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NETSOL TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis Or Plan Of Operation
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the quarter ending
September 30, 2012.
Forward-Looking Information
This report contains certain forward-looking statements and information relating
to the Company that is based on the beliefs of its management as well as
assumptions made by and information currently available to its management. When
used in this report, the words "anticipate", "believe", "estimate",
"expect", "intend", "plan", and similar expressions as they relate to the
Company or its management, are intended to identify forward-looking
statements. These statements reflect management's current view of the Company
with respect to future events and are subject to certain risks, uncertainties
and assumptions. Should any of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described in this report as anticipated, estimated or
expected. The Company's realization of its business aims could be materially and
adversely affected by any technical or other problems in, or difficulties with,
planned funding and technologies, third party technologies which render the
Company's technologies obsolete, the unavailability of required third party
technology licenses on commercially reasonable terms, the loss of key research
and development personnel, the inability or failure to recruit and retain
qualified research and development personnel, or the adoption
of technology standards which are different from technologies around which
the Company's business ultimately is built. The Company does not intend to
update these forward-looking statements.
NetSol Technologies, Inc. (NasdaqCM: NTWK) (NasdaqDubai: NTWK) is a worldwide
provider of IT and enterprise application solutions, NetSol Technologies, Inc.
executes its mission of focusing technology on the operational needs of its
clients. NetSol's services and solutions enable businesses to streamline their
operations and compete more effectively.
The Company is organized into two main revenue areas, consisting of enterprise
solutions - NetSol Financial Suite (NFS™) - for the global financing, leasing
and lending industry, and a portfolio of managed services, including customized
application development, systems integration, and business process
engineering. In addition, NetSol's solutions portfolio includes smartOCI®
its e-Procurement search engine for SAP SRM users.
NetSol's clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers
and financial institutions, global vehicle manufacturers, and enterprise
technology providers, all of which are serviced by NetSol delivery locations
across 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 San
Francisco Bay Area, for North America; the London Metropolitan area for Europe;
and Bangkok, Thailand, Beijing, China and Lahore, Pakistan for Asia Pacific. The
Company continues to maintain services, solutions and/or sales specific offices
in Australia, China, Thailand, and Pakistan and through alliances in the Kingdom
of Saudi Arabia and Japan.
In today's highly competitive marketplace, business executives with labor or
services-centric budgetary responsibilities are not just encouraged but, in
fact, obliged to engage in "Make or Buy" decision process when contemplating how
to support and staff new development, testing, services support and delivery
activities. The Company business offerings are aligned as a BestShoring®
solutions strategy. Simply defined, BestShoring® is NetSol Technologies' ability
to draw upon its global resource base and construct the best possible solution
and price for each and every customer. Unlike traditional outsourcing offshore
vendors, NetSol draws upon an international workforce and delivery capability to
ensure a "BestShoring® delivers BestSolution™" approach.
NetSol combines domain expertise with competitive cost blended rates from its
"center of excellence" delivery center in Pakistan and other global centers
located in the USA, UK, Thailand and China, Our model also provides localized
programs in key markets and project management while minimizing any
implementation risk associated with a single service center. Our BestShoring®
approach, which we consider a unique and cost effective global development
model, is leading the way, providing value added solutions for Global Business
Services™ through a win-win partnership, rather than the traditional outsourced
vendor framework. Our global locations provides NetSol customers with the
optimum balance of subject matter expertise, in-depth domain experience, and
cost effective labor, all merged into a scalable solution. In this way,
"BestShoring® delivers BestSolution™".
Information technology services are valuable only if they fulfill the business
strategy and project objectives set forth by the customer. NetSol's expert
consultants have the technical knowledge and business experience to ensure the
optimization of the development process in alignment with basic business
principles. The Company offers a broad array of professional services to clients
in the global commercial markets and specializes in the application of advanced
and complex IT enterprise solutions to achieve its customers' strategic
objectives. Its service offerings include IT consulting & services; business
intelligence, information security, independent system review, outsourcing
services and software process improvement consulting; maintenance and support of
existing systems; and, project management.
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In addition to services, our product offerings are fashioned to provide a Best
Product for Best Solution model. Our offerings include our flagship global
solution, NetSol Financial Suite (NFS™). NFS™, a robust suite of five software
applications, is an end-to-end solution for the lease and finance industry
covering the complete leasing and finance cycle starting from quotation
origination through end of contract. The five software applications under NFS™
have been designed and developed for a highly flexible setting and are capable
of dealing with multinational, multi-company, multi-asset, multi-lingual,
multi-distributor and multi-manufacturer environments. Each application is a
complete system in itself and can be used independently to address specific
sub-domains of the leasing/financing cycle. NFS™ is a result of more than eight
years of effort resulting in over 60 modules grouped in five comprehensive
applications. When used together, they fully automate the entire leasing /
financing cycle.
