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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(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, 2001
[ ] For the transition period from __________ to __________
Commission file number: 0-22773
NETSOL TECHNOLOGIES, INC.
(Previously NETSOL INTERNATIONAL, INC.)
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
24025 Park Sorrento, Suite 220, 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 15,979,505 shares of its $.001 par value Common Stock
issued and outstanding as of February 14, 2002.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
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NETSOL TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet as of December 31, 2001
Comparative Unaudited Consolidated Statements of Operations
and Statements of Comprehensive Loss for the Three Months and
Six Months Ended December 31, 2001 and 2000
Comparative Unaudited Consolidated Statements of
Cash Flow for the Six Months Ended December 31,
2001 and 2000
Notes to the Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Netsol International, Inc.)
CONSOLIDATED UNAUDITED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
CURRENT ASSETS:
Cash $ 239,053
Accounts receivable, net of allowance of
$78,718 1,310,940
Revenues in excess of billings 182,038
Other current assets 256,164
------------
Total current assets 1,988,195
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $ 1,146,251 2,905,914
OTHER ASSETS 741,012
INTANGIBLES:
Product licenses, renewals, enhancements, copyrights,
Trademarks and trade names, net 3,060,563
Customer lists, net 1,354,154
Goodwill, net 1,755,000
------------
Total intangibles, net 6,169,717
------------
$ 11,804,838
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,950,331
Billings in excess of revenues 10,882
Net assets of subsidiary under winding up order 49,752
Notes payable, bank 248,963
Current maturities of obligations under capital lease 180,112
------------
Total current liabilities 3,440,040
OBLIGATIONS UNDER CAPITALIZED LEASES, less current maturities 313,334
LITIGATION SETTLEMENT 171,860
LOAN PAYABLE 128,765
CONTINGENCY (see Notes) --
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares authorized,
15,860,225 shares issued and outstanding 15,860
Stock subscriptions receivable (43,650)
Additional paid-in capital 30,963,187
Other comprehensive income 317,201
Accumulated deficit (23,501,759)
------------
Total stockholders' equity 7,750,839
------------
$ 11,804,838
============
See notes to consolidated financial statements.
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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Netsol International, Inc.)
CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three months ended Six months ended
December 31, December 31,
------------------------------ ------------------------------
2001 2000* 2001 2000*
------------ ------------ ------------ ------------
NET REVENUES $ 856,940 $ 2,005,476 $ 1,986,770 $ 3,910,985
COST OF REVENUES 820,275 1,005,442 1,727,746 1,816,612
------------ ------------ ------------ ------------
GROSS PROFIT 36,665 1,000,034 259,024 2,094,373
OPERATING EXPENSES:
Selling and marketing 66,973 17,114 126,087 239,431
Depreciation and amortization 408,740 304,575 817,663 638,364
Settlement expenses -- -- 389,860 --
Salaries and wages 371,215 585,072 780,854 1,070,312
Professional services, including non-cash
compensation 159,355 395,268 631,368 606,581
General and administrative 316,137 1,037,901 613,244 1,274,826
------------ ------------ ------------ ------------
Total operating expenses 1,322,420 2,339,930 3,359,076 3,829,514
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,285,755) (1,339,896) (3,100,052) (1,735,141)
OTHER INCOME/(EXPENSE) (100,601) 67,093 (132,822) 124,233
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,386,356) (1,272,803) (3,232,874) (1,610,908)
LOSS FROM DISCONTINUED OPERATIONS -- (21,498) -- (391,486)
------------ ------------ ------------ ------------
NET LOSS $ (1,386,356) $ (1,294,301) $ (3,232,874) (2,002,394)
============ ============ ============ ============
NET LOSS PER SHARE -- BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.10) $ (0.11) $ (0.24) $ (0.14)
DISCONTINUED OPERATIONS -- (0.01) -- (0.04)
------------ ------------ ------------ ------------
NET LOSS $ (0.10) $ (0.12) $ (0.24) $ (0.18)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 14,521,850 11,026,111 13,335,746 10,998,607
============ ============ ============ ============
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Netsol International, Inc.)
UNAUDITED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $ (1,386,356) $ (1,294,301) $ (3,232,874) $ (2,002,394)
Other comprehensive income/(loss)-
foreign currency translation 236,645 (380,914) 167,442 (789,879)
------------ ------------ ------------ ------------
Comprehensive income/(loss) $ (1,149,711) $ (1,675,215) $ (3,065,432) $ (2,792,273)
============ ============ ============ ============
* Restated for discontinued operation.
