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, 1999 ( ) For the transition period from __________ to __________ Commission file number: 333-28861 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) 5000 North Parkway Calabasas, Suite 202, Calabasas, CA 91302 (Address of principal executive offices) (Zip Code) (818) 222-9195 / (818) 222-9194 (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 8,531,189 shares of its $.001 par value Common Stock issued and outstanding as of February 2, 2000. Transitional Small Business Disclosure Format (check one) Yes No X --- --- NETSOL INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of December 31, 1999 3 Comparative Unaudited Consolidated Statements of Operations for the six Months Ended December 31 1999 and 1998 4 Consolidated Statement of Stockholders; Equity 5 Unaudited Consolidated Statements of Cash Flows for the three and six months ended December 31, 1999 and 1998 6-8 Notes to the Unaudited Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12 (b) Reports on Form 8-K 12
2 PART I - FINANCIAL INFORMATION ITEM 1 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 ASSETS
Current Assets: Cash $ 421,371 Accounts receivable 2,578,245 Other current assets 959,965 ---------------- Total Current Assets 3,959,581 ---------------- Property and Equipment, at cost, net of accumulated depreciation 513,938 ---------------- Other Assets: Deposits 7,620 Product license, renewals, enhancements and copyrights, net 6,223,150 Customer lists, net 1,640,102 Goodwill, net 3,287,775 ---------------- Total Other Assets 11,158,647 ---------------- Total Assets $ 15,632,166 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 3,307,959 Current maturities of obligations under capital lease 21,375 Loan payable 7,000 ---------------- Total Current Liabilities 3,336,334 ---------------- Obligations under capitalized leases, less current maturities 88,606 ---------------- Total Liabilities 3,424,940 ---------------- Stockholders' Equity: Common stock; $.001 par value, 25,000,000 shares authorized, 8,726,198 shares issued and outstanding 8,726 Common stock receivable (25,000) Additional paid-in capital 15,866,662 Accumulated deficiency (3,643,162) ---------------- Total Stockholders' Equity 12,207,226 ---------------- Total Liabilities and Stockholders' Equity $ 15,632,166 ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended December 31, 1999 & 1998 and For the Six Months Ended December 31, 1999 & 1998
Three Months Ended Six Months Ended December 31 December 31 -------------------------------------- ------------------------------------- 1999 1998 1999 1998 ------------------ ------------------ ----------------- ----------------- (unaudited) (unaudited) (unaudited) (unaudited) Net revenues $ 1,771,809 $ 1,186,989 $ 2,990,317 $ 2,523,823 Cost of revenues 570,301 -0- 974,845 -0- ------------------ ------------------ ---------------- ------------------ Gross profit 1,201,508 1,186,989 2,015,472 2,523,823 Operating expenses 1,640,660 1,767,241 3,128,173 3,081,497 Other income/(expense) (28,356) (59,469) (28,356) (34,272) ------------------ ------------------ ---------------- ------------------ Net loss before income allocated to minority interest (467,508) (639,721) (1,141,058) (591,946) Minority interest in subsidiaries earnings -0- (35,296) -0- (168,146) ------------------ ------------------ ----------------- ------------------ Net loss $ (467,508) $ (675,017) $ (1,141,058) $ (760,092) ================== ================== ================= ================== Net loss per share: Basic ($0.05) ($0.29) ($0.14) ($0.33) Diluted ($0.05) ($0.20) ($0.14) ($0.23) Weighted average shares outstanding: Basic 8,557,882 2,337,180 8,089,132 2,337,180 Diluted 8,557,882 3,357,940 8,089,132 3,357,940
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON Common ------------------------- No. of $0.001 par stock SHARES AMOUNT RECEIVABLE ------------------------- -------------- Balance at June 30, 1998 1,774,065 $1,774 $-0- Common stock and warrants sold through Initial public offering 251,000 251 -- Issuance of common stock in exchange for Services rendered 235,000 235 -- Common stock options granted for services -- -- -- Exercise of common stock options 105,000 105 -- Sale of common stock warrants -- -- -- Exercise of warrants to convert to common stock 397,000 397 -- Issuance of common stock relating to acquisition of subsidiaries 4,690,000 4,690 -- Net loss for the year ended June 30, 1999 -- -- -- --------------------------------------- Balance at June 30, 1999 7,452,065 7,452 -0- --------------------------------------- Sale of common stock through private placement 609,333 609 (25,000) Issuance of common stock in exchange for services 247,500 248 -- Exercise of warrants to convert to common stock 12,300 12 -- Issuance of common stock relating to acquisition of subsidiaries 405,000 405 -- Net loss for the six months ended December 31, 1999 -- -- -- --------------------------------------- Balance at December 31, 1999 8,726,198 $8,726 $(25,000) ======================================= ======================================================================================================== Additional To paid-in Accumulated stockholders' CAPITAL (DEFICIENCY) EQUITY/(DEFICIENCY) ------- ------------ ------------------- Balance at June 30, 1998 $ 542,061 $ (875,370) $ (331,535) Common stock and warrants sold through Initial public offering 987,733 -- 987,984 Issuance of common stock in exchange for Services rendered 710,631 -- 710,866 Common stock options granted for services 199,844 -- 199,844 Exercise of common stock options 945 -- 1,050 Sale of common stock warrants 5,667 -- 5,667 Exercise of warrants to convert to common stock 294,952 -- 295,349 Issuance of common stock relating to acquisition of subsidiaries 9,658,810 -- 9,663,500 Net loss for the year ended June 30, 1999 -- (1,626,734) (1,626,734) --------------------------------------------- Balance at June 30, 1999 12,400,643 (2,502,104) 9,905,991 -------------------------------------------- Sale of common stock through private placement 1,880,403 -- 1,856,013 Issuance of common stock in exchange for services 440,378 -- 440,625 Exercise of warrants to convert to common stock 73,788 -- 73,800 Issuance of common stock relating to acquisition of subsidiaries 1,071,450 -- 1,071,855 Net loss for the six months ended December 31, 1999 -- (1,141,058) (1,141,058) ---------------------------------------------- Balance at December 31, 1999 $15,866,662 $(3,643,162) $ 12,207,226 ==============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents For the Three Months Ended December 31, 1999 & 1998 and For the Six Months Ended December 31, 1999 & 1998
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 ---------------------------------- --------------------------------- 1999 1998 1999 1998 ---------------- ---------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (457,639) $ (675,017) $ (1,141,058) $ (760,092) --------------------------------------------------------------------- ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 182,783 71,175 (12,800) 79,691 Non-cash compensation expense 365,625 566,000 440,625 566,000 Minority interest income -0- 35,296 -0- 168,146 (Increase) decrease in accounts receivable (1,497,806) 127,012 (2,059,139) (222,323) (Increase) decrease other current assets (532,588) 11,778 (792,895) (15,160) (Increase) decrease in deposits (3,205) (687) (3,205) (687) Increase (decrease) in accounts payable & accrued expenses 1,321,292 (270,037) 2,308,686 (114,153) --------------------------------------------------------------------- Total adjustments (163,899) 540,537 (118,728) 461,514 --------------------------------------------------------------------- Net cash provided by (used for) operating activities (631,407) (134,480) (1,259,785) (298,578) ---------------------------------------------------------------------
6
CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) sale of investments, net -0- 35,273 -0- (161,539) Purchase of property, plant and equipment (126,186) (58,445) (283,720) (118,752) ---------------------------------------------------------------------------- Net cash provided by (used for) investing activities (126,186) (23,172) (283,720) (280,291) ---------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock and warrants, net 900,782 27,716 1,890,786 1,009,989 Proceeds from (payments on) notes payable 2,327 (20,000) 102,327 (228,300) Payments on loan payable, related party -0- -0- (44,750) (100,000) Deferred offering costs -0- -0- -0- 203,813 Payments on capital lease obligations (10,415) -0- (15,200) (2,758) ---------------------------------------------------------------------------- Net cash provided by (used for) financing activities 892,694 7,716 1,933,163 882,744 ---------------------------------------------------------------------------- Net increase (decrease) in cash 135,101 (149,936) 389,658 303,875 Cash and equivalents, beginning of period 286,270 448,293 31,713 (5,518) ----------------- ------------------ ----------------- ----------------- Cash and equivalents, end of period $ 421,371 $ 298,357 $ 421,371 $ 298,357 ================= ================== ================= ================= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Increase (Decrease) in Cash and Cash Equivalents For the Three Months Ended December 31, 1999 & 1998 and For the Six Months Ended December 31, 1999 & 1998
