 2022. This represents a decrease of $438,033 or a change of $2,959 on a constant currency basis. Interest income is earned on cash maintained in interest bearing accounts.
During the year ended June 30, 2023, we recognized a gain of $6,748,038 in foreign currency exchange transactions compared to $4,327,590 for the year ended June 30, 2022. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. Dollar and the Euro. During the year ended June 30, 2023, the value of the U.S. dollar and the Euro increased 39.8% and 45.6%, respectively, compared to the PKR. During the year ended June 30, 2022, the value of the U.S. dollar and the Euro increased 29.9% and 14.9%, respectively, compared to the PKR.
The share of net loss from equity investment was $1,033,243 for the year ended June 30, 2023 compared to $2,021,480 for the period ended June 30, 2022. This represents a decrease of $988,237 or a change of $986,639 on a constant currency basis. During the year ended June 30, 2023, we recorded an impairment of approximately $1,041,000 on our investment in Drivemate. During the year ended June 30, 2022, we recorded an impairment of approximately $1,617,000 related to our investments in WRLD3D and Drivemate.
Included in other expenses for the year ended June 30, 2023 is $324,000 and $650,000 related to other comprehensive loss on liquidation of NTPK Thailand and WRLD3D, respectively. These amounts were reclassified from other comprehensive income to the statement of operations for the year ended June 30, 2023.
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Non-controlling Interest
For the year ended June 30, 2023 and 2022, the net income attributable to non-controlling interest was $1,099,275 and $1,951,959, respectively. The decrease in non-controlling interest is primarily due to the decrease in net income of NetSol PK.
Net Income (Loss) Attributable to NetSol
Net loss was $5,243,748 for the year ended June 30, 2023 compared to a net loss of $851,156 for the year ended June 30, 2022. This is an increase in loss of $4,392,592 with an increase of $11,427,411 on a constant currency basis, compared to the prior year. For the year ended June 30, 2023, net loss per share was $0.46 for basic and diluted shares. For the year ended June 30, 2022, net loss per share was $0.08 for basic and diluted shares.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure.
We define the non-GAAP measures as follows:
● | EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. | |
● | Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense. | |
● | Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. |
We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company.
The non-GAAP measures reflect adjustments based on the following items:
EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.
Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.
Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA.
27 |
Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the years ended June 30, 2023 and 2022 are as follows:
For the Years | ||||||||
Ended June 30, | ||||||||
2023 | 2022 | |||||||
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 | |||
Weighted Average number of shares outstanding | ||||||||
Basic | 11,279,966 | 11,250,219 | ||||||
Diluted | 11,279,966 | 11,250,219 | ||||||
Basic adjusted EBITDA | $ | (0.20 | ) | $ | 0.16 | |||
Diluted adjusted EBITDA | $ | (0.20 | ) | $ | 0.16 | |||
(a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows | ||||||||
Net Income (loss) attributable to non-controlling interest | $ | 1,099,275 | $ | 1,951,959 | ||||
Income Taxes | 253,158 | 258,468 | ||||||
Depreciation and amortization | 905,002 | 1,096,709 | ||||||
Interest expense | 237,162 | 109,361 | ||||||
Interest (income) | (369,197 | ) | (526,567 | ) | ||||
EBITDA | $ | 2,125,400 | $ | 2,889,930 | ||||
Add back: | ||||||||
Non-cash stock-based compensation | 29,450 | 13,527 | ||||||
Adjusted EBITDA of non-controlling interest | $ | 2,154,850 | $ | 2,903,457 |
28 |
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $15,533,254 at June 30, 2023, compared to $23,963,797 at June 30, 2022.