See notes to consolidated financial statements.
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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months Six months
ended ended
December 31, December 31,
2001 2000*
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss from continuing operations $(3,232,874) $(1,610,908)
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Depreciation and amortization 971,976 683,639
Non-cash compensation and settlement expense 748,513 64,800
Bad debt expense 9,324 425,402
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 674,607 (989,308)
Other current assets 72,584 629,105
Other assets 64,343 (735,350)
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 126,160 (2,058,541)
----------- -----------
Total adjustments 2,667,507 (1,980,253)
----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (565,367) (3,591,161)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from certificate of deposit 32,031 1,000,000
Purchase of property, plant and equipment (50,427) (483,649)
----------- -----------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (18,396) 516,351
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 419,050 1,091,600
Proceeds from loans payable, stockholders, net -- 437,419
Proceeds from (payments on) notes payable, net 171,323 --
Payments on loan payable -- (75,000)
Exercise of stock options -- 33,000
Payments on capital lease obligations (73,682) (56,997)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 516,691 1,430,022
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (67,072) (1,644,788)
CASH USED FOR DISCONTINUED OPERATIONS -- (77,514)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (67,072) (1,722,302)
CASH AND EQUIVALENTS, beginning of period 306,125 2,981,046
----------- -----------
CASH AND EQUIVALENTS, end of period $ 239,053 $ 1,258,744
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 59,077 $ 31,643
=========== ===========
Income taxes paid $ 3,597 $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 650,000 shares of common
stock per settlement agreements $ 389,860 $ --
=========== ===========
Issuance of 200,000 shares of common stock
Applied against acquisition payable $ 50,000 $ --
=========== ===========
Issuance of common stock
for services rendered, including related party $ 358,653 $ 64,800
=========== ===========
* Restated for discontinued operation.
See notes to consolidated financial statements.
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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES (Formerly Netsol International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, Network
Solutions (PVT), Ltd., NetSol (PVT), Limited, NetSol Connect (PVT), Ltd., NetSol
UK, Limited, Network Solutions Group Ltd. and Subsidiaries, Abraxas Australia
Pty, Ltd., NetSol eR, Inc., Supernet AG and NetSol USA, Inc. All material
intercompany accounts have been eliminated in consolidation.
COMPANY NAME CHANGE: Effective February 8, 2002, the Company changed its name
from NetSol International, Inc. to NetSol Technologies, Inc. The name change was
approved by a majority of shareholders at the Company's annual shareholders
meeting and by the board of directors.
BUSINESS ACTIVITY: The Company designs, develops, markets, and exports
proprietary software products to customers in the automobile finance and leasing
industry worldwide. The Company also provides consulting services in exchange
for fees from customers.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles 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.
BASIS OF PRESENTATION: 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 United States 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.
WINDING-UP ORDER: Effective November 26, 2001, Network Solutions Ltd., the
operating subsidiary of Network Solutions Group Ltd., entered into a Winding-up
Order (liquidation) with The Insolvency Service in the United Kingdom ("UK").
The Insolvency Service is an executive agency within the Department of Trade and
Industry in the UK. The Company anticipates a final dissolution order from The
Insolvency Service for these entities to be received within 90-120 days from
placement date. This UK entity has had no operations in the current fiscal year.
NetSol Technologies has negotiated a settlement agreement with the largest
creditor of Network Solutions Ltd. NetSol Technologies has now assumed this
debt, the present value of which approximated $170,000 at December 31, 2001
using the effective interest rate method. Of this amount, $128,765 is presented
as a long-term loan payable at December 31, 2001. This settlement was reached to
remove the personal guarantee of a prior director of NetSol Technologies,
subject to the terms of the agreement being satisfied. The net assets of Network
Solutions Ltd. (excluding the above amount assumed by NetSol Technologies) are
presented as a separate line item under current liabilities on the consolidated
December 31, 2001 balance sheet.
GOING CONCERN: The Company's consolidated financial statements are prepared
using the accounting principles generally accepted in the United States of
America applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. Without
realization of additional capital, it would be unlikely for the Company to
continue as a going concern. The factor raises substantial doubt about the
Company's ability to continue as a going concern.
Management recognizes that the Company must generate additional resources to
enable it to continue operations. Management has implemented its plan, which
includes closing down its generating UK entities, disposal of its German
subsidiary, and cost cutting measures at every entity level. Additionally,
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management's plans also include the sale of additional equity securities and
debt financing from related parties and outside third parties. However, no
assurance can be given that the Company will be successful in raising additional
capital. Further, there can be no assurance, assuming the Company successfully
raises additional equity, that the Company will achieve profitability or
positive cash flow. If management is unable to raise additional capital and
expected significant revenues do not result in positive cash flow, the Company
will not be able to meet its obligations and may have to cease operations.
