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 September 30, 2001
( ) For the transition period from __________ to __________
Commission file number: 0-22773
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 14,492,172 shares of its $.001 par value Common Stock
issued and outstanding as of November 9, 2001.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
Page 1
NETSOL INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet as of September 30, 2001
Comparative Unaudited Consolidated Statements of
Operations for the Three Months Ended September 30,
2001 and 2000
Comparative Unaudited Consolidated Statements of
Cash Flow for the Three Months Ended September 30,
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
Page 2
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 730,702
Accounts receivable, net of allowance of $72,526 1,701,239
Revenues in excess of billings 92,872
Other current assets 157,823
------------
Total current assets 2,682,636
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $1,012,048 2,898,488
OTHER ASSETS 780,714
INTANGIBLES:
Product licenses, renewals, enhancements, copyrights,
Trademarks and trade names, net 3,230,594
Customer lists, net 1,431,571
Goodwill, net 1,852,500
------------
Total intangibles, net 6,514,665
------------
$ 12,876,503
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,124,835
Billings in excess of revenues 60,172
Notes payable, bank 383,281
Current maturities of obligations under capital lease 183,527
------------
Total current liabilities 3,751,815
OBLIGATIONS UNDER CAPITALIZED LEASES, less current maturities 228,068
LITIGATION SETTLEMENT 185,360
CONTINGENCY (see Notes) --
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares authorized,
14,885,923 shares issued and outstanding 14,886
Stock subscriptions receivable (43,650)
Additional paid-in capital 30,774,872
Other comprehensive income 80,556
Accumulated deficit (22,115,404)
------------
Total stockholders' equity 8,711,260
------------
$ 12,876,503
============
See notes to consolidated financial statements.
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NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months
ended ended
September 30, September 30,
2001 2000*
------------ ------------
NET REVENUES $ 1,129,830 $ 1,905,509
COST OF REVENUES 907,470 661,170
------------ ------------
GROSS PROFIT 222,360 1,244,339
OPERATING EXPENSES:
Selling and marketing 59,114 62,656
Depreciation and amortization 408,923 333,789
Settlement expenses 389,860 --
Salaries and wages 409,639 211,313
Professional services, including non-cash compensation 472,014 635,240
General and administrative 297,107 396,586
------------ ------------
Total operating expenses 2,036,657 1,639,584
------------ ------------
LOSS FROM OPERATIONS (1,814,297) (395,245)
OTHER INCOME/(EXPENSE) (32,222) 57,140
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,846,519) (338,105)
LOSS FROM DISCONTINUED OPERATIONS -- (369,988)
------------ ------------
NET LOSS $ (1,846,519) $ (708,093)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.15) $ (0.03)
DISCONTINUED OPERATIONS -- $ (0.03)
------------ ------------
NET LOSS $ (0.15) $ (0.06)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 12,291,721 10,971,099
============ ============
* Restated for discontinued operation.
See notes to consolidated financial statements.
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NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
Three months Three months
ended ended
September 30, September 30,
2001 2000*
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss from continuing operations $(1,846,519) $ (338,105)
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Depreciation and amortization 492,849 333,789
Non-cash compensation and settlement expense 621,390 --
Bad debt expense -- 30,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 475,670 (807,908)
Other current assets 51,387 707,802
Other assets 28,276 (304,149)
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 30,292 (1,776,082)
----------- -----------
Total adjustments 1,699,864 (1,816,548)
----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (146,655) (2,154,653)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from certificate of deposit 32,031 1,000,000
Purchase of property, plant and equipment (22,417) (361,476)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 9,614 638,524
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 301,550 1,007,000
Proceeds from loans payable, stockholders -- 504,512
Proceeds from (payments on) notes payable, net 305,641 250,000
Payments on loan payable -- (75,000)
Exercise of stock options -- 29,000
Payments on capital lease obligations (45,573) (25,550)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 561,618 1,689,962
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS 424,577 173,833
CASH USED FOR DISCONTINUED OPERATIONS -- (79,542)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 424,577 94,291
CASH AND EQUIVALENTS, beginning of period 306,125 2,981,046
----------- -----------
CASH AND EQUIVALENTS, end of period $ 730,702 $ 3,075,337
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 30,575 $ 31,643
=========== ===========
Income taxes paid $ 1,897 $ --
=========== ===========
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
shares for services rendered $ 231,530 $ --
=========== ===========
* Restated for discontinued operation.
See notes to consolidated financial statements.
Page 5
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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.
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 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.
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,
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 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 International, 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 $80,556 at
September 30, 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
Page 6
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.
PRIVATE PLACEMENT: The Company sold 962,333 (212,333 to a related party) shares
of its restricted Rule 144 common stock in the amount of $144,350 through a
private placement offering during the quarter ended September 30, 2001 pursuant
to Rule 506 of Regulation D of the Securities and Exchange Act of 1933.