NFS™ also includes LeasePak. LeasePak provides the leasing technology industry
with the development of Web-enabled and Web-based tools to deliver superior
customer service, reduce operating costs, streamline the lease management
lifecycle, and support collaboration with origination channel and asset
partners. LeasePak can be configured to run on HP-UX, SUN/Solaris or Linux, as
well as for Oracle and Sybase users. In terms of scalability, NetSol
Technologies North America offers the basic solutions as well as a collection of
highly specialized add on modules for systems, portfolios and accrual methods
for virtually all sizes and complexities of operations. These solutions provide
the equipment and vehicle leasing infrastructure at leading Fortune 500 banks
and manufacturers, as well as for some of the industry's leading independent
lessors.
NetSol North America, Inc. has recently launched its Infrastructure as a Service
(IaaS) business line. In its updated public cloud forecast in June 2012, Gartner
estimated that IaaS was the fastest growing cloud segment. NetSol's IaaS
offering will differentiate itself from the competition by providing much
enhanced performance at a lower cost point. At an elastic cloud price,
management believes these customers will experience performance, reliability and
speed usually associated with a highly scalable private cloud.
Our product offerings and services also include: LeaseSoft Portals and Modules
through our European operations; LeasePak 6.0b of our NFS™ product suite;
enterprise wide information systems, such as or LRMIS, MTMIS, business
intelligence and information security services.
NetSol's IP, smartOCI®, now part of Vroozi, Inc., a wholly owned subsidiary of
NTI, develops innovative e-commerce solutions for all business sizes and
industry verticals which help companies search, source, negotiate, and order
goods and services from suppliers electronically optimizing organization's
procurement and supply chain operations. Vroozi's business to business search
engine, collaborative commerce, and electronic marketplace applications are
deployed On Demand and can integrate seamlessly with major ERP vendor systems
such as SAP or deployed independently on the Internet.
Vroozi's first product to market is smartOCI®; a new search engine technology
and buy-side content marketplace provider which enables corporate buyers and
shoppers a simple and intuitive user interface to search multiple supplier
catalogs simultaneously within the SAP procurement application. The smartOCI®
technology was officially released to the market in 2011 at the SAP SAPPHIRE
Conference in Orlando, Florida, and has strengthened NetSol's presence in the
global SAP Services market.
NetSol global operation is broken down into three regions: North America, Europe
and Asia Pacific. All of the subsidiaries are seamlessly integrated to function
effectively in terms of global delivery capabilities, cross selling to
multinational captives' finance companies, centralized marketing organization
and a network of employees connected across the globe to support local and
global customers and partners.
The following discussion is intended to assist in an understanding of NetSol's
financial position and results of operations for the quarter ended September 30,
2012. It should be read together with our consolidated financial statements and
related notes included herein.
A few of NetSol's major successes achieved in 2011-2012 were:
• NetSol Technologies Pakistan signed multi-million dollar agreements to
implement NFS™ solution, for a major European Bank in China and, an automobile
manufacturer in Thailand.
• NetSol Technologies (Beijing) Co. Limited signed an agreement to license and
implement NFS™ solution with Chongqing Auto Finance Co., Ltd.
• NTPK Thailand signed a consultancy and services agreement for a premier auto
manufacturer in Thailand.
25--------------------------------------------------------------------------------• First NextGen - NFS™ went live with Thailand's Kiatnakin, a leading Bank, and
a leading provider of financial services to commercial and corporate sectors
in Thailand.
• NTPK Thailand and NEC India signed a partnership agreement to jointly develop
and support business in the asset finance and leasing industry in India, as
well as other markets in the Asia Pacific region.
• NetSol Technologies and ABeam Consulting Ltd. entered into a strategic
partnership agreement to jointly develop and support business in the asset
finance and leasing industry in Japan, as well as cooperating in other key
markets to serve Japanese corporations operating throughout the Asia Pacific
region.
• Atheeb NetSol, the Saudi Arabia joint venture of NetSol Technologies, Inc.,
signed four new agreements in the areas of cyber security, application
development and consulting.
• NTNA signed an enhancement project for an auto finance captive subsidiary of a
leading auto manufacturer.
• Vroozi, Inc. signed a large SRM 7.0 project implementation with long term care
service provider in the United States.
• Vroozi, Inc. developed a 'Big Data' loader for the smartOCI® Catalog Manager
which allows large supplier catalog files to be loaded via a secure web
connection.
• Vroozi, Inc., has signed an agreement with a top U.S. media company to
implement a full B2B e-commerce search engine suite, including the smartOCI®
Search Engine, Catalog Manager and Supplier Marketplace.
• A leading U.S. chipmaker has signed an agreement to implement smartOCI® search
engine in its SAP e-Procurement environment.
• NTE jointly acquired United Kingdom-based Virtual Lease Services, Ltd.