Uncertainties
On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. These attacks have caused major instability in the U.S. and
other financial markets. Leaders of the U.S. government have announced their
intention to actively pursue those behind the attacks and to possibly initiate
broader action against global terrorism. Due to these attacks, any response may
lead to armed hostilities or to further acts of terrorism in the United States
or elsewhere, and such developments would likely cause further instability in
financial markets. In addition, armed hostilities and further acts of terrorism
may directly impact the Company's physical facilities and operations, which are
located in North America, Australia and the Southeast Asian Region (including
collectively significant subsidiaries located in Pakistan), or those of their
customers. Furthermore, the recent terrorist attacks, declaration of war against
terrorism and future developments may result in reduced demand from customers
for services or may negatively impact the clients' ability to outsource.
Currently, there are tensions involving Afghanistan, a neighbor of Pakistan.
These hostilities and tensions could lead to political or economic instability
in Pakistan and a possible adverse effect on operations and future financial
performance. These developments will subject the Company's worldwide operations
to increased risks and, depending on their magnitude, could have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
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, 2001. 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.
FOREIGN CURRENCY: The accounts of Network Solutions Group Ltd. and Subsidiaries
and NetSol UK, Limited use the British Pounds, Network Solutions PK, Ltd.,
NetSol (Pvt), Limited and NetSol Connect PVT, Ltd. use Pakistan Rupees, NetSol
Abraxas Australia Pty, Ltd. uses the Australian dollar and Supernet AG uses the
German Mark as the functional currencies. NetSol Technologies, Inc. and
subsidiaries NetSol USA, Inc. and NetSol eR, 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. Translation gains of $317,201 at
December 31, 2001 are classified as an item of other comprehensive income in the
stockholders' equity section of the consolidated balance sheet.
REVENUE RECOGNITION: Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with all applicable accounting
regulations, including American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, Software Revenue Recognition, as
amended by SOP 98-4 and 98-9. Any revenues from software arrangements with
multiple elements are allocated to each element of the arrangement based on the
relative fair values using specific objective evidence as defined in the SOPs.
If no such objective evidence exists, revenues from the arrangements are not
recognized until the entire arrangement is completed and accepted by the
customer. Once the amount of the revenue for each element is determined, the
Company recognizes revenue as each element is completed and accepted by the
customer. For arrangements that require significant production, modification or
customization of software, the entire arrangement is accounted for by the
percentage of completion method, in conformity with Accounting Research Bulletin
("ARB") No. 45 and SOP 81-1.
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NEW ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141 "Business Combinations." SFAS No. 141
supersedes Accounting Principles Board ("APB") No. 16 and requires that any
business combinations initiated after June 30, 2001 be accounted for as a
purchase; therefore, eliminating the pooling-of-interest method defined in APB
16. The statement is effective for any business combination initiated after June
30, 2001 and shall apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations since the Company has not
participated in such activities covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition, measurement and amortization of
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
The Company is evaluating any accounting effect, if any, arising from the
recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's
financial position or results of operations.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
PRIVATE PLACEMENT: The Company sold 550,000 shares of its restricted Rule 144
common stock in the amount of $82,500 through a private placement offering
during the quarter ended December 31, 2001 pursuant to Rule 506 of Regulation D
of the Securities and Exchange Act of 1933.
Certain employees exercised 140,000 $0.25 stock options during the second
quarter, resulting in an additional $35,000 of cash flows from financing
activities.
INTANGIBLES ASSETS: Accumulated amortization at December 31, 2001 was $1,271,616
for products licenses, renewals, enhancements, copyrights, trademarks and trade
names, $1,135,311 for customer lists and $1,442,500 for goodwill.
LITIGATION SETTLEMENT: The Company has reached a settlement agreement involving
an ongoing litigation with Adrian Cowler and the Surrey Design Partnership
Limited. $389,860 of costs resulting with this settlement has been recorded in
the first quarter of fiscal 2002 using the effective interest method. Terms of
the settlement agreement call for issuance of 650,000 restricted shares of the
Company's common stock (issued in November 2001) and cash payments in aggregate
approximating $286,000 over the next four years and three months
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(through March 31, 2006), of which $171,860 is classified as long term on the
balance sheet at December 31, 2001.
