UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2004
( ) For the transition period from __________ to __________
Commission file number: 0-22773
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other Jurisdiction of (I.R.S. Employer NO.)
Incorporation or Organization)
23901 Calabasas Road, Suite 2072, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No | |
The issuer had 12,409,155 shares of its $.001 par value Common Stock issued and
outstanding as of February 7, 2005.
Transitional Small Business Disclosure Format (check one)
Yes |X| No | |
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Page 1
NETSOL TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet as of December 31, 2004 (restated) 3
Comparative Unaudited Consolidated Statements of Operations
for the Three and Six Months Ended December 31, 2004 (restated) and 2003 (restated) 4
Comparative Unaudited Consolidated Statements of Cash Flow
for the Three and Six Months Ended December 31, 2004 (restated) and 2003 (restated) 5
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 16
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
(a) Exhibits
(b) Reports on Form 8-K
Signatures 25
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Page 2
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2004
(UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 488,110
Certificates of deposit 550,000
Accounts receivable, net of allowance for doubtful accounts of $80,000 1,679,126
Revenues in excess of billings 2,324,715
Other current assets (restated) 499,829
---------------
Total current assets 5,541,780
Property and equipment, net of accumulated depreciation 4,276,307
Intangibles:
Product licenses, renewals, enhancedments, copyrights,
trademarks, and tradenames, net 2,352,804
Customer lists, net 483,736
Goodwill (restated) 1,166,611
---------------
Total intangibles (restated) 4,003,151
----------------
Total assets (restated) $ 13,821,238
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,638,752
Current portion of notes and obligations under capitalized leases 267,846
Due to officers (restated) 40,138
Billings in excess of revenues 228,430
Loans payable, bank 392,699
---------------
Total current liabilities 2,567,863
Obligations under capitalized leases, less current maturities 56,910
Convertible debenture (restated) 130,292
----------------
Total liabilities 2,755,065
Minority interest 99,752
Contingencies --
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 share authorized;
12,254,076 issued and outstanding 12,254
Additional paid-in-capital (restated) 43,072,118
Treasury stock (27,197)
Accumulated deficit (restated) (30,663,934)
Stock subscription receivable (restated) (1,234,650)
Common stock to be issued 254,800
Other comprehensive loss (446,970)
---------------
Total stockholders' equity (restated) 10,966,421
----------------
Total liabilities and stockholders' equity (restated) $ 13,821,238
================
See accompanying notes to consolidated financial statements.
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Page 3
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Six Months
Ended December 31, Ended December 31,
2004 2003 2004 2003
--------------- -------------- --------------- ----------------
(Restated) (Restated) (Restated) (Restated)
Net revenues $ 2,723,227 $ 1,208,345 $ 4,781,532 $ 2,180,957
Cost of revenues 839,387 490,336 1,601,655 950,713
--------------- -------------- --------------- ----------------
Gross profit 1,883,840 718,009 3,179,877 1,230,244
Operating expenses:
Selling and marketing 135,352 27,465 254,700 46,687
Depreciation and amortization 316,982 303,562 623,140 608,697
Settlement costs 43,200 100,000 43,200 100,000
Bad debt expense - 41,188 - 93,506
Salaries and wages 447,984 278,909 795,221 594,449
Professional services, including non-cash
compensation 140,971 84,288 255,305 239,702
General and adminstrative 282,338 361,446 549,232 748,484
--------------- -------------- --------------- ----------------
Total operating expenses 1,366,827 1,196,858 2,520,798 2,431,525
------------------------------ --------------- ----------------
Income (loss) from operations 517,013 (478,849) 659,079 (1,201,281)
Other income and (expenses)
Gain (Loss) on sale of assets - 3,069 (620) (33,919)
Beneficial conversion feature (164,465) (96,027) (201,965) (96,027)
Fair market value of warrants issued (221,614) - (249,638) -
Gain on forgiveness of debt 139,367 104,088 189,641 104,088
Interest expense (108,425) - (130,000) -
Other income and (expenses) 17,580 (48,819) 37,624 (85,392)
--------------- -------------- --------------- ----------------
Total other expenses (337,557) (37,689) (354,958) (111,250)
--------------- -------------- --------------- ----------------
Net income (loss) before minority interest in sub subsidiary 179,456 (516,538) 304,121 (1,312,531)
Minority interest in subsidiary (809) 58,029 14,259 93,338
--------------- -------------- --------------- ----------------
Net income (loss) 178,647 (458,509) 318,380 (1,219,193)
Other comprehensive (loss) gain:
Translation adjustment (89,720) (27,419) (173,409) (107,207)
--------------- -------------- --------------- ----------------
Comprehensive income (loss) $ 88,927 $ (485,928) $ 144,971 $(1,326,400)
=============== ============== =============== ================
Net income (loss) per share:
Basic $ 0.02 $ (0.06) $ 0.03 $ (0.17)
=============== ============== =============== ================
Diluted $ 0.01 $ (0.06) $ 0.02 $ (0.17)
=============== ============== =============== ================
Weighted average number of shares outstanding
Basic 10,643,113 7,331,928 10,073,951 7,089,123
=============== ============== =============== ================
Diluted 13,455,875 7,331,928 12,760,805 7,089,123
=============== ============== =============== ================
See accompanying notes to consolidated financial statements.
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Page 4
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended December 31,
2004 2003
---------------- ----------------
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) from continuing operations $ 318,379 $ (1,219,193)
Adjustments to reconcile net income (loss) to net cash
Used in operating activities:
Depreciation and amortization 762,688 608,697
Gain on settlement of debt (189,641) (104,088)
Loss on sale of assets 620 33,919
Minority interest in subsidiary (14,259) (93,338)
Stock issued for services 52,835 -
Stock issued for settlement costs 100,000
Fair market value of warrants and stock options granted 249,638 -
Beneficial conversion feature 201,965 96,027
Changes in operating assets and liabilities:
Increase in assets:
Accounts receivable (727,132) (14,785)
Other current assets (1,391,738) (977,161)
Decrease in liabilities:
Accounts payable and accrued expenses (728,055) (350,316)
----------------------------------
Net cash used in operating activities (1,464,697) (1,920,238)
Cash flows from investing activities:
Purchases of property and equipment (467,586) (129,082)
Sales of property and equipment 86,988 143,462
Purchases of certificates of deposit (550,000) (1,220,221)
Proceeds from sale of certificates of deposit 391,403 1,000,000
Increase in intangible assets - development costs (299,479) (66,855)
Capital investments in minority interest of subsidiary 287,797 10,000
Proceeeds from sale of minority interest of subsidiary - 200,000
----------------------------------
Net cash used in investing activities (550,877) (62,696)
Cash flows from financing activities:
Proceeds from sale of common stock 1,512,000 1,102,049
Proceeds from the exercise of stock options 343,900 814,350
Purchase of treasury shares (51,704) -
Proceeds from loans 5,994 800,000
Payments on capital lease obligations & loans (236,597) (376,489)
----------------------------------
Net cash provided by financing activities 1,573,593 2,339,910
Effect of exchange rate changes in cash 58,930 (14,260)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (383,051) 342,716
Cash and cash equivalents, beginning of period 871,161 214,490
----------------------------------
Cash and cash equivalents, end of period $ 488,110 $ 557,206
==================================
See accompanying notes to consolidated financial statements.
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Page 5
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Six Months
Ended December 31,
2004 2003
-------------- -------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 50,749 $ 47,911
============== =============
Taxes $ 14,083 $ --
============== =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for accrued expenses and accounts payable $ 42,808 $ --
============== =============
Common stock issued for conversion of convertible debenture $ 1,050,000 $ --
============== =============
Common stock issued for settlement of debt $ 45,965 $ --
============== =============
Common stock issued for legal settlement $ -- $ 100,000
============== =============
Common stock issued for conversion of note payable $ -- $ 500,000
============== =============
Common stock issued for acquisition of product license $ -- $ 166,860
============== =============
See accompanying notes to consolidated financial statements.
