ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion is intended to assist in an understanding of NetSol's
financial position and results of operations for the year ended June 30, 2010.
Forward Looking Information
This report contains certain forward-looking statements and information relating
to NetSol that is based on the beliefs of 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 NetSol or its management, are
intended to identify forward-looking statements. These statements reflect
management's current view of NetSol 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
inaccurate, actual results may vary materially from those described in this
report as anticipated, estimated or expected. NetSol'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 NetSol'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 is built. NetSol does not
intend to update these forward-looking statements.
Management undertook major steps to counter the deep effect of global recession,
such as:
o In 2009-2010, to enhance productivity and cost efficiencies, the concept of
Global Delivery Model has been implemented. Without moving the source codes
of US products or UK products to Lahore, Pakistan, we have integrated the
local developers / engineers / programming resources with PK technology group
teams. This model would eventually create much stronger band width for
customers worldwide but also have the same interfacing local management
available for regional clients. In essence, the concept of BestShoring� model
is effectively being executed.
o The global delivery model would further streamline the cost base as well as
optimum utilization of NetSol Center of Excellence, CMMI Level 5 technology
campus and translate into better and more competitive pricing modules for our
customers.
o Revamped sales organization from several departments into one group. The newly
created global sales organization under one president of global sales,
centrally headquartered in the UK, would provide much improved visibility and
traction in all key markets worldwide. In addition to achieving critical mass
and visibility the regional sales heads have been created to directly report
to President Group Sales.
o Key senior and middle management personnel were relocated in China, USA and UK
to best leverage the talent across the globe and cost rationalization.
o Substantially reduced office costs by relocating NTNA staff from Emeryville,
California to Alameda, California by entering a new office lease that will
save nearly $1.0 million in annual rent and maintenance expenses.
o Engaged RedChip Companies, Inc. to lead its investor relations programs.
RedChip's highly professional team, who specialize in the capital market
space, was engaged to strengthen our public relations and assist in building
strong relationships with current and prospective investors. /
o Some marketing and new project activities had to be slowed down due to the
poor economy but the most strategic new product development and research and
development activities has increased. Management's vision is that a one
product global solution is the key initiative that will place NetSol in the
next level of critical mass solutions providers.
Business Development Activities:
� NetSol launched a long term strategy in 2008 to get NetSol brand and name
recognition in UAE and GCC States by a dual listing on DIFX (now the NASDAQ
DUBAI exchange). Management believes that the signing of a joint venture
agreement with a very well established Saudi Arabian business conglomerate
represents a major break-through for the Company. The joint venture is a
relationship between NetSol Technologies, Inc. and the Atheeb Group of the
Kingdom of Saudi Arabia ("KSA"). NetSol owns 51% and Atheeb owns 49% of the
newly created Atheeb NetSol, Ltd. to be based in Riyadh, Saudi Arabia. Atheeb
has been in operation since 1985 and has major businesses in defense, public
works, telecom, financial, transportation and agriculture. By partnering with
Atheeb through a joint venture, NetSol gains access to not only major local
projects in key sectors but also to regional economies in GCC states, Central
Asia and Africa. The influence and reputation of Atheeb in the KSA and
regional markets is compelling, and NetSol expects to benefit handsomely in
coming years. The joint venture will fully utilize NetSol PK's Lahore based
center of excellence, CMMI Level 5 technology campus.
� The acquisition of Ciena Solutions for SAP services has been effectively
integrated with NetSol's operation. Our new SAP services and offerings are
being marketed to our existing US based clients and new markets to establish a
key new vertical. The US clients list includes a major energy utility company
in California. Additionally, we believe a majority of NetSol global clients
could benefit from SAP services and solutions. The Company is beta testing its
product, SMART OCI, a search engine to expand its SAP product portfolio. The
practice was recently awarded SAP PartnerEdge status as an SAP services
partner.
� By expanding into the Americas, NetSol sees a strong opportunity to establish
its brand recognition and create critical mass in the Americas. Despite the
recession and consolidations in the U.S., NetSol has embarked on an aggressive
strategy to reposition and rebrand NetSol for the U.S markets. For example,
NetSol is strategically rolling out offerings of the NetSol Financial Suite�
to our global auto manufacturers, whether captive or non-captive, in the North
and South American markets. NetSol sees a new market in Mexico, Brazil, Costa
Rica and many countries in Latin America as both mature and emerging markets
are ripe for our flagship NFS� applications. NetSol added two new global
customers to the Americas in Nissan's North America and Mexican operations. In
addition, NTNA is experiencing new enhancement and orders from a few existing
clients in North America, reflecting confidence in our US team.
� Management envisions a major growth in the Chinese market as China continues
to have strong economic indicators amongst the major industrial countries.
Auto sales in China have surpassed that of the US in numbers of unit sold.