CONTINGENCY: The Company, in the determined event of default, may become
potentially liable up to $400,000 with respect to some of its obligations under
a registration rights agreement with Deephaven Capital Management.
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE POOLING OF INTEREST METHOD:
SUPERNET AKTIENGESELLSCHAFT (SUPERNET AG)
On May 2, 2000, the Company issued 425,600 Rule 144 restricted common shares in
exchange for 100% of the outstanding capital stock of Supernet
Aktiengesellschaft, a German Company. This business combination was accounted
for using the pooling of interest method of accounting under APB Opinion No. 16,
and accordingly, the accompanying financial statements have been restated to
show the results of operations as if the combination had occurred at the
beginning of all periods presented. On May 1, 2001, management of the Company
committed to a formal plan to dispose of Supernet AG, a division or segment of
the Company, through a sale of all the issued and outstanding shares of Supernet
AG. The closing date was on May 21, 2001. The Company is following the guidance
of APB No. 30 in the accounting for and disclosure of this disposal. The losses
from operations of this discontinued division is presented on the face on the
Statement of Operations for all periods presented. There are no applicable
corresponding income tax effects, which applied to this disposal. Revenues
applicable to this discontinued division were $347,370 for the six months ended
December 31, 2000. Included in accounts payable and accrued expenses at December
31, 2001 is approximately $140,000 remaining that the Company has accrued for
under the terms of the sale agreement.
RECLASSIFICATIONS: Certain accounts balances from the prior year comparable
quarter have been reclassified to conform to present quarter presentation.
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
NetSol Technologies, Inc. ("NetSol" or the "Company") is in the business of
information technology ("I/T") services. Since it was founded in 1997, the
Company has developed enterprise solutions that help clients use I/T more
efficiently in order to improve their operations and profitability and to
achieve business results. Network Solutions Pvt. Ltd. ("NetSol PK") develops the
majority of the software for the Company. NetSol PK was the first company in
Pakistan to achieve the ISO 9001 accreditation. The Company is in the process of
attaining SEI CMM Level 3 accreditation. This is one of the highest levels of
recognition for quality and best practices a software house can achieve.
Company Business Model
The Company offers a broad array of professional services to clients in the
global commercial markets and specializes in the application of advanced and
complex I/T enterprise solutions to achieve its customers' strategic objectives.
Its service offerings include outsourcing, systems integration, customized IT
solutions, project/program management and I/T management consultancy, as well as
other professional services, including e-business solutions.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, system design and architecture,
change management, enterprise applications development, network operations,
desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The Company also develops sophisticated software systems for the asset based
lease and finance industries. NetSol has developed a complete integrated lease
and finance package, which is a series of five products that can be marketed and
utilized in an integrated system. These products are ePOS, PMS, SMS, CMS (under
development), and WFS. These five applications form the full suite of the asset
based lending Enterprise Resource Planning applications. These applications can
run virtually the entire operations of a captive leasing company.
NetSol ePOS is a browser-based Point of Sale system that can be used by any
front-end selling operation, including motor vehicle dealers and other outlets.
ePOS users create quotations and financing applications for the customers using
predefined financial products. The proposal is submitted to Back Office (PMS)
for credit approval. After analysis, the proposal is sent back to ePOS system
with a final decision.
Proposal Management System (PMS) provides various finance/leasing companies with
the ability to quickly assess the worthiness of an applicant applying for a loan
or a lease. The core of the system is driven by a strong workflow management
engine with integrated links to credit rating agencies and offers an automated
point scoring strategy for automatic approval/rejection/referral. It can be
customized to link to any Point of Sale System, and it has the ability to
integrate any vehicle data provider such as Glass' Guide in Europe and
Australia.
The NetSol Wholesale Finance System (WFS) is developed to automate and manage
the Whole Sale Finance (Floor Plan) activities of a Finance Company. The design
of the system is based on the concept of One Loan One Asset to facilitate Asset
Tracking and Costing of an asset. The system covers Credit Limit
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Request, Payment of Loan, Billing, and Settlement, Auditing of Stocks, Dealer
Information and ultimately the pay-off functions.
Settlement Management System (SMS) verifies the signed document sent by the
dealer/broker/third party against the information stored in the Proposal
Management System database. SMS verifies all calculations before loading the
contract into the Contract Management System. Other main features are collection
of first rental and disbursement of funds to dealers, insurance companies and
other third parties. Workflow software is part of SMS and it enables the users
of SMS to communicate with Proposal Management workflow or within its own
workgroup.
The Contract Management System (CMS) manages lease/finance contracts for
financing of vehicles from inception until completion and creates all the
required accounting entries to interface with a general ledger. The leasing
company is able to establish, maintain and terminate such financial contracts.