("VLS"), together with Investec Asset Finance Plc.
• Signed a multi-million dollar agreement to implement the NFS™ solution,
including its retail platforms, to a European Automobile manufacturer for its
Malaysian operations.
• Won a major contract in the area of 'Information Security' with a leading
Telecom in Pakistan.
• NetSol Technologies signed a significant contract to implement its NFSTM
solution for a major European automobile manufacturer.
• Signed a multi-million dollar contract with a major heavy machinery
manufacturer to implement its core NetSol Financial Suite solution in
Thailand.
The success of the Company, in the near term, will depend, in large part, on the
Company's ability to: (a) continue to grow revenues and improve profits, (b)
adequately capitalize for growth in various markets and verticals; (c) make
progress in the North American markets and, (d) continue to streamline sales and
marketing efforts in every market we operate. However, management's outlook for
the continuing operations, which has been consolidated and has been streamlined,
remains optimistic.
Marketing and Business Development Activities
Management has developed, and the board of directors has ratified, an aggressive
3-5 year growth strategy aimed at increasing competitiveness and financial
strength.
This plan is designed to:
Achieve 15-25% annual revenue growth for the next 5 years
Achieve 55-60% gross margins in 2013 and average 65% for next three years.
Result in enhanced organic growth
Build a strong new ecommerce vertical under Vroozi platform
Continue to enhance delivery and service capabilities in Pakistan ,China,
Thailand, USA and UK.
Strengthen NetSol brand and market shares in APAC markets
Consistently hire the best available talent to develop the next line of
managers for our growing demand
The plan contemplates the following enhanced activities and initiatives will
accomplish these goals:
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o Continued expansion in the Chinese market which offers ever growing new
opportunities in the auto, banking and lending sectors for NFS™.
o NetSol is positioning China to become a dominant market for lending enterprise
solutions for captive multinationals and local Chinese companies, including
equipment finance, big ticket leasing markets and the banking industry. In the
lease and finance domain NetSol can claim the de facto leadership position in
the rapidly growing Chinese market.
o Further augmentation of NTPK Thailand. The office space in Bangkok has been
enhanced with new hires of local and international staff to address and
support a very rapidly growing market. The pipeline of new customers is
growing from the markets in Japan, South Korea, Australia, India and other
regional markets. These markets will be serviced and supported from the
Thailand office with strong sales and client support team. The Bangkok
facility is intended to become an alternate delivery and implementation center
for global customers and partners in Asia Pacific.
o The new and fast growing manifestations of e-commerce, such as cloud computing, are being utilized by some of our offerings and will be further
explored by us for other offerings. Our e-commerce division's smartOCI® has
been demonstrated and presented to major fortune 500 companies in the US as an
on-demand, catalogue content management system. The demand of e-procurement
search engine seems robust and attractive. Continued new license sales
activities are in the pipeline for Vroozi, Inc. Presently smartOCI® is the
main asset in this entity while we explore other channels of growth in
e-commerce and search engine space. There has been a surge of interest amongst
fortune 500 corporations for demos and workshops for smartOCI® in recent
months. To date, ten new US based major corporations have been signed up for
smartOCI®.
o Europe continues to experience a severe recession coupled with regional debt
crises. NetSol Europe's operations have maintained modest growth in sales
while the Company has further rationalized overall operating
overheads. Despite the sluggish economy in Europe, our relationship with
existing clientele is very strong and we expect to generate new revenues from
these customers in this fiscal year. The integration of VLS in conjunction
with Investec Bank as a JV partner should bolster growth in services sectors
complementing core solutions and augmenting overall market share in the UK.
o The market of the Kingdom of Saudi Arabia is robust, rich and well
capitalized, offering vast opportunities for NetSol through our joint venture.
Recently, there have been a few new local IT contracts awarded but our vision
is based on long term and high value projects in the defense, public,
infrastructure and multinational auto captive markets. In order to be equal
partners with a major conglomerate, Atheeb Group, a $2 billion group in
revenue, we need to have the serious financial wherewithal and resources to
bid on major projects exceeding $100 million each in value. Currently, the
joint venture has 10 employees based in Riyadh with direct delivery and
implementation support from NetSol PK. Recently ANSCL has signed four new
contracts both in defense and private sector to provide IT services and
consulting in the key areas that are valued to over $2.0MN. This is just a
beginning as we see very exciting new developments as we close new contracts.
o Our NFS™ suite of products is currently undergoing a major initiative towards
developing the next generation of solutions. The Company believes that this
would change the landscape for NetSol and increase both demand and the market.
We are in the middle of developing a comprehensive sales and marketing plan
requiring new personnel, markets and investment. However, the demand for
current NFS has been very robust with some global clients and many new fortune
500 captive finance companies in China, Thailand and Japan.
o In order to maximize the market and product potential of our SAP and Ecommerce
line, highlighted by our smartOCI® product, we spun this line off into its own
operational entity. We believe this will better enhance product and market
development by providing a dedicated management and fulfillment staff.