Net cash provided by operating activities was $2,009,571 for the year ended June 30, 2023 compared to $3,060,622 for the year ended June 30, 2022. At June 30, 2023, we had current assets of $41,603,867 and current liabilities of $20,769,234. We had accounts receivable of $11,714,422 at June 30, 2023 compared to $8,669,202 at June 30, 2022. We had revenues in excess of billings of $12,377,677 at June 30, 2023 compared to $15,425,377 at June 30, 2022 of which $nil and $853,601 are shown as long term as of June 30, 2023 and 2022, respectively. The long-term portion was discounted by $nil and $28,339 at June 30, 2023 and 2022, respectively, using the discounted cash flow method with an interest rate of 4.35%, for the years ended June 30, 2023 and 2022. During the year ended June 30, 2023, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings slightly decreased by $2,480 from $24,094,579 at June 30, 2022 to $24,092,099 at June 30, 2023. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,552,181 and $5,779,510, respectively, at June 30, 2023. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,813,541 and $8,567,145, respectively, at June 30, 2022. The average days sales outstanding for the years ended June 30, 2023 and 2022 were 168 and 140 days respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.
Net cash used by investing activities amounted to $1,399,231 for the year ended June 30, 2023, compared to $2,260,147 for the year ended June 30, 2022. We had net purchases of property and equipment of $1,399,231 compared to $2,260,147 for the comparable period last fiscal year.
Net cash used in financing activities was $718,992 compared to $1,378,721, for the years ended June 30, 2023, and 2022, respectively. During the years ended June 30, 2023 and 2022, our subsidiaries used cash of $61,124 and $950,352, respectively, for the purchase of treasury shares. During the year ended June 30, 2022, we purchased 22,510 shares of our common stock from the open market for $100,106. The year ended June 30, 2023, included cash inflow of $270,292 from bank proceeds compared to $941,841 for the same period last year. During the year ended June 30, 2023, we had net payments for bank loans and capital leases of $928,160 compared to $1,270,104 for the year ended June 30, 2022. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 15 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates.
We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options. As of June 30, 2023, we had approximately $15.5 million of cash, cash equivalents and marketable securities of which approximately $13.5 million is held by our foreign subsidiaries. As of June 30, 2022, we had approximately $24.0 million of cash, cash equivalents and marketable securities of which approximately $22.8 million was held by our foreign subsidiaries.
We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally.
As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing working capital of $2 to $3 million for APAC, U.S. and European new business development activities and infrastructure enhancements.
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Financial Covenants
Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($379,747) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($1,741,493) and a running finance facility of Rupees 53.6 million ($186,688). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($3,134,687). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol PK also has an approved export refinance facility of Rs. 380 million ($1,323,535) from Samba Bank Limited. During the tenure of loan, these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times.
As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities.
Dividends and Redemption
It has been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since our inception is expected to continue but is subject to regular review by the Board of Directors.
Contractual Obligations
Our contractual obligations are as follows:
Payment due by period | More than 5 | |||||||||||||||||||
Contractual Obligation | Total | 0 - 1 year | 1-3 Years | 3-5 Years | years | |||||||||||||||
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 |
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Currency Exchange Risk
Economic Exposure
We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. Since the majority of the Company’s operations are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the US Dollar and we don’t have any imports; therefore, we believe it is counter-productive to hedge this exposure. The devaluation of the Pakistan Rupee results in a foreign exchange gain to the Company.
Transaction Exposure
Our exposure to foreign currency transaction gains and losses is the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary, primarily the Euro, Yuan, Baht and the Pakistan Rupee. Our foreign subsidiaries conduct their businesses in local currency. Since the majority of the Company’s operations are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the US Dollar and we don’t have any imports; therefore, we believe it is counter-productive to hedge this exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 are included at the end of this report on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NETSOL’s financial statements for the fiscal years ended June 30, 2023 and June 30, 2022, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of NETSOL’s financial statements for the fiscal year ended June 30, 2023 and 2022, there were no disagreements, disputes, or differences of opinion with BF Borgers CPA PC. (“BF Borgers”) on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of BF Borgers would have caused BF Borgers to make reference to the matter in their report.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).
Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2023. This assessment was based on the criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, the Company has determined that as of June 30, 2023, the Company’s internal control over financial reporting are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal year 2023, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).