Contracts may include added value services such as vehicle maintenance and/or
insurance premiums. It furthermore incorporates functional extensions such as
litigation, remarketing of vehicles, securitization of a portfolio and post
dated check management.
These are traditionally complex business applications and require a great deal
of industry experience both in the development as well as implementation stages.
NetSol, over the years, has developed core competencies in the asset based
lending software space. These are sought after skills shared in a team of
approximately 30 business consultants. NetSol is able to demand a premium for
these consultants and leverages this competency when bidding for new business.
Typically, the sales cycle for these products is anywhere between six to twelve
months and NetSol derives its income both from selling the license to use the
products as well as extensive customization, implementation, support and
maintenance. License fees can vary generally between $75,000 to $500,000 per
license depending upon the size of the customer and the complexity of the
customization. The revenue for the license and the customization flows in
several phases and could take from six months to two years before its is fully
recognized as income in accordance with generally accepted accounting
principles.
STATUS OF ANY NEW PRODUCTS OR SERVICES
The Company expanded its menu of software into banking and other financial
areas. NetSol PK launched new customized banking applications software. The
Company has the technical know how and capability to successfully enter this
vibrant banking sector. Over eight new business development and project
management teams in the area of banking and finance were created in the second
quarter of 2001. As a result of this new initiative, NetSol added a new fortune
500 customer such as Citibank in Pakistan. The entry in the banking sector was
broadened by creating new relationships with yet new customers such as Askari
Leasing Co. and a few other local customers in Asia Pacific region.
NetSol further strengthened its US presence on the West and East Coasts.
NetSol's `Proximity Development Center' or PDC model was introduced in the US.
PDC provides the Company with the ability to have on shore competencies in
project management, systems analysis and design as well as customer relationship
management. PDC model provides a face-to-face interaction and interfacing of
project managers and high-level developers with the US based customers at very
competitive prices.
NetSol USA, as a Government Suppliers Agreement ("GSA") approved vendor, has the
ability to participate in numerous government related contracts and projects
tendered by the various government agencies.
Marketing and Selling
The objective of the Company's marketing program is to create and sustain
preference and loyalty for NetSol as a leading provider of enterprise solutions,
e-services consulting and software solutions provider. Marketing is performed at
the corporate and business unit levels. The corporate marketing department has
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overall responsibility for communications, advertising, public relations and our
website and also engineers and oversees central marketing and communications
programs for use by each of our business units.
Our dedicated marketing personnel within the business units undertake a variety
of marketing activities, including sponsoring focused client events to
demonstrate our skills and products, sponsoring and participating in targeted
conferences and holding private briefings with individual companies. We believe
that the industry focus of our sales professionals and our business unit
marketing personnel enhances their knowledge and expertise in these industries
and will generate additional client engagements.
The Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the later agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues.
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, the Company's service offerings are
marketed to clients in a wide array of industries including, automotive;
chemical; tiles/ceramics; Internet marketing; software; medical, banks and
financial services..
Geographically, NetSol has operations in North America, the Middle East and Asia
Pacific region.
CHANGES IN FINANCIAL CONDITION
Three Months Ended December 31, 2001 as compared to the Three Months Ended
December 31, 2000 (restated for discontinued operation).
Net sales were $856,940 for the quarter ended December 31, 2001. This is a
decrease from the sales of the same quarter for the previous year of $2,005,476
(restated for discontinued operation), which is as a result of the both closing
down of the UK operations and an overall slowing of sales as a result of the
economic downturn. The Company is aware of existing customers who have planned
significant reductions in their IT spending projections for the near term.
The gross profit was $36,665 in the quarter ending December 31, 2001. This is in
comparison with $1,000,034 (restated) for the same quarter of the previous year.
The gross profit percentage has decreased from approximately 38% for fiscal 2001
to approximately 4% for the second quarter of fiscal 2002 as a result of the
Company maintaining staffing levels to appropriately position itself for
anticipated new agreements heading into the remainder of the current fiscal
year. While management is striving to negotiate better pricing on new
agreements, the Company has been required to react to overall general economic
factors in determining its present pricing structure.
Operating expenses were $1,322,420 for the quarter ending December 31, 2001.