Growth - New Alliances, Mergers & Acquisition
o The markets in the US and UK offer a host of complementary companies with
impressive client bases to expand the distribution channels for NFS™ and its
new generation product line. There are established small sized Companies,
with relatively low valuations, which can become part of NetSol on an
affordable basis. It is important to seek out these companies in order to grow
our customer base, revenue and net margins by leveraging our delivery and
implementation model.
27--------------------------------------------------------------------------------Funding and Investor Relations:
The fundamental challenge constantly facing the management is to achieve
sustainable growth with a healthy balance sheet, without too much dilution. In
light of global opportunities for organic growth and through alliances and
mergers and acquisitions, the Company raised cash through a public offering of
shares of common stock in 2012. We are using this cash infusion to support sales
and marketing, Vroozi, infrastructure, and operations and capital investment in
the Chinese subsidiary, NetSol Beijing. Going forward any new capital raise
would depend on new opportunities to accelerate growth organically and/or
through M&A.
We are using proceeds from the last offering of shares to the public on:
· Expansion in China, Thailand and other emerging markets.
· Expanding the North American operation to roll out NetSol new generation
solutions and enter Cloud Computing Solutions including building Vroozi.
· Build Vroozi as a winning name in the E-Commerce space.
· Support larger IT related public and defense sectors projects in the Kingdom
of Saudi Arabia with our joint venture partner.
· Capital Expenditures for our next generation products, technology and
infrastructure.
· Hiring and training of programmers, engineers, sales and marketing to create a
bigger bench for technical team to cater to bigger volume new contracts.
Investor Relations efforts will include:
· Working to grow our institutional investor base.
· Sharing the NetSol story with sell side analysts, funds, portfolio managers
and the financial media.
· Aggressively positioning NetSol in front of major investors' conferences and
road shows to be organized by our IR consultants and investment bankers.
· Utilizing US mainstream media to highlight NetSol's image and 'niche' business
offering.
· Founding management continued investment in the Company in the open market
reaffirming their commitment to the potential and the future of the Company.
Improving the Bottom Line:
Management believes that these measures will improve the bottom line on an
ongoing basis:
· Improve pricing, sales volume and fee structures.
· Continue consolidation and reevaluating operating margins as ongoing
activities.
· Streamline further cost of goods sold to improve gross margins to historical
levels over 60%, as sales ramp up.
· Generate higher revenues per employee, enhance productivity and lower cost per
employee.
· Optimize the utilization of NetSol's best talent and resources,
infrastructure, processes and disciplines to maximize the bottom-line and
fully leverage the cost arbitrage.
· Grow process automation and leverage the best practices of CMMI level 5.
Global delivery concept and integration will further improve both gross and
net margins.
· Cost efficient management of every operation and continue further
consolidation to improve bottom line.
· Create more visibility and predictability by implementing SaaS model in mature
markets. Retire Debt to reduce the interest cost significantly and to make
every effort to avoid any one time charges.
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Management continues to be focused on scaling up its delivery capability and has
achieved key milestones in that respect. Key projects are being delivered on
time and on budget, quality initiatives are succeeding, especially in maturing
internal processes. CMMI level companies are reassessed every three years by
independent consultants under the standards of the Carnegie Mellon University to
maintain its CMMI Level 5 quality certification. As required, NetSol was
reassessed in 2010 and was successfully recertified as CMMI Level 5. We believe
that the CMMI standards are a key reason in NetSol's demand surge worldwide. We
remain convinced that this trend will continue for all NetSol offerings
promoting further beneficial alliances and increasing the number and quality of
our global customers.
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
· The global economic uncertainty and consolidations have opened doors for low
cost solution providers such as NetSol. The BestShoring® model of NetSol is a
catalyst in today's environment.
· Global economic pressures and the recession have shifted users of IT processes
and technology to utilize both offshore and onshore solutions providers, to
control costs and improve ROIs.
· Serious interest in NetSol's next generation solution has been expressed by a
few global companies. Demos and workshops with key global clients and partners
of have been very well received. Hence, the new generation solution, while not
completely ready, is gaining momentum.
· First successful implementation of NextGen - NFS™ solution with a Thai bank is
a very positive indicator for new deals.
· China has become the world's second largest economy, continuing to grow by
over 8% a year while growth in other industrial nations has declined or grown
only marginally.
· China's automobile and banking sectors have been unaffected by the global
meltdown and their recent automobile sales statistics have outperformed all
other economies.
· Growing interest in Japan for IT services and NFS applications within banking,
equipment finance and general leasing industries.