Certain directors, officers and employee exercised $0.25 stock options during
the quarter. The exercise of these options provided $157,200 of cash flows from
financing activities. In addition, 690,000 options were exercised through the
rendering of savings and settlement of debt.
INTANGIBLES ASSETS: Accumulated depreciation at September 30, 2001 was
$1,101,585 for products licenses, renewals, enhancements, copyrights, trademarks
and trade names, $1,057,894 for customer lists and $1,247,500 for goodwill.
LITIGATION SETTLEMENT: The Company has reached a tentative 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 current period. 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 and one-half
(through March 31, 2006) years, of which $185,360 is classified as long term on
the balance sheet at September 30, 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 $212,397 for the three months
ended September 30, 2000. Included in accounts payable and accrued expenses at
September 30, 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.
Page 7
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
NetSol International, 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.
Recent Events-Termination of Recent Proxy Contest/Going Concern Qualification
Beginning in May 2001, a shareholder group (the "NetSol Shareholder Group")
comprised of [Blue Water Master Fund, L.P., Blue Water Partners II, L.P, PSM
International Limited and Dr. Henry Vogel] commenced a proxy contest to take
control of NetSol from the then incumbent management of NetSol. On June 10,
2001, the Shareholder Group purported to convene a NetSol board meeting and
claimed that it had removed the incumbent directors and officers of NetSol and
elected new directors and officers. On June 11, 2001, the Shareholder Group took
physical control of NetSol's Calabasas premise and the incumbent management
immediately sought a Temporary Restraining Order ("TRO") from Nevada court
requesting the removal of the Shareholder Group and the reinstatement of the
incumbent management. The management purportedly elected by the Shareholder
Group also issued press releases, filed Form 8-Ks and engaged in other
communications with third parties purportedly on behalf of NetSol. On June 19,
2001 the Court ordered a Receiver to take control of the day-to-day operations
of the Company with participation of both incumbent management and the
Shareholder Group. The Court also invalidated the June 10, 2001 board actions
and all other actions taken at the direction of the Shareholder Group on behalf
of NetSol, and held that such group acted as "illegitimate management." On
August 2, 2001 the Shareholder Group filed a Schedule 13D reporting the
dissolution of the group and the termination of the plan to control NetSol. On
August 3, 2001, the court dismissed the Receiver and reinstated the incumbent
Board of Directors and officers of NetSol. On July 30, 2001, Cary Burch, one of
the incumbent directors of NetSol who was aligned with the Shareholder Group,
resigned.
This proxy contest has had a material adverse effect on NetSol's operations,
including its relations with its customers, suppliers, and investors. In
addition, our stock price has materially declined from $4.80 on April 30, 2001
(the month prior to the Shareholder Group's commencement of the proxy contest)
to less than $1 as of the date of this report. The Company has incurred to date
in excess of $500,000 in legal and corporate fees, costs, and expenses related
to the proxy contest. As a result of the adverse effect on our business caused
by the proxy contest, recurring losses and negative working capital, the audit
report dated October 5, 2001 of our auditors states that there is substantial
doubt as to our ability to continue as a going concern.
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.
Page 8
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 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.
Page 9
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.
In the fiscal year 2001, NetSol eR, Inc., and NetSol USA, Inc., both wholly
owned subsidiaries of NetSol , implemented PDC models with their customers such
as Leverage Consulting, OPSION Medical, Voice Stream Wireless and Global One.
NetSol USA also specializes in providing professional IT consultants and project
managers to fortune 500 companies and, as a Government Suppliers Agreement
("GSA") approved vendor, it 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
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.
Page 10
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 throughout North America, the Middle East
and Asia Pacific region.
CHANGES IN FINANCIAL CONDITION
Three Months Ended September 30, 2001 as compared to the Three Months Ended
September 30, 2000 (restated for discontinued operation).
Net sales were $1,129,830 for the quarter ended September 30, 2001. This is a
decrease from the sales of the same quarter for the previous year of $1,905,509
(restated for discontinued operation), which is largely as a result of the
closing down of the UK operations. On a positive trend, the current quarter
sales represents an increase of more than 15% from the immediate preceding
fourth quarter ended June 30, 2001. The management of the Company was able to
achieve this solid increase even as it was addressing the numerous ongoing
challenges as a result of the invalid takeover attempt. Due to the maturity of
the lease and finance products, the Company is positioning itself to market
these licenses to the North American and other global markets. The Company
anticipates that revenue for the second quarter to be comparable to the first
quarter, with between 20% to 25% growth occurring in the second half of fiscal
2002.
