SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2020
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22773
NETSOL TECHNOLOGIES, INC.
(Exact Name of Registrant specified in its charter)
|(State or other jurisdiction of||(I.R.S. Employer|
|incorporation or organization)||Identification Number)|
23975 Park Sorrento, Suite 250,
Calabasas, CA 91302
(Address of principal executive offices) (Zip code)
(Issuer’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of exchange on which registered|
|Common Stock, $0.01 par value per share||NTWK||NASDAQ|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
|Large Accelerated Filer [ ]||Accelerated Filer [ ]|
|Non-accelerated Filer [ ]||Smaller reporting company [X]|
|Emerging growth company [ ]|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $40,605,532 based upon the closing price of the stock as reported on NASDAQ Capital Market ($4.0 per share) on December 31, 2019, the last business day of the registrant’s second quarter. As of September 18, 2020, there were 11,727,594 shares of common stock outstanding and no shares of its Preferred Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
|Note About Forward-Looking Statements|
|Item 1A||Risk Factors||13|
|Item 1B||Unresolved Staff Comments||13|
|Item 3||Legal Proceedings||13|
|Item 4||Mine Safety Disclosures||13|
|Item 5||Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||14|
|Item 6||Selected Financial Data||14|
|Item 7||Management’s Discussion and Analysis of Financial Condition and Results of Operations||15|
|Item 7A||Quantitative and Qualitative Disclosures about Market Risk||31|
|Item 8||Financial Statements and Supplementary Data||31|
|Item 9||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||32|
|Item 9A||Controls and Procedures||32|
|Item 9B||Other Information|
|Item 10||Directors, Executive Officers and Corporate Governance||33|
|Item 11||Executive Compensation||37|
|Item 12||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||52|
|Item 13||Certain Relationships and Related Transactions, and Director Independence||52|
|Item 14||Principal Accountant Fees and Services||53|
|Item 15||Exhibits and Financial Statement Schedules||54|
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.
ITEM 1 - BUSINESS
NetSol Technologies, Inc. (Nasdaq CM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.
The Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial applications under the brand name NFS Ascent® for leading businesses in the global finance and leasing industry.
NETSOL’s clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NETSOL delivery locations around the globe.
Founded in 1997, NETSOL is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:
|●||North America||Los Angeles Area|
|●||Europe||London Metropolitan Area, Horsham|
|●||Asia Pacific||Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney|
The Company continues to maintain services, solutions and/or sales specific offices in the USA, England, Australia, Thailand, China, Indonesia and Pakistan.
Company Business Model
NETSOL believes that strong technology solutions with provable returns on investment are required to sell to its globally competitive and mature marketplace. NETSOL believes that people are the drivers of success and we invest in hiring, training and retaining 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 NETSOL and a unique value for its customers. NETSOL continues to underpin this effective business model with a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.
Niche Market Focus
By specializing in leasing and financing solutions, we have gained footholds in several global locations and a market leading position in the captive auto-finance segment and a growing presence in the general asset finance space.
Subject Matter Expertise
Our dual expertise in enterprise technology implementation and financial application development has helped us emerge as a global contender in the lease and finance industry and secure a broad footprint throughout the major markets of North America, Asia Pacific and Europe. The Asia Pacific operating region has particularly benefitted from the organic growth in the fast-developing leasing automation industry, which is still nascent by Western standards.
NETSOL has a strong presence in the captive auto-finance domain. With a collective experience of over two decades in Asia Pacific and over three decades in North America and Europe, NETSOL is one of a few global competitors in this niche industry.
Proximity with Global and Regional Customers
The Company has offices across the world, located strategically to maintain close contact and proximity with its customers in various key markets. This has helped in strengthening customer relationships and building a deeper understanding of local market dynamics. Simultaneously, the Company is able to extend services and even support development through a combination of local/onsite and central/off-site resources. This approach allows the Company to offer blended rates to its 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, NETSOL has employed the same facilities and competencies to extend its offerings into related segments, including:
|●||IT consulting & services|
|●||independent system review|
|●||outsourcing services and software process improvement consulting|
|●||maintenance and support of existing systems|
Our global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational asset finance companies, leveraging a centralized marketing and pre-sales organization and, a network of employees connected across the globe to support local and global customers and partners.
Covering the complete finance and leasing cycle starting from quotation origination through end of contract transactions, NFS Ascent® has been 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® is built on cutting-edge, modern technology that enables auto, equipment and big-ticket finance companies to run their retail and wholesale finance business with ease. With comprehensive domain coverage and powerful configuration engines, it is architected to empower finance and leasing companies with a platform that supports their growth in terms of business volume and transactions.
The Company’s next generation platform offers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with 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.
The Company’s premier solution has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. We believe NFS Ascent® allows:
|●||Improvement in overall productivity throughout the delivery organization:|
|○||The features of the integrated Business Process Manager, Workflow Engine and Business Rule Engine, will 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.|
|●||Improvement in talent acquisition and retention:|
|○||Because NFS Ascent® has been developed using the latest technologies and tools available in the market, it is helping us in attracting and retaining top engineers.|
|●||Better customer satisfaction:|
|○||As a result of the powerful NFS Ascent® platform and improvement in the talent pool, the quality of our deliverables has increased.|
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® On The Cloud
The Company’s premier, next generation solution NFS Ascent® is now also available on the Cloud at a SaaS/Subscription based pricing. With quick, 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.
NFS Digital is a combination of our core strengths, domain and technology. Our insight into the evolving landscape along with our valuable experience enables us to define sound digital transformation strategies and compliment them with smart digital solutions so 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-service 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.|
|The powerful mAccount is a self-service mobile solution. It empowers the dealer with a commanding backend system and allows the customer to setup a secured account and view information 24/7 to keep track of contract status, reducing inbound calls for customer queries and improving turnaround time for repayments.|
|●||Mobile Point of Sale|
|The application mPOS is a web and mobile enabled platform featuring a customizable home screen dashboard along with multiple quotation, application submission, work queues and detailed reporting to empower dealer networks in making the right decisions at the right time, in turn optimizing productivity.|
|Mobile Platform 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.|
|The mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency, in real time.|
|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 verification on the go. The application features a reporting dashboard that displays progress stats, action items and latest notifications, enabling the client to achieve daily goals while tracking performance.|
Otoz Mobility Orchestration System
Otoz is a subsidiary of NetSol Technologies, Inc. and provides customer-friendly, business-to-business, white-label solutions for mobility. Our suite of agile and configurable solutions includes a range of car-sharing and subscription products. With just over 16 months since its inception, Otoz’s team of 40 individuals from 7 nationalities has developed a product which has been benchmarked by a partner company of Google in the UK. Otoz has recorded strong interests from tier 1 auto-finance companies across the globe.
Otoz is a digital platform that helps automotive asset-holders (auto-manufacturers, auto-captives and fleet owners) and start-ups to launch, orchestrate and scale mobility businesses. Otoz platform is built on cutting-edge technology stack which comprises of Cloud-Native Architecture, Microservices, Artificial Intelligence, Machine Learning, Blockchain, DevOps and APIs. Otoz powerful feature-set allows automotive asset-holders with the ability to orchestrate a range of car-share and vehicle subscription services. The data-driven nature of platform empowers automotive asset-holders to maximize optimize and utilize mobility offerings. Otoz enables customers to book car-share and subscribe to vehicles through its intuitive, digital, and easy to use interface. An API driven architecture allows quick integration of ecosystem partners such as maintenance, roadside and offline jobs providers to allow seamless operation of mobility services. Salient features are:
|●||Otoz provides white-label solutions to OEMs, captive finance companies and other fleet owners/operators to launch their own mobility models.|
|●||Dynamic and personalized pricing: Our suite of AI models can assess consumer price sensitivities and fuel data-driven models and maximize conversion rates.|
|●||Optimal customer targeting and personalization: Segmenting target customers and developing data-driven incentive structures will drive growth.|
|●||Increased Asset utilization: Assets can be deployed across different mobility solutions, such as car sharing and car subscription to maximize utilization.|
|●||Telematics (real-time tracking): Otoz is a connected platform and IoT data is tracked in real time offering security and optimal asset management to operators.|
|●||Digital twin: Accuracy of mileage, service data, accidents, trip data are efficiently tracked through blockchain, ensuring transparency and supporting optimal asset management.|
|●||Blockchain: The automotive value chain can be managed via blockchain, for example, by using smart contracts to manage vehicle operations safely and efficiently.|
|●||The platform is built on the latest cloud-native architecture comprising of microservices, DevOps, containerization and continuous delivery to ensure quick time to market and global scalability (multitenancy and multicurrency).|
|●||An AI-driven chatbot ensures 24-hour availability of customer services.|
Otoz Mobility Orchestration System Applications:
Otoz back-office consists of highly flexible and configurable modules that help manage and orchestrate mobility services. These modules include: Fleet Management, Trip Management, Communications Management, Notification Management, Payment Management, Member Management, Promotions and Discounts, WorkQueue and Template Management. In addition, Otoz back office provides insights related to market intelligence, business KPIs and car-usage analytics. The back-office modules are configured according to client’s requirement and the module is white-labelled as well.
Otoz offers its customers with native iOS and Android mobile apps. These apps serve as a channel to reach out to the end customers and offer multi-services on a single app.
Otoz offers a complete digital platform on a web-based front-office application. End customers of Otoz clients can visit the website to attain mobility services such as car-share, car subscription and rentals.
Otoz offers its client an AI powered chatbot that offers customers the ability to book a vehicle for their mobility needs on the chatbot. The chatbot is equipped with computer vision APIs that serve as a medium to verify customer’s documents. Customers can pay through the chatbot and ultimately complete the booking. Otoz offers this chatbot as a white-label solution as well.