ITEM 9B. OTHER INFORMATION
NONE
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
NONE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers and persons owning more than 10% of the outstanding Common Stock, file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and beneficial owners of more than 10% of the Company’s Common Stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on copies of such forms furnished as provided above, or written representations that no such forms were required, the Company believes that during the fiscal year ended June 30, 2023, all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of more than 10% of its Common Stock were complied with.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Board of Directors
At the 2022 Annual Shareholders Meeting held in June 2023, a five-member board stood for election. The members were elected and, according to the bylaws of the Company shall retain their position as directors until the next meeting. The board of directors is made up of Mr. Najeeb U. Ghauri (Chairman of the Board), Mr. Mark Caton, Ms. Malea Farsai, Mr. Kausar Kazmi and Mr. Michael Francis. Mr. Henry Tolentino did not stand for re-election due to personal reasons and Mr. Michael Francis was nominated and elected to the Board.
Committees
During the fiscal year 2023, the Audit Committee, the Compensation Committee and the Nominating and Corporate Government Committee were structured as follows: The Audit Committee consisted of Mr. Kazmi, as Chair, with Mr. Caton and Mr. Tolentino as members. The Compensation Committee consisted of Mr. Caton, as Chair, with Mr. Kazmi and Mr. Tolentino as its members. The Nominating and Corporate Governance Committee consisted of Mr. Tolentino, as Chair, with Mr. Caton and Mr. Kazmi as its members. In September 2023, Mr. Michael Francis was appointed as the Chair of the Nominating and Corporate Governance Committee and was appointed as a member of the Audit Committee and the Compensation Committee.
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The table below provides the membership for each of the committees during Fiscal Year 2023.
Nominating and | ||||||
Corporate | ||||||
Audit | Compensation | Governance | ||||
Director | Committee | Committee | Committee | |||
Najeeb Ghauri | ||||||
Malea Farsai | ||||||
Mark Caton (I) | X | X (C) | X | |||
Kausar Kazmi (I) | X (C) | X | X | |||
Henry Tolentino * (I) | X | X | X (C) | |||
Michael Francis ** (I) (N) |
*Mr. Tolentino’s term ended June 2023.
** Mr. Francis was elected to the Board in June 2023, but did not join as a committee member until September 2023.
(I) Denotes an Independent Director.
(C) Denotes the Chairperson of the Committee.
(N) Mr. Francis became the Nominating Committee Chairman in September 2023.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The Board of Directors elects the executive officers of the Company annually. Each year the stockholders elect the Board of Directors. The executive officers serve varying terms until their death, resignation or removal by the Board of Directors. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
Name |
Year First Elected as an Officer or Director |
Age | Position Held with the Registrant | Family Relationship | ||||
Najeeb Ghauri | 1997 | 69 | Chief Executive Officer, Chairman and Director | Brother of Naeem Ghauri | ||||
Naeem Ghauri | 1999 | 66 | President | Brother of Najeeb Ghauri | ||||
Roger Almond | 2013 | 58 | Chief Financial Officer | None | ||||
Patti L. W. McGlasson | 2004 | 58 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | ||||
Mark Caton | 2002 | 74 | Director | None | ||||
Malea Farsai | 2018 | 54 | Director; Corporate Counsel | None | ||||
Henry Tolentino | 2018 | 74 | Director | None | ||||
Syed Kausar Kazmi | 2019 | 70 | Director | None | ||||
Michael Francis | 2023 | 57 | Director | None |
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Business Experience of Officers and Directors:
NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NETSOL. He has been the Co-founder and director of the Company since 1997, Chairman since 2003 and Chief Executive Officer from January 1998 to September 2002 and from October 2006 to present. Mr. Ghauri was responsible for NETSOL listing on NASDAQ in 1999 and NETSOL Pakistan subsidiary listing on the Karachi Stock Exchange in 2005. Mr. Ghauri served as the Company’s Chief Executive Officer from 1999 to 2001 and as the Chief Financial Officer from 2001 to 2005. As CEO, Mr. Ghauri is responsible for managing the day-to-day operations of the Company, as well as the Company’s overall growth and expansion plan. In 2017, Mr. Najeeb Ghauri as the CEO, implemented a Company-wide initiative cutting costs which saved the Company in excess of $7,000,000. Mr. Ghauri was also instrumental in the substantial increase in revenue for fiscal year end 2015. In addition, Mr. Ghauri traveled overseas multiple times to execute the largest contract for the Company, worth over $100 million, in December 2015. Under his watch, NETSOL has become a leading player in China with innovation and a cutting-edge technology.