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Page 6
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Company designs, develops, markets, and exports proprietary software
products to customers in the automobile finance and leasing, banking and
financial services industries worldwide. The Company also provides consulting
services in exchange for fees from customers.
The consolidated condensed interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended June 30, 2004. The Company follows the same
accounting policies in preparation of interim reports. Results of operations for
the interim periods are not indicative of annual results.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NetSol Technologies (PVT), Ltd. ("PK
Tech"), NetSol (PVT), Limited ("PK Private"), NetSol CONNECT (PVT), Ltd. (now,
NetSol Akhter Pvt. Ltd.) ("Connect"), NetSol Abraxas Australia Pty Ltd., NetSol
USA and NetSol Technologies UK, Ltd. All material inter-company accounts have
been eliminated in consolidation.
For comparative purposes, prior year's consolidated financial statements have
been reclassified to conform to report classifications of the current year.
NOTE 2 - USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however, the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
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Page 7
NOTE 4 - EARNINGS PER SHARE:
Earnings per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net
income per share is based upon the weighted average number of common shares
outstanding. Diluted net income per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
----------------------------------------------------------------------------------------------------
For the three months ended December 31, 2004 Net Income Shares Per Share
----------------------------------------------------------------------------------------------------
Basic earnings per share: $ 178,647 10,643,113 $ 0.01
Net income available to common shareholders
Effect of dilutive securities
Stock options 1,995,981
Warrants 816,781
--------------- -------------- --------------
Diluted earnings per share $ 178,647 13,455,875 $ 0.01
=============== ============== ==============
----------------------------------------------------------------------------------------------------
For the six months ended December 31, 2004 Net Income Shares Per Share
----------------------------------------------------------------------------------------------------
Basic earnings per share: $ 318,380 10,073,951 $ 0.03
Net income available to common shareholders
Effect of dilutive securities
Stock options 1,924,129
Warrants 762,725
--------------- -------------- --------------
Diluted earnings per share $ 318,380 12,760,805 $ 0.02
=============== ============== ==============
Weighted average number of shares used to compute basic and diluted loss per
share is the same in the financial statements for the period ended December 31,
2003, since the effect of dilutive securities is anti-dilutive.
NOTE 5 - FOREIGN CURRENCY:
The accounts of NetSol Technologies UK, Ltd. use the British Pound; NetSol
Technologies, (PVT), Ltd, NetSol (Pvt), Limited and NetSol Connect PVT, Ltd. use
Pakistan Rupees; and NetSol Abraxas Australia Pty, Ltd. uses the Australian
dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary
NetSol USA, Inc., use the U.S. dollars as the functional currencies. Assets and
liabilities are translated at the exchange rate on the balance sheet date, and
operating results are translated at the average exchange rate throughout the
period. Accumulated translation losses of $446,970 at December 31, 2004 are
classified as an item of accumulated other comprehensive loss in the
stockholders' equity section of the consolidated balance sheet. During the six
months ended December 31, 2004 and 2003, comprehensive loss in the consolidated
statements of operation included translation loss of $173,409 and $107,207,
respectively.
NOTE 6 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 2004:
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Page 8
Prepaid Expenses $ 298,472
Advance Income Tax 86,949
Employee Advances 36,315
Security Deposits 11,876
Other Receivables 66,217
-------------
Total $ 499,829
=============
In August 2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company agreed to pay the consultant a total
of 100,000 shares of its common stock valued at $111,920. This has been recorded
as a prepaid expense and is being amortized over the life of the service
agreement. During the six months ended December 31, 2004, $20,985 was expensed.
NOTE 7 - DEBTS
NOTES PAYABLE
Notes payable as of December 31, 2004 consist of the following:
--------------------------------------------------------------------------------
Balance at Current Long-Term
Name 12/31/04 Maturities Maturities
--------------------------------------------------------------------------------
H. Smith Settlement $ 168,321 $ 168,321 $ --
A. Zaman Settlement 21,300 21,300 --
First Funding 3,217 3,217
Subsidiary note 5,229 5,229
Subsidiary capital leases 69,779 69,779 --
----------------------------------------------
$ 267,846 $ 267,846 $ --
==============================================
On September 25, 2002 the Company signed a settlement agreement with Adrian
Cowler ("Cowler") and Surrey Design Partnership Ltd. The Company agreed to pay
Cowler (pound)218,000 pound sterling or approximately $320,460 USD including
interest, which the Company has recorded as a note payable in the accompanying
consolidated financial statements. The agreement calls for monthly payments of
(pound)3,000 until March 2004 and then (pound)4,000 per month until paid. As of
June 30, 2004, the balance was $146,516. During the six months ended December
31, 2004, the Company paid (pound)12,000 or $21,997. In December 2004, the
Company reached an agreement with Cowler to pay the balance of the loan in one
lump-sum payment. Cowler agreed to accept (pound)52,000 or $103,371 as payment
in full. As a result, the Company recorded a gain on forgiveness of debt of
$21,148 in the accompanying consolidated financial statements.
In November 2002, the Company signed a settlement agreement with Herbert Smith
for (pound)171,733 or approximately $248,871, including interest, which the
Company has recorded as a note payable in the accompanying consolidated
financial statements. The Company agreed to pay $10,000 upon signing of the
agreement, $4,000 per month for twelve months, and then $6,000 per month until
paid. The balance owing at June 30, 2004 was $199,321. During the six months
ended December 31, 2004, the Company paid $31,000. The balance owing at December
31, 2004 was $168,321. The entire balance has been classified as current and is
included in "Current maturities of notes and obligations under capitalized
leases" in the accompanying consolidated financial statements.
In June 2002, the Company signed a settlement agreement with a former employee
for payment of past services rendered. The Company agreed to pay the employee a
total of $75,000. The agreement calls for monthly payments of $1,500 per month
until paid. The balance owing at June 30, 2004 was $26,300. During the six
months ended December 31, 2004, the Company paid $5,000. The entire balance has
been classified as a current liability in the accompanying consolidated
financials statements.
In January 2004, the Company renewed its director's and officer liability
insurance for which the annual premium is $167,000. In April 2004, the Company
arranged financing with AFCO Credit Corporation with a down payment of $50,100
with the balance to be paid in monthly installments. The balance owing as of
December 31, 2004 was $0.
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Page 9
In October 2004, the Company renewed its professional liability insurance for
which the annual premium is $5,944. The Company has arranged for financing with
the insurance company with a down payment of $1,853 and nine monthly payment of
$480 each. During the three months ended December 31, 2004, the Company paid
$2,727. The balance owing at December 31, 2004 was $3,217 and is classified as a
current liability in the accompanying consolidated financials statements.
In addition, the various subsidiaries had current note payable of $5,229 and
current maturities of capital leases of $69,779 as of December 31, 2004.
BANK NOTE
The Company's Pakistan subsidiary, NetSol Technologies (Private) Ltd., has three
loans with a bank, secured by the Company's assets. These notes consist of the
following as of December 31, 2004:
TYPE OF MATURITY INTEREST BALANCE
LOAN DATE RATE USD
---------------------------------------------------------------------------
Export Refinance Every 6 months 4% $ 326,907
Term Loan April 20, 2005 10% 15,507
Line of Credit On Demand 8% 50,285
-----------------
Total $ 392,699
=================
DUE TO OFFICERS
The officers of the Company from time to time loan funds to the Company. As of
June 30, 2004, the officers had a balance owing to them of $17,219. During the
six months ended December 31, 2004, $25,000 of accrued wages was added to the
balance due to officers. In addition, one officer exercised options against the
balances owed totaling $2,083. The balance owing as of December 31, 2004 was
$40,136.
NOTE 8 - STOCKHOLDERS' EQUITY:
REVERSE STOCK SPLIT
On August 18, 2003, the Company affected a 1 for 5 reverse stock split for all
the issued and outstanding shares of common stock. All historical share and per
share amounts in the accompanying consolidated financial statements have been
restated to reflect the 5:1 reverse stock split.