China continues to maintain a GDP rate of 8-9% in 2010, while some of the
western markets are struggling with their economy. China's market offers a
tremendous opportunity to NetSol as being the leader in leasing and finance
soft ware applications space. China is now the globe's second largest economic
power and its auto and banking sectors are growing at a dynamic pace, unlike
the western markets. We are expanding the Beijing office and adding local
staff. Our current ten multi-national customers in China have begun to expand
their relationship with NetSol. We recently signed a few new deals with a few
multinational auto companies and Minsheng Bank, one of the largest in China
Management anticipates that the NFS� products will demonstrate a noted break
through with Chinese companies in coming months.
� The European economy has shown serious decline and the severe impact of
consolidation and budget cuts have started to intensely affect our business
there. The European markets are expected to remain sluggish and we will hold
off any further investment until next year. However, it appears that decisions
made by some European nations signal economic recovery in the major European
economies.
� We expect top line growth through investment in organic marketing activities.
NetSol marketing activities will continue to:
� Encourage organic revenue growth in the Chinese market in the automobile,
banking, manufacturing and captive leasing sectors.
� Expand the Beijing office with new local Chinese staff and senior business
development and project management teams.
� Further penetrate the Asia Pacific markets by selling NetSol offerings in the
key and robust markets of Australia, New Zealand, Singapore, Thailand, South
Korea and, Japan.
� Expand Thailand operations with the aim of making it a second hub, after
China. A few senior business development teams have been mobilized and
relocated in Thailand to support the new business development efforts in the
APAC region.
� While consolidating the development and sales teams, further build and expand
in the North America market. As the most mature and largest market for the
Company's solutions, North America will remain key to new revenue in the
coming years. NetSol's existing product line including LeasePak and its
modules will remain as a primary offering to support our existing customers.
� NetSol SAP practice will enhance the revenue and add new customers for SAP
consulting service, staffing & proprietary bolt-on software offerings.
� Expand and support the new and innovative road map of more capable and robust
solutions to the existing 30 plus US customers.
� Increase marketing activities by participating in major forums such as ELFA
(the Equipment Leasing & Finance Association) in North America and many other
selected international forums to grow NetSol business and image.
� Test market NFS� new generation products with key global customers.
� Expand and win new customers in the Middle Eastern markets through a recently
formed joint venture with Atheeb Group in the KSA. This will include sectors
in leasing, banking, defense and public areas.
� Optimize Lahore's center of excellence in emerging and growing markets in
Middle East.
� Grow new revenues in public and defense sectors in Pakistan.
Funding and Investor Relations:
Management anticipates, but there is no guaranty, that as the price of the
Company's shares of common stock will rise, as quoted on the Nasdaq Capital
Market, and that:
� Officers may exercise options that are currently in the money;
� Company may look to raise new capital through debt or common stock offerings
with friends of family investors which will be held for long term investment
and require no payment of placement fees.
� Exercise of warrants by major fund investors.
Investor Relations efforts will include:
� Newly hired IR and PR firm will play a major part in expanding the new retail
and institutional investors base
� Telling the NetSol story to sell side analysts, funds, portfolio managers and
financial media
� Aggressively position NetSol in front of major investors' conferences and road
shows to be organized by RedChip and other major institutions.
� Push strategy with US mainstream media to build NetSol image and a 'Niche'
business offering.
� Founding management's aim to continue to invest in the company is anticipated
to display such management's belief in NetSol's potential to new investors.
� Aggressively enhance the visibility and liquidity in NASDAQDUBAI exchange
through road shows and Middle East focused investors' conferences.
Improving the Bottom Line:
Management believes an essential improvement to the bottom line will be the
successful completion of the acquisition of NTNA and NTE by NetSol PK. This
acquisition completes the full integration of the entities resulting in improved
operating costs. Additionally, the acquisition, which is accomplished by NetSol
PK with the issuance of new shares of common stock of NetSol PK to the Company,
will increase the Company's ownership percentage of NetSol PK from 58% to
77%. This change decreases the minority interest thus positively impacting the
earnings per share.
This integration is anticipated to:
� Improve pricing 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 PK 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.
� Reduced General and Administrative expense and expenses of marketing programs.
� Retire Debt to reduce the interest cost significantly and to make every effort
to avoid any one time charges.
Management continues to be focused on building 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.
In a quest to continuously improve its quality standards, 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. The quest for
quality standards is imperative to NetSol's overall sustainability and
success. In 2008, NetSol became ISO 27001 certified, a global standard and a set
of best practices for Information Security Management.
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
� The global recession 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.
� The global economic pressures and recession has shifted IT processes and
technology to utilize both offshore and onshore solutions providers, to
control the costs and improve ROIs.
� China has become the second largest economy and has grown to over 9% GDP a
year while other industrial nations have declined or grown marginally.
