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NETSOL TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of 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 ended September 30, 2014. 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) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for our clients as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions. Page 20 --------------------------------------------------------------------------------NFS Ascent™ 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™ (NetSol Financial Suite) and NFS AscentTM for leading businesses in the global lease and finance industry. 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 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 San Francisco Bay Area · Europe London Metropolitan area · Asia Pacific Lahore, Bangkok, Beijing and Sydney The Company maintains services, solutions and/or sales specific offices in the USA, England, Germany, Pakistan, Thailand, China, Australia and Japan. NetSol's offerings include its flagship global solution, NFS™. A robust suite of five software applications, it is an end-to-end solution for the lease and finance industry covering the complete leasing and financing cycle, starting from quotation origination through end of contract transactions. 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. When used together, they fully automate the entire leasing/financing cycle for any size company, including those with multi-billion dollar portfolios. On October 24, 2013, we announced the introduction and global release of NFS Ascent™, the Company's next-generation platform, offering 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 30 years. 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 under various generally accepted accounting principles (GAAP), as well as international financial reporting standards (IFRS). 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. NFS Ascent™ has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to dramatically improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. We believe that the transition from NFS™ to NFS Ascent™ allows: · Improvement in overall productivity throughout the delivery organization: The new architecture and design of the system allow the implementation team o to deliver more with less, thus potentially increasing the delivery of more projects in any given financial year. The functionalities, like the Business Process Manager, Workflow Engine and o Business Rule Engine, provides flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization. Page 21-------------------------------------------------------------------------------- The NFS Ascent™ platform and the SOA architecture allow us to develop o portals and mobile applications quickly by utilizing our existing services. Integration with other systems becomes easier and quicker as we can expose our services to the external world for consumption. The n-tier architecture allows us to better distribute the tasks among o various team members, and because of the loose coupling between various modules and layers, the risk of regression in other parts of the system as a result of changes made in one part of the system is reduced tremendously. · Improvement in talent acquisition and retention: Because NFS Ascent™ has been developed using the latest technologies and o tools available in the market, it helps us attract and retain top engineers. · Better customer satisfaction: As a result of the powerful NFS Ascent™ platform and improvement in the o talent acquisition and retention, the quality of our deliverables should increase. While the next-generation of NFS™ is designed to be a truly global solution, ready for customization in any market, the Company has historically provided products tailored to the various markets. It offers the following regional products: LeasePak In North America, NTA has and continues to develop LeasePak Productivity modules as an additional companion set of products to operate in conjunction with the LeasePak base system licensed software. LeasePak streamlines the lease management lifecycle, while maintaining customer service and reducing operating costs. It is web-enabled and can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. It is easily scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes of operations with varying complexity. It is part of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, 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 and asset disposition. Recently, it has been integrated with Vertex Series O. LeasePak-SaaS The LeasePak-Software as-a-Service ("SaaS") targets small and mid-sized leasing and finance companies. The product dramatically reduces the customer's IT spending by minimizing the cost of acquiring and maintaining expensive IT infrastructure and related administrative staff. LeasePak SaaS offers a new deployment option whereby customers only require access to the internet and web browser to use the software. Customers pay for the use of the system through a monthly subscription fee, covering use of the software, maintenance, support, hosting and other various items that reduce the overall cost and processing time of finance companies. NTA's solutions now include the SaaS business line, which provides enhanced performance, while reducing the overall cost of ownership. 