· As reported by the Associated Press, China surpassed the US as the number one
automobile market in auto sales. JD Powers & Associates anticipated further
strong growth in future auto sales. It is anticipated that this market
opportunity will result in further penetration by NetSol into China's
burgeoning leasing and finance market.
· E-Commerce, new technologies, innovations and online activities are gaining
momentum in many verticals. New areas for diversification are opening for
NetSol. The B2B market has never been stronger in the US market alone thereby
offering a potentially huge opportunity to grow Vroozi offerings.
· Strong entry in e-commerce space by way of developing and marketing a new IP
and winning series of fortune 500 US customers.
· The surviving IT companies, such as NetSol, with price advantage and a global
presence, will gain further momentum as economic indicators turn positive. The
bigger customers and targeted verticals are much more cost conscious and are
seeking a better rate of return on investments in IT services. NetSol has an
edge due to its BestShoring® model and proven track record of delivery and
implementations worldwide.
· The Kingdom of Saudi Arabia is investing billions in healthcare, education,
defense, cyberspace securities, IT, infrastructure and many other new sectors.
This makes it one of the most promising markets for the Atheeb NetSol joint
venture.
· The dependency of our blue chip clients on NetSol solutions has further
deepened; creating new enhancements, new modules, and services orders in the
US.
· Improved outlook and earnings of bellwether technology companies in USA,
reflecting the turnaround of this sector after recession.
· Global opportunities requiring NetSol to diversify its delivery capabilities
to Bangkok and such other new emerging economies that offer geopolitical
stability and low cost IT resources, thereby reducing dependency upon the
Lahore technology campus.
29--------------------------------------------------------------------------------· Our global multi-national clients have continued to pursue deeper
relationships in newer regions and countries. This reflects our customers'
dependencies and satisfaction with our NetSol Financial Suite of products.
· The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports
is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT
exports of services. There are 4 more years remaining on this tax incentive.
Negative trends:
· Geopolitical unrest due to extremism in the regions of Pakistan and
Afghanistan.
· Continued strains in US-Pakistan relations.
· The emergence of many smaller players offering IT solutions in China has
resulted in greater price competition.
· The fear of renewed recession in the US and, a continued sluggish European
market could adversely affect our business in North America and Europe.
Tightened liquidity and credit restrictions in consumer spending has either
delayed or reduced spending on business solutions and systems, squeezing IT
budgets and extending decision making cycles. Restricted liquidity and
financial burden due to tighter internal processes and limited budgets might
cause delays in the receivables from some clients. Anticipated worsening US
deficit and a rise in inflation in coming years would put further stress on
consumers and business spending.
· Volatility in oil prices, the Euro zone in European markets and uncertainty
overall in global economies could deter the growth and GDP in the US.
· Unrest and growing war in Afghanistan could increase the migration of both
refugees and extremists to Pakistan, thus creating domestic and regional
challenges.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP").
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us include
revenue recognition and multiple element arrangements, intangible assets,
software development costs, and goodwill.
REVENUE RECOGNTION
The Company recognizes revenue from license contracts without major
customization when a non-cancelable, non-contingent license agreement has been
signed, delivery of the software has occurred, the fee is fixed or determinable,
and collectability is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage of
completion method. Revenue from the implementation of software is recognized on
a percentage of completion method.
Revenue from consulting services is recognized as the services are performed for
time-and-materials contracts. Revenue from training and development services is
recognized as the services are performed. Revenue from maintenance agreements is
recognized ratably over the term of the maintenance agreement, which in most
instances is one year.
MULTIPLE ELEMENT ARRANGEMENTS
We may enter into multiple element revenue arrangements in which a customer may
purchase a number of different combinations of software licenses, consulting
services, maintenance and support, as well as training and development (multiple
element arrangements).
VSOE of fair value for each element is based on the price for which the element
is sold separately. We determine the VSOE of fair value of each element based on
historical evidence of our stand-alone sales of these elements to third-parties
or from the stated renewal rate for the elements contained in the initial
software license arrangement. When VSOE of fair value does not exist for any
undelivered element, revenue is deferred until the earlier of the point at which
such VSOE of fair value exists or until all elements of the arrangement have
been delivered. The only exception to this guidance is when the only undelivered
element is maintenance and support or other services, then, the entire
arrangement fee is recognized ratably over the performance period.
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--------------------------------------------------------------------------------INTANGIBLE ASSETS
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, and customer lists. Intangible assets with
finite lives are amortized over the estimated useful life and are evaluated for
impairment at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We assess
recoverability by determining whether the carrying value of such assets will be
recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, we
recognize an impairment loss based on the excess of the carrying amount over the
fair value of the assets.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to internally develop computer software products or to enhance an
existing product are recorded as research and development costs and expensed
when incurred until technological feasibility for the respective product is
established. Thereafter, all software development costs are capitalized and
reported at the lower of unamortized cost or net realizable value.