This compares with $2,339,930 (restated) for the same quarter of the previous
year. The decrease in the current fiscal year is largely attributable decreases
in professional fees, general and administrative costs and salaries and wages,
slightly offset by higher depreciation charges. Depreciation and amortization
expense increased to $408,740 for the quarter ended December 31, 2001 as
compared to $304,575 for the quarter ended December 31, 2000. Combined general
and administrative and salaries and wage costs were $687,352, or a decrease of
$935,621 from the quarter ended December 31, 2000. This decrease is attributable
to a reduction in operational expenses as the company was both in the process of
working through the aftermath of the invalid takeover attempt and restructuring
its entities at all levels to position itself for new contracts.
Net loss was $1,386,356 for the quarter ended December 31, 2001 as compared to
$1,294,301 for the quarter ended December 31, 2000. The prior year comparable
quarter net loss figure is comprised of a net
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loss of $1,272,803 from continuing operations and a net loss of $21,498 from
discontinued operations. The increased loss is a direct result of reduced sales
while also not reducing sufficient developer staffing levels for anticipated new
contracts. This resulted in a net loss per share from continuing operations,
basic and diluted, of $0.10 for the quarter ended December 31, 2001 as compared
with $0.11 (restated) for continuing operations and $0.01 for discontinued
operations for the quarter ended December 31, 2000.
The Company's cash position was $953,387 at December 31, 2001. This is presented
on the financial statements as $239,053 as cash and cash equivalents, and a
total $714,334 as certificates of deposit, which is included in other assets.
This represents an decrease of approximately $67,000 from June 30, 2001.
Six Months Ended December 31, 2001 as compared to the Six Months Ended December
31, 2000 (restated for discontinued operation).
Net sales were $1,986,770 for the six months ended December 31, 2001. This is a
decrease from the sales of the same period for the previous year of $3,910,985
(restated for discontinued operation), which is as a result of negative events
surrounding the invalid takeover attempts, the closing down of the UK operations
and an overall slowing of sales as a result of the economic downturn. The
Company anticipates 10%-15% growth occurring in the second half of fiscal 2002.
The gross profit was $259,024 for the six months ending December 31, 2001. This
is in comparison with $2,094,373 (restated) for the same period of the previous
year. The gross profit percentage has decreased from approximately 38% for
fiscal 2001 to approximately 13% for the current year to date of fiscal 2002 as
a result of the Company maintaining staffing levels to appropriately position
itself for anticipated new agreements heading into the remainder of the current
fiscal year. While management is striving to negotiate better pricing on new
agreements, the Company has been required to react to overall general economic
factors in determining its present pricing structure. The Company anticipates
its gross profit margin to increase towards the end of the third quarter with
anticipation for a 20%-25% range in the second half of fiscal 2002.
Operating expenses were $3,359,076 for the six months ending December 31, 2001.
This compares with $3,829,514 (restated) for the same period of the previous
year. The decrease in the current fiscal year is largely attributable decreases
in salaries and wages and general and administrative costs, partially offset by
higher professional services expense and depreciation charges. Depreciation and
amortization expense increased to $817,663 for the six months ended December 31,
2001 as compared to $638,364 for the six months ended December 31, 2000. The
increase in professional services is attributable to additional operational
expenses as the company was in the process of working through the aftermath of
the invalid takeover attempt well into fiscal 2002.
Net loss was $3,232,874 for the six months ended December 31, 2001 as compared
to $2,002,394 for the six months ended December 31, 2000. The prior year
comparable quarter net loss figure is comprised of a net loss of $1,610,908 from
continuing operations and a net loss of $391,486 from discontinued operations.
The increased loss is a direct result of reduced sales while also not reducing
sufficient developer staffing levels for anticipated new contracts. This
resulted in a net loss per share from continuing operations, basic and diluted,
of $0.24 for the six months ended December 31, 2001 as compared with $0.14
(restated) for continuing operations and $0.04 for discontinued operations for
the six months ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced a reduction in its cash balances, however the
Company is continuing to take action to re-focus on its self-sustaining
operating subsidiaries, while scaling back significantly on loss making
operations and anticipated capital expenditures. The majority of the contracts
for NetSol eR and NetSol USA (North American operations) are time and materials
contracts which provides good liquidity to fund specific working capital
requirements for those entities. In generating this revenue growth, the Company
continues to anticipate that capital expenditures requirements will be kept at
very low levels throughout fiscal 2002 and into first half of fiscal 2003. The
Company presently estimates that it will be able to reduce its current monthly
rate of using working capital beginning in the near term. The Company
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anticipates it will continue to receive cooperation from its creditors it
working out payment plans that will enable the Company to have sufficient cash
flows to put towards business development activities. In the opinion of
management, the Company believes that the impact from certain software sales
contracts within its Pakistan subsidiary operations will have an impact upon its
liquidity in the short term; however, management does believe that its
anticipated positive cash flows from re-focusing on its profitable operations, a
reduction in the Company's projected capital expenditure requirements for the
next twelve months, along with the financing options being pursued, cash flows
will be sufficient for the foreseeable future to manage the short term liquidity
impact from these specific software contracts and finance anticipated working
capital requirements. The Company believes that certain of its needed capital
will result from the continuing successful collection of its accounts receivable
balances as projects are completed throughout the remainder of fiscal 2002,
particularly in its Pakistan operations. The Company also remains confident it
can continue to raise sufficient additional funds though private placements of
its common stock as was pursued and achieved in the second quarter in the
financing deal entered into with Red Sea, Ltd.