Artificial Intelligence Models
Otoz applications contain a suite of AI models that makes the digital platform truly data driven in nature. Otoz has intelligence around, pricing, customer retention and lifetime value, vehicle recommendations and customer segmentation. These models work seamlessly within the Otoz platform in harmony with other microservices. Team Otoz is working on packaging these AI models in a way to sell it independently to clients that requires only AI capability.
Otoz is a multi-service, multi-product platform comprising of various customer journeys such as car-share, car subscription, rentals, airport transfers, digital retail and more. Team Otoz has a product roadmap of building a Super App which will carry all services and features in one package; allowing our B2B customers to subscribe to different products on the go.
While NFS Ascent® is designed to be a truly global solution ready for customization in any market, the Company has historically provided products tailored to various markets. As such, we offer the following additional regional products:
In North America, NetSol Technologies Americas, Inc. (NTA) has and continues to develop the LeasePak CMS product which is now tailored to be an offering on the Microsoft Azure™ cloud. LeasePak streamlines the lease and loan management lifecycle, enabling superior portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reduce operating costs, simplify accounting and improve profits. It is scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accounting methods for virtually all sizes and complexity of operations. It is the centerpiece of vehicle leasing infrastructure at leading Fortune 500 banks and Automotive Captives, as well as for some of the industry’s leading independent lessors. It handles every aspect of the lease or loan lifecycle, including credit application origination, credit adjudication, pricing, documentation, booking, payments, customer service, collections, midterm adjustments, and end-of-term options for asset disposition and remarketing.
LeasePak Cloud - SaaS
NTA also offers the LeasePak Software-as-a-Service (“SaaS”) business line, which provides high performance with a reduced total cost of ownership. SaaS offers a proven deployment option whereby customers only require access to the internet to use the software. With an elastic cloud price, revenue stream predictability and improved return on investment for customers, management believes that its SaaS customers will experience the performance, the reliability and the speed usually associated with a highly scalable private cloud. LeasePak-SaaS targets small and mid-sized leasing and finance companies.
In addition to offering NFS Ascent® to the European market, NTE has some regional offerings, including:
|●||LeaseSoft – a full lifecycle asset lease and finance system aimed predominantly at the UK and European funder market, including modules to support web portals and an electronic data interchange manager to facilitate integration between funders and introducers.|
|●||LoanSoft – similar to LeaseSoft, but optimized for the consumer loan market.|
The implementation process of our products can span from three to eighteen months depending upon the 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 seek enhancements and additions to improve their business processes. NETSOL charges these efforts in a man-day rate.
Post implementation, NETSOL consultants may remain at the client site to assist the customer in smooth operations. After this phase, the regular maintenance and support services phase for the implemented software begins. In addition to the daily rate paid by the customer for each consultant, the customer also pays for all the transportation related expenses, boarding of the consultants, and a living allowance. NETSOL’s involvement in all the above steps is priced to bring value to our customers and increase our profitability from our interactions.
Cloud-enabled NFS Ascent® 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 occur through the following three main areas:
|●||Implementation related services|
|●||Maintenance and support related services|
License fees in a single market can vary based on relatively low cost for a simple SaaS arrangement to a multi-million-dollar fee for multiple module implementations. There are various attributes which determine the level of complexity, a few of which are: number of contracts; size of the portfolio; business strategy of the customer; internal business processes followed by the customer; number of business users; amount of customization required; complexity of data migration and branch network of the customer.
The Company recognizes revenue from license contracts when the software has been delivered to the customer. Implementation related services, including configuration, data migration and third-party interfaces are recognized as the services are performed. Maintenance and support related services are then provided on a continued basis. The annual maintenance 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 its revenues and to ensure a predictable revenue base over coming years, the business has shifted to a new pricing strategy whereby the business is now offering its cloud ready products at SaaS/subscription-based pricing models. Rapid deployments coupled with 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 and provides an alternative to current customers seeking lower software usage and maintenance costs.
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.
NETSOL has strategic partnerships with Microsoft and CGI pertaining to cloud-hosting activities for the Company’s cloud-based products. NETSOL hosts its cloud version of Ascent, NFS Ascent® 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.
NETSOL and CGI agreed to promote each other for their respective products and services amongst their respective existing customers across various regions. NETSOL also utilizes CGI for managed services and cloud hosting related activities for NETSOL’s engagements with their customers in Europe particularly.
The Company is a Microsoft Certified Silver Partner and an Oracle Certified Partner.
MARKETING AND SELLING
NETSOL management continues its optimism that the Company will experience ever increasing opportunities for its product and services offerings in 2020 and beyond. The objective of the Company’s 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 the website. In addition, corporate marketing oversees central marketing and communications programs for use by each of the business units.
Our dedicated marketing personnel, within the regions, undertake a variety of marketing activities, including sponsoring focused client events to demonstrate our skills and products, sponsoring and participating in targeted conferences 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.
NETSOL provides its services primarily to clients in global commercial industries. In the global commercial area, the Company’s service offerings are marketed to clients in a wide array of industries including, automotive, software, banks, higher education and financial services.
The Asian continent, including Australia and New Zealand, from the perspective of marketing, are targeted by the Asia Pacific Region from its Bangkok, Beijing, Jakarta, Lahore, Shanghai and Sydney facilities. The marketing for our core offerings in the Americas and Europe is carried out from our Los Angeles Area and London Metropolitan Area offices, respectively.
PEOPLE AND CULTURE
The Company believes it has developed a strong corporate culture that is critical to its success. Its key values are delivering world-class quality software, client-focused timely delivery, leadership, long-term relationships, creativity, openness and transparency and professional growth. The services provided by NETSOL require proficiency in many fields, such as software engineering, project management, business analysis, technical writing, sales and marketing, and communication and presentation skills.
Due to the growing demand for our core offerings and IT services, retention of technical and management personnel is essential. Our employee turnover was under 10% in 2020 with a goal to maintain the turnover level under 10% during the 2021 fiscal year and onwards. In addition, we are committed to improving key performance indicators such as efficiency, productivity and revenue per employee.
To encourage all employees to build on our core values, we reward teamwork and promote individuals that demonstrate these values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. We support gender diversity on a global basis. NETSOL is an equal opportunity employer with the largest concentration of female employees in Lahore, Pakistan and our U.S. headquarters.
NETSOL believes it should give back to the community and employees as much as possible. Certain of our subsidiaries are located in regions where basic services are not readily available. Where possible, NETSOL acts to not only improve the quality of life of its employees but also the standard of living in these regions. Examples of such programs are:
|●||Humanitarian Relief: We are all aware of the devastation that can be wrought by natural disasters. NETSOL has historically supported earthquake and flood relief where the need is the greatest.|
|●||Literacy Program: Launched to educate our illiterate employees, the main objective of this program is to enable these employees 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 low paid employees. NETSOL employees voluntarily contribute a fixed amount every month to the fund and the Company 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 NETSOL.|
|●||Day Care Facility: NETSOL’s human resources are its key assets and thus the Company takes numerous steps to ensure the provision of basic comforts to its 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 offices 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 outpatient 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 and Flu on a routine basis.|
There is significant competition for employees with the skills required to perform the services we offer. The Company runs an elaborate training program for different cadre of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. The Company believes that it has been successful in its 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, 2020, we had approximately 1,400 employees; comprised of 80% software engineers, programmers, project managers, quality assurance, sales, pre-sales, business development, dedicated employees to core NFS and NFS Ascent® and 20% non-IT personnel, and 140 plus employees supporting the regional offerings as well as IT consulting and services. None of our employees are subject to a collective bargaining agreement.
Neither a single company, nor a small number of companies, dominate the IT market in the space in which the Company competes. A substantial number of companies offer services that overlap and are competitive with those offered by NETSOL. Some of these are large computer manufacturers and computer consulting firms that have greater financial resources than NETSOL and, in some cases, may have greater capacity to perform services similar to those provided by NETSOL.
We compete chiefly against leading suppliers of IT solutions to the global asset finance and leasing industry, including names such as White Clarke Group, 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 names such as Wipro, InfoSys, Satyam Infoway, HCL and TCS (Tata Consulting).
Otoz competes in a niche space which has seen growth in the competition recently. Mature players include RideCell, Invers and Vulog that have been around for more than 7 years. These players dominate the market share in the US, Europe and India. Recently, new players have emerged which includes Wunder Mobility and M-Tribes that are focused towards micromobility and delivery-based services. Otoz competes with these companies over shared mobility offerings which includes P2P car-share, daily rentals, station-based car-share and free-float car-share. Otoz does not compete with the aforementioned players on fleet management hardware. Lastly, Otoz also offers vehicle subscription SaaS platform for which it competes with Clutch Technologies.
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 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 26.4% and 15.8% of our revenue for our fiscal year ended June 30, 2020, respectively. Other globally renowned auto captives that are customers of the Company include Toyota, Nissan, Ford, and FIAT.
Other customers of the Company include equipment finance and leasing companies and banks worldwide.
GLOBAL OPERATIONS AND GEOGRAPHIC DATA
The Company 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.
Mr. Peter Minshall joined NetSol Technologies Americas, Inc. (NTA) as executive Vice President in August 2020 and is responsible for the entire portion of NTA’s business operations. He brings over 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 visionary, focused, and 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.
Otoz CEO and Founder, Mr. Naeem Ghauri is based out of NetSol Thai offices located in Bangkok, Thailand. Co-founder and Chief Product Officer, Murad Baig is based out of NetSol London office. Co-founder and Chief Strategy Officer, Heidi Bauer is based out of the U.S. where she leads global business development and sales.
Mr. Asad Ghauri is the President of Asia Pacific (APAC) and Group Managing Director of Europe. Mr. Ghauri has a long history of experience in the Company, including a tenure as a board of director member, and vast experience in leading our APAC unit. We believe this experience will be utilized to lead growth in Europe.