EQUITY TRANSACTIONS
PRIVATE PLACEMENTS
In August 2004, the Company received $200,000 for the purchase of 190,476 shares
of the Company's common stock. In November 2004, the stock was issued to the
purchasing parties.
During the quarter ended December 31, 2004, the Company sold 1,217,143 shares of
its common stock for $1,268,000 in a private placement agreement.
In addition, the Company received $62,000 as payment on stock subscriptions
receivable during the six months ended December 31, 2004.
SERVICES, ACCRUED EXPENSES AND PAYABLES
In August 2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company issued 50,000 shares of its common
stock valued at $55,960 for the first year of service and has agreed to issue an
additional 50,000 shares at the beginning of the second year. The value of these
shares of $55,960 is included in the "Stock to be Issued" on the accompanying
consolidated financial statements.
In October 2004, the Company issued 5,000 shares for services rendered valued at
$6,850. In addition, 1,339 shares were issued for accrued expenses valued at
$3,000.
In November 2004, the Company entered into an agreement with a vendor whereby
the Company issued the vendor 20,000 shares valued at $22,968 for the payment of
outstanding invoices in the amount of $16,052. As a result, the Company recorded
a beneficial conversion feature expense in the amount of $6,916.
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Page 10
STOCK OPTIONS EXERCISED
During the quarter ended December 31, 2004, the Company issued 742,777 shares of
its common stock for the exercise of options. The Company received $343,900 in
cash from the exercise of these options and recorded "Stock Subscription
Receivable" in the amount of $795,083.
ISSUANCE OF SHARES FOR CONVERSION OF DEBT
During the quarter ended September 30, 2004, three of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $150,000 and the Company issued 80,646 shares of its common stock
to the note holders.
During the quarter ended December 31, 2004, sixteen of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $900,000 and the Company issued 483,873 shares of its common stock
to the note holders.
STOCK SUBSCRIPTION RECEIVABLE
Stock subscription receivable represents stock options exercised and issued that
the Company has not yet received the payment from the purchaser as they were in
processing when the quarter ended.
During the quarter ended September 30, 2004, the Company received a payment of
$20,000 on the receivable. The balance at September 30, 2004 was $313,650.
During the quarter ended December 31, 2004, the Company recorded receivables
from options exercises of $803,000 and received payments of $110,000. The
Company also recorded receivables from purchase agreements $182,000 and received
payments of $24,000. Also during the quarter, a purchaser decided not to
complete the agreed purchase and therefore 20,000 shares were cancelled and the
related value of $30,000 was reversed from the receivable account. The balance
at December 31, 2004 was $1,134,650.
COMMON STOCK PURCHASE WARRANTS AND OPTIONS
From time to time, the Company issues options and warrants as incentives to
employees, officers and directors, as well as to non-employees.
Common stock purchase options and warrants consisted of the following during the
six months ended December 31, 2004:
Exercise Exercise
Options Price Warrants Price
--------------- --------------- ------------ ---------------
Outstanding and exercisable, June 30, 2004 1,862,277 $0.75 to $5.00 693,182 $0.50 to $5.00
Granted 498,500 $1.14 to $1.30 282,260 $3.30
Exercised (742,777) $0.75 to $2.21 -- --
Expired (10,000) $1.00 --
--------------- ------------
Outstanding and exercisable, Dec. 31, 2004 1,608,000 975,442
There were no options granted or exercised during the quarter ended September
30, 2004.
During the quarter ended December 31, 2004, 498,500 options were granted to
employees of the company and are fully vested and expire ten years from the date
of grant unless the employee terminates employment, in which case the options
expire within 30 days of their termination. No expense was recorded for the
granting of these options.
In compliance with FAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for year ended December 31, 2004 as follows:
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Page 11
Net income - as reported $ 318,380
Stock-based employee compensation expense,
included in reported net loss, net of tax --
Total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (313,195)
----------------
Pro forma net income $ 5,185
================
Earnings per share:
Basic, as reported 0.03
Diluted, as reported 0.02
Basic, pro forma (0.00)
Diluted, pro forma (0.00)
During the quarter ended September 30, 2004, three debenture holders converted
their notes into common stock. As part of the conversion, warrants to purchase a
total of 40,323 common shares were issued to the note holders. The warrants
expire in five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $28,024 or $0.69 per share and
recorded the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 3.25%
Expected life 5 years
Expected volatility 82%
Dividend yield 0%
During the quarter ended December 31, 2004, sixteen debenture holders converted
their notes into common stock. As part of the conversion, warrants to purchase a
total of 241,937 common shares were issued to the note holders. The warrants
expire in five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $221,614 or $0.92 per share and
recorded the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 3.25%
Expected life 5 years
Expected volatility 82%
Dividend yield 0%
NOTE 9 - INTANGIBLE ASSETS:
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, customer lists and goodwill. The Company
evaluates intangible assets, goodwill and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets, other
long-lived assets and, goodwill is measured by comparing their net book value to
the related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Potential impairment of goodwill after July 1, 2002 has been
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to the
financial statements of the Company beginning July 1, 2002.
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As part of intangible assets, the Company capitalizes certain computer software
development costs in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Costs incurred
internally to create a computer software product or to develop an enhancement to
an existing product are charged to expense when incurred as research and
development expense 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 by 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.
Product licenses and customer lists were comprised of the following as of
December 31, 2004:
Product Licenses Customer Lists Total
----------------- --------------- ------------
Intangible asset - June 30, 2004 $ 5,450,357 $ 1,977,877 $ 7,428,234
Additions 260,553 - 260,553
Effect of translation adjustment (3,670) (3,670)
Accumulated amortization (3,354,436) (1,494,141) (4,848,577)
------------------ ---------------- -------------
Net balance - Dec. 31, 2004 $ 2,352,804 $ 483,736 $ 2,836,540
================== ================ =============
Amortization expense:
Six months ended Dec. 31, 2004 $ 395,675 $ 157,832 $ 553,507
Six months ended Dec. 31, 2003 $ 398,449 $ 157,832 $ 556,281
The above amortization expense includes amounts in Cost of Goods Sold for
capitalized software development costs.
Amortization expense of intangible assets over the next five years is as
follows:
---------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDING
Asset 6/30/05 6/30/06 6/30/07 6/30/08 6/30/09 TOTAL
---------------------------------------------------------------------------------------------------------------
Product Licences 356,748 713,498 33,372 33,372 7,612 1,144,602
Customer Lists 157,834 276,326 44,076 5,500 - 483,736
----------------------------------------------------------------------- -------------
514,582 989,824 77,448 38,872 7,612 1,628,338
======================================================================= =============
There were no impairments of the goodwill asset in the six months ended December
31, 2004 and 2003
NOTE 10 - LITIGATION:
On March 3, 2004 Uecker and Associates, Inc. as the assignee for the benefit of
the creditors of PGC Systems, Inc. formerly known as Portera Systems, Inc. filed
a request for arbitration demanding payment from NetSol for the amounts due
under a software agreement in the amount of $175,700. A settlement was reached
by and between the Company and Portera on November 11, 2004 whereby Portera
agreed to a settlement of any and all issues related to the claim in exchange
for one time payment of $75,000 which was paid by December 3, 2004. As a result
of this settlement, the Company recorded an expense of $43,200 in the
accompanying consolidated financial statements.