Capitalization ceases when the product or enhancement is available for general
release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate that
the unamortized software development costs exceed the net realizable value, the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis.
STOCK-BASED COMPENSATION
Our stock-based compensation expense is estimated at the grant date based on the
award's fair value as calculated by the Black-Scholes-Merton (BSM) option
pricing model and is recognized as expense over the requisite service period.
The BSM model requires various highly judgmental assumptions including expected
volatility and expected term. If any of the assumptions used in the BSM model
changes significantly, stock-based compensation expense may differ materially in
the future from that recorded in the current period. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. We estimate the forfeiture rate based on
historical experience and our expectations regarding future pre-vesting
termination behavior of employees. To the extent our actual forfeiture rate is
different from our estimate; stock-based compensation expense is adjusted
accordingly.
RECENT ACCOUNTING PRONOUNCEMENTES
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, see Note 3 of
Notes to Condensed Consolidated Financial Statements included elsewhere in this
Quarterly Report.
GOODWILL
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.
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--------------------------------------------------------------------------------CASH RESOURCES
The company had $8.02 million worldwide in cash as on September 30, 2012.
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--------------------------------------------------------------------------------AVAILABLE INFORMATION
Through the company's web sites, its customers, both existing and potential, and
investors can access a wide range of information about its product offerings,
and support and technical matters.
Our website is located at www.netsoltech.com, and our investor relations website
is located at http://www.netsoltech.com/IR/. 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 Quarterly Report on Form 10-Q 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://www.netsoltech.com/us/investors/corporate-governance . The content of
our websites are not intended to be incorporated by reference into this 10-Q 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.
33
--------------------------------------------------------------------------------CHANGES IN FINANCIAL CONDITION
QuarterEnded September 30, 2012 as compared to the Quarter Ended September 30,
2011
Net revenues for the quarter ended September 30, 2012 and 2011 are broken out
among the subsidiaries as follows:
2012 2011
Revenue % Revenue %
Corporate headquarters $ - 0.00 % $ - 0.00 %
North America:
NTNA 1,279,721 11.56 % 909,069 14.59 %
Vroozi 433,469 3.92 % -
1,713,190 15.47 % 909,069 14.59 %
Europe:
NTE 1,117,915 10.10 % 916,618 14.72 %
VLS 388,086 3.51 % - 0.00 %
1,506,001 13.60 % 916,618 14.72 %
Asia-Pacific:
NetSol PK 3,793,002 34.26 % 3,184,046 51.12 %
NetSol-Innovation 804,509 7.27 % 902,195 14.48 %
Connect 169,243 1.53 % 149,795 2.40 %
Abraxas 751,889 6.79 % 68,782 1.10 %
NTPK Thailand 2,334,066 21.08 % 98,202 1.58 %
7,852,709 70.92 % 4,403,020 70.69 %
Total $ 11,071,900 100.00 % $ 6,228,708 100.00 %
34--------------------------------------------------------------------------------
The following table sets forth the items in our unaudited consolidated statement
of operations for the three months ended September 30, 2012 and 2011 as a
percentage of revenues.
For the Three Months
Ended September 30,
2012 % 2011 %
Net Revenues:
License fees $ 3,241,501 29.28 % $ 1,075,850 17.27 %
Maintenance fees 2,045,706 18.48 % 2,037,206 32.71 %
Services 5,784,693 52.25 % 3,115,652 50.02 %
Total net revenues 11,071,900 6,228,708 100.00 %
Cost of revenues:
Salaries and consultants 3,385,668 30.58 % 2,383,411 38.26 %
Travel 325,294 2.94 % 285,673 4.59 %
Repairs and maintenance 127,997 1.16 % 74,194 1.19 %
Insurance 37,719 0.34 % 35,868 0.58 %
Depreciation and amortization 958,151 8.65 % 789,105 12.67 %
Other 921,858 8.33 % 516,409 8.29 %
Total cost of revenues 5,756,687 51.99 % 4,084,660 65.58 %
Gross profit 5,315,213 48.01 % 2,144,048 34.42 %
Operating expenses:
Selling and marketing 762,963 6.89 % 700,281 11.24 %
Depreciation and amortization 342,001 3.09 % 191,674 3.08 %
Salaries and wages 1,153,873 10.42 % 806,564 12.95 %
Professional services, including non-cash
compensation 206,502 1.87 % 186,749 3.00 %
General and adminstrative 1,347,928 12.17 % 1,085,222 17.42 %
Total operating expenses 3,813,267 34.44 % 2,970,490 47.69 %
Income (loss) from operations 1,501,946 13.57 % (826,442 ) -13.27 %
Other income and (expenses)
Gain (loss) on sale of assets 14,296 0.13 % (1,641 ) -0.03 %
Interest expense (292,389 ) -2.64 % (251,430 ) -4.04 %