Due to the demand for the Company’s premier solution NFS Ascent’s® Wholesale Platform in Europe, the Company appointed Chris Mobley as Head of NFS Ascent® Wholesale Operations in Europe. Mobley brings over two decades of industry experience to NETSOL with an accomplished background and domain-specific knowledge and expertise within the wholesale finance space.
At the starting of the previous financial year, NETSOL acquired the remaining stake in Virtual Lease Services (VLS), a UK-based portfolio and risk management servicing partner for business and consumer finance providers. By acquiring the remaining stake, NETSOL became the outright owner of the organization.
VLS is led by Ms. Louise Ikonomides. As Managing Director and founding shareholder of VLS, Ms. Ikonomides has been with VLS since its inception in 1999.
Asia Pacific Region
NETSOL Technologies, Ltd., (“NETSOL PK”) a majority owned subsidiary of the parent company is located in Lahore, Pakistan and is headed by Mr. Salim Ghauri as its CEO. Mr. Ghauri is a co-founder of NETSOL PK and has been with the Company since 1996. NETSOL PK is the “Center of Excellence” and state of the art facility for programming, R&D, global implementations and 24-hour support to our customers worldwide.
NETSOL Beijing entity is headed by Mr. Hui Liang as President. A two-decade long veteran of the tech industry, Liang brings his vast expertise to the Company. He has previously worked at Abeam Consulting, a Japanese consulting company specializing in enterprise solutions in a vast range of industries as well as for IBM Japan.
The Global Sales Division is headed by Mr. Asad Ghauri as President of Sales from the NETSOL Lahore office. Mr. Ghauri has been with NETSOL since 2000 and has over 20 years of experience in business and IT.
The Asia Pacific region including Australia/New Zealand and the Middle East, is supported and clients serviced from the APAC region offices located in Sydney, Beijing, Shanghai, Bangkok, Indonesia, Lahore and Karachi. While Lahore, Pakistan continues to be a nucleus of the Company’s delivery and research and development, Bangkok’s expanded sales operation and client relations facility has grown into a back-up to the Lahore facility. With the continued growth of the Chinese market, our Beijing office continues to expand as both a sales and support facility. Finally, the Asia Pacific region maintains and will establish offices through the region as is necessary to support its customers and to explore potential new markets.
Our APAC Region accounted for approximately 71% of our revenues in 2020. 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 21 of Notes to Consolidated Financial Statements under Item 8.
The Company relies upon a combination of nondisclosure and other contractual arrangements, as well as common law trade secret, copyright and trademark laws to protect its proprietary rights. The Company enters into confidentiality agreements with its employees, generally requires its consultants and clients to enter into these agreements, and limits access to and distribution of its proprietary information. The 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.. 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 the Company maintains subsidiaries and conducts 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.
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
ITEM 1B – UNRESOLVED STAFF COMMENTS
ITEM 2 - PROPERTIES
Our corporate headquarters are located in Calabasas, California where we lease 5,000 square feet of office space. We own our Lahore Technology Campus which consists of approximately 140,000 square feet of computer and general office space. This includes 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 has been consolidated with the corporate headquarters. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3 - LEGAL PROCEEDINGS
On or about July 13, 2020, the Company was named as a defendant in a civil lawsuit based on an alleged breach of contract claim filed by Royal News Corp. d/b/a Royal Media Group (“RMG”). The lawsuit is captioned Royal News Corp. d/b/a Royal Media Group v. Netsol Techs., Inc., U.S. District Court Case No. 1:20-cv-05381-PAE (S.D.N.Y.) (the “Lawsuit”). On or about August 24, 2020, the Company and RMG reached an agreement to fully resolve the case and are in the process of documenting the agreement, which includes a release of each other from all obligations, contractual or otherwise, claims, disputes or other matters, in exchange for (i) a payment by the Company to RMG in the amount of $100,000; and (ii) RMG dismissing the Lawsuit, with prejudice, pursuant to Rule 41(a) of the Federal Rules of Civil Procedure. On September 22, 2020, a notice of dismissal with prejudice was filed with the United States District Court Southern District of New York.
ITEM 4 – MINE SAFETY DISCLOSURES
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 2020||High||Low|
|Fiscal Year 2019||High||Low|
RECORD HOLDERS - As of September 18, 2020, the number of holders of record of the Company’s common stock was 149.
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, 2020:
exercise price of
of securities |
Plans approved by
Plans not approved by
|(1)||Represents 20,386 available for issuance under the 2005 Incentive and Nonstatutory Stock Option Plan, 98,196 under the 2013 Incentive and Nonstatutory Stock Option Plan and 306,422 under the 2015 Incentive and Nonstatutory Stock Option Plan.|
As of June 30, 2020, 66,421 shares of common stock that have been granted as compensation, but have not yet vested.
(b) RECENT SALES OF UNREGISTERED SECURITIES
(c) ISSUER PURCHASES OF EQUITY SECURITIES
Effective July 30, 2020, the Company’s, Board of Directors authorized the repurchase of up to two million dollars’ worth of the Company’s issued and outstanding common shares. The repurchase plan is authorized commencing July 30, 2020, and ending December 24, 2020, subject to an additional six-month extension at the discretion of management. Although no shares were repurchased during fiscal year 2020, the Company purchased 147,052 shares at an average price of $3.16 per share subsequent to the fiscal year ended June 30, 2020.
ITEM 6 – SELECTED FINANCIAL DATA
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, 2020. 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, 2020 were:
|●||NETSOL acquired the remaining stake in Virtual Lease Services, a UK-based portfolio and risk management servicing partner for business and consumer finance providers. By acquiring the remaining stake, NETSOL became the outright owner of the organization.|
|●||Due to the demand for the Company’s premier solution NFS Ascent’s® Wholesale Platform in Europe, NETSOL appointed Chris Mobley as Head of NFS Ascent® Wholesale Operations in Europe. Mr. Mobley brings over two decades of industry experience to NETSOL with an accomplished background and domain-specific knowledge and expertise within the wholesale finance space.|
|●||NETSOL announced the SaaS or subscription-based pricing model for our global markets in addition to its existing license options. All global contracts now provide NETSOL customers with the option for subscription-based pricing as an alternative to the traditional license model. This Software-as-a-Service (SaaS) pricing option is now available for all cloud-based NETSOL products and services, including NETSOL’s core, next-gen solution NFS Ascent®.|
|●||NETSOL signed a multi-million-dollar agreement with a large UK vehicle finance company to implement its NFS Ascent® Wholesale Platform. This agreement pertains to accessing NFS Ascent® Wholesale Finance System (WFS) via subscription-based pricing, the dynamic pricing model that NETSOL has introduced in all operating regions in response to growing demand for this model. This monumental implementation marked the first roll-out of NFS Ascent® in the United Kingdom.|
|●||NETSOL signed an agreement with a bank in the United Kingdom for NFS Ascent® on the cloud. This contract covers the implementation of NFS Ascent’s® Retail platform, including its Omni Point of Sale solution (Omni POS) and Contract Management System (CMS). Similar to the previous contract with a large independent used vehicle finance company in the United Kingdom, implementation is expected in less than six months, enabling the bank to gain value from Ascent’s technology in the shortest possible timeframe and setting a new standard for time to deployment in the industry. This major agreement not only validates increasing traction and demand for NFS Ascent® in the United Kingdom, but also its European market readiness.|
|●||NETSOL announced its first North American customer for NFS Ascent®. This was done as the company secured a contract with SCI Lease Corp, a Canadian-based national automotive leasing company, for the deployment of its NFS Ascent® Contract Management System (CMS) on the cloud. This contract represented NETSOL’s first official sale of NFS Ascent® in the North American market and also the first Software-as-a-Service (SaaS) based agreement for Ascent in this region.|
|●||A major American multinational automaker went live in China with NETSOL’s next-gen solution NFS Ascent’s® Retail Platform. This deployment covered the complete Ascent® Retail Platform, which includes its Omni-Point of Sale (Omni-POS) and Contract Management System (CMS). This multi-million-dollar contract marked the second successful implementation of NETSOL’s next-gen product NFS Ascent® in China.|
|●||NETSOL went live with its NFS Ascent® Wholesale Platform with BMW Automotive Finance in China. This second largest customer has a strong presence in China as well as the rest of the Asia-Pacific region, and this deployment was part of a previously announced $30 million contract in which NETSOL was selected as the vendor of choice after an extensive evaluation process.|
|●||NETSOL went live with its NFS Digital Mobile Collector application for a top tier multi-finance company in Indonesia. This mCollector go-live, which was part of a larger contract originally signed in 2018, was carried out to improve the client’s existing business practices through the use of new digital technology.|
|●||As part of the previously announced $100 million plus contract with Daimler Financial Services, the largest signing in NETSOL’s history, for implementations in 12 countries, NFS Ascent® went live in Hong Kong. NETSOL implemented its NFS Ascent® Retail Platform, consisting of its Omni Point of Sale (Omni POS) and Contract Management System (CMS), for this existing customer.|
|●||As part of the DFS contract, the Company’s next-gen solution NFS Ascent® also went live in Malaysia. This implementation consisted of the full suite of NFS Ascent®, including its Omni Point of Sale (Omni POS) and Contract Management System (CMS), as well as its Wholesale Finance System (WFS). Malaysia marked the ninth deployment to go live following successful implementations in Japan, China, South Africa, Thailand, New Zealand, Australia, South Korea, and Hong Kong. This series of deployments constitutes the largest and most prestigious contract signing in NETSOL’s history.|
|●||Pertaining to NETSOL’s wholly-owned subsidiary Otoz, as the first in a number of planned rollouts, the new mobility technology startup announced the creation of an Ai-powered chatbot that is intended to cater to renters and car owners, which will be integrated into the current Drivemate chat application LINE. Otoz also provided further information regarding its ongoing strategic partnership with Drivemate, the leading peer-to-peer car-sharing service in Thailand.|
|●||Otoz also announced a pilot car-sharing program with an existing tier-one European auto captive finance customer in China. As part of the program, thousands of the auto captive’s employees will be eligible to use flexible car-sharing products, all of which will be deployed on the Otoz platform. Among the many use cases and trials being conducted, Otoz will enable options for flexible car rentals as well as peer-to-peer car-sharing and other subscription-based programs.|
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 teams in each key location to execute our long-term strategy.|
|●||Develop, groom and retain the next tier level management for leadership to navigate long term growth.|
|●||Upgraded Bangkok and Beijing offices 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 Otoz and 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. The Chinese auto leasing market is young and low on consumer penetration in comparison with the giant U.S. market.