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NOTE 11 - SEGMENT INFORMATION
The following table presents a summary of operating information and certain
year-end balance sheet information for the six months ended December 31:
2004 2003
(Restated) (Restated)
Revenues from unaffiliated customers:
North America $ 274,119 $ 207,500
International 4,507,413 1,973,457
--------------- ---------------
Consolidated $ 4,781,532 $ 2,180,957
=============== ===============
Operating income (loss):
North America $ (1,189,824) $ (1,503,783)
International 1,848,903 302,502
--------------- ---------------
Consolidated $ 659,079 $ (1,201,281)
=============== ===============
Identifiable assets:
North America $ 3,636,852 $ 4,661,446
International 10,184,386 5,175,774
--------------- ---------------
Consolidated $ 13,821,238 $ 9,837,220
=============== ===============
Depreciation and amortization:
North America $ 530,425 $ 526,188
International 92,715 82,509
--------------- ---------------
Consolidated $ 623,140 $ 608,697
=============== ===============
Capital expenditures:
North America $ - $ 27,073
International 467,586 102,009
--------------- ---------------
Consolidated $ 467,586 $ 129,082
=============== ===============
NOTE 12 - MINORITY INTEREST IN SUBSIDIARY
In August 2003, the Company entered into an agreement with United Kingdom based
Akhter Group PLC ("Akhter"). Under the terms of the agreement, Akhter Group
acquired 49.9 percent of the Company's subsidiary; Pakistan based NetSol Connect
PVT Ltd. ("Connect"), an Internet service provider ("ISP"), in Pakistan through
the issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The new partnership with Akhter Computers is
designed to rollout connectivity and wireless services to the Pakistani national
market. On signing of this Agreement, the Shareholders agreed to make the
following investment in the Company against issuance of shares of Connect.
Akhter US$ 200,000
The Company US$ 50,000
During the quarter ended September 30, 2003, the funds were received by Connect
and a minority interest of $200,000 was recorded for Akhter's portion of the
subsidiary. During the quarter ended December 31, 2003, Akhter paid an
additional $10,000 to the Company for this purchase. Per the agreement, it was
envisaged that Connect would require a maximum $500,000 for expansion of its
business from each partner. Akhter was to meet the initial financial
requirements of the Connect until November 1, 2003. As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to meet
the expansion requirement of the company. As of December 31, 2004, a total of
$751,356 had been transferred to Connect.
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For the six months ended December 31, 2004, the subsidiary had net losses of
$28,575, of which $14,259 was recorded against the minority interest. The
balance of the minority interest at December 31, 2004 was $99,752.
NOTE 13 - CONVERTIBLE DEBENTURE
On March 24, 2004, the Company entered into an agreement with several investors
to acquire Series A Convertible Debentures (the "Bridge Loan") whereby a total
of $1,200,000 in debentures were procured through Maxim Group, LLC. The Company
received a net of $1,049,946 after placement expenses. In addition, the
beneficial conversion feature of the debenture was valued at $252,257. The
Company has recorded this as a contra-account against the loan balance and is
amortizing the beneficial conversion feature over the life of the loan. During
the six months ended December 31, 2004, the Company amortized $195,049. The
unamortized balance at December 31, 2004 was $19,708.
During the six months ended December 31, 2004, nineteen of the convertible
debenture holders elected to convert their notes into common stock. The total of
the notes converted was $1,050,000 and the Company issued 564,519 shares of its
common stock to the note holders. The net balance at December 31, 2004, is
$130,292.
Under the terms of the Bridge Loan agreements, and supplements thereto, the
debentures bear interest at the rate of 10% per annum, payable on a quarterly
basis in common stock or cash at the election of the Company. The maturity date
is 24 months from the date of signing, or March 26, 2006. Pursuant to the terms
of a supplemental agreement dated May 5, 2004 between NetSol and the debenture
holders, the conversion rate was set at one share for each $1.86 of principal.
The Company recorded interest expense on the debentures in the amount of
$79,252.
In addition, each debenture holder is entitled to receive, at the time of
conversion, warrants equal to one-half of the total number of shares issued. The
total number of warrants that may be granted is 322,582. The warrants expire in
five years and have an exercise price of $3.30 per share. The fair value of the
warrants will be calculated and recorded using the Black-Scholes method at the
time of granting, when the debenture is converted. During the six months ended
December 31, 2004, nineteen debenture holders converted their notes into common
stock. As part of the conversion, warrants to purchase a total of 282,260 common
shares were issued to the note holders. (See note 8) The warrants were valued
using the fair value method at $249,638 and the expense was recorded in the
accompanying consolidated financial statements.
NOTE 14 - GAIN ON SETTLEMENT OF DEBT
In September 2004, the Company transferred 24,004 of its treasury shares valued
at $45,965 to Brobeck Phleger & Harrison, Llp, in exchange of debt, as part of a
settlement agreement. The Company recorded a gain of $8,285 on the settlement.
During the quarter ended September 30, 2004, the Company evaluated the
liabilities of its discontinued operations and determined that $41,989 was no
longer payable. The Company recorded a gain of $41,989 as a result of the
write-off of these liabilities from its financial statements.
In October 2004, the Company reached an agreement with a vendor to settle the
amounts owing. The vendor agreed to accept $29,642 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of $11,029.
In December 2004, the Company reached an agreement with Cowler to pay the
balance owing on the loan in one lump-sum payment (see Note 7). Cowler agreed to
accept (pound)52,000 or $103,371 as payment in full. As a result, the Company
recorded a gain on forgiveness of debt of $21,148.
During the quarter ended December 31, 2004, a former officer of Abraxas, the
Company's Australian subsidiary, agreed to forgive amounts accrued to him for
long-term service leave prior to the Company's acquisition in 1999. The amounts
accrued were during the period of 1984 to 1999. As a result, the Company
recorded a gain on forgiveness of debt of $107,190.
NOTE 15 - SUBSEQUENT EVENTS
On January 19, 2005, the Company entered into an agreement to acquire 100% of
the issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition is projected to
close February 22, 2005. CQ Systems' business model complements the Company's
growth strategy. CQ Systems' product offering is synergistic to that of the
Company, as it has an established and balanced mix of recurring revenue flow
form the European marketplace, and a strong foothold with a comparable target
audience. The Company believes the acquisition will facilitate considerable
growth within the European marketplace as the Company blend and expands the
product offering by leveraging the Company's offshore technology infrastructure
to contain costs and improve margins.
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According to the terms of the Share Purchase Agreement, the Company will acquire
100% of the issued and outstanding shares of CQ from CQ's current shareholders,
whose identity is set forth in the Share Purchase Agreement (the "CQ
Shareholders") at the completion date in exchange for a purchase price
consisting of: a) 50.1% of CQ's total gross revenue for the twelve month period
ending March 31, 2005 after an adjustment for any extraordinary revenue, i.e.
non-trading revenue ("LTM Revenue") multiplied by 1.3 payable: (i) 50% in shares
of restricted common stock of the Company at a per share cost basis of $2.313
and as adjusted by the exchange rate of U.S. Dollar to British Pound (at the
spot rate for the purchase of sterling with U.S. dollars certified by NatWest
Bank plc as prevailing at or about 11:00 a.m.) on January 19, 2005 and, (ii) 50%
in cash; and b) 49.9% of CQ's LTM Revenue for the period ending March 31, 2006
multiplied by 1.3 payable, at the Company's discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided,
however that the cost basis of the Company's common stock shall be based on the
20 day volume weighted average of the Company's shares of common stock as traded
on NASDAQ 20 days prior to March 31, 2005 and, provided that under no
circumstances shall the total number of shares of common stock issued to the CQ
Shareholders exceed 19% of the issued and outstanding shares of common stock,
less treasury shares, of the Company at January 19, 2005.
The initial purchase price was (pound)3,576,335 or $6,730,382, of which one-half
was due at closing payable in cash and stock and the other half is due when the
audited March 31, 2006 financial statements are completed. On the closing date,
$1.7 million was paid and 681,965 shares were issued to the shareholders of CQ,
valued at $1,676,795 at an average price per share of $2.46 was recorded. In
addition, the agreement called for the accumulated retained earnings amounting
to (pound)423,711 or $801,915 of CQ Systems as of the closing date to be paid to
the shareholders in cash and stock. In April 2005, the additional cash
(pound)350,000 or $662,410 was paid and 77,503 shares of the Company's common
stock valued at $139,505 were issued. The total amount paid at closing was
$4,178,710.