Interest income 24,167 0.22 % 32,805 0.53 %
Gain on foreign currency exchange transactions 395,156 3.57 % (120,906 ) -1.94 %
Share of net loss from equity investment - 0.00 % (100,000 ) -1.61 %
Beneficial conversion feature (367,744 ) -3.32 % (21,583 ) -0.35 %
Other (expense) (32 ) 0.00 % (7,719 ) -0.12 %
Total other (expenses) (226,546 ) -2.05 % (470,474 ) -7.55 %
Net income (loss) before income taxes 1,275,399 11.52 % (1,296,916 ) -20.82 %
Income taxes (13,996 ) -0.13 % (24,534 ) -0.39 %
Net income (loss) after tax 1,261,403 11.39 % (1,321,450 ) -21.22 %
Non-controlling interest (332,279 ) -3.00 % (137,258 ) -2.20 %
Net income (loss) attibutable to NetSol 929,124 8.39 % (1,458,708 ) -23.42 %
Net revenues for the quarter ended September 30, 2012 were $11,071,900 as
compared to $6,228,708 for the quarter ended September 30, 2011. This reflects a
significant increase of $4,843,192 or 77.76% in the current quarter as compared
to the quarter ended September 30, 2011. Year over year, revenue from license
income was increased by $2,165,651 mainly due to signing of new deals of the
core NetSol Financial SuiteTM. The comparative quarter was one of our most
sluggish quarters as certain deals were delayed. Services revenue, which also
includes consulting and implementation, increased to $5,784,693, as compared to
$3,115,652 last year. This is an increase by 85.67%. The increase in services
revenue is due to implementation of our product at new customers' sites and
ongoing requests for customization and enhancement from our existing customers.
Our maintenance fees slightly increased by $8,500.00, which was $2,045,706 in
the current quarter, as compared to $2,037,206 in the comparable period. As we
manage to sell more licenses, this fee is expected to increase in the future.
The gross profit was $5,315,213 in the quarter ending September 30, 2012 as
compared with $2,144,048 for the same quarter of the previous year. This is an
increase of 147.91% or $3,171,165. The gross profit percentage for the quarter
also increased to 48.01% from 34.42% in the quarter ended September 30, 2011,
mainly due to increase in license and services revenue. The cost of sales was
$5,756,687 in the current quarter compared to $4,084,660 in the comparable
quarter of fiscal 2011. As a percentage of sales it decreased from 65.58% for
the quarter ended September 30, 2011 to 52% in the current quarter. Salaries and
consultant fees increased by $1,002,257; from $2,383,411, in the prior
comparable quarter, to $3,385,668. As a percentage of sales, it decreased from
38.26% in the prior comparable quarter to 30.58% in the current quarter. The
increase in salaries is due to the annual pay raise and hiring of new employees
at key locations including North America, China and Thailand. Depreciation and
amortization expense increased to $958,151 compared to $789,105 in the
corresponding quarter last year or an increase of $169,046.
35
--------------------------------------------------------------------------------
Operating expenses were $3,813,267 for the quarter ending September 30, 2012 as
compared to $2,970,490, for the corresponding period last year or an increase of
28.37% or $842,777. As a percentage of sales, it decreased from 47.69% to
34.44%. The main reason of this variation is the consolidation of expenses of
another subsidiary (VLS) which was not in the corresponding period. Depreciation
and amortization expense amounted to $342,001 and $191,674 for the quarter ended
September 30, 2012 and 2011, respectively. Combined salaries and wage costs were
$1,153,873 and $806,564 for the comparable periods, respectively. As a
percentage of sales, these costs decreased from 12.95% to 10.42%. General and
administrative expenses were $1,347,928 and $1,085,222 for the quarters ended
September 30, 2012 and 2011, respectively, an increase of $262,706 or 24.21%. As
a percentage of sales, these expenses were 12.17% in the current quarter
compared to 17.42% in the comparable quarter.
Selling and marketing expenses were $762,963 and $700,281, in the quarter ended
September 30, 2012 and 2011, respectively. The Company is marketing its products
in different geographies of the world and has hired more professional resources
for the business development. Also the aggressive marketing of smartOCI® and
other Vroozi products in North America and Europe has resulted in increase in
sales and marketing expenses. Professional services expense increased 10.58% to
$206,502 in the quarter ended September 30, 2012, from $186,749 in the
corresponding period last year.
Income from operations was $1,501,946, compared to loss of $826,442, for the
quarters ended September 30, 2012 and 2011, respectively. This represents an
increase of $2,328,388 for the quarter compared with the comparable period in
the prior year. As a percentage of sales, net income from operations was 13.57%
in the current quarter compared to a net loss of 13.27% in the prior period.