ADDITIONAL RAISE OF CAPITAL
The Company sold 550,000 shares of its restricted Rule 144 common stock in the
amount of $82,500 through a private placement offering during the quarter ended
December 31, 2001 pursuant to Rule 506 of Regulation D of the Securities and
Exchange Act of 1933.
Certain employees exercised 140,000 $0.25 stock options during the second
quarter, resulting in an additional $35,000 of cash flows from financing
activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was involved in proceedings with Adrian Cowler and The Surrey Design
Partnership Limited, the former owners of Network Solutions Group Limited
("NSGL"). The Company and the above named parties have reached a settlement
agreement. Terms of the settlement agreement call for issuance of 650,000
restricted shares of the Company's common stock and cash payments in aggregate
approximating $286,000 over the next four years and three months (through March
31, 2006), of which $171,860 is classified as long term on the balance sheet at
December 31, 2001.
A Nevada state court placed the Company into a Receivership on June 19, 2001 as
a result of a proxy contest by a group of shareholders. Ultimately, the Court
invalidated their actions and the shareholders group disbanded their actions and
dissolved their group; whereupon, the court removed the Receiver from the
Company on August 3, 2001 and returned full control of NetSol to the incumbent
Board of Directors and management.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During August to December 1999, the Company issued and sold 633,366 shares of
common stock for aggregate gross proceeds of $1,553,661 in a private placement
under Rule 506, Regulation D. The class of investors to which the Company sold
shares to was "accredited investors".
During November 1999, the Company issued 8% notes payable, which were
convertible to common shares at $6.50 per share. The Company raised a total of
$350,000 of which $250,000 was converted into 38,462 shares. In connection with
this note offering, the Company issued non-detachable warrants to purchase
57,000 shares of common stock with an exercise price of $6.50 per share to its
broker JS Capital, as commission.
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In July 2000, the Company sold 63,666 shares of its common stock for gross
proceeds in the amount of $955,000. The shares of common stock were issued in a
private placement in reliance on the exemption from registration under Section
4(2) of the Securities Act of 1933 (the "Securities Act"). The class of persons
to whom such securities were sold was all individual "accredited investors".
On January 8, 2001, the Company entered into an agreement for equity financing
with Deephaven Capital Management, an investment fund ("Deephaven") pursuant to
which the Company sold shares of common stock in a private placement
transaction, which closed in two traunches. Under the terms of our securities
purchase agreement with Deephaven, we issued 183,150 shares of common stock to
Deephaven in connection with a first closing, which occurred on January 8, 2001
for gross proceeds of $1 million. We also issued warrants to purchase an
aggregate of up to 54,945 shares of common stock to Deephaven in the first
closing at an exercise price of $6.83 per share. We issued 279,720 shares of
common stock to Deephaven in connection with a second closing, which occurred on
February 20, 2001 for gross proceeds of $1 million. We also issued warrants to
purchase an aggregate of up to 83,916 shares of common stock to Deephaven in the
second closing at an exercise price of $4.47 per share. All warrants are
exercisable for a period of five years from the date of issuance and have
adjustment provisions for dilution events in connection with issuances of our
common stock and other equivalents below the applicable warrant exercise price
and for stock splits, stock dividends and similar transactions. In connection
with our sale of common stock pursuant to the Deephaven securities purchase
agreement, we paid an aggregate of $100,000 to Jessup & Lamont, the placement
agent in the transaction, and issued warrants to purchase up to 9,158 shares of
common stock at an exercise price of 6.83 per share in the first closing and
warrants to purchase up to 13,986 shares of common stock at an exercise price of
$4.47 per share in the second closing. These warrants have the same terms as the
warrants issued to Deephaven pursuant to the Deephaven securities purchase
agreement. The shares of common stock and warrants issued to Deephaven and
Jessup & Lamont were issued in reliance on the exemption from registration under
Section 4(2) of the Securities Act. The Company agreed to file and have declared
effective a registration statement pursuant to the terms of a registration
rights agreement with Deephaven with respect to such securities. The Company has
filed a registration statement with respect to the shares of common stock and
warrants held by Deephaven and Jessup & Lamont, which has not been declared
effective as of the date of this report. The Company is in default with respect
to some of its obligations under the registration rights agreement.