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. Page 22 --------------------------------------------------------------------------------LeaseSoft In addition to offering all NetSol products, NetSol Technologies Europe, Ltd. ("NTE") has some regional offerings, including: · LeaseSoft Portal - introduced to support online access to proposals and for the foundation of web-based origination systems; · LeaseSoft Document Manager - introduced to facilitate the automation, production and distribution of proposal documentation, including indexation and branding of all outbound and inbound documents; · LeaseSoft Auto-Decision Engine - developed to provide automation of credit checking and underwriting for standards based financial products; · LeaseSoft EDI Manager - introduced to facilitate process automation between business introducers and funders; · Evolve - launched to provide an entry level software package for own-book brokerages and small to medium size funders. The following discussion is intended to assist in an understanding of NetSol's financial position and results of operations for the three months ended September 30, 2014. It should be read together with our condensed consolidated financial statements and related notes included herein. A few of NetSol's major successes achieved in the first three months of fiscal year 2015 were: · NetSol PK signed an agreement valued at more than $16 million over a period of five years to implement NFS AscentTM. The implementation, with a major multi-finance group in Asia, will fully automate all finance front and back office operations. · NetSol China signed an agreement with an auto captive finance company in China for the implementation of NFSTM, the Company's legacy system. · NetSol PK signed an agreement to implement NFS™ at a leading auto captive finance company in China. · NTE and VLS developed a Business Process Outsource service to address the broker market for own book management. In collaboration with funders, the service will form part of the funding approval process, which will generate a significant increase in sales opportunities. · Established a new office in Stuttgart, Germany to improve NetSol's presence in Europe. · Expanded relationship with CNH Industrial Capital, Australia, to further implement NFS. Our success, 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 and European 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, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space. The plan contemplates the following enhanced activities and initiatives to accomplish these goals: · Continue to advance infrastructure and systems in Lahore, Bangkok and San Francisco locations. · Strengthen the NetSol brand in the Americas and further penetrate in APAC markets such as China, Thailand, Indonesia, Australia and New Zealand. · Hire and retain the best available talent to develop the next line of managers for our growing demand. · Develop the sales and delivery capabilities for the Americas markets, in particular the growth in the U.S. auto and banking sectors. A shift in revenue contribution from the Americas markets in next few users would improve both gross and net operating margins due to the volume and size of U.S. contracts; further position NetSol to deliver and support the new growth and technology dimensions in IT services, maintenance, mobile apps and cloud based solutions. · Maintain the quality of our delivery, after delivery support, and client relationships. · We plan to aggressively market NFS Ascent™ in Europe and North America to penetrate the auto captive leasing and financing sectors. Page 23-------------------------------------------------------------------------------- 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. While we believe this quality certification will be renewed, our current reassessment due for August 2013 is currently pending. We believe that the CMMI standards are a key reason in reliance and trust in NetSolproducts. We remain optimistic 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: · Improving U.S. economy generally, and particularly in the auto and banking markets. · Slowly improving economic environment in the U.K. and major European economies. · New emerging markets and IT destinations in Thailand, Malaysia, Indonesia and Australia. · Interest of global companies in NetSol's next-generation solution. · Growing interest in Japan for IT services and NFS™ applications within banking, equipment finance and general leasing industries. Negative trends: · Geopolitical unrest in the Middle East and potential terrorism and the disruption risk it creates. · Restricted liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables from some clients. · The threats of conflict between the U.S. and Middle Eastern region could potentially create volatility in oil prices, causing readjustments of corporate budgets and consumer spending slowing global auto sales. · Continued conflicts in Afghanistan could increase the migration of both refugees and extremists to Pakistan, thus creating domestic and regional challenges. · Internal political challenges in Pakistan affecting the economy and image of the country. 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. Page 24--------------------------------------------------------------------------------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). Vendor Specific Objective Evidence ("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. Page 25 --------------------------------------------------------------------------------STOCK-BASED COMPENSATION Our stock-based compensation expense is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly. GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase 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 PRONOUNCEMENTES For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. 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/us/investors/overview. 