In Thailand, we established a sales headquarters, client service center, as well as a headquarters for OTOZ. The NetSol Thai operation is the hub for our global markets and directly supports all APAC markets including China, Indonesia and Australia. Our operation in Bangkok serves a very robust and growing market for leasing companies and regional banks.
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
|●||NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in North American and European markets.|
|●||Mobility and digital transformation is the new norm showing acceleration in every sector particularly in auto and banking.|
|●||On Cloud demand for our solution is on the rise.|
|●||COVID-19 has created new dynamics for businesses and corporations with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, should positively impact our financials.|
|●||COVID-19 is creating new opportunities for our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors.|
|●||In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms.|
|●||Growing opportunities and dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools.|
|●||OTOZ platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe.|
|●||Improved stability in US and Pakistan relationship boosting confidence and trade relations.|
|●||China’s China Pakistan Economic Corridor (CPEC) investment has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors.|
|●||China auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience.|
|●||COVID-19 has caused a global recession that will adversely impact every one of our business sectors.|
|●||Most OEMs and auto sectors are experiencing major slowdown due to lockdowns and health concerns.|
|●||The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus.|
|●||The steep drop of global oil prices reflects a sudden drop in transportation, air travels and road travels. The lockdowns worldwide present layers of challenges for every business worldwide.|
|●||US and China trade conflicts tend to further aggravate the global business environment.|
|●||Working from office poses its own risk of virus spread until it vanishes completely.|
|●||Global outlook for auto sector is uncertain if the recessionary impact worsens. This might cause delay or procrastination on decision making by our customers.|
|●||Marketing activities have been reduced dramatically particularly global and regional industry conferences. The indications it will be quite some time before these marketing activities can resume.|
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.
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.
The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.
The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance 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 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.
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.
Revenue from support services and product updates, referred to as maintenance 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.
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.
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from maintenance 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 recognized 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, maintenance 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.
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:
● 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).
Modified Retrospective Transition Adjustments
● For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.
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 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.
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 represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
Recent Accounting Pronouncement
See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2020 COMPARED TO THE YEAR ENDED JUNE 30, 2019
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2020 and 2019 as a percentage of revenues.
|For the Years|
|Ended June 30,|
|Services - related party||300,821||0.5||%||636,731||0.9||%|
|Total net revenues||56,372,319||100.0||%||67,819,183||100.0||%|
|Cost of revenues:|
|Salaries and consultants||18,821,738||33.4||%||19,253,364||28.4||%|
|Depreciation and amortization||2,897,371||5.1||%||3,525,857||5.2||%|
|Total cost of revenues||29,408,949||52.2||%||32,932,567||48.6||%|
|Selling and marketing||6,450,663||11.4||%||7,831,758||11.5||%|
|Depreciation and amortization||834,583||1.5||%||897,800||1.3||%|
|General and administrative||17,138,832||30.4||%||17,357,918||25.6||%|
|Research and development cost||1,468,954||2.6||%||1,971,228||2.9||%|
|Total operating expenses||25,893,032||45.9||%||28,058,704||41.4||%|
|Income from operations||1,070,338||1.9||%||6,827,912||10.1||%|
|Other income and (expenses)|
|Gain on sale of assets||23,103||0.0||%||81,455||0.1||%|
|Gain on foreign currency exchange transactions||398,610||0.7||%||6,345,859||9.4||%|
|Share of net loss from equity investment||(605,864||)||-1.1||%||(841,845||)||-1.2||%|
|Total other income (expenses)||1,262,753||2.2||%||6,247,412||9.2||%|
|Net income before income taxes||2,333,091||4.1||%||13,075,324||19.3||%|
|Income tax provision||(1,141,068||)||-2.0||%||(1,057,784||)||-1.6||%|
|Net income attributable to NetSol||$||937,081||1.7||%||$||8,583,399||12.7||%|
A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 21 “Segment Information and Geographic Areas” within the Notes to the Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.
|For the Year||Change in||Change due to||(Unfavorable)|
|Ended June 30,||Constant||Currency||Change as|
|Cost of revenues:||29,408,949||52.2||%||32,932,567||48.6||%||(90,133||)||3,613,751||3,523,618|
|Income (loss) from operations||$||1,070,338||1.9||%||$||6,827,912||10.1||%||$||(5,487,220||)||$||(270,354||)||$||(5,757,574||)|
Net revenues for the years ended June 30, 2020 and 2019 by segment are as follows:
License fees for the year ended June 30, 2020 were $4,564,560 compared to $16,768,749 for the year ended June 30, 2019 reflecting a decrease of $12,204,189 with a change in constant currency of $11,493,282. The decrease in license revenue for the fiscal year ended June 30, 2020 compared to 2019 is primarily due to the decrease in license revenue recognized for the DFS and BMW contracts to implement our NFS Ascent® Retail Platform. In the fiscal year ended June 30, 2020, we recorded $2,500,000 of license revenue for the DFS, 12 country NFS Ascent® contract, $470,000 for an NFS Ascent® contract in the U.K., and $1,540,000 from license revenues through sales of our regional offerings in China, Australia, the U.S. and the U.K. In fiscal year ended June 30, 2019, we recorded $6,600,000 of license revenue recognized for the DFS, 12 country NFS Ascent® contract, $8,000,000 related to the NFS Ascent® contracts signed with a tier-one auto captive finance company and a major American multinational automaker to implement our product in China, and $2,200,000 from license revenues through sales of our regional offerings in China, Australia, the U.S. and the U.K.
Maintenance fees for the year ended June 30, 2020, were $18,951,248 compared to $15,521,413 for the year ended June 30, 2019 reflecting an increase of $3,429,835 with a change in constant currency of $5,286,321. Maintenance fees begin once a customer has “gone live” with our product. The increase was due to the start of new maintenance agreements from customers who went live with our product during the latter stages of fiscal year 2019 and into fiscal year 2020. We anticipate maintenance fees to gradually increase as we implement both our NFS legacy product and NFS Ascent®.
Services income for the year ended June 30, 2020, was $32,555,690 compared to $34,892,290 for the year ended June 30, 2019, reflecting a decrease of $2,336,600 with an increase in constant currency of $751,124. The services revenue increase based on constant currency was due to an increase in services revenue associated with new implementations and change requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process.
Services – related party
Services income from related party for the year ended June 30, 2020 was $300,821 compared to $636,731 for the year ended June 30, 2019 reflecting a decrease of $335,910 with a decrease in constant currency of $228,507. The decrease in related party service revenue is due to a decrease in revenue due to less services performed for WRLD3D.
The gross profit was $26,963,370, for the year ended June 30, 2020 as compared with $34,886,616 for the year ended June 30, 2019. This is a decrease of $7,923,246 with a decrease in constant currency of $5,774,477. The gross profit percentage for the year ended June 30, 2020 also decreased to 47.8% from 51.4% for the year ended June 30, 2019. The cost of sales was $29,408,949 for the year ended June 30, 2020 compared to $32,932,567 for the year ended June 30, 2019 for a decrease of $3,523,618 and on a constant currency basis a decrease of $90,133. As a percentage of sales, cost of sales increased from 48.6% for the year ended June 30, 2019 to 52.2% for the year ended June 30, 2020.
Salaries and consultant fees decreased by $431,626 from $19,253,364 for the year ended June 30, 2019 to $18,821,738 for the year ended June 30, 2020 and on a constant currency basis increased by $1,754,053. The decrease in salaries and consultant fees is due to the devaluation of the Pakistan Rupee (“PKR”) compared to the U.S. Dollar. The increase in salaries on a constant currency basis is due to the increase in the number of technical employees and the annual increase in salaries and wages. We had 976, 932, and 1,009 technical employees as of June 30, 2018, 2019 and 2020, respectively. As a percentage of sales, salaries and consultant expense increased from 28.4% for the year ended June 30, 2019 to 33.4% for the year ended June 30, 2020.
Travel decreased by $2,346,126 from $6,527,868 for the year ended June 30, 2019 to $4,181,742 for the year ended June 30, 2020 and on a constant currency basis decreased by $1,799,905. The decrease in travel is due to the COVID-19 Pandemic. As a percentage of sales, travel expense decreased from 9.6% for year ended June 30, 2019 to 7.4% for the year ended June 30, 2020.
Depreciation and amortization expense decreased to $2,897,371 compared to $3,525,857 for the year ended June 30, 2019 or a decrease of $628,486 and on a constant currency basis a decrease of $146,175. Depreciation and amortization expense decreased as some products became fully amortized.
Operating expenses were $25,893,032 for the year ended June 30, 2020 compared to $28,058,704, for the year ended June 30, 2019 for a decrease of 7.7% or $2,165,672 and on a constant currency basis a decrease of 1.0% or $287,257. As a percentage of sales, it increased from 41.4% to 45.9%. The decrease in operating expenses was primarily due to decreases in selling and marketing expenses, salaries and wages and research and development cost offset by an increase in general and administrative expenses.