In September 2020, Mr. Ghauri was presented with the highest civilian award in Pakistan, “Sitar e Imtiaz”, a medal of pride, in recognition for his work in IT and charitable causes in Pakistan. This medal was conferred by the President of Pakistan at the President House in Islamabad, Pakistan. Prior to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company (ARCO) (now acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent nearly five years with Unilever as brand and sales managers. Mr. Ghauri attended Eastern Illinois University in 1977-78 for Bachelor of Science degree in Management/Economics. He earned an M.B.A. in Marketing Management from Peter F. Drucker School of Management, Claremont, California in 1981. Mr. Ghauri was elected Vice Chairman of US Pakistan Business Council in 2006, a Washington D.C. based council of US Chamber of Commerce. He is also very active in several philanthropic activities in emerging markets and is a founding director of Pakistan Human Development Fund, a non-profit organization, a partnership with UNDP to promote literacy, health services and poverty alleviation in Pakistan. Mr. Ghauri has participated in NASDAQ opening and/or closing bell ceremonies in 2006, 2008,2009, 2015 and 2020.
Skills and Qualifications: Mr. Ghauri has an extensive executive, operational and strategic leadership experience in a global setting and substantial experience in establishing management performance objective and establishing goals. Mr. Ghauri not only serves the Board with his experience as a chief executive officer, but also his skills and insight into global operational logistics, which he developed over the course of his 25-year career in technology industry.
NAEEM GHAURI was a Director of the Company from 1999 through 2020 and was the Company’s Chief Executive Officer from August 2001 to October 2006. Mr. Ghauri is also a co-founder of the Company. Currently, Mr. Ghauri serves as the President and Director of Global Sales of NETSOL, director of NETSOL (UK) Ltd., a wholly owned subsidiary of the Company located in London, and Chairman of NetSol Technologies Limited in Pakistan. While instrumental in numerous transactions, his most significant contribution to the revenue of the Company was his role in overseeing and leading the closing of the largest contract to date for the Company worth $100 million signed in December 2015. More recently, Mr. Ghauri headed the sales team that signed a contract valued in excess of $35 million. Mr. Ghauri spearheaded the Innovation practice of the Company while he was located in Thailand with an eye towards working with rideshare platforms as sustainable business models for the Company as the CEO of OTOZ™, Inc. He is currently based out of NetSol’s Pakistan office, Prior to joining the Company, Mr. Ghauri was Program Director for Mercedes-Benz Finance Ltd., from 1994-1999. Mr. Ghauri supervised over 200 project managers, developers, analysts and users in nine European Countries. Mr. Ghauri is a board member of Drivemate Co., Ltd., the Company’s partner in Thailand, as a representative of NetSol. Mr. Ghauri earned his degree in computer science from Brighton University in England.
Skills and Qualifications: Mr. Naeem Ghauri has served in many leadership capacities within the Company throughout the past 23 years. Through his various senior leadership positions and extensive executive experience, Mr. Ghauri brings to NetSol his unique insight related to technology, innovation, marketing, and growth, including digital and mobility strategy.
ROGER ALMOND was appointed Chief Financial Officer on September 9, 2013. Since 2007, Roger Almond held the position of Senior Manager at Pickard & Green Certified Public Accountants where he and his team were responsible for assisting national and international companies with their financial reporting requirements to the SEC. Roger Almond’s duties also included overseeing multiple entity consolidations, converting financial data to US GAAP, preparing financials statements, footnotes and MD&A. Prior to his current position, Roger Almond held the position of Assurance Manager at Grant Thornton LLP, in Los Angeles, California from 2003-2006. From November 1999 to August 2003, he was the Chief Financial Officer of Keysor Century Corporation located in Saugus, California.