Net income was $929,124, compared to a net loss of $1,458,708, for the quarters
ended September 30, 2012 and 2011, respectively. This is an increase of
$2,387,832 compared to the prior year. Included in this income is foreign
currency exchange gain of $395,156 compared to an exchange loss of $120,906 in
the same reporting period last year, mainly due to appreciation of the USD, Euro
and Pound in the current quarter against the Pakistan Rupee. The current fiscal
quarter amount includes a net reduction of $332,279, compared to $137,258 in the
prior period, for the 49.9% non-controlling interest in NetSol Innovation owned
by other parties, the 39.48% non-controlling interest in NetSol PK and 49%
non-controlling interest in VLS. Interest expense was $292,389 in the current
quarter as compared to $251,430 in the comparable period. Net income per share,
basic and diluted, was $0.12 as compared to net loss per share $0.26 for the
quarters ended September 30, 2012 and 2011 respectively.
The net EBITDA income was $2,511,495 compared to a loss of $234,770 for the
quarters ended September 30, 2012 and 2011, after amortization and depreciation
charges of $1,300,152 and $980,779, income taxes of $13,996 and $24,534,
interest expense of $292,389 and $251,430, and interest income of $24,167 and
$32,805 respectively. The EBITDA earning per share, basic and diluted was $0.33
for the quarter ended September 30, 2012 as compared to a loss per share of
$0.04 for the quarter ended September 30, 2011. As a percentage of revenues
EBITDA was 22.68% compared to (3.77%) for the quarters ended September 30, 2012
and 2011, respectively. Although the net EBITDA income is a non-GAAP measure of
performance, we are providing it because we believe it to be an important
supplemental measure of our performance that is commonly used by securities
analysts, investors, and other interested parties in the evaluation of companies
in our industry. It should not be considered as an alternative to net income,
operating income or any other financial measures calculated and presented, nor
as an alternative to cash flow from operating activities as a measure of our
liquidity. It may not be indicative of the Company's historical operating
results nor is it intended to be predictive of potential future results.
36
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
We note that the Company's cash position was $8,019,788 at September 30, 2012,
compared to $3,123,686 at September 30, 2011.
Net cash provided by operating activities amounted to $2,898,831 for the three
months ended September 30, 2012, as compared to $883,900 for the comparable
period last fiscal year. The increase is mainly due to increase in net profits
of the Company. The average collection cycle for accounts receivables ranges
between three to six months from the date of invoicing. The average days sales
outstanding, for the period ended September 30, 2012, was 150 days as compared
with 205 days in same period of fiscal 2012.
Net cash used by investing activities amounted to $2,488,599 for the three
months ended September 30, 2012, as compared to $3,293,974 for the comparable
period last fiscal year. The Company had net purchases of property and equipment
of $1,457,134 compared to $1,427,884 for the comparable period last fiscal year.
The increase in intangible assets which represents amounts capitalized for the
development of new products was $1,091,966 and $1,768,681 for the comparable
periods.
Net cash provided by financing activities amounted to $171,628 and $1,410,133
for the three months ended September 31, 2012, and 2011, respectively. The three
months ended September 30, 2012 included the cash inflow of $252,900 from the
exercising of stock options and warrants compared to $140,000 in the three
months ended September 30, 2011. In the current fiscal period, the Company had
net payments on account of bank loans, loans and capital leases of $1,160,684 as
compared to $4,885,224 in the comparable period last year. The Company is
operating in varying geographical regions of the world through its 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 the detail
of which is given in Note No. 12 of the annexed financial statements. The
company and all its subsidiaries are in compliance with the covenants of the
financial arrangements and there is no default, whatsoever, which may lead to
early payment of these obligations. The Company anticipates to pay back all
these obligations on their respective due dates from its own sources.
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 $5.0 to $7.0 million for US, European and UAE, 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 the Company, we will be very cautious and prudent about any
new capital raise given the global market declines. However, the Company is very
conscious of the dilutive effect and price pressures in raising equity-based
capital.
Financial Covenants
Our UK based subsidiary, NetSol Technologies Europe Limited (NTE) has an
approved overdraft facility of £300,000 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. NTE had been granted another
credit facility of £1,000,000 for the acquisition VLS. This facility requires
that NTE's adjusted tangible net worth would not be less than £600,000. For this
purpose, adjusted tangible net worth means shareholders' funds less intangible
assets plus non-redeemable preference shares. In addition, NTE's cash debt
service coverage would not fall below 150% of the aggregate debt service
cost. The Pakistani subsidiary, NetSol Technologies Limited (NTPK) has an
approved facility for both export refinance and term finance from Askari Bank
Limited amounting to Rupees 362.5 million ($3,793,428) which requires NTPK to
maintain a long term debt equity ratio of 60:40 and the current ratio of 1:1.
As of the date of this report, the Company and all its subsidiaries are in
compliance with the financial covenants associated with its 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.
37--------------------------------------------------------------------------------
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