Selling and marketing expenses decreased $1,381,095 or 17.6% and on a constant currency basis a decrease of $844,758 or 10.8%. The decrease in selling and marketing expenses is due to decrease in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent® globally.
General and administrative expenses were $17,138,832 for the year ended June 30, 2020 compared to $17,357,918 at June 30, 2019 or a decrease of $219,086 or 1.3% and on a constant currency basis an increase of $797,684 or 4.6%. During the year ended June 30, 2020, salaries decreased by $1,112,184 or $512,629 on a constant currency basis due to reduction in salaries, and less share grants. Professional services increased by $104,726 or $130,533 on a constant currency basis and other general and administrative expenses increased by $1,077,944 or increased $1,466,481 on a constant currency basis. The increase on a constant currency basis is primarily due to the increase in withholding taxes on payments from customers and funds transferred from China of approximately $850,000, a new office lease in London of approximately $150,000, and software license and subscription fees of approximately $140,000.
Research and development costs were $1,468,954 for the year ended June 30, 2020 compared to $1,971,228 at June 30, 2019 or a decrease of $502,274 or 25.5% and on constant currency basis a decrease of $239,075 or 12.1%. The decrease in research and development costs is due to less spending on our innovation initiatives with Blockchain, AI, and IoT.
Income/Loss from Operations
Income from operations was $1,070,338 for the year ended June 30, 2020 compared to $6,827,912 for the year ended June 30, 2019. This represents a decrease of $5,757,574 with a decrease of $5,487,220 on a constant currency basis for the year ended June 30, 2020 compared with the year ended June 30, 2019. As a percentage of sales, income from operations was 1.9% for the year ended June 30, 2020 compared to 10.1% for the year ended June 30, 2019.
Other Income and Expense
Other income was $1,262,753 for the year ended June 30, 2020 compared to $6,247,412 for the year ended June 30, 2019. This represents a decrease of $4,984,659 with a decrease of $5,137,165 on a constant currency basis. The decrease is primarily due to the foreign currency exchange transactions. 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, 2020, we recognized a gain of $398,610 in foreign currency exchange transactions compared to a gain of $6,345,859 for the year ended June 30, 2019. During the year ended June 30, 2020, the value of the U.S. dollar and the Euro increased 3.1% and 1.8%, respectively, compared to the PKR. During year ended June 30, 2019, the value of the U.S. dollar and the Euro increased 33.9% and 30.8%, respectively, compared to the PKR. Interest income was $1,569,536 for the year ended June 30, 2020 compared to $955,061 for the period ended June 30, 2019. This represent an increase of $614,475 or a change of $800,815 on constant currency basis. The increase is due to the increase in cash which is invested into short term deposits and interest accrued on convertible note receivables.
For the year ended June 30, 2020 and 2019, the net income attributable to non-controlling interest was $254,942 and $3,434,141, 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 income was $937,081 for the year ended June 30, 2020 compared to $8,583,399 for the year ended June 30, 2019. This is a decrease of $7,646,318 with a decrease of $7,622,678 on a constant currency basis, compared to the prior year. For the year ended June 30, 2020, net income per share was $0.08 for basic and diluted shares. For the year ended June 30, 2019, net income per share was $0.74 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.
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, 2020 and 2019 are as follows:
|For the Year Ended||For the Year Ended|
|June 30, 2020||June 30, 2019|
|Net Income (loss) attributable to NetSol||$||937,081||$||8,583,399|
|Depreciation and amortization||3,731,954||4,423,657|
|Non-cash stock-based compensation||808,616||1,174,625|
|Adjusted EBITDA, gross||$||5,650,981||$||18,030,343|
|Less non-controlling interest (a)||(1,330,352||)||(5,140,004||)|
|Adjusted EBITDA, net||$||4,320,629||$||12,890,339|
|Weighted Average number of shares outstanding|
|Basic adjusted EBITDA||$||0.37||$||1.11|
|Diluted adjusted EBITDA||$||0.37||$||1.11|
|(a) The reconciliation of adjusted EBITDA of non-controlling interest|
|to net income attributable to non-controlling interest is as follows|
|Net Income attributable to non-controlling interest||$||254,942||$||3,434,141|
|Depreciation and amortization||1,060,605||1,397,613|
|Non-cash stock-based compensation||82,401||86,578|
|Adjusted EBITDA of non-controlling interest||$||1,330,352||$||5,140,004|
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $20,166,830 at June 30, 2020, compared to $17,366,364 at June 30, 2019.
Net cash provided by operating activities was $3,972,426 for the year ended June 30, 2020 compared to $4,933,210 for the year ended June 30, 2019. At June 30, 2020, we had current assets of $51,895,711 and current liabilities of $20,116,106. We had accounts receivable of $11,414,257 at June 30, 2020 compared to $15,599,314 at June 30, 2019. We had revenues in excess of billings of $18,506,733 at June 30, 2020 compared to $16,111,366 at June 30, 2019 of which $1,300,289 and $1,281,492 are shown as long term as of June 30, 2020 and 2019, respectively. The long-term portion was discounted by $41,286 and $99,139 at June 30, 2020 and 2019, respectively, using the discounted cash flow method with an interest rate of 4.35%, during years ended June 30, 2020 and 2019. During the year ended June 30, 2020, 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 decreased by $1,789,690 from $31,710,680 at June 30, 2019 to $29,920,990 at June 30, 2020. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $5,680,837 and $9,139,561, respectively at June 30, 2020. The average days sales outstanding for the years ended June 30, 2020 and 2019 were 200 and 171 days respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.
Net cash used by investing activities amounted to $2,054,890 for the year ended June 30, 2020, compared to $3,649,680 for the year ended June 30, 2019. We had net purchases of property and equipment of $1,270,965 compared to $1,555,680 for the comparable period last fiscal year. For the year ended June 30, 2020 and 2019, we invested $600,000 and $1,526,500, respectively, in short-term convertible notes. For the year ended June 30, 2019, we purchased the remaining 49% share of VLS for $927,100. We paid cash of $317,500 at the closing date and accrued the remaining $609,600, which was subsequently paid during the fiscal year ended June 30, 2020.
Net cash provided by financing activities was $1,700,293 compared to $17,167, for the years ended June 30, 2020, and 2019, respectively. The year ended June 30, 2020 included the cash inflow of $Nil from the exercising of stock options compared to $85,000 for the year ended June 30, 2019. During the year ended June 30, 2020, we purchased zero shares of our common stock from the open market compared to 41,650 shares of common stock for $250,945 for the same period last year. The year ended June 30, 2020, included cash inflow of $4,221,203 from bank proceeds compared to $1,227,158 for the same period last year. During the year ended June 30, 2020, we had net payments for bank loans and capital leases of $611,913 compared to $480,231 for the year ended June 30, 2019. 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, 2020, we had approximately $20.2 million of cash, cash equivalents and marketable securities of which approximately $18.2 million is held by our foreign subsidiaries. As of June 30, 2019, we have approximately $17.4 million of cash, cash equivalents and marketable securities of which approximately $16.1 million is 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 and reduced reliance on external capital raise.
As a growing company, we have on-going capital expenditure needs based on our short term and long-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.
While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.
Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($370,370) 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 ($2,975,482) and a running finance facility of Rupees 75 million ($446,322). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($5,355,868). 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 ($2,261,366) and a running finance facility of Rs. 120 million ($714,116) 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.
Our contractual obligations are as follows:
|Payment due by period|
|Contractual Obligation||Total||0 - 1 year||1-3 Years||3-5 Years||More than 5 years|
|Paycheck Protection Program Loans||469,721||182,669||287,052||-||-|
|Term Finance Facility||1,380,878||354,337||1,026,541||-|
|Loan Payable Bank - Export Refinance||2,975,482||2,975,482||-||-||-|
|Loan Payable Bank - Export Refinance II||2,261,365||2,261,365||-||-||-|
|Loan Payable Bank - Export Refinance III||2,975,483||2,975,483||-||-||-|
|Term Finance Facility||65,473||16,423||32,846||16,204||-|
|Subsidiary Finance Leases||469,406||292,074||177,332||-||-|
|Operating Lease Obligations||2,624,890||1,215,699||1,329,763||76,286||3,142|
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.
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
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.
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, 2020 and June 30, 2019, 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, 2020, 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 its report.
In connection with the audit of NetSol’s financial statements for the fiscal year ended June 30, 2019, there were no disagreements, disputes, or differences of opinion with KSP Group, Inc. (“KSP”) on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of KSP would have caused KSP to make reference to the matter in its 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.
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, 2020. 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, 2020, 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 2020, 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
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, 2020, 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 2019 Annual Shareholders Meeting held in June 2020, 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. Henry Tolentino.
The Audit Committee is made up of Mr. Kazmi, as Chairman, with Mr. Caton and Mr. Tolentino as members. The Compensation Committee consists of Mr. Caton, as Chairman, with Mr. Kazmi and Mr. Tolentino as its members. The Nominating and Corporate Governance Committee consists of Mr. Tolentino, as Chairman, with Mr. Caton and Mr. Kazmi as its members.
The table below provides the membership for each of the committees during Fiscal Year 2020.
|Naeem Ghauri *|
|Shahid J. Burki (I)*||X (C)||X||X|
|Mark Caton (I)||X||X (C)||X|
|Kausar Kazmi (I) (A)||X||X||X|
|Henry Tolentino (I)||X||X||X (C)|
|*||Mr. Ghauri and Mr. Burki did not stand for reelection in June 2020.|
|(I)||Denotes an Independent Director.|
|(C)||Denotes the Chairperson of the Committee.|
|(A)||Mr. Kazmi became the Audit Committee Chairman in July 2020.|
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||66||Chief Executive Officer, Chairman and Director||None|
|Roger Almond||2013||55||Chief Financial Officer||None|
|Patti L. W. McGlasson||2004||55||Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel||None|
|Malea Farsai||2018||51||Director; Corporate Counsel||None|
|Syed Kausar Kazmi||2019||67||Director||None|
Business Experience of Officers and Directors:
NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer from January 1998 to September 2002 and from October 2006 to present. Mr. Ghauri is a co-founder of NetSol Technologies, Inc. He was responsible for NetSol listing on NASDAQ in 1999, the NetSol subsidiary listing on KSE (Karachi Stock Exchange) in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008. 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. Prior to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company (ARCO) (now acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent nearly five years with Unilever as brand and sales managers. Mr. Ghauri attended Eastern Illinois University where he received a Bachelor of Science degree in Management/Economics in 1978. He also received an M.B.A. in Marketing Management from Claremont Graduate School in 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 and 2020.