Three Months Ended Six Months Ended December 31 December 31 -------------------------------------- ------------------------------------- 1999 1998 1999 1998 ------------------ ------------------ ----------------- ----------------- Supplemental Cash Flow Information: Cash paid during the period for interest: $ 21,531 $ 2,912 $ 26,031 $ 12,294 ================= ================== ================ ================= Cash paid during the period for income taxes: $ -0- $ -0- $ -0- $ -0- ================= ================== ================ ================= Supplemental disclosure of non-cash investing and financing activities: Issuance of 490,000 shares of common stock per stock purchase agreement -- -- -- $2,523,500 ============================================================================= Issuance of 175,000 shares of common stock per stock purchase agreement -- $566,000 -- $566,000 ============================================================================= Issuance of 405,000 shares of common stock per stock purchase agreements -- -- $1,071,855 -- ============================================================================= Issuance of common stock shares for services rendered $365,625 -- $440,625 -- =============================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 8 NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (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 UK, Ltd., Netsol USA, Inc., (formerly Mindsources, Inc.) and Network Solutions Group Limited. All material inter-company accounts have been eliminated in consolidation. PRIVATE PLACEMENT: The Company sold 101,833 shares and warrants restricted under Rule 144 common stock in the amount of $866,009 through a private placement offering pursuant to Regulation D of the Securities and Exchange Act of 1933 and convertible promissory note placement. UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS: As reported on Form 8K, the Company acquired Abraxas Software Pty. Ltd. (Abraxas), a Company organized under the laws of the country of Australia. The acquisition was recorded as a purchase acquisition on January 2, 2000, whereby the Company acquired 100% of the outstanding capital stock of Abraxas in exchange for 150,000 shares of the Company's restricted common shares. The audited financial statements for the acquired subsidiary will be filed within sixty days. Accordingly, the required proforma financial information, will be presented in the next quarter. 9 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company NetSol International, Inc. ("Company") was incorporated under the laws of the State of Nevada on March 18, 1997. The Company's address is 5000 North Parkway Calabasas, Suite 202, Calabasas, California 91302 and its telephone number is (818) 222-9195. Effective September 15, 1998, the Company acquired 51% of the outstanding capital stock of Network PVT Solutions Limited ("NetSol PVT"), a software development company in Lahore, Pakistan. In addition, the Company purchased 43% of the outstanding capital stock of NetSol (UK) Limited, a corporation organized under the laws of the United Kingdom ("NetSol UK"), which is a sister company to NetSol PVT. The Company paid a purchase price for the increased interest in NetSol and the interest in NetSol UK of $500,000, plus 490,000 shares of common stock of the Company. The Company already owned 10% of the outstanding capital stock of NetSol PVT. On April 17, 1999, the Company entered into an agreement with NetSol PVT and NetSol UK to acquire the remaining 49% of NetSol PVT and 57% of NetSol UK in exchange for 4.2 million shares of restricted common stock of the Company. NetSol PVT was incorporated in Pakistan on August 22, 1996, under the companies ordinance of 1984, as a private company limited by shares. NetSol PVT's principle business is the design and development on new software applications and designs. NetSol PVT has developed several leasing and finance products creating a market within the finance industry. Currently, NetSol PVT has developed a fully integrated leasing and finance package, which is a series of seven products that can be marketed in an integrated system. Mercedes Benz Finance - - Singapore, Mercedes Benz Leasing - Thailand, Mercedes Benz Finance Ltd. - United Kingdom and Mercedes Benz Finance - Australia are some of NetSol PVT's customers which account for a majority of its revenues. In addition, NetSol provides off shore development and customized Information Technology ("IT") solutions and has blue chip customers such as ICI of UK, Fuzzy Informatik of Germany, and 1st Net Technologies, Inc., USA. NetSol PVT has 200 employees, 90% of which specialized in IT. NetSol PVT is the first company in Pakistan to achieve ISO 9001 accreditation. NetSol UK was incorporated in December 1997 under the laws of the United Kingdom. NetSol UK was established for service and support of customers in the European markets. In addition, NetSol UK was established to function as a marketing arm of the Company in Europe. RESULTS OF OPERATIONS Three Months Ended December 31, 1999, as compared to three Months Ended December 31, 1998. NET SALES Net sales of $1,771,809 for the second quarter ended December 31, 1999, were greater than the sales of the same quarter, for the previous year of $1,186,989, by $584,820. Likewise, net sales of $2,990,317 for the six months ended December 31, 1999, were greater than net sales for same six month period of the prior year of $2,523,823, by $466,494. The augmented sales levels are due to the acquisitions of the subsidiaries centralized in Europe and Asia. 10 COST OF SALES AND GROSS PROFIT The gross profit was $1,201,508 in the quarter ending December 31, 1999. This favorably compares to a gross profit level of $1,186,989 for the corresponding quarter of the previous fiscal year. Additionally, the gross profit for the current quarter illustrates a $387,544 increase from the quarter ended September 30, 1999. Again, this increase is substantially due to the operations of the subsidiaries in Europe and Asia. OPERATING EXPENSES Operating expenses were $1,640,660 during the quarter ended December 31, 1999. This is $126,581 less than the operating expenses for the same quarter of the previous fiscal year ended December 31, 1998, of $1,767,241. This reduction was due to fewer acquisition expenses during the quarter, and increased efficiencies in operations for the Company in the U.S. and worldwide. The overall net loss per share for the quarter ended December 31, 1999, was $0.05. This represented an improvement of $0.15 per share from the net loss per share on a diluted basis in the same quarter of the previous year and a $0.03 improvement from the prior quarter ended September 30, 1999. INTEREST Net interest expenses paid were $21,531, during the quarter ended December 31, 1999. This compares with $2,912 for the same period in the previous fiscal year and is due to an increase in capital lease obligations entered into by the subsidiaries in Europe and Asia. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash requirements are for operating expenses, including the funding of accounts receivable, labor costs, and raw material purchases. The Company also has cash requirements for capital expenditures and for the funding of additional business acquisitions. The Company's primary sources of cash from operations are from the operations in the United Kingdom and Pakistan. For the quarter ended December 31, 1999, the overall increase in cash totaled $135,101. This increase was attributable to sales of common shares and exercising of warrants amounting to approximately $900,000, which was in excess of the cash used for operating and investing activities. The net cash used for operating activities of $631,407, resulted in large part from an increase in receivables of $1,497,806 that was driven by business growth and a lesser, corresponding increase in accounts payable of $1,321,292. The net cash used for investing activities of $126,186 was solely due to the purchase of property, plant and equipment. For comparative purposes, the quarter ended December 31, 1998, resulted in a decrease in cash of $149,936, which was substantially due to the net cash used by operations of $134,480. The Company's current plans require additional capital expenditures for the remainder of the year of approximately $800,000 to support additional acquisitions and fund additional increases in accounts receivable of the subsidiaries. During the quarter ended December 31, 1999, the Company had cash of $892,694 provided by financing activities and expects similar capital infusions in the remaining quarters of this fiscal year. 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS To the best knowledge of management and the Company's counsel, there is no material litigation pending or threatened against the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company did not receive any additional proceeds from its Public Offering since its Annual Report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 1.(a) The Annual Meeting of the Stockholders of the Company was held at the Los Angeles Airport Hilton and Towers at 5711 West Century Blvd., Los Angeles, CA 90045, on Friday November 5, 1999, at 10:00 AM (PST). Refer to Item 4. on previously filed form 10Q-SB for period ending September 30, 1999. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K Form 8-K filed in January of 2000, for the acquisition of Abraxas Australia. SIGNATURES 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: February 3, 2000 Najeeb U. Ghauri /s/ Najeeb Ghauri --------------------------------- NAJEEB U. GHAURI PRESIDENT, CHIEF FINANCIAL OFFICER 12