In accordance with SFAS 141, the Company will recognize the lesser of the
maximum amount of the contingent consideration based on earnings or the excess
of the fair market value of assets acquired over the purchase price as a
deferred liability. The purchase price has been allocated as follows:
Purchase Price Allocation
-------------------------
Purchase Price $ 7,532,297
Less contingent consideration (3,353,587)
-----------
Net purchase price $ 4,178,710
===========
Net tangible assets $ 984,420
Intangible Assets:
Product License 2,190,807
Customer Lists 1,316,880
Deferred liability (313,397)
-----------
Net purchase price $ 4,178,710
===========
NOTE 16- RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the six
months ended December 31, 2004 and 2003, the Company determined that certain
transactions and presentation in the financial statements had not been accounted
for properly in the Company's financial statements. Specifically, the amount of
impairment of goodwill was over-recorded and classified as amortization expense.
In addition, the beneficial conversion feature of the convertible dibenture was
overstated and loans to officers hadn't been properly reflected on the financial
statements and the exercise of options against these loans had been recorded as
receivables as of June 30, 2004.
The Company has restated its financial statements for these adjustments as of
December 31, 2004 and 2003.
The effect of the correction of the error is as follows:
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AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ------------ ------------ ------------
BALANCE SHEET
As of December 31, 2004
Assets:
Other current assets $ 512,494 $ 499,829
Goodwill $ 723,928 $ 1,166,611
Total intangibles $ 3,560,468 $ 4,003,151
Total assets $ 13,391,220 $ 13,821,238
Liabilities:
Due to officers $ -- $ 40,136
Convertible debenture payable $ 112,500 $ 130,292
Total liabilities $ 2,697,137 $ 2,755,065
Stockholder's Equity:
Additional paid-in capital $ 43,350,274 $ 43,072,118
Accumulated deficit $(31,296,539) $(30,663,934)
Subscription receivable $ (1,375,642) $ (1,234,650)
Other comprehensive loss $ (323,619) $ (446,970)
Total stockholder's equity $ 10,594,331 $ 10,966,421
STATEMENT OF OPERATIONS:
For the six months ended For the six months ended
December 31, 2004 December 31, 2003
----------------- -----------------
Cost of revenues $ 1,580,620 $ 1,601,655
Gross profit $ 3,200,912 $ 3,179,877
Depreciation and amortization $ 838,473 $ 623,140 $ 824,029 $ 608,697
General and adminstrative $ 570,266 $ 549,232
Total operating expenses $ 2,757,165 $ 2,520,798 $ 2,646,857 $ 2,431,525
Income (loss) from operations $ 443,747 $ 659,079 $ (1,416,613) $ (1,201,281)
Beneficial conversion feature exp $ 231,916 $ 201,965 $ -- $ --
Other income (expense) $ 43,219 $ 37,624
Net income (loss) $ 78,692 $ 318,380 $ (1,434,525) $ (1,219,193)
Net income (loss) per share:
Basic $ 0.01 $ 0.03 $ (0.20) $ (0.17)
Diluted $ 0.01 $ 0.02 $ (0.20) $ (0.17)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the quarter and six
months ending December 31, 2004.
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.
INTRODUCTION
NetSol is an end-to-end information technology ("IT") and business consulting
services provider for the lease and finance, banking and financial services
industries. Operating on a global basis with locations in the U.S., Europe,
India, East Asia and Asia Pacific, the Company helps its clients identify,
evaluate, and implement technology solutions to meet their most critical
business challenges and maximize their bottom line. The Company's products
include sophisticated software applications for the asset-based lease and
finance industry, and with the acquisition of Pearl Treasury Systems, the "PTS
System" designed to seamlessly handle foreign exchange and money market trading
for use by financial institutions and customers.
The Company's IP backbone, located in Karachi, Pakistan at our subsidiary,
Network Technologies Pvt. Ltd., develops the majority of the Company's software
and has achieved the ISO 9001 and Software Engineering Institute Capability
Maturity Model Level 4 software development assessment. The economies of scale
presented by our Pakistani operations have permitted the Company to capitalize
on the upward trend in information technology outsourcing. Economic pressures
have driven more companies to outsource major elements of their IT operations,
particularly application development and technology consulting. NetSol has
capitalized on this market trend by providing an off-shore development model at
costs well below those of companies located in India, Europe and the United
States.
Together with this focus on providing an outsourcing, off-shore solution to
existing and new customers, NetSol has also adopted a dynamic growth strategy
through accretive acquisitions.
PLAN OF OPERATIONS
Management has set the following new goals for the Company's next 12 months.
Initiatives and Investment to Grow Revenues and Capabilities
o Enhance Software Design, Engineering and Service Delivery
Capabilities by increasing investment in training.
o Enhance and invest in R&D or between 5-7% of yearly budgets in
financial, banking and various other domains within NetSol's core
competencies.
o Recruit additional senior level marketing and technical
professionals in Lahore, London, and Adelaide offices to be able
to support potential new customers from the North American and
European markets.
o Embark on a program of recruiting the best available talent in
project and program management.
o In June 2004, the Company relocated its entire staff in Lahore to
three floors of its newly built, fully dedicated and wholly owned
Technology Campus. The Company is in the process of expanding the
last two remaining floors to add new personnel.
o Increase Capex, to enhance Communications and Development
Infrastructure.
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o Launch new business development initiatives for various products
and services such as LeaseSoft in hyper growth economies such as
China.
o Create new technology partnership with Oracle and strengthen our
relationship with Intel in Asia Pacific and in the USA.
o Aggressive marketing strategy in local government and private
sectors in Pakistan.
o Ramping up the telecom sectors through its majority owned
subsidiary NetSol Akhter and injecting needed capital. The telecom
sector is one of the most untouched sectors in Pakistan. NetSol
has seized this opportunity to aggressively market its products
and services with its strong infrastructure, brand name and
resources in this region.
o Aggressive new business development activities in UK and European
markets through organic growth, new alliances and mergers and
acquisition.
Top Line Growth through Investment in Marketing Organically and by Mergers and
Acquisition ("M&A") activities:
o Launch LeaseSoft into new markets by assigning new, well
established companies as distributors in Europe, Asia Pacific
including Japan.
o Expand relationships with key customers in the US, Europe and Asia
Pacific.
o Product Positioning through alliances, joint ventures and
partnerships.
o Direct Marketing of Services.
o Embark on roll up strategy by broadening M&A activities broadly
in the software development domain.
o Effectively position and marketing campaign for InBanking system.
This is a potentially big revenue generator in the banking domain
for which NetSol has already invested significant time and
resources towards completing the development of this application.
Seeking major development partners to market this treasury systems
in the global markets.
With these goals in mind, the Company entered in to the following significant
and new strategic alliances and relationships:
CQ Systems Ltd. On January 19, 2005, the Company entered into an agreement to
acquire 100% of the issued and outstanding shares of common stock of CQ Systems
Ltd., a company organized under the laws of England and Wales. The acquisition
is projected to close during the first quarter of 2005. CQ Systems' business
model complements the Company's growth strategy. CQ Systems' product offering is
synergistic to that of the Company, as it has an established and balanced mix of
recurring revenue flow form the European marketplace, and a strong foothold with
a comparable target audience. The Company believes the acquisition will
facilitate considerable growth within the European marketplace as we blend and
expand our product offering by leveraging our offshore technology infrastructure
to contain costs and improve margins.
TiG Joint Venture. In December 2004, NetSol forged a new and a strategic
relationship with a UK based public company TIG Plc. A new Joint Venture was
signed by the two companies to create a new company, TiG NetSol Pvt Ltd., with
50.1% ownership by NetSol Technologies, Inc. and 49.9% ownership by TiG. The
creation of this joint venture would provide new revenues for NetSol as TiG
plans to outsource the development load to NetSol through this joint venture.
According to recent figures of TiG, they have approximate revenue of over $120
million of which approximately $50 million of that revenue is generated from
technology business. Both companies anticipate a significant size of TiG's
technology business to be outsourced to NetSol's offshore development facility
in the next few years. Both companies, according to this agreement, would invest
a total of $1 million or $500, 000 each in next few months for infrastructure,
dedicated personnel and system in the NetSol IT campus in Lahore. At least two
floors in the campus are being dedicated for this partnership in Lahore.
LeaseSoft Distributors. NetSol is also very active in appointing key
distributors in South East Asia and in Europe for its LeaseSoft products. As
soon we have signed these agreements, the shareholders will be notified through
press releases.
DaimlerChrysler. NetSol signed a global frame agreement with DaimlerChrysler,
Germany for LeaseSoft products and services that now expands the marketing reach
to over 60 countries. DaimlerChrysler as a group represent the largest customers
for NetSol. Since the signing of global frame agreement in summer 2004, NetSol
has sold a few new Leasesoft licences to some new markets and new customers such
as Toyota Leasing Thailand and Mauritius Commercial Bank. The pipeline for new
sales of Lease soft is very healthy in all these markets
Intel Corporation. NetSol forged what management believes to be a very important
and strategic alliance with Intel Corporation to develop a blueprint that would
give broader exposure and introduction to NetSol's LeaseSoft products to a
global market. NetSol recently attended major events in China and in San
Francisco through its Intel relationship, which was designed to connect and
introduce the Company to Intel partners worldwide.
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Investment Banking Relations. The relationship with Maxim Group, LLC, NetSol's
investment banker located in New York, continues to grow as the bank has
effectively raised new capital and has been assisting the Company in executing
its M&A and growth strategy. NetSol UK, the Company's wholly owned United
Kingdom subsidiary, has engaged The Alta Group, a local mergers and acquisition
company to assist it in identifying opportunities in the European markets.
Funding and Investor Relations.
o The Company continues to explore various means and most cost
efficient methods to inject new capital for the explosive growth
it is experiencing. With this in mind, the Company has entered
into an agreement with AKD Securities to conduct a pre-IPO and IPO
of the shares of common stock of NetSol Technologies Ltd., its
subsidiary located in Lahore, Pakistan on the Karachi Stock
Exchange (KSE).
o As announced in January, a significant initiative NetSol would
list its key subsidiary in Pakistan on the KSE. This IPO is
expected to generate approximately $6.million from a most bullish
and merging market. This would strengthen the net assets of NetSol
as a whole and would provide sizable new capital for growth and
strategic new initiatives.
o Infuse new capital from potential exercise of outstanding investor
warrants and employees options for business development and
enhancement of infrastructures.
o NetSol has engaged Westrock Advisors LLC, in New York for new
investor relations and company coverage. Just recently they
initiated and distributed research coverage of NetSol with a `buy'
rating.
Improving the Bottom Line.
o Continue to review costs at every level and take appropriate steps
to further reduce operating overheads.
o Discontinue any programs, projects or offices that are not
producing desirable and positive results
o Consistently improving quality standards and work to achieve CMMi
Level 5 standard by sometime in 2006
o Grow process automation.
o Profit Centric Management Incentives.
o More local empowerment and P&L Ownership in each Country Office.
o Improve productivity at the development facility and business
development activities.
o Cost efficient management of every operation and continue further
consolidation to improve bottom line.
o Improve prices of all our product offerings, yet maintain the
competitiveness. This will further improve gross margins across the
board.
After streamlining key operations, Management believes that NetSol is in a
position to derive higher productivity based on current capital employed.
Nonetheless, as the business ramps up, management anticipates the need to hire
additional personnel.
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. Management believes that further leverage was provided by
the development `engine' of NetSol, which became CMM Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMM Level 4
assessment in December 2004. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced their
assessment of level 4. Now, as a result of achieving CMM level 4, the Company is
experiencing a growing demand for its products and alliances from blue chip
companies worldwide. NetSol is now aiming for CMM level 5, the highest CMM
level, potentially as early as 2005. NetSol plans to further enhance its
capabilities by creating similar development engines in other Southeast Asian
countries with CMM levels quality standards. This would make NetSol much more
competitive in the industry and provide the capabilities for development in
multiple locations. Increases in the number of development locations with these
CMM levels of quality standards will provide customers with options and
flexibility based on costs and broader access to skills and technology.
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MATERIAL TRENDS AFFECTING THE COMPANY
NetSol has identified the following material trends affecting the Company
Positive trends:
o Outsourcing of services and software development is growing
worldwide.
o The Global IT budgets are estimated to exceed $1.2 trillion in 2004,
according to the internal estimates of Intel Corporation. About 50%
of this IT budget would be consumed in the U.S. market alone
primarily on the people and processes.
o Burgeoning Chinese markets and economic boom.
o Overall economic expansion worldwide and explosive growth in the
merging markets specifically.
o Regional stability and improving political environment between
Pakistan and India.
o Economic turnaround in Pakistan including: a steady increase in gross
domestic product; much stronger dollar reserves, which is at an all
time high of over $13 billion; stabilizing reforms of government and
financial institutions; improved credit ratings in the western
markets, and strong stock markets.
o Pakistan's continuous fight against extremism and terrorism in the
region, boosting confidence of foreign investors and companies.
o Major turnarounds in the telecom sector as new opportunities are
arising due to privatization, new incentives, reduction of bandwidth
prices and tariffs.
o The stability in economic, political and business fronts in Pakistan
has opened numerous new opportunities particularly in the telecom and
private sectors.
Negative trends:
o The disturbance in Middle East and rising terrorist activities post
9/11 worldwide have resulted in issuance of travel advisories in some
of the most opportunistic markets. In addition, travel restrictions
and new immigration laws provide delays and limitations on business
travel.
o The potential impact of higher U.S. interest rates including, but not
limited to, fear of inflation that may drive down IT budgets and
spending by U.S. companies.
o Higher oil prices worldwide may slow down the global economy causing
delays in new orders and reduction in budgets.
CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of the
Company including information regarding contingencies, risk and financial
condition. Management believes our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where our financial
information is subject to the use of estimates, assumptions and the application
of judgment include our evaluation of impairments of intangible assets, and the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
The recoverability of these assets requires considerable judgment and is
evaluated on an annual basis or more frequently if events or circumstances
indicate that the assets may be impaired. As it relates to definite life
intangible assets, we apply the impairment rules as required by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which requires
significant judgment and assumptions related to the expected future cash flows
attributable to the intangible asset. The impact of modifying any of these
assumptions can have a significant impact on the estimate of fair value and,
thus, the recoverability of the asset.
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INCOME TAXES
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. During fiscal year 2004-2005, we estimated the allowance on net
deferred tax assets to be one hundred percent of the net deferred tax assets.
CHANGES IN FINANCIAL CONDITION
QUARTER ENDED DECEMBER 31, 2004 AS COMPARED TO THE QUARTER ENDED DECEMBER 31,
2003:
Net revenues for the quarter ended December 31, 2004 were $2,723,227 as compared
to $1,208,345 for the quarter ended December 31, 2003. Net revenues are broken
out among the subsidiaries as follows:
2004 2003
------------ -------------
Netsol USA $ 103,985 3.82% $ 127,152 10.52%
Netsol Tech 1,827,001 67.09% 705,299 58.37%
Netsol Private 164,696 6.05% 35,102 2.90%
Netsol Connect 289,886 10.64% 157,188 13.01%
Netsol UK 276,806 10.16% 113,823 9.42%
Netsol-Abraxas Australia 60,853 2.23% 69,781 5.77%
---------------------- -----------------------
Total Net Revenues $ 2,723,227 100.00% $ 1,208,345 100.00%
====================== =======================
This reflects an increase of $1,514,882 or 125.37% in the current quarter as
compared to the quarter ended December 30, 2003. The increase is attributable to
new orders of licenses and an increase in services business, including
additional maintenance work. The Company's biggest revenue growth was achieved
in all three of its Pakistan based subsidiaries, which generated sales both
domestically and internationally. The Company has experienced solid and
consistent demand for IT services in the domestic sectors of Pakistan. The
export licenses of LeaseSoft and maintenance related services surged primarily
due to the most recent endorsement by our biggest customer DaimlerChrysler of
Germany. NetSol and DaimlerChrysler signed a global frame agreement that added
new revenues and assisted in acquiring new customers such as Toyota Leasing
Thailand and Mauritius Commercial Bank. The impressive growth in revenue is also
attributed to several domestic contracts won in the second half of 2004 in
Pakistan.
Our telecom company, NetSol Akhter, added its 50th new corporate customer in
Pakistan whose customers include, but are not limited to: AKD Securities,
Reuters and, Marriot Hotels. The subsidiary is now EBITDA positive along with
very strong and consistent bottom-line of the main subsidiary NetSol
Technologies, Ltd.
The U.S. subsidiary has been fully integrated with the parent company to reduce
costs NetSol USA has been managing several projects with Seattle based Capital
Stream since November 2003. While the Capital Stream project generated strong
revenue since its inception, it is now at the final stage of completion.
NetSol UK continues its business development activities and has seen good
traction in its sales pipeline. NetSol UK added a very strategic new customer
TiG ("The Innovation Group"), a publicly listed UK company. We believe our
relationship with TiG will yield significant new recurring revenues to the
subsidiary. NetSol UK has ongoing relationships with Habib Allied Bank and DCD
Group. These relationships are bringing recurring revenues and are expected to
continue in the near term.
As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing demand for
LeaseSoft. Although the sales cycle for LeaseSoft is rather long, we are
experiencing a 100% increase in product demonstration, evaluation and assessment
by blue chip companies in the UK, Australia, Japan, Europe and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. Based on ELA, (Equipment and Leasing Association of N.
America) the size of the world market for the leasing and financing industry is
in excess of $500 billion of which the software sector represents over a billion
dollars. A number of large leasing companies will be looking to renew legacy
applications. This places NetSol in a very strong position to capitalize on any
upturn in IT spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2005 that could potentially increase the
sales and bottom line. As the Company sells more of these licenses, management
believes it is possible that the margins could increase to upward of 70%. The
license prices of these products vary from $100,000 to $500,000 with additional
charges for customization and maintenance of between 20%-30% each year. The
Company, in parallel, has developed banking applications software to boost its
product line and these systems were sold to Citibank and Askari Banks in
Pakistan in 2002. New customers in the banking sector are also growing and the
Company expects substantial growth in this area in the coming year.
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The gross profit was $1,883,840 in the quarter ending December 31, 2004 as
compared with $718,009 for the same quarter of the previous year for an increase
of $1,165,831. The gross profit percentage has increased to approximately 69% in
the quarter ended December 31, 2004 from approximately 59% for the quarter ended
December 31, 2003. In comparison to the prior quarter ended September 30, 2004,
the cost of sales increased approximately $77,119, revenues increased $664,922,
and an overall increase of 6% in gross profit.
Operating expenses were $1,366,827 for the quarter ending December 31, 2004 as
compared to $1,196,858, for the corresponding period last year. The increase is
selling and marketing expenses and salaries is due to the expansion of our
selling efforts. The Company has streamlined its operations by consolidation,
divestment and enhanced operating efficiencies. Depreciation and amortization
expense amounted to $316,982 and $303,562 for the quarter ended December 31,
2004 and 2003, respectively. Combined salaries and wage costs were $447,984 and
$278,909 for the comparable periods, respectively, or an increase of $169,075
from the corresponding period last year.
Selling and marketing expenses were $135,352 and $27,465, in the quarter ended
December 31, 2004 and 2003, respectively, reflecting the growing sales activity
of the Company. The Company wrote-off as uncollectible bad debts of $0 in the
current quarter compared to $41,188 for the comparable prior period in the prior
year. Professional services expense increased to $140,971 in the quarter ended
December 31, 2004, from $84,288 in the corresponding period last year.
Income from operations was $517,013 compared to a loss of $478,849 for the
quarters ended December 31, 2004 and 2003, respectively. This represents a
decrease of $995,862 for the quarter compared with the comparable period in the
prior year. This is directly due to reduction of operational expenses and
improved gross margin.
Net income was $178,647 compared to net losses of $458,509 for the quarters
ended December 31, 2004 and 2003, respectively. This is an increase of 108%
compared to the prior year. The add-back for the 49.9% minority interest in
NetSol Connect owned by another party was $(809) compared to $58,029. During the
current quarter, the Company also recognized an expense of $164,465 for the
beneficial conversion feature on convertible debentures, an expense of $221,614
for the fair market value of warrants issued and a gain of $139,367 from the
settlement of a debt. Net income per share, basic was $0.02 and diluted was
$0.01 for the quarter ended December 31, 2004 as compared with a loss per share
of $0.06 basic and diluted for the corresponding period last year.
The net EBITDA income was $495,629 compared to loss of $154,947 after
amortization and depreciation charges of $316,982 and $303,562 respectively.
Although the net EBITDA income is a non-GAAP measure of performance we are
providing it for the benefit of our investors and shareholders to assist them in
their decision-making process.
SIX MONTH PERIOD ENDED DECEMBER 31, 2003 AS COMPARED TO THE SIX MONTH PERIOD
ENDED DECEMBER 31, 2002: Net revenues for the six months ended December 31, 2004
were $4,781,532 as compared to $2,180,957 for the six months ended December 31,
2003. Net revenues are broken out among the subsidiaries as follows:
2004 2003
------------- -------------
Netsol USA $ 274,119 5.73% $ 207,500 9.51%
Netsol Tech 2,940,860 61.50% 1,252,196 57.41%
Netsol Private 467,505 9.78% 95,681 4.39%
Netsol Connect 558,220 11.67% 301,400 13.82%
Netsol UK 449,067 9.39% 181,697 8.33%
Netsol-Abraxas Australia 91,761 1.92% 142,483 6.53%
----------------------- --------------------------
Total Net Revenues $ 4,781,532 100.00% $ 2,180,957 100.00%
======================= ==========================
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This reflects an increase of $2,600,575 or 119.24% in the current six months as
compared to the six months ended December 31, 2003. The increase is attributable
to new orders of licenses and an increase in services business, including
additional maintenance work. The Company's biggest revenue growth was achieved
in all three of its Pakistan based subsidiaries and its UK based subsidiary,
which generated sales both domestically and internationally. The Company has
experienced solid and consistent demand for IT services in the domestic sectors
of Pakistan. The export licenses of LeaseSoft and maintenance related services
surged primarily due to the most recent endorsement by our biggest customer
DaimlerChrysler of Germany. NetSol and DaimlerChrysler signed a global frame
agreement that added new revenues and assisted in acquiring new customers such
as Toyota Leasing Thailand and Mauritius Commercial Bank.
Our telecom company, NetSol Akhter, added its 50th new corporate customer in
Pakistan whose customers include, but are not limited to: AKD Securities,
Reuters and, Marriot Hotels.
NetSol USA has been managing several projects with Seattle based Capital Stream
since November 2003.
NetSol UK continues its business development activities and has seen good
traction in its sales pipeline. NetSol UK added a very strategic new customer
TiG ("The Innovation Group"), a publicly listed UK company. We believe our
relationship with TiG will yield significant new recurring revenues to the
subsidiary. NetSol UK has ongoing relationships with Habib Allied Bank and DCD
Group. These relationships are bringing recurring revenues and are expected to
continue in the near term.
As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing demand for
LeaseSoft. Although the sales cycle for LeaseSoft is rather long, we are
experiencing a 100% increase in product demonstration, evaluation and assessment
by blue chip companies in the UK, Australia, Japan, Europe and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. Based on ELA, (Equipment and Leasing Association of N.