Skills and Qualifications: Mr. Ghauri has an extensive executive, operational and strategic leadership experience in a global setting. Substantial experience in establishing management performance objective and establishing goals.
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.
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 nearly 28 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.
MARK CATON joined the Board of Directors in 2007. Mr. Caton is currently President of Ciena Financial, Inc. a diversified financial services company, a position he has held since 2006. Prior to joining Ciena, Mr. Caton was President of NetSol Technologies USA, responsible for US sales, from June 2002 to December 2003. Mr. Caton was 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 2002-2003. Mr. Caton is a Chairman of the Compensation Committee and a member of the Audit and Nominating and Corporate Governance Committees. Mr. Caton received his BA from UCLA in psychology in 1971.
Skills and Qualifications: Mr. Caton has over 25 years of experience in marketing and management.
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 Horowitz and Beam where she represented both domestic and international private and public clients from technology to apparel in various transactions. She has also worked on the formation of business startups and IPOs. Ms. Farsai was on the team that took the Company 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 NetSol, Ms. Farsai continues to work part-time as the Company’s Corporate Counsel overseeing the Company’s insurance needs as well as day to day corporate legal needs. She has also obtained many of NetSol’s various trademarks for the Company. During her tenure as a Board member this past year, Ms. Farsai has been actively updating and overseeing the Company’s Corporate and Social Responsibilities (CSR) globally. Prior to joining NetSol, she practiced law with the law firm of Horowitz and Beam in Irvine, California from 1996-2000. Ms. Farsai received her B.A. degree from University of California, Irvine and her J.D. in 1996, and has been a member of the California State Bar since 1996. She sits on the board of various charitable organizations in Los Angeles.
Skills and Qualifications: Ms. Farsai has served the Company and its legal department since its inception and has a breadth of knowledge and understanding about NetSol’s business through her role as Corporate Counsel. She also has an understanding of Public Company corporate governance as well as the management and retention of a diverse group of employees.
HENRY TOLENTINO joined the Board of Directors in 2018. Mr. Tolentino brings more than 30 years of experience in the auto finance industry working with global manufacturers such as Toyota and General Motors. Prior to joining NetSol’s advisory board, Mr. Tolentino has held several executive positions at Toyota Leasing (Thailand) Co., Ltd., including most recently as president from 2006 to 2014 and then served as an advisor from 2015 to 2016. Prior to Toyota Leasing, Mr. Tolentino spent more than 10 years with Toyota Motor Credit Corporation, USA. He began his career in the auto finance industry with General Motors Acceptance Corporation. Mr. Tolentino joined the advisory board of NetSol in September 2017 where he provided strategic advice to the senior management of the Company. Mr. Tolentino is the Chairman of the Nomination and Corporate Governance Committee and member of the Audit and Compensation Committees.
Skills and Qualifications: Mr. Tolentino has significant knowledge in international automobile manufacturing, business strategy and managing growth in the automotive industry.
SYED KAUSAR KAZMI joined the Board of Directors in 2019. Mr. Kazmi brings over 40 years of expertise in the banking industry and is currently the Head of Commercial Banking and Business Development at Habib Bank Zurich PLC, located in London where he has served in this capacity since 2016. Prior to this position, Mr. Kazmi served as the Head of Business Development for UK and Europe at Habib Bank AG Zurich in London from 2012-2016, before which Mr. Kazmi was the CEO of the UK operations of Habib Bank AG Zurich from 2009-2012. In 2018, Mr. Kazmi was awarded by Power 100, Parliamentary Review in association with The British Publishing Company a “Lifetime Achievement Award” for his significant and lasting impact on the banking sector. In addition, Mr. Kazmi has been awarded by the Asian Media Group the “GG2 Power List” celebrating Britain’s 101 most influential Asians from 2016-2018.
Mr. Kazmi received his BSc in Chemical Engineering with II Class Honors from Habib Institute of Technology in 1974. He sits on the board of many charitable organizations, with a focus on helping raise funds. Mr. Kazmi will succeed Mr. Burki as the Chairman of the Audit Committee and is a member of the Nominating and Corporate Governance and Compensation Committees.
Skills and Qualifications: Mr. Kazmi has strong financial services and management expertise. He directs the operations of a financial services business, expending its focus on business development.
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.
The Company has an Audit Committee whose members are the independent directors of the Company, specifically, Mr. Kazmi, Mr. Caton, and Mr. Tolentino. Mr. Kazmi is the current Chairman 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.
ITEM 11-EXECUTIVE COMPENSATION
Our Compensation Committee is responsible for establishing and overseeing compensation programs that comply with NetSol’s executive compensation philosophy. As described in this Compensation Discussion and Analysis (“CD&A”), the Compensation Committee follows a disciplined process for setting executive compensation. This process involves analyzing factors such as company performance, individual performance, strategic goals and competitive market data to arrive at each element of compensation. The Compensation Committee approves compensation decisions for all executive officers. An independent compensation consultant helps the Compensation Committee by providing advice, information, and an objective opinion. This CD&A will focus on the compensation awarded to NetSol’s “named executive officers”—the Chief Executive Officer, Chief Financial Officer, and General Counsel, Corporate Secretary. You can find more complete information about all elements of compensation for the named executive officers in the following discussion and in the Summary Compensation table that appears on page 45.
Fiscal 2020 Executive Compensation Highlights and Governance
This section identifies the most significant decisions and changes made regarding NetSol’s executive compensation in fiscal year 2020.
Shareholder Approval of Compensation
At the last annual general meeting held on June 26, 2020, shareholders expressed support for our executive compensation programs, with 80.40% 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 marked increase in support of this plan at the June 26, 2020 Annual Shareholders Meeting, the Compensation Committee believes the compensation program meaningfully explains the Compensation Committee’s compensation decisions and its determination to tie long term incentives of the Chief Executive Officer to performance criteria. The Compensation Committee continues to reach out to its shareholders regarding their positions on the Company’s compensation program. In connection with the proxy solicitations, the executive compensation was discussed with certain of our top shareholders and their general acceptance of the compensation structure is reflected in the proxy vote results. Accordingly, the Compensation Committee will continue to provide the CEO with a bonus criterion that is based on total revenues and income from operations on a graduated basis. Bonuses would be paid 60% in cash and 40% in stock valued at the share price on June 30th of the fiscal year in which it was earned.
Based on the 2016 Annual Meeting of Shareholders vote on the Frequency of Say on Pay voting, we will continue to provide our stockholders with an annual opportunity to cast an advisory vote on the compensation programs for our named executive officers and as always, the stockholders are welcome to contact Investor Relations with any questions.
Governance and Evolving Compensation Practices
The Compensation Committee and the Board are aware of evolving practices in executive compensation and corporate governance. In response, we have adopted and/or maintained certain policies and practices that are in keeping with “best practices” in many areas. For example:
● The Compensation Committee engages an independent compensation consultant to evaluate our chief executive officer’s executive compensation practices in comparison to a peer group.
● We do not provide excessive executive perquisites to our named executive officers.
● Our incentive plans expressly prohibit repricing of options (directly or indirectly) without prior shareholder approval.
● Our policy on the prevention of insider trading prohibits various types of transactions involving Company stock or securities, including short sales, options trading, hedging, margin purchases and pledges.
● Our stock ownership guidelines require our executive officers to align their long-term interests with those of our stockholders.
● Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, in an open market transaction.
● Beginning with our fiscal year 2018 to current, we modified our compensation practices for our CEO to tie a significant portion to financial results both on a top line and bottom-line basis.
General Compensation Overview
For 2020, compensation designed for our executive officers consisted of:
|●||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:
|●||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 2020, 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.
|Executive Compensation Principles|
|Shareholder Alignment||●||Our executive compensation programs are designed to create shareholder value.|
|●||Long-term incentive awards, delivered in the form of equity, make up a portion of our executives’ total compensation and closely align the interests of executives with the long-term interests of our shareholders. Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, on an open market transaction.|
|Performance based||●||Long-term incentive awards are designed to reward our executive officers for creating long-term shareholder value. Long-term incentive awards are granted primarily in the form of stock options and/or shares.|
|Appropriate Risk||●||Our executive compensation programs are designed to encourage executive officers to take appropriate risks in managing their businesses to achieve optimal performance.|
|Competitive with external talent markets||●||Our executive compensation programs are designed to be competitive within the relevant markets.|
|Simple and transparent||●||Our executive compensation programs are designed to be readily understood by our executives, and transparent to our investors.|
Compensation Analysis Peer Group
After consideration of business models, company revenue and market capitalization of other companies in the Company’s technology industry segment, and with the input from Compensation Resources, Inc., the compensation consultant used by the Company at the time the study was last conducted, the Compensation Committee established the following list of peer companies to provide a comparative framework for use in setting executive compensation:
|Amber Road, Inc.||B Square Corp.|
|Cass Information Systems||Data Watch Corp.|
|Digital Turbine, Inc.||Everbridge, Inc.|
|Mitek Systems, Inc.||SPS Commerce Inc.|
|USA Technologies, Inc.||Zix Corp.|
Executive Officer Base Salaries and Compensation Comparisons
Compensation plans are developed by utilizing publicly available compensation data in the information technology and software services industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. The Compensation Committee has determined to utilize the services of a consultant for purposes of comparing our compensation program with similarly situated companies in like industries. The recommendations of these consultants will be utilized by the Compensation Committee in determining the appropriate compensation packages in addition to taking into account the unique global scale of the Company’s business. While these consultants may make general recommendations about the size and components of compensation, we anticipate our philosophy to continue on the basis of a pay-for-performance philosophy.