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. Page 26 --------------------------------------------------------------------------------CHANGES IN FINANCIAL CONDITION Quarter Ended September 30, 2014 compared to the Quarter Ended September 30, 2013 Net revenues for the quarter ended September 30, 2014 and 2013 are broken out among the subsidiaries as follows: 2014 2013 Revenue % Revenue % North America 1,166,777 11.41 % 1,081,618 12.12 % Europe 1,850,013 18.09 % 1,208,502 13.55 % Asia-Pacific 7,210,361 70.50 % 6,630,622 74.33 % Total $ 10,227,151 100.00 % $ 8,920,742 100.00 % Page 27-------------------------------------------------------------------------------- The following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended September 30, 2014 and 2013 as a percentage of revenues. For the Three Months Ended September 30, 2014 % 2013 % Net Revenues: License fees $ 1,584,553 15.49 % $ 2,252,567 25.25 % Maintenance fees 2,848,641 27.85 % 2,380,409 26.68 % Services 4,397,957 43.00 % 3,320,223 37.22 % Services - related party 1,396,000 13.65 % 967,543 10.85 % Total net revenues 10,227,151 100.00 % 8,920,742 100.00 % Cost of revenues: Salaries and consultants 4,116,217 40.25 % 3,259,791 36.54 % Travel 421,871 4.13 % 388,585 4.36 % Depreciation and amortization 1,801,567 17.62 % 926,315 10.38 % Other 674,863 6.60 % 688,544 7.72 % Total cost of revenues 7,014,518 68.59 % 5,263,235 59.00 % Gross profit 3,212,633 31.41 % 3,657,507 41.00 % Operating expenses: Selling and marketing 1,132,360 11.07 % 1,055,141 11.83 % Depreciation and amortization 580,773 5.68 % 426,617 4.78 % General and administrative 3,675,755 35.94 % 3,407,000 38.19 % Research and development cost 66,265 0.65 % 58,688 0.66 % Total operating expenses 5,455,153 53.34 % 4,947,446 55.46 % Loss from operations (2,242,520 ) -21.93 % (1,289,939 ) -14.46 % Other income and (expenses) Loss on sale of assets (11,052 ) -0.11 % (13,795 ) -0.15 % Interest expense (73,093 ) -0.71 % (69,217 ) -0.78 % Interest income 57,919 0.57 % 32,854 0.37 % Gain on foreign currency exchange transactions 79,220 0.77 % 1,111,423 12.46 % Other income 379 0.00 % 9,798 0.11 % Total other income (expenses) 53,373 0.52 % 1,071,063 12.01 % Net loss before income taxes (2,189,147 ) -21.41 % (218,876 ) -2.45 % Income tax provision (40,076 ) -0.39 % (11,131 ) -0.12 % Net loss from continuing operations (2,229,223 ) -21.80 % (230,007 ) -2.58 % Loss from discontinued operations - 0.00 % (201,249 ) -2.26 % Net loss (2,229,223 ) -21.80 % (431,256 ) -4.83 % Non-controlling interest 391,197 3.83 % (665,859 ) -7.46 % Net loss attributable to NetSol $ (1,838,026 ) -17.97 % $ (1,097,115 ) -12.30 % Page 28--------------------------------------------------------------------------------Revenues License fees License fees for the three months ended September 30, 2014 were $1,584,553 compared to $2,252,567 for the three months ended September 30, 2013 reflecting a decrease of $668,014. During the quarter ended September 30, 2014, we signed two different deals for the implementation of our legacy system, NFSTM. These deals include both license and services elements. License revenue from one deal was recognized in the September 30, 2014 quarter whereas that of the other deal will be recognized in future quarters. During the quarter ended September 30, 2014, we signed a major contract for the implementation of our next-generation platform, NFS AscentTM. The contract includes license fee, customization and implementation services. As the services element is much more than the license fee, the contract is considered having major customization and therefore, no license revenue has been recognized from this contract. We anticipate recognizing the license revenue along with services delivered in the following quarters using the percentage of completion method. We further believe that the mix of license and services revenue will be different for NFS AscentTM compared to the legacy system, NFSTM and in most cases, we will be recognizing license revenue from NFS AscentTM following the percentage of completion method. Maintenance fees Maintenance fees, for the three months ended September 30, 2014, were $2,848,641 compared to $2,380,409, for the three months ended September 30, 2013, reflecting an increase of $468,232. 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 2014 and into fiscal year 2015. We anticipate maintenance fees to remain flat until we are able to license NFS Ascent™ to new customers. Services Services income for the three months ended September 30, 2014 were $5,793,957 compared to $4,287,766 for the three months ended September 30, 2013 reflecting an increase of $1,506,191. Included in the services income are services provided to related parties of $1,396,000 for the three months ended September 30, 2014 compared to $967,543 for the same period last year. 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. Moving forward, with the implementation of new projects of NFS AscentTM, we anticipate this element of our revenue to increase more compared to the license fee. Gross Profit The gross profit was $3,212,633, for the three months ended September 30, 2014 compared with $3,657,507 for the three months ended September 30, 2013. This is a decrease of 12.2% or $444,874. The gross profit percentage for the three months ended September 30, 2014 also decreased to 31.4% from 41.0% for the three months ended September 30, 2013. The decrease in the gross profit is due to the increase in the cost of sales. The cost of sales was $7,014,518 for the three months ended September 30, 2014 compared to $5,263,235 for the three months ended September 30, 2013. As a percentage of sales, cost of sales increased from 59.0% for the three months ended September 30, 2013 to 68. 6% for the three months ended September 30, 2014. Salaries and consultant fees increased by $856,426 from $3,259,791 for the three months ended September 30, 2013 to $4,116,217 for the three months ended September 30, 2014. The increase in salaries and consultant fees is due to the hiring and training of technical employees at key locations including Pakistan, Thailand, China and North America as we anticipate new projects associated with NFS Ascent™. As a percentage of sales, salaries and consultant expense increased from 36.5% for the three months ended September 30, 2013 to 40.3% for the three months ended September 30, 2014. Depreciation and amortization expense increased to $1,801,567 compared to $926,315 for the three months ended September 30, 2013, or an increase of $875,252. Depreciation and amortization expense increased as we began amortizing the product licenses costs that had been capitalized related to the NFS Ascent™ development. Page 29--------------------------------------------------------------------------------Operating Expenses Operating expenses were $5,455,153 for the three months ended September 30, 2014 compared to $4,947,446, for the three months ended September 30, 2013 or an increase of 10.3% or $507,707. As a percentage of sales, it decreased from 55.5% to 53.3%. The increase in operating expenses was primarily due to the increase in depreciation and amortization of $154,156 or 36.1% and an increase in general and administrative expenses of $268,755 or 7.9%. The increase in general and administrative expenses is primarily due an increase in salaries of approximately $240,078 due to annual raises and hiring of additional employees. Loss from Operations Loss from operations was $2,242,520 compared to $1,289,939 for the three months ended September 30, 2014 and 2013, respectively. This represents an increase of $952,581 for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. As a percentage of sales, net loss from operations was 21.93% for the three months ended September 30, 2014 compared to 14.46% for the three months ended September 30, 2013. Other Income and Expenses Other income was $53,373 for the three months ended September 30, 2014 compared to $1,071,063 for the three months ended September 30, 2013. Included in other income for the quarter ended September 30, 2013 was an exchange gain of $1,111,423 on foreign currency exchange transactions compared to $79,220 in the current quarter. Net Loss Net loss was $1,838,026 for the three months ended September 30, 2014 compared to $1,097,115 for the three months ended September 30, 2013. This is an increase of $740,911 compared to the prior year. Net loss per share, basic and diluted, was $0.20 for the three months ended September 30, 2014 compared to $0.12 for the three months ended September 30, 2013. LIQUIDITY AND CAPITAL RESOURCES Our cash position was $10,382,556 at September 30, 2014, compared to $11,462,695 at June 30, 2014. Net cash used in operating activities was $481,025 for the three months ended September 30, 2014 compared to cash provided by operating activities of $2,923,370 for the three months ended September 30, 2013. At September 30, 2014, we had current assets of $28,738,213 and current liabilities of $16,325,545. We had accounts receivable of $13,686,401 at September 30, 2014 compared to $7,635,775 at June 30, 2014. We had revenues in excess of billings of $2,173,990 at September 30, 2014 compared to $2,377,367 at June 30, 2014. During the three months ended September 30, 2014, 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 increased $5,847,249 from $10,013,142 at June 30, 2014 to $15,860,391 at September 30, 2014. The increase is due to invoicing of maintenance fees to various customers. To some customers, the maintenance fee is invoiced in advance for the year. The amount is recorded in unearned revenue and is recognized as revenue on the time proportionate method. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,197,588 and $3,212,477, respectively at September 30, 2014. The average days sales outstanding for the three months ended September 30, 2014 and 2013 were 116 and 305 days, respectively, for each period. 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 $940,287 for the three months ended September 30, 2014, compared to $3,972,805 for the three months ended September 30, 2013. We had purchases of property and equipment of $1,031,128 compared to $2,691,066 for the comparable period last fiscal year. The increase in intangible assets which represents amounts capitalized for the development of new products was $nil for the three months ended September 30, 2014 and $1,362,026 for the three months ended September 30, 2013. Net cash provided by financing activities was $806,721 and $630,382 for the three months ended September 30, 2014, and 2013, respectively. During the three months ended September 30, 2014, we received $850,000 pursuant to a stock purchase agreement for the purchase of 298,245 restricted shares of common stock at $2.85 per share. The three months ended September 30, 2014 included the cash inflow of $nil from the exercising of stock options and warrants compared to $560,500 for the three months ended September 30, 2013. During the three months ended September 30, 2014, we had net payments for bank loans and capital leases of $2,591,334 as compared to $198,853 for the three months ended September 30, 2013. We are operating in various 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 as described in Note No. 11 of the financial statements. We 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. We anticipate paying back all these obligations on their respective due dates from its own sources. Page 30 -------------------------------------------------------------------------------- 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 and warrants. As of September 30, 2014, we had approximately $10.38 million of cash, cash equivalents and marketable securities of which approximately $6.64 million is held by our foreign subsidiaries. As of June 30, 2014, we had approximately $11.46 million of cash, cash equivalents and marketable securities of which approximately $8.4 million is held by our foreign subsidiaries. We intend to permanently reinvest these funds outside the U.S., and therefore, we do not anticipate repatriating undistributed earnings from our non-U.S. operations. If funds from foreign operations are required to fund U.S. operations in the future and if U.S. tax has not previously been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds. 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 $2.5 to $3.5 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations. 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. Financial Covenants Our U.K.-based subsidiary, 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 PK has an approved facility for both export refinance and term finance from Askari Bank Limited amounting to Rupees 312.5 million ($3,097,126) which requires NetSol PK 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, 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. |