Roger Almond received his BS in Accounting from Brigham Young University in 1991 and he is a Certified Public Accountant licensed in California. He has also completed executive management courses at UCLA in 2001.
Skills and Qualifications: Through his senior leadership as Chief Financial Officer, Mr. Almond possesses extensive knowledge in several important business areas, including public company accounting, leadership, risk assessment, and international, cross-border accounting.
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PATTI L. W. MCGLASSON joined NETSOL as General Counsel in January 2004 and was elected to the position of Secretary in March 2004. She was appointed Senior Vice President, Corporate and Legal Affairs in 2013.
In the role of General Counsel, Ms. McGlasson is responsible for leading NETSOL’s legal department company-wide. She is also responsible for the implementation of the Company’s internal corporate governance and policy plans, ethics and business conduct. She oversees all board meetings in her executive position as corporate secretary.
Ms. McGlasson has over 30 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. Immediately prior to joining NETSOL, Patti practiced at Vogt & Resnick, law corporation. She was admitted to practice in California in 1991.
She received her Bachelor of Arts in Political Science in 1987 from the University of California, San Diego and, her Juris Doctor and Masters in Law in Transnational Business from the University of the Pacific, McGeorge School of Law, in 1991 and 1993, respectively. As part of her Masters in Law in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke in Rotterdam, the Netherlands in 1991.
Skills and Qualifications: As General Counsel, Ms. McGlasson offers extensive knowledge in several important strategic areas, including innovative problem-solving related to global risks and opportunities. Her legal expertise also helps NetSol navigate cross-cultural and cross-border opportunities.
MARK CATON joined the Board of Directors in 2007. Mr. Caton is currently President of Centela Capital, Inc. a diversified financial services company, a position he has held since 2006. Prior to joining Centela Capital, Mr. Caton was President of NETSOL Technologies USA, responsible for US sales, from June 2002 to December 2003. Mr. Caton was previously employed by ePlus from 1994 to 2002 as Senior Vice President-Business Development. He was a member of the UCLA Alumni Association Board of Directors and served on the Board of Directors of NETSOL from 2002-2005. Mr. Caton is the Chair of the Compensation Committee and a member of the Audit and Nominating and Corporate Governance Committees. Mr. Caton received his BA from UCLA in psychology in 1971.
Skills and Qualifications: Mr. Caton serves the Board with his 45 years of experience in sales, marketing and management in the financial leasing and software industries.
MALEA FARSAI joined the Board of Directors for the first time in 2018 and is currently the Company’s Corporate Counsel. Before joining NETSOL in March 2000, Ms. Farsai was an associate at the law firm of Horwitz and Beam where she represented both domestic and international private and public clients from technology to apparel in various transactions from 1996-2000. She has also worked on the formation of business startups and IPOs. Ms. Farsai was on the team that took NETSOL public and is the one who listed NETSOL on NASDAQ in 1999 and has maintained its listing since then to current. After nearly two decades with the Company, Ms. Farsai continues to work part-time as Corporate Counsel overseeing the Company’s insurance as well as day to day corporate legal needs. She has also obtained many of NETSOL’s various trademarks. Ms. Farsai has been actively updating and overseeing the Company’s Corporate and Social Responsibilities (CSR) globally and has effectively established a 501(c)(3) foundation for NETSOL to continue its charitable work internationally. Ms. Farsai received her B.A. degree from University of California, Irvine and her J.D. in 1996, and has been a member of the California State Bar since 1996. She sits on the board of various charitable organizations in Los Angeles.
Skills and Qualifications: Ms. Farsai has served the Company and its legal department since its inception and has a breadth of knowledge and understanding about NETSOL’s business through her role as Corporate Counsel. She also has an understanding of Public Company corporate governance as well as the management and retention of a diverse group of employees.