In establishing the compensation of our named Chief Executive Officer, we based the amounts primarily on the market data and advice provided by Compensation Resources, Inc. with respect to the compensation paid to individuals who perform substantially similar functions within the peer group companies. In connection with the other named executive officers, we also relied on the recommendations of the Chief Executive Officer’s analysis relative to those individuals’ performance and compensation. We also examined the outstanding stock options and equity grants held by the executive officers for the purpose of considering the retention value of any additional equity awards.
As a general guideline, for our named executive officers, we aim to set base salary, cash compensation and total compensation at approximately the mean market range. Our analysis determined that the base salary of our Chief Executive officer was slightly above the mean, cash compensation was generally within the mean, but the total direct compensation was below the mean. As such, it was determined to develop a long-term, performance-based element of the compensation that brought the total direct compensation within the mean.
2020 Executive Compensation Components
An executive’s base salary is a fixed element of the executive’s compensation intended to attract and retain executives. It is evaluated together with components of the executive’s other compensation to ensure that the executive’s total compensation is consistent with our overall compensation philosophy. Base salaries are adjusted annually by the Compensation Committee.
The base salaries were established in arms-length negotiations between the executive and the Company, considering their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company. The Company expects each named executive officer to contribute to the Company’s overall success as a member of the executive team rather than focus solely on specific objectives within the officer’s area of responsibility.
We provided a 3% increase in base salary for Ms. McGlasson in fiscal 2020. Due to the effects of COVID-19, the Company reduced her base salary by 13%. We provided a 4% increase in base salary for Mr. Almond in fiscal 2020. Due to the effects of COVID-19, the Company reduced his salary by 13%. In fiscal year 2020, Mr. Ghauri’s base salary did not increase. Due to the effects of COVID-19, Mr. Ghauri’s base salary was reduced by 4.7%. Mr. Ghauri’s perquisites were reduced by 8% for a total compensation reduction of 5.4%. The Compensation Committee determined that salary alone was an adequate basis for short term compensation, and that equity incentives would be used for the long-term elements of incentive programs for Ms. McGlasson and Mr. Almond.
Our compensation program includes eligibility for bonuses as rewarded by the Compensation Committee. All executives are eligible for annual performance-based cash bonuses in accordance with Company policies. The Compensation Committee takes into consideration the executive’s performance during the previous year to determine eligibility for discretionary bonuses. Further, the compensation committee will review, if applicable, the performance criteria set forth in an executive’s previous year’s agreement and will determine if the executive has met such criteria in order to achieve the bonus. The Company’s bonus criteria at the executive management level, is typically based on a gross revenue and income from operations targets. Cash bonuses, if any for 2020 are reflected in the summary of compensation discussed below starting on page 48. For 2020, based on structured KPI’s by the compensation committee, Mr. Ghauri did not earn a bonus. See bonus structure as discussed below on page 46. The Compensation Committee determined that Gross Revenue and Income from Operations structure used in fiscal 2020 continues to be a proper measure for measuring Mr. Ghauri’s performance in that it encourages his participation in revenue generating activities and continues to incentivize him to monitor and maximize cost efficiency.
Long-Term Equity Incentive Compensation
We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Because base salary and equity awards are such basic elements of compensation within our industry, as well as the high technology and software industries in general, and are generally expected by employees, we believe that these components must be included in our compensation mix in order for us to compete effectively for talented executives. We award time based vested stock from our Equity Incentive Plans for several reasons. First, such awards facilitate retention of our executives. Restricted stock generally vests only if the executive remains employed by the Company. Second, time-based stock awards align executive compensation with the interests of our shareholders and thereby focuses executives on increasing value for the shareholders. Time vested stock generally only provides a superior return if the stock price appreciates, and results in materially less dilution to the shareholders than options while frequently providing equivalent value to the employee at less cost to the Company than options. In determining the number of shares to be granted to executives, we take into account the individual’s position, scope of responsibility, ability to affect profits and shareholder value, past and recent performance, and the estimated value of shares at the time of grant. Assuming individual performance at a level satisfactory to the Compensation Committee, the size of total equity compensation is generally targeted at the 50th percentile for the peer group. As indicated above, market data, including compensation percentiles, were among several factors the committee reviewed in determining compensation.
Equity incentives provided to executives are determined by the Fair Market Value of our common stock on the grant date. Each executive’s stock award was based on an analysis of the Compensation Committee of an appropriate overall cash compensation for each individual taking into account their position and compensation at similarly situated companies. Each executive’s stock award was based on a desired overall compensation cash value less the base salary as approved by the Compensation Committee.
In fiscal year 2020, Ms. McGlasson and Mr. Almond received a grant of 7,500 and 10,000 shares of common stock, respectively, vesting quarterly over a two-year period.
Mr. Ghauri is eligible to receive grants of shares based on the performance criteria connected to gross revenues and net income from operations as discussed below. The total compensation including equity grants is designed to bring the Chief Executive Officer to the mean market average.
Mr. Ghauri’s bonus for fiscal year 2020 is based on the total revenues and income from operations on a graduated basis. The following table demonstrates the graduated percentage of bonus that Mr. Ghauri will be eligible to earn based on the percentage of the goal achieved. Bonuses will be paid 60% in cash and 40% in shares of common stock valued on June 30, 2020. Total net revenues and income from operations are based on those values reported for the year ending June 30, 2020 excluding any adjustments relating to changes in revenue recognition policy.
|Bonus %||% of Bonus||25||%||50||%||100||%||125||%||150||%||175||%||200||%|
|Net revenues||55||%||Increase in revenues||5||%||10||%||15||%||20||%||25||%||30||%||35||%|
|% of Bonus||25||%||50||%||100||%||125||%||150||%||175||%||200||%|
|Income from Operations||45||%||Income from Operations %||5.0||%||7.5||%||10.0||%||12.5||%||15.0||%||17.5||%||20.0||%|
Mr. Ghauri’s bonus for the fiscal year 2021 will be based on the same criteria stated above.
Perquisites and Other Personal Benefits
We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the level of perquisites and other personal benefits provided to NetSol’s executive officers.
We maintain benefits and perquisites that are offered to all employees, including health and dental insurance. Benefits and perquisites may vary in different country locations and are consistent with local practices and regulations.
Termination Based Compensation
Upon termination of employment, all executive officers with a written employment agreement are entitled to receive severance payments under their employment agreements. In determining whether to approve, and as part of the process of setting the terms of, such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges securing new employment following termination. Further, the Committee recognizes that many of the named executives and officers have participated in the Company since its founding and that this participation has not resulted in a return on their investments. Termination and Change in Control Payments considered both the risk and the dedication of these executives’ service to the Company.
Our Chief Executive Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the fourth anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the fourth anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
Our Chief Financial Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the first anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the first anniversary from the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
The Secretary of the Company has an employment agreement that provides, if she is terminated without cause or if the executive terminates the agreement with Good Reason, she is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the second anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for her and her family until the end of the employment term and through the end of the second anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
These agreements were designed to assist in the retention of the services of our named executives and to determine in advance the rights and remedies of the parties in connection with any termination. The types and amounts of compensation and the triggering events set forth in these agreements were based on a review of the terms and conditions of normal and customary agreements in our competitive marketplace.
Tax and Accounting Implications
Deductibility of Executive Compensation
As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Compensation Committee is aware of the limitations imposed by Section 162(m) and considers the issue of deductibility when and if circumstances warrant. The committee reviews proposed compensation plans in light of applicable tax deductions, and generally seeks to maximize the deductibility for tax purposes of all elements of compensation. However, the committee may approve compensation that does not qualify for deductibility, including stock option and time-based restricted stock awards, if and when the committee deems it to be in the best interests of the Company and our shareholders.
Accounting for Stock-Based Compensation
Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation.
The following table shows the compensation for the fiscal year ended June 30, 2019, 2018, and 2017, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.
|Name and Principle Position||Fiscal Year Ended||Salary ($)||Bonus ($)||Stock Awards ($) (1)||Option Awards ($)||All Other Compensation ($)||Total ($)|
|CEO & Chairman||2019||$||675,000||$||432,488||$||-||$||21,598||(3)||$||200,000||(4)||$||1,329,086|
|Roger K Almond||2020||$||217,111||$||20,000||$||56,900||$||-||$||10,639||(5)||$||304,650|
|Chief Financial Officer||2019||$||221,520||$||20,000||$||55,500||$||-||$||10,191||(5)||$||307,211|
|Patti L. W. McGlasson||2020||$||219,481||$||-||$||42,675||$||-||$||10,019||(6)||$||272,175|
|Secretary, General Counsel||2019||$||226,113||$||-||$||55,500||$||-||$||10,378||(6)||$||291,991|
(1) The stock was awarded as compensation to the officers. See also Grants of Plan Based Awards. These amounts do not reflect compensation actually received by the named executive officer. These amounts represent the aggregate grant date fair value of the stock awards granted during the relevant time period, computed in accordance with FASB ASC 718, excluding the effect of any estimated forfeitures based on vesting conditions. A summary of the assumptions we applied in calculating these estimates is set forth in the Notes to Consolidated Financial Statements included in Note 18. The awards for which the aggregate grant date fair value is shown in this column include awards described under the Grants of Plan-Based Awards Table and in the Outstanding Equity Awards at Fiscal Year-End Table.