America) the size of the world market for the leasing and financing industry is
in excess of $500 billion of which the software sector represents over a billion
dollars. A number of large leasing companies will be looking to renew legacy
applications. This places NetSol in a very strong position to capitalize on any
upturn in IT spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2005 that could potentially increase the
sales and bottom line. As the Company sells more of these licenses, management
believes it is possible that the margins could increase to upward of 70%. The
license prices of these products vary from $100,000 to $500,000 with additional
charges for customization and maintenance of between 20%-30% each year. The
Company, in parallel, has developed banking applications software to boost its
product line and these systems were sold to Citibank and Askari Banks in
Pakistan in 2002. New customers in the banking sector are also growing and the
Company expects substantial growth in this area in the coming year.
The gross profit was $3,179,877 for the six months ending December 31, 2004 as
compared with $1,230,244 for the same period of the previous year. The gross
profit percentage has increased 10.09% to 66.5% in the current fiscal year from
56.41% for the six months ended December 31, 2003. The increase in gross profit
margins is due to repeat sales of some licenses to new customers and to existing
customers.
Operating expenses were $2,520,798 for the six-month period ending December 31,
2004 as compared to $2,431,525, for the corresponding period last fiscal year
for an increase of $89,273. The increase is mainly due to the increased sales
activities of the Company. The Company has streamlined its operations by
consolidation, divestment and enhanced operating efficiencies. Depreciation and
amortization expense amounted to $623,140 and $608,697 for the six-month period
ended December 31, 2004 and December 31, 2003, respectively. Combined salaries
and wage costs were $795,221 and $594,449 for the six month period ended
December 31, 2004 and 2003, respectively, or an increase of $200,772 from the
corresponding period last year.
Selling and marketing expenses increased to $254,700 in the six-month period
ended December 31, 2004 as compared to $46,687 in the six-month period ended
December 31, 2003. This reflects the Company's expanding sales and marketing
efforts. The Company wrote-off as uncollectible bad debts of $0 and $93,506 for
the six months ended December 31, 2004 and 2003, respectively. Professional
services expense increased to $255,305 in the six-month period ended December
31, 2004, from $239,702 in the corresponding period last year.
Income from continued operations was $659,079 compared to loss of $1,201,281 for
the six months ended December 31, 2004 and 2003, respectively. This represents
an increase of $1,860,360 for the six-month period compared to the prior year.
This is directly due to reduction of operational expenses and improved gross
margins.
Net income was $318,380 for the six months ended December 31, 2004 compared to
net loss of $1,219,193 for the six months ended December 31, 2003. This is an
increase of 124% compared to the prior year. The add-back for the 49.9% minority
interest in NetSol Connect owned by another party was $14,259 compared to
$93,338. During the current six months, the Company also recognized an expense
of $201,965 for the beneficial conversion feature on convertible debentures, an
expense of for the fair market value of warrants issued and a gain of $189,641
from the settlement of a debt. Net income per share was $0.03, basic and $0.02
diluted, for the six months ended December 31, 2004 as compared with a loss per
share of $0.17 for the corresponding period last year.
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The net EBITDA income was $941,520 compared to loss of $610,496 after
amortization and depreciation charges of $623,140 and $608,697 respectively.
Although the net EBITDA income is a non-GAAP measure of performance we are
providing it for the benefit of our investors and shareholders to assist them in
their decision-making process.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $488,110 at December 31, 2004 compared to
$557,206 at December 31, 2003. In addition the Company had $550,000 in
certificates of deposit. The total cash position, including the certificates of
deposits, was $998,110 as of December 31, 2004.
Net cash used for operating activities amounted to $1,464,697 for the six months
ended December 31, 2004, as compared to $1,920,238 for the comparable period
last fiscal year. The decrease is mainly due to an increase in net income as
well as an increase in prepaid expenses and accounts receivable. In addition,
the Company experienced a decrease of $763,065 in its accounts payable and
accrued expenses.
Net cash used by investing activities amounted to $550,877 for the six months
ended December 31, 2004, as compared to $62,696 for the comparable period last
fiscal year. The difference lies primarily in the purchase of property and
equipment during the current fiscal year. The Company had net purchases of
property and equipment of $380,598 compared to net sales of $14,380 for the
comparable period last fiscal year. During the current fiscal year, an
additional $287,797 was infused into the Company's minority interest in the
Company's subsidiary NetSol Connect.
Net cash provided by financing activities amounted to $1,573,593 and $2,339,910
for the six months ended December 31, 2004, and 2003, respectively. The current
fiscal period included the cash inflow of $1,512,000 compared to $1,102,049 from
issuance of equity and $343,900 compared to $814,350 from the exercising of
stock options and warrants. In the current fiscal period, the Company had net
payments on loans and capital leases of $230,603 as compared to net proceeds of
$423,511 in the comparable period last year.
The management expects to continue to improve its cash position in the current
and future quarters due to the new business signed up in the last quarter. In
addition, the Company anticipates additional exercises of investor warrants and
employee stock options in the current and subsequent quarters. During the
current fiscal period, management reduced the current liabilities significantly
by paying down these obligations. Management anticipates receiving proceeds from
option exercises in the coming months and will continue to explore the best
possible means and terms to raise new capital. Management is confident of being
able to strengthen its cash position and further improve the liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The Company would continue
to inject new capital towards expansion, growing sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.
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 next 12 months, we have following capital
needs:
o Injection of new capital of up to $500,000 in a strategic
joint-venture of NetSol-TiG. This partnership serves to outsource
TiG's software development business to our offshore-based development
facility.
o New capital requirement for NetSol Akhter, the telecom division in an
amount up to $2.0 million as required by the agreement with Akhter.
o Working capital of $1.0 million for debts payments, 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 consider raising capital through the
following methods: equity based financing; warrant and option exercises.
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The methods of raising funds for capital needs may differ based on the
following:
o stock volatility due to market conditions in general and NetSol stock
performance in particular. This may cause a shift in our approach to
raise new capital through other sources such as secured long term debt.
o Analysis of the cost of raising capital in the U.S., Europe or emerging
markets. By way of example only, if the cost of raising capital is high
in one market and it may negatively affect the company's stock
performance, we may explore options available in other markets.
Should global or other general macro economic factors cause an adverse climate,
we would defer new financing and use internal cash flow for capital
expenditures.
ITEM 3. CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the chief
executive officer and chief financial officer, conducted an evaluation of the
disclosure controls and procedures as defined by rule 13a-15(e) as of the end of
the period covered by this interim report on Form 10-QSB. Based upon that
evaluation, the Chairman, Chief Financial Officer and Chief Executive Officer
concluded that our disclosure controls and procedures are effective.
There has been no change, including corrective actions with regard to
deficiencies or weaknesses in the Company's internal controls or in other
factors that has materially affected, or is reasonably likely to materially
affect, these internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 2004 Uecker and Associates, Inc. as the assignee for the benefit of
the creditors of PGC Systems, Inc. formerly known as Portera Systems, Inc. filed
a request for arbitration demanding payment from NetSol for the amounts due
under a software agreement in the amount of $175,700. A settlement was reached
by and between the Company and Portera on November 11, 2004 whereby Portera
agreed to a settlement of any and all issues related to the claim in exchange
for one time payment of $75,000 which was paid by December 3, 2004.
ITEM 2. CHANGES IN SECURITIES.
In the quarter ended December 31, 2004, sixteen holders of $900,000 in
convertible debentures converted their notes into 483,873 shares of the
Company's common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CEO)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CFO)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)
REPORTS ON FORM 8-K.
a) On November 9, 2004, NetSol Technologies, Inc. issued a press release
announcing results of operations and financial conditions for the quarter ended
September 30, 2004.
b) On December 17, 2004, NetSol Technologies, Inc. issued a press release
revising its guidance for the 2005 fiscal year.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this amended report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NETSOL TECHNOLOGIES, INC.
Date: March 21, 2006 /s/ Naeem Ghauri
---------------------------
NAEEM GHAURI
Chief Executive Officer
Date: March 21, 2006 /s/ Najeeb Ghauri
---------------------------
NAJEEB GHAURI
Chairman
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