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 March 31, 2000 ( ) 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) 222-9197 (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 10,475,531 shares of its $.001 par value Common Stock issued and outstanding as of March 31, 2000. Transitional Small Business Disclosure Format (check one) Yes No X --- --- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Balance Sheet as of March 31, 2000 3 Comparative Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2000, and 1999 4 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended March 31, 2000 5 Comparative Unaudited Consolidated Statements of Cash Flows for the Three and Nine Months Ended March 31, 2000, and 1999 6-7 Notes to the Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 13 (b) Reports on Form 8-K 13
-2- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2000
ASSETS Current Assets: Cash $ 4,402,497 Accounts receivable 1,942,094 Other current assets 1,305,810 ---------------- Total Current Assets 7,650,401 ---------------- Property and Equipment, at cost, net of accumulated depreciation 1,032,603 ---------------- Other Assets: Deposits 5,285 Product license, renewals, enhancements and copyrights, net 6,124,848 Customer lists, net 1,612,304 Goodwill, net 5,008,680 ---------------- Total Other Assets 12,751,117 ---------------- Total Assets $ 21,434,121 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses Current maturities of obligations under capital lease $ 1,748,060 Loan payable 57,605 39,461 ---------------- Total Current Liabilities 1,845,126 ---------------- Obligations under capitalized leases, less current maturities 230,418 ---------------- Total Liabilities 2,075,544 ---------------- Stockholders' Equity: Common stock; $.001 par value, 25,000,000 shares authorized, 10,475,531 shares issued and outstanding 10,476 Common stock receivable (25,000) Additional paid-in capital 23,813,865 Accumulated deficiency (4,440,764) ---------------- Total Stockholders' Equity 19,358,577 ---------------- Total Liabilities and Stockholders' Equity $ 21,434,121 ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -3- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Forthe Three Months Ended March 31, 2000 & 1999 and For the Nine Months Ended March 31, 2000 & 1999
Three Months Ended Nine Months Ended MARCH 31 MARCH 31 -------------------------------------- ------------------------------------- 2000 1999 2000 1999 ------------------ ------------------ ----------------- ----------------- (unaudited) (unaudited) (unaudited) (unaudited) Net revenues $ 1,858,348 $ 897,759 $ 4,848,665 $ 3,421,582 Cost of revenues 725,484 -0- 1,700,329 -0- ------------------ ------------------ ----------------- ----------------- Gross profit 1,132,864 897,759 3,148,336 3,421,582 Operating expenses 1,919,625 980,748 5,047,798 4,062,245 Other income/(expense) (10,842) 46,713 (39,198) 12,441 ------------------ ------------------ ----------------- ----------------- Net loss before income allocated to minority interest (797,603) (36,276) (1,938,660) (628,222) Minority interest in subsidiaries earnings -0- (137,470) -0- (305,616) ------------------ ------------------ ----------------- ----------------- Net loss $ (797,603) $ (173,746) $ (1,938,660) $ (933,838) ================== ================== ================= ================= Net loss per share: Basic and diluted ($0.08) ($0.06) ($0.22) ($0.37) Weighted average shares outstanding: Basic and diluted 9,600,865 2,809,188 8,963,798 2,521,142
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -4- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1999 AND THE NINE MONTHS ENDED MARCH 31, 2000
COMMON ---------------------------- Common Additional No. of $0.001 par stock paid-in SHARES AMOUNT RECEIVABLE CAPITAL ---------------------------- --------------- -------------- Balance at June 30, 1998 1,774,065 $ 1,774 $ -0- $ 542,061 Common stock and warrants sold through Initial public offering 251,000 251 -- 987,733 Issuance of common stock in exchange for Services rendered 235,000 235 -- 710,631 Common stock options granted for services -- -- -- 199,844 Exercise of common stock options 105,000 105 -- 945 Sale of common stock warrants -- -- -- 5,667 Exercise of warrants to convert to common stock 397,000 397 -- 294,952 Issuance of common stock relating to acquisition of subsidiaries 4,690,000 4,690 -- 9,658,810 Net loss for the year ended June 30, 1999 -- -- -- -- --------------------------------------------------------------------- Balance at June 30, 1999 7,452,065 7,452 -0- 12,400,643 --------------------------------------------------------------------- Sale of common stock through private placement 611,333 612 (25,000) 1,907,701 Issuance of common stock in exchange for services 448,083 448 -- 936,917 Exercise of common stock options 596,250 596 -- 911,317 Exercise of warrants to convert to common stock 812,800 813 -- 4,875,987 Issuance of common stock relating to acquisition of subsidiaries 555,000 555 -- 2,781,300 Net loss for the nine months ended March 31, 2000 -- -- -- -- --------------------------------------------------------------------- Balance at March 31, 2000 10,475,531 $ 10,476 $ (25,000) $ 23,813,865 ===================================================================== To Accumulated stockholders' (DEFICIENCY) EQUITY/(DEFICIENCY) ------------ ------------------- Balance at June 30, 1998 $ (875,370) $ (331,535) Common stock and warrants sold through Initial public offering -- 987,984 Issuance of common stock in exchange for Services rendered -- 710,866 Common stock options granted for services -- 199,844 Exercise of common stock options -- 1,050 Sale of common stock warrants -- 5,667 Exercise of warrants to convert to common stock -- 295,349 Issuance of common stock relating to acquisition of subsidiaries -- 9,663,500 Net loss for the year ended June 30, 1999 (1,626,734) (1,626,734) ---------------------------------- Balance at June 30, 1999 (2,502,104) 9,905,991 ---------------------------------- Sale of common stock through private placement -- 1,883,313 Issuance of common stock in exchange for services -- 937,365 Exercise of common stock options -- 911,913 Exercise of warrants to convert to common stock -- 4,876,800 Issuance of common stock relating to acquisition of subsidiaries -- 2,781,855 Net loss for the nine months ended March 31, 2000 (1,938,660) (1,938,660) ---------------------------------- Balance at March 31, 2000 $(4,440,764) $ 19,358,577 ==================================