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HENRY TOLENTINO joined the Board of Directors for the first time in 2018 and served as a director until his term ended in June 2023. Mr. Tolentino brought over than 30 years of experience in the auto finance industry working with global manufacturers such as Toyota and General Motors. Prior to joining NETSOL’s advisory board in 2017, Mr. Tolentino held several executive positions at Toyota Leasing (Thailand) Co., Ltd., including most recently as president from 2006 to 2014 and then served as an advisor from 2015 to 2016. Prior to Toyota Leasing, Mr. Tolentino spent more than 10 years with Toyota Motor Credit Corporation, USA. He began his career in the auto finance industry with General Motors Acceptance Corporation. Mr. Tolentino served as the Chair of the Nomination and Corporate Governance Committee and member of the Audit and Compensation Committees until the end of his term in June 2023.
Skills and Qualifications: Mr. Tolentino has significant knowledge in international automobile manufacturing, business strategy and managing growth in the automotive industry. Using his experience, he provided the Company’s management with strategic advice.
SYED KAUSAR KAZMI joined the Board of Directors in 2019. Mr. Kazmi brings over 40 years of expertise in the banking industry and is currently the Head of Commercial Banking and Business Development at Habib Bank Zurich PLC, located in London where he has served in this capacity since 2016. Prior to this position, Mr. Kazmi served as the Head of Business Development for UK and Europe at Habib Bank AG Zurich in London from 2012-2016, before which Mr. Kazmi was the CEO of the UK operations of Habib Bank AG Zurich from 2009-2012. In 2018, Mr. Kazmi was awarded by Power 100, Parliamentary Review in association with The British Publishing Company a “Lifetime Achievement Award” for his significant and lasting impact on the banking sector. In addition, Mr. Kazmi has been awarded by the Asian Media Group the “GG2 Power List” celebrating Britain’s 101 most influential Asians from 2016-2018.
Mr. Kazmi received his BSc in Chemical Engineering with II Class Honors from Habib Institute of Technology in 1974. He sits on the board of many charitable organizations, with a focus on helping raise funds. Mr. Kazmi is the Chair of the Audit Committee and is a member of the Nominating and Corporate Governance and Compensation Committees.
Skills and Qualifications: Mr. Kazmi has strong financial services and management expertise. He directs the operations of a financial services business, expending its focus on business development.
MICHAEL FRANCIS is nominated to the Board of Directors for the first time this year in June 2023. Mr. Francis brings over 30 years of expertise in the banking and finance industry. He is currently Joint Managing Partner of Alderson Francis Associates Ltd, which provides business consulting to UK finance, software, and private equity businesses. Prior to this, he was Co-Head of Investment Banking at Investec Bank UK PLC, until October 2020. He was at Investec for 18 years, in various roles, most significantly as the founder and CEO of Investec asset Finance PLC, which is a significant client of NETSOL. From November 2022 to May 2023, Mr. Francis served as an interim executive director for VLS, a subsidiary of NTE to utilize his Financial Conduct Authority (FCA) authorization to assist VLS in strategic management of its business and to meet VLS’s FCA requirements. Mr. Francis also held senior management positions at Barclays Bank PLC and ANZ Investment Bank. Mr. Francis received his BSc in Biochemistry with II Class Honors from The University College of Wales, Aberystwyth in 1987. He is also a Fellow of the Institute of Chartered Accountants in England and Wales, qualifying with Ernst & Young in 1992. Mr. Francis is currently a trustee of the School of Hard Knocks located in the United Kingdom. He also served as the Chair of the Finance Committee of The Beacon School, located in the UK, for nine years. In September 2023, Mr. Francis was appointed as the Chair of the Nomination and Corporate Governance Committee and a member of the Audit and Compensation Committees.
Skills and Qualifications: Mr. Francis brings to the Board a seasoned expertise in financial services strategy, especially in the field of Lease and Finance as well as management proficiency.
COPORATE GOVERNANCE
Code of Business Conduct & Ethics
The Company adopted its Code of Business Conduct & Ethics, as amended and restated on September 9, 2013, applicable to every officer, director and employee of the Company, including, but not limited to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct & Ethics has been posted on our website and may be viewed at http://ir.netsoltech.com/governance-docs.
Audit Committee
The Company has an Audit Committee whose members are the independent directors of the Company, specifically, Mr. Kazmi, Mr. Caton, and Mr. Tolentino with Mr. Francis replacing Mr. Tolentino after being elected to the Board in June 2023 and being appointed as a member of the Audit Committee in September 2023. Mr. Kazmi is the current Chair of the Audit Committee.
Audit Committee Financial Expert
The Company has identified its audit chairperson, Mr. Kausar Kazmi as its Audit Committee financial expert. Mr. Kazmi is an independent board member as the term is defined in the Nasdaq Listing Rules. Mr. Kazmi’s over 40 years of experience in the banking industry including his current tenure as Head of Commercial Banking and Business Development for UK and Europe for Habib Bank AG Zurich as well as his service as a board member on various charities as the board member responsible for fundraising, provides him with an understanding of generally accepted accounting principles and financial reporting. Additionally, this experience provides an ability to assess the general application of accounting principles in connection with the accounting for estimates, accruals and reserves; experience analyzing financial statements that were comparable in the breadth and complexity of issues that can be reasonably expected to be raised by the Company’s financial statements; an understanding of internal control over financial reporting; and an understanding of audit committee functions.
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ITEM 11-EXECUTIVE COMPENSATION
Introduction
Our Compensation Committee is responsible for establishing and overseeing compensation programs that comply with NetSol’s executive compensation philosophy. As described in this Compensation Discussion and Analysis (“CD&A”), the Compensation Committee follows a disciplined process for setting executive compensation. This process involves analyzing factors such as company performance, individual performance, strategic goals and competitive market data to arrive at each element of compensation. The Compensation Committee approves compensation decisions for all executive officers. An independent compensation consultant helps the Compensation Committee by providing advice, information, and an objective opinion. This CD&A will focus on the compensation awarded to NetSol’s “named executive officers”—the Chief Executive Officer, Chief Financial Officer, and General Counsel, Corporate Secretary. You can find more complete information about all elements of compensation for the named executive officers in the following discussion and in the Summary Compensation table that appears on page 43.
Fiscal 2023 Executive Compensation Highlights and Governance
This section identifies the most significant decisions and changes made regarding NETSOL’s executive compensation in fiscal year 2023.
Shareholder Approval of Compensation
At the last annual general meeting held on June 7, 2023, shareholders expressed support for our executive compensation programs, with 75% of votes cast at the meeting voting to ratify the compensation of our named executive officers. Although the advisory shareholder vote on executive compensation is non-binding, the Compensation Committee has considered, and will continue to consider, the outcome of the vote and the sentiments of our shareholders when making future compensation decisions for the named executive officers. Based on the results from our last annual general meeting, the Compensation Committee believes shareholders support the Company’s executive compensation philosophy and the compensation paid to the named executive officers.
Taking into account the support of this plan at the June 7, 2023 Annual Shareholders Meeting, the Compensation Committee believes the compensation program meaningfully explains the Compensation Committee’s compensation decisions and its determination to tie long term incentives of the Chief Executive Officer to performance criteria. The Compensation Committee continues to reach out to its shareholders regarding their positions on the Company’s compensation program. In connection with the proxy solicitations, the executive compensation was discussed with certain of our top shareholders and their general acceptance of the compensation structure is reflected in the proxy vote results. Accordingly, the Compensation Committee will continue to provide the CEO with a bonus criterion that is based on total revenues and income from operations on a graduated basis. Bonuses would be paid 60% in cash and 40% in stock valued at the share price on June 30th of the fiscal year in which it was earned.
At the annual general meeting on June 7, 2023, the Shareholders overwhelmingly approved an annual vote on the Frequency of Say on Pay voting. Accordingly, we will continue to provide our stockholders with an annual opportunity to cast an advisory vote on the compensation programs for our named executive officers and as always, the stockholders are welcome to contact Investor Relations with any questions.
Governance and Evolving Compensation Practices
The Compensation Committee and the Board are aware of evolving practices in executive compensation and corporate governance. In response, we have adopted and/or maintained certain policies and practices that are in keeping with “best practices” in many areas. For example:
● The Compensation Committee engages an independent compensation consultant to evaluate our chief executive officer’s executive compensation practices in comparison to a peer group.
● We do not provide excessive executive perquisites to our named executive officers.
● Our incentive plans expressly prohibit repricing of options (directly or indirectly) without prior shareholder approval.
● Our policy on the prevention of insider trading prohibits various types of transactions involving Company stock or securities, including short sales, options trading, hedging, margin purchases and pledges.
● Our stock ownership guidelines require our executive officers to align their long-term interests with those of our stockholders.
● Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, in an open market transaction.
● Beginning with our fiscal year 2019 to current, we modified our compensation practices for our CEO to tie a significant portion to financial results both on a top line and bottom-line basis.
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General Compensation Overview
For 2023, compensation designed for our executive officers consisted of:
● | Base Salary | |
● | Cash awards at the discretion of the Compensation Committee | |
● | Long term equity in the form of time-based restricted stock; and | |
● | Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees. |
In response to discussions we have had with certain shareholders and given the percentage voting in favor of our executive compensation, beginning with the 2019 fiscal year, Chief Executive Officer compensation shall consist of:
● | Base Salary | |
● | Short-term cash awards conditioned upon achieving objective performance targets | |
● | Long-term equity in the form of time and objective performance targets; and | |
● | Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees. |
The Compensation Committee administers the cash and non-cash compensation programs applicable to our executive officers. The Compensation Committee makes all decisions about executive officer compensation for the Chief Executive Officer and the remaining named executives after discussion with our Chief Executive Officer about his direct reports. The Compensation Committee has often refined the direct reports’ compensation recommendations made by the Chief Executive Officer. Our Chief Executive Officer’s compensation is determined solely by the Compensation Committee, which, consistent with NASDAQ requirements, is comprised exclusively of independent directors, and the Chief Executive Officer does not participate in Committee decisions surrounding his compensation.
Independent Compensation Consultant
The Compensation Committee retained Compensation Resources, Inc. as its independent compensation consultant. Compensation Resources provided chief executive officer and director compensation consulting services to the Compensation Committee, including a competitive market analysis of peers and the base salary, total cash compensation and total direct compensation. Interactions with Compensation Resources was limited to the Compensation Committee Chair and interaction with executives was generally limited to discussions as required to compile information at the Compensation Committee’s direction. During fiscal year 2023, Compensation Resources did not provide services to the Company. Based on these factors and its own evaluation of Compensation Resources independence pursuant to the requirements approved and adopted by the SEC, the Compensation Committee has determined that the work performed by Compensation Resources does not raise any conflicts of interest.
Compensation Philosophy and Objectives
Our executive compensation philosophy calls for competitive total compensation that will reward executives for achieving individual and corporate performance objectives and will attract, motivate and retain leaders who will drive the creation of shareholder value. It incorporates elements that create shareholder value by driving financial performance, retaining a high-performing and talented executive team, and aligning the interests of the executive team with the interests of shareholders. The Compensation Committee reviews the compensation and benefit programs for executive officers, including the named executive officers, and performs an annual assessment of the Company’s executive compensation policy. In determining total compensation, the Compensation Committee considers the objectives and attributes described below.
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Executive Compensation Principles | ||
Shareholder Alignment | ●
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Our executive compensation programs are designed to create shareholder value.
Long-term incentive awards, delivered in the form of equity, make up a portion of our executives’ total compensation and closely align the interests of executives with the long-term interests of our shareholders. Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, on an open market transaction. |
Performance based | ● | Long-term incentive awards are designed to reward our executive officers for creating long-term shareholder value. Long-term incentive awards are granted primarily in the form of stock options and/or shares. |
Appropriate Risk | ● | Our executive compensation programs are designed to encourage executive officers to take appropriate risks in managing their businesses to achieve optimal performance. |
Competitive with external talent markets | ● |