On December 7, 2001, the Company entered into a new funding and business
development alliance with Red Sea, Ltd., a private investment company investing
in small cap technology businesses. The agreement is for the purchase of
2,000,000 restricted Rule 144 shares at $0.22 per share and 1,000,000 warrants
at $0.70 per warrant, or an average price of $0.38. The shares and the
underlying shares of the warrants shall be restricted for a period of one year.
The remaining funds in the amount of $700,000 would be paid upon the exercise of
the warrants, which is at the sole discretion of Red Sea. At the direction of
Red Sea, the funding is designated almost exclusively for the purpose of
business development and related activities. The agreement also includes certain
defined business development targets and provides the opportunity for the
development of significant business activities for the Company by means of the
extensive business relationships and alliances that Red Sea has access to.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Incorporated by reference to the Company's Definitive Proxy Statement on Form
14(a) filed on December 14, 2001. The Annual Meeting of Shareholders was held on
January 25, 2002 and the final tally of votes on February 8, 2002 produced the
following proposals adopted by the margins indicated:
Election of Board of Directors: 9,363,777 shares have been voted in favor of the
proposal; and 20,549 shares against and zero shares abstain.
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Election of Auditors: 9,370,740 shares have been voted in favor of the Election
of Auditors; 13,412 shares against and 174 shares abstain.
Ratification of the 2001 Employee Stock Option Plan of the Company and 9,316,420
shares have been voted in favor of the proposal; 64,405 shares against and 3,501
shares abstain.
Amendment of bylaws and articles of incorporation of the Company to eliminate
cumulative voting, and 9,306,885 shares have been voted in favor of the
proposal; 76,829 shares against and 612 shares abstain.
Amendment of bylaws to eliminate actions by written consent, and 9,285,157
shares have been voted in favor of the proposal; 95,459 shares against and 3,710
shares abstain.
Amendment of bylaws to eliminate any stockholder to call special meeting of
stockholders, and 9,323,699 shares have been voted in favor of the proposal;
60,418 shares against and 209 shares abstain.
Amendment of bylaws to require stockholders to provide the board of directors
with notice in the event of nomination to the board of directors and other
proposals that they may have, and 9,332,908 shares have been voted in favor of
the proposal; 44,498 shares against and 6,920 shares abstain.
Amendment of articles of incorporation to allow for undesignated preferred stock
in the amount of 5,000,000 shares, and 9,251,233 shares have been voted in favor
of the proposal; 127,267 shares against and 5,826 shares abstain.
Amendment of articles of incorporation to increase the number of authorized
shares from 25,000,000 to 50,000,000, and 9,291,395 shares have been voted in
favor of the proposal; 87,082 shares against and 5,849 shares abstain.
Amendment of the articles of incorporation and the bylaws to limit the liability
of the officers and board of directors to amounts acceptable by law, and
9,260,658 shares have been voted in favor of the proposal; 123,094 shares
against and 574 shares abstain.
Amendment of the articles of incorporation to change the name of the Company
from NetSol International, Inc. to NetSol Technologies, Inc., and 9,371,354
shares have been voted in favor of the proposal; 12,598 shares against and 374
shares abstain.
ITEM 5. OTHER INFORMATION
WINDING-UP ORDER: Effective November 26, 2001, Network Solutions Ltd.,
the operating subsidiary of Network Solutions Group Ltd., entered into a
Winding-up Order (liquidation) with The Insolvency Service in the United Kingdom
("UK"). The Insolvency Service is an executive agency within the Department of
Trade and Industry in the UK. The Company anticipates a final dissolution order
from The Insolvency Service for this entity to be received within 90-120 days
from placement date. This entity has had no operations in the current fiscal
year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits and Reports on Form 8-K.
None.
The Company filed no reports on Form 8-K during the quarter ended December 31,
2001.
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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NETSOL TECHNOLOGIES, INC.
(Registrant)
Date: February 19, 2002 /s/ Naeem Ghauri
-------------------------------------
NAEEM GHAURI
Chief Executive Officer
/s/ Syed Husain
--------------------------------------
SYED HUSAIN
Chief Accounting and Operating Officer
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