� China's automobile and banking sectors have been unaffected by the global
meltdown and in fact have outgrown all other economies with their recent
automobile sales statistics.
� China sold 58 cars per 1,000 people as compared to 900 cars per 1,000 in the
USA. There is a tremendous opportunity for NetSol's penetration in China's
burgeoning leasing and finance market for NetSol.
� 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.
� NetSol has never lost a product customer despite the recent severe recession.
The dependency of our blue chip clients on NetSol solutions has further
elevated new enhancements and services orders in the US.
� Improved outlook and earnings of bell weather technology companies in USA,
reflecting the turnaround of this sector after recession.
� The aid and support of trade in Pakistan from countries like the US, China,
Saudi Arabia and other western and friendly countries seems to be growing
recently. This will positively affect NetSol, local employees and customers
worldwide. Pakistan has every potential to rise up as the plans for energy,
power, agriculture and infrastructures (including 12 new dams to be built by
Chinese companies) create a much better outlook and growth for Pakistan.
� US AID and many other western agencies are diligently assisting the Pakistani
people to improve literacy, education, poverty alleviation and healthcare
programs. These initiatives will necessarily result in more graduates in
science and technology areas.
� Global opportunities to diversify delivery capabilities in new emerging
economies that offer geopolitical stability and low cost IT resources reducing
dependency upon Lahore technology campus.
� 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 7 more years remaining on this tax incentive.
Negative trends:
� Geo political unrest due to extremism in the regions of Pakistan and
Afghanistan.
� The worst flooding disaster in Pakistan due to heavy monsoon rainfall has
affected more than 20 million people. The rebuilding of the affected areas
will distract the government of Pakistan and major resources will be diverted
to deal with the aftermath of this disaster. Accordingly, management expects
delays in major public and defense projects.
� The emergence of many smaller players offering IT solutions in China has
resulted in competition on pricing.
� The sluggish European market, due to debt crisis, could lead to our European
business suffering.
� Dramatic and deep global recession has created a serious decline in business
spending causing significant budget cuts for many of the Company's target
verticals.
� Tightened liquidity and credit restrictions in consumer spending has either
delayed or reduced spending on business solutions and systems squeezing IT
budgets and elongating decision making cycles.
� Tighter internal processes and budgets will cause delays in the receivables
from few clients.
� Challenged US auto sectors, banking and retail sectors, thus resulting in
longer sales and closing cycles.
� Anticipated worsening US deficit and rise in inflation in coming years would
further put stress on consumers and business spending.
� 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 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.
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 over three
years, whichever method results in a higher level of amortization.
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.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Board of Directors
At the 2010 Annual Shareholders Meeting the Company's current seven member board
stood for election. As a quorum at this meeting was not achieved, and according
to the bylaws of the Company, the current slate retains its positions as
directors until the next meeting. The board of directors is made up of: Mr.
Najeeb U. Ghauri, Mr. Salim Ghauri, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr.
Shahid Burki, Mr. Mark Caton and Mr. Alexander Shakow.
Committees
The Audit committee is made up of Mr. Burki as Chairman, Mr. Caton, Mr. Beckert
and Mr. Shakow as members. The Compensation committee consists of Mr. Caton as
its Chairman and Mr. Beckert, Mr. Burki, and Mr. Shakow as its members. The
Nominating and Corporate Governance Committee consists of Mr. Beckert as
chairman and Mr. Burki, Mr. Caton and Mr. Shakow as members.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2010 COMPARED TO THE YEAR ENDED JUNE 30, 2009
Net revenues for the year ended June 30, 2010 were $36,779,897 as compared to
$26,448,177 for the year ended June 30, 2009. Net revenues are broken out among
the subsidiaries as follows:
2010 2009
Revenue % Revenue %
North America:
NTNA $ 5,627,277 15.30 % $ 5,396,693 20.40 %
5,627,277 15.30 % 5,396,693 20.40 %
Europe:
Netsol UK - 0.00 % - 0.00 %
NTE 5,105,434 13.88 % 3,886,337 14.69 %
5,105,434 13.88 % 3,886,337 14.69 %
Asia-Pacific:
Netsol Tech (PK) 21,397,724 58.18 % 13,265,196 50.16 %
EI 2,210,357 6.01 % 3,098,353 11.71 %
Netsol Connect 542,521 1.48 % 673,256 2.55 %
Netsol-Abraxas Australia 96,583 0.26 % 128,342 0.49 %
Netsol-Thailand 1,800,000 4.89 % 0.00 %
26,047,185 70.82 % 17,165,147 64.90 %
Total $ 36,779,897 100.00 % $ 26,448,177 100.00 %
|
The following table sets forth the items in our consolidated statement of
operations for the years ended June 30, 2010 and 2009 as a percentage of
revenues.
. . .