(2) Bonus was awarded by the Compensation Committee in late September 2018 for the results of his cost saving initiatives in fiscal 2018. The expense was accounted for in fiscal year 2019.
(3) The life of 20,000 outstanding options, granted in February 2009, was extended for one year for the year ended June 30, 2019.
(4) Per Mr. Najeeb Ghauri’s compensation agreement, he received $156,586, $200,000 and $200,000 in allowances, perquisites and benefits such as car allowance, insurance premiums, and home office allowance for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.
(5) Consists of $10,639, $10,191 and $9,952 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2020, 2019 and 2018, respectively.
(6) Consists of $10,019, $9,935 and $9,795 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2020, 2019 and 2018, respectively.
Grants of Plan-Based Awards
In September 2016, Mr. Najeeb Ghauri was granted 82,644 shares of the Company’s common stock which 50% vested immediately and the remaining 50% will vest annually from June 2017 to June 2021. The shares were approved by the Compensation Committee as an incentive for the named officer.
In July 2018, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly over the period of three years. The shares were approved by the Compensation Committee as an incentive for the named officer.
In August 2019, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.
In July 2018, Ms. Patti McGlasson was granted 7,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.
In August 2019, Ms. Patti McGlasson was granted 7,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.
Discussion of Summary Compensation Table
The terms of our executive officers’ compensation are derived from our employment agreements with them and the annual performance review by our Compensation Committee. The terms of Mr. Najeeb Ghauri’s employment agreement with the Company were the result of negotiations between the Company and the executive and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Almond’s employment agreement with the Company were the result of negotiations between our Chief Executive Officer and the employees and were approved by our Compensation Committee.
Employment Agreement with Najeeb Ghauri
Effective January 1, 2007, the Company entered into an Employment Agreement with our Chief Executive Officer, Najeeb Ghauri (the “CEO Agreement”). The CEO Agreement was amended effective January 1, 2008, January 1, 2010, July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Pursuant to the CEO Agreement, as amended, between Mr. Ghauri and the Company (the “CEO Agreement”), the Company agreed to employ Mr. Ghauri as its Chief Executive Officer for a five-year term. The term of employment automatically renews for 12 additional months unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. For the fiscal year 2020, Mr. Ghauri is entitled to an annualized compensation of $900,000 consisting of salary, allowances, perquisites and benefits, and is eligible for annual bonuses based on the bonus structure adopted by the Compensation Committee as described in Item 11 under Executive Compensation beginning on page 38. As previously discussed, the $900,000 was temporarily reduced to $851,000 in response to the COVID-19 pandemic. Mr. Ghauri is entitled to six weeks of paid vacation per calendar year.
The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CEO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 48 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 48 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 30 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CEO Agreement by Mr. Ghauri.
The above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2007. The above summary of the First Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2008. The above summary of the Second Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31, 2009. The above summary of the Third Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary of the Fourth Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
Employment Agreement with Roger K. Almond
Effective March 1, 2015, the Company entered into an Employment Agreement with our Chief Financial Officer, Mr. Roger K. Almond. Pursuant to the Employment Agreement, between Mr. Almond and the Company (the “CFO Agreement”), the Company agreed to employ Mr. Almond as its Chief Financial Officer from the date of the CFO Agreement through February 28, 2017. According to the terms of the CFO Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. For the fiscal year 2020, Mr. Almond is entitled to an annualized base salary of $230,381 per annum, a $2,000 per month car allowance, 10,000 shares of common stock to be granted equally on a quarterly basis over 2 years issued after each quarter of service through June 30, 2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $230,381 base salary was temporarily reduced to $186,515 in response to the COVID-19 pandemic. In addition, Mr. Almond is entitled to participate in the Company’s equity incentive plans and is entitled to four weeks of paid vacation per calendar year.
The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CFO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 12 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 12 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CFO Agreement by Mr. Almond.
The above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on March 4, 2015.
Employment Agreement with Patti L. W. McGlasson
Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary, General Counsel and Sr. Vice President, Legal and Corporate Affairs, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement and its related amendments, between Ms. McGlasson and the Company (the “General Counsel Agreement”), the Company agreed to employ Ms. McGlasson as its Secretary and General Counsel from the date of the General Counsel Agreement through June 30, 2017. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. The General Counsel Agreement was amended on July 25, 2013 and again on June 30, 2014 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”). Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the GC Agreement, Ms. McGlasson is entitled to an annualized base salary of $232,896 per annum, 7,500 shares of common stock to be granted equally on a quarterly basis over 2 years issued after each quarter of service through June 30, 2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $232,896 was temporarily reduced to $188,552 in response to the COVID-19 pandemic. In addition, Ms. McGlasson is entitled to participate in the Company’s equity incentive plans and, is entitled to six weeks of paid vacation per calendar year.
The General Counsel Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the General Counsel Agreement, if she terminates her employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, she shall be entitled to all remaining salary from the termination date until 24 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 24 months. She shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If she is terminated by the Company for Cause (as described below), or at the end of the employment term, she shall not be entitled to further compensation. Under the General Counsel Agreement, Good Reason includes the assignment of duties inconsistent with her title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks her to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the General Counsel Agreement by the Company. Under the General Counsel Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform her duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the General Counsel Agreement by Ms. McGlasson.
The above summary of the General Counsel Agreement is qualified in its entirety by reference to the full text of the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2006 on September 27, 2006. The above summary is also qualified in its entirety by reference to the full text of the Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q for the quarter ended March 31, 2010. The above summary is also qualified in its entirety by reference to the full text of the Second Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary is also qualified in its entirety by reference to the full text of the Third Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options and grants of unvested stock awards outstanding on June 30, 2020, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.
|OPTION AWARDS||STOCK AWARDS|
|NAME||NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE||NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE||OPTION EXERCISE PRICE ($)||OPTION EXPIRATION DATE||NUMBER OF SHARES OF COMMON STOCK THAT HAVE NOT VESTED||MARKET VALUE OF SHARES THAT HAVE NOT VESTED ($)||EQUITY
INCENTIVE PLAN AWARDS: |
NUMBER OF UNEARNED SHARES THAT HAVE NOT VESTED
INCENTIVE PLAN AWARDS: |
MARKET OR PAYOUT VALUE OF SHARES THAT HAVE NOT VESTED ($)
|Roger K Almond||-||-||-||8,336||46,964||-||-|
|Patti L. W. McGlasson||-||-||-||3,752||21,349||-||-|
We do not have any qualified or non-qualified defined benefit plans.
Potential Payments upon Termination or Change of Control
Generally, regardless of the manner in which a named executive officer’s employment terminates, the executive officer is entitled to receive amounts earned during the term of employment. Such amounts include the portion of the executive’s base salary that has accrued prior to any termination and not yet been paid, and unused vacation pay.
In addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment or a change of control, as set forth below.
Najeeb Ghauri, Chairman and Chief Executive Officer
In the event that Mr. Ghauri is terminated as a result of a change in control, he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one percent of the Company’s consolidated gross revenues for the previous twelve (12) months; and at the election of the Executive, (c) a one-time cash payment equal to the cash value of all shares eligible for exercise upon the exercise of Executive’s Options then currently outstanding and exercisable as if they had been exercised in full (the “Change of Control Termination Payment”). In the event Executive elects to receive the cash value of the shares underlying Executive’s options, he shall so notify the Company of his intent.
The following table summarizes the potential payments to Mr. Ghauri assuming his employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year.
|BENEFITS AND PAYMENTS||TERMINATION AFTER CHANGE OF CONTROL||TERMINATION UPON DEATH OR DISABILITY||TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON|
|Base Salary Continuance||$||2,756,000||$||114,833||$||2,756,000|
|Health Related Benefits||63,168||-||63,168|
|Salary Multiple Pay-out||2,060,110||-||-|
|Bonus or Revenue One-time Pay-Out||563,723||-||-|
|Net Cash Value of Options||-||-||-|
Roger Almond, Chief Financial Officer
In the event that Mr. Almond is terminated as a result of a change in control, he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).
The following table summarizes the potential payments to Mr. Almond assuming his employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year.
|BENEFITS AND PAYMENTS||TERMINATION AFTER CHANGE OF CONTROL||TERMINATION UPON DEATH OR DISABILITY||TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON|
|Base Salary Continuance||$||217,111||$||36,185||$||217,111|
|Health related benefits||10,644||-||10,644|
|Salary Multiple Pay-out||649,162||-||-|
|Bonus or Revenue One-time Pay-Out||281,862||-||-|
|Net Cash Value of Options||-||-||-|
Patti L. W. McGlasson, Senior V.P. of Legal and Corporate Affairs, Secretary and General Counsel
In the event that Ms. McGlasson is terminated as a result of a change in control, she is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and her salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).
The following table summarizes the potential payments to Ms. McGlasson assuming her employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year.
|BENEFITS AND PAYMENTS||TERMINATION AFTER CHANGE OF CONTROL||TERMINATION UPON DEATH OR DISABILITY||TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON|
|Base Salary Continuance||$||445,822||$||37,152||$||445,822|
|Health related benefits||20,040||-||20,040|
|Salary Multiple Pay-out||666,504||-||-|
|Bonus or Revenue One-time Pay-Out||281,862||-||-|
|Net Cash Value of Options||-||-||-|
Director Compensation Table
The following table sets forth a summary of the compensation earned by our Directors and/or paid to certain of our Directors pursuant to the Company’s compensation policies for the fiscal year ended June 30, 2020, other than Najeeb Ghauri, Naeem Ghauri and Malea Farsai who were paid as part of their employment agreements with the Company or its subsidiaries and not as directors.
|NAME||FEES EARNED OR PAID IN CASH ($)||SHARE AWARDS ($) (1)||TOTAL ($)|
|Shahid Javed Burki||59,197||55,845||115,042|