The gross profit was $222,360 in the quarter ending September 30, 2001. This is
in comparison with $1,244,339 (restated) for the same quarter of the previous
year. The gross profit percentage has decreased from approximately 38% for
fiscal 2001 to approximately 20% for the first 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 $2,036,657 for the quarter ending September 30, 2001.
This compares with $1,639,584 (restated) for the quarter ending September 30,
2000. The increase in the current fiscal year is largely attributable to the
one-time charge of litigation settlement costs of $389,860, as well as
additional amortization of goodwill and other intangible assets as a result of a
change in an accounting estimate in the fourth quarter of fiscal 2001. The
current quarter operating expenses represent a significant decrease from the
operating expenses of $10,436,405 from the immediately preceding fourth quarter
of last fiscal year. Depreciation and amortization expense increased to $408,923
for the quarter ended September 30, 2001 as compared to $333,789 for the quarter
ended September 30, 2000. Combined general and administrative and salaries and
wage costs were $706,746, or an increase of $98,847 from the quarter ended
September 30, 2000. This increase is attributable to additional operational
expenses as the company was in the process of working through the aftermath of
the invalid takeover attempt. Selling and marketing expenses were comparable for
both quarters as the Company has yet to aggressively launch its global marketing
efforts.
Net loss was $1,846,519 for the quarter ended September 30, 2001 as compared to
$708,093 for the quarter ended September 30, 2000. The prior year comparable
quarter net loss figure is comprised of a net loss of $338,105 from continuing
operations and a net loss of $369,988 from discontinued operations. The current
quarter loss is a significant decrease from the fourth quarter loss of last
fiscal year of $8,398,082. Additionally, the current quarter loss includes the
one-time charge of $389,860 resulting from a litigation settlement as well as
costs in excess of $150,000 as it relates to the activities surrounding the
invalid takeover attempt. This resulted in a net loss per share from continuing
operations, basic and diluted, of $0.15 for the quarter ended September 30, 2001
as compared with $0.03 (restated) for continuing operations and $0.03 for
discontinued operations for the quarter ended September 30, 2000. The current
quarter loss per share represents a significant decrease from the loss per share
from continuing operations of $0.72 for the fourth quarter of last fiscal year.
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The Company's cash position was $1,448,671 at September 30, 2001. This is
presented on the financial statements as $730,702 as cash and cash equivalents,
and a total $717,969 as certificates of deposit, which is included in other
assets (as it is held as collateral). This represents an increase of
approximately $400,000 from June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company was able to generate an increase in cash and cash equivalents of
$424,577 for the quarter ended September 30, 2001. This is a significant
positive trend from the fourth quarter ended June 30, 2001, which showed a cash
and cash equivalents decrease of $952,619 for that quarter. 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 its fiscal 3rd quarter. 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. 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 first quarter.
ADDITIONAL RAISE OF CAPITAL
The Company sold 962,333 (212,333 to a related party) shares of its restricted
Rule 144 common stock in the amount of $144,350 through a private placement
offering during the quarter ended September 30, 2001 pursuant to Rule 506 of
Regulation D of the Securities and Exchange Act of 1933.
Certain directors, officers and employee exercised $0.25 stock options during
the quarter. The exercise of these options provided $157,200 of cash flows from
financing activities. In addition, 690,000 options were exercised through the
rendering of savings and settlement of debt.
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 tentative
settlement agreement. Terms of the tentative 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 and one-half
years, of which $185,360 is classified as long term on the balance sheet at
September 30, 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
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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.
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 tranches. 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.
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 Preliminary Proxy Statement on Form
14(a) filed on October 29, 2001.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) None.
(b) Reports on Form 8-K.
On August 28, 2001, a Form 8-K was filed announcing at a meeting held on August
18, 2001, Naeem Ghauri and Shahab Ghauri resigned their positions as board
members. On August 7, 2001, a Form 8-Kwas filed announcing a letter of
resignation was received from Cary Burch dated July 30, 2001. On August 3, 2001,
a Form 8-K was filed announcing that on July 31, 2001, the District Court of
Nevada removed the Receiver it had appointed on June 20, 2001 once it had
learned that the Shareholders Group is no longer interested in taking over the
company. On July 16, 2001 a Form 8-K was filed announcing that the court had
approved the settlement between the management of NetSol and the shareholders
Group. On July 9, 2001, a Form 8-K was filed announcing on July 6, 2001, the
Nevada District Count had granted a preliminary injunction in favor of the
Company.
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.
NETSOL INTERNATIONAL, INC.
(Registrant)
Date: November 14, 2001 /s/ Naeem Ghauri
---------------------------------
NAEEM GHAURI
Chief Executive Officer
/s/ Rick M. Poole
---------------------------------
RICK M. POOLE
Chief Financial Officer
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