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 March 31, 2000 & 1999 and For the Nine Months Ended March 31, 2000 & 1999
Three months ended Nine months ended MARCH 31, MARCH 31, -------------------------------------- ----------------------------------- 2000 1999 2000 1999 ------------------ ------------------ ----------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (797,603) $ (173,746) $ (1,938,660) $ (933,838) --------------------------------------------------------------------------- ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 287,360 74,640 274,560 154,331 Non-cash compensation expense 336,875 78,751 777,500 644,751 Minority interest income -0- 137,470 -0- 305,616 (Increase) decrease in accounts receivable 636,151 (38,060) (1,422,988) (260,383) (Increase) decrease other current assets (345,845) (66,424) (1,138,740) (81,584) (Increase) decrease in deposits 2,336 (3,199) (869) (3,886) Increase (decrease) in accounts payable & accrued expenses (1,559,899) (332,106) 748,787 (446,259) --------------------------------------------------------------------------- Total adjustments (643,022) (148,928) (761,750) 312,586 --------------------------------------------------------------------------- Net cash provided by (used for) operating activities (1,440,625) (322,674) (2,700,410) (621,252) --------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) sale of investments, net -0- -0- -0- (161,539) Purchase of property, plant and equipment (401,583) (12,587) (685,303) (131,339) --------------------------------------------------------------------------- Net cash provided by (used for) investing activities (401,583) (12,587) (685,303) (292,878) --------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock and warrants, net 5,805,335 117,150 7,696,121 1,127,139 Proceeds from (payments on) notes payable 39,461 -0- 141,788 (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 (21,462) (871) (36,662) (3,629) --------------------------------------------------------------------------- Net cash provided by (used for) financing activities 5,823,334 116,279 7,756,497 999,023 --------------------------------------------------------------------------- Net increase (decrease) in cash 3,981,126 (218,982) 4,370,784 84,893 Cash and equivalents, beginning of period 421,371 298,357 31,713 (5,518) ------------------ ------------------ ----------------- --------------- Cash and equivalents, end of period $ 4,402,497 $ 79,375 $ 4,402,497 $ 79,375 ================== ================== = ================ ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -6- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Increase (Decrease) in Cash and Cash Equivalents Forthe Three Months Ended March 31, 2000 & 1999 and For the Nine Months Ended March 31, 2000 & 1999
Three months ended Nine months ended MARCH 31, MARCH 31, -------------------------------------- ----------------------------------- 2000 1999 2000 1999 ------------------ ------------------ ----------------- --------------- Supplemental Cash Flow Information: Cash paid during the period for interest: $ 12,554 $ 4,546 $ 38,585 $ 16,840 ================== ================== ================= =============== 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 =========================================================================== Issuance of 4,200,000 shares of common stock per stock purchase agreements -- $ 7,140,000 $ 1,071,855 $ 7,140,000 =========================================================================== Issuance of common stock shares for services rendered $ 336,875 $ 138,750 $ 777,500 $ 138,750 =========================================================================== Issuance of 150,000 shares of common stock for Abraxas acquisition $ 1,710,000 -- $ 1,710,000 -- ===========================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -7- NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (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.), Network Solutions Group Limited, Abraxas Software PTY, Ltd., and Netsol eR, Inc. All material inter-company accounts have been eliminated in consolidation. BUSINESS COMBINATIONS: During August of 1999, the Company acquired Network Solutions Group Limited, (a United Kingdom company) and Mindsources, Inc. (a United States company) in exchange for 155,000 and 250,000 Rule 144 restricted shares of the Company's common stock, respectively. On January 2, 2000, the Company acquired Abraxas Software PTY, Ltd. (Abraxas), a company organized under the laws of the Country of Australia, in exchange for 150,000 Rule 144 restricted shares of the Company's common stock. All these acquisitions have been accounted for as purchase transactions and, accordingly, the fair value of the Company's stock that was issued was allocated to assets and liabilities based on estimated fair values as of the acquisition date. PRIVATE PLACEMENT: The Company sold 611,333 shares of its restricted Rule 144 common stock in the amount of $1,883,313 through private placement offerings pursuant to Regulation D of the Securities and Exchange Act of 1933. UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS: As reported on Form 8-K, the Company acquired Abraxas. 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 valued at $1,710,000. Abraxas had a negative net equity at December 31, 1999 of $96,743, resulting in the recording of goodwill in the amount of $1,806,743. The audited financial statements for the acquired subsidiary were filed on Form 8-K on January 14, 2000 and on Form 8-K/A on March 14, 2000. Since the acquisition did not constitute a significant acquisition and the proforma adjustments related to the acquisition are immaterial to the financial statement presentation as a whole, proforma financial information, is not presented. SUBSEQUENT EVENTS: The Company acquired SuperNet AG (a German ISP providing high quality, low-cost Internet-access nationwide in Germany on May 3, 2000. Under the terms of the definitive agreement, valued at approximately $20 million, the Company is acquiring all of SuperNet AG's issued and outstanding stock in exchange for 425,600 shares of the Company's restricted common stock. The required audited statements and proforma information are currently being gathered and will be filed on Form 8-K. On April 25, 2000, the Company announced that its wholly owned subsidiary NetSol eR, Inc. (eReady) will launch NetSolCONNECT, a nationwide ISP in Pakistan with plans to commence operations in June of 2000. On April 4, 2000, the Company named Syed Husain as its chief financial officer. Mr. Husain will report to President Najeeb Ghauri, who had been the acting CFO. PART 1 - FINANCIAL INFORMATION 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 Solutions PVT 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 over 250 employees, of which approximately 90% are IT specialized. 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. PRODUCTS AND PROJECTS IN QUARTER ENDING MARCH 31, 2000 PROJECTS: The Company's projects in the quarter ending March 31, 2000, include NetSol USA's development and service agreement with Omnipoint Technologies, Inc. NetSol USA is to develop software applications with the ability of tracking key components in the wireless environment. The contract is valued at $600,000 with an option to renew. The Company also entered into a partnership with CFS Group PLC of London (CFS), whereby NetSol in Pakistan will develop and maintain software to be marketed and distributed by CFS. Additionally, the Company broke ground on the first phase of development for its new technology campus in Lahore, Pakistan. The first phase is expected to be completed by the Fall of 2000. PRODUCTS: The Company launched two new products during the quarter ended March 31, 2000. The first product is a Contract Management System (CMS), which automates and manages contracts at the finance level of a company. The second , is an electronic Point of Sale system (ePos), which is a browser based point of sale system that is used by auto dealerships and other outlets. The electronic point of sale system can be used on the Intranet and is platform independent. RESULTS OF OPERATIONS Three Months Ended March 31, 2000, as compared to the Three Months Ended March, 31, 1999. NET SALES Net sales of $1,858,348 for the third quarter ended March 31, 2000, were greater than the sales of the same quarter, for the previous year of $897,759, by $960,589. Likewise, net sales of $4,848,665 for the nine months ended March 31, 2000, were greater than net sales for same nine month period of the prior year of $3,421,582, by $1,427,083. The augmented sales levels are due to the acquisitions of the subsidiaries centralized in Europe and Asia. COST OF SALES AND GROSS PROFIT The gross profit was $1,132,864 in the quarter ending March 31, 2000. This favorably compares to a gross profit level of $897,759 for the corresponding quarter of the previous fiscal year. Additionally, the gross profit for the current quarter illustrates a consistent gross profit level for each quarter of this fiscal year. Again, this increase is substantially due to the subsidiaries operations in Europe and Asia. OPERATING EXPENSES Operating expenses were $1,919,625 during the quarter ended March 31, 2000. This is $938,877 greater than the operating expenses for the same quarter of the previous fiscal year ended March 31, 1999, of $980,748. This increase was due to additional acquisition expenses during the quarter and stock issued for services amounting to $336,875. The overall net loss per share for the quarter ended March 31, 2000, was $0.08. This represented an increase of $0.02 per share from the net loss per share in the same quarter of the previous year. INTEREST Net interest expenses paid were $12,554, during the quarter ended March 31, 2000. This compares with $4,546 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, Pakistan, United States, and Australia. For the quarter ended March 31, 2000, the overall increase in cash totaled $3,981,126. This increase was attributable to sales of common shares and exercising of warrants amounting to $5,805,335, which was in excess of the cash used for operating and investing activities. The net cash used for operating activities of $1,440,625, resulted in large part from a decrease in payables of $1,559,899. The net cash used for investing activities of $401,583 was solely due to the purchases of property, plant and equipment. For comparative purposes, the quarter ended March 31, 1999, resulted in a decrease in cash of $218,982, which was substantially due to the net cash used by operations of $322,674. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company's current plans require additional capital expenditures for the remainder of the year of approximately $2,000,000 to support additional acquisitions and fund additional increases in accounts receivable of the subsidiaries. During the quarter ended March 31, 2000, the Company had cash of $5,823,334 provided by financing activities and expects similar capital infusions in the remaining quarters of this fiscal year. 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 None. 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 on January 14, 2000, for the acquisition of Abraxas Software (PTY) Ltd. Form 8-K/A filed on March 14, 2000, for the acquisition of Abraxas Software (PTY) Ltd. filing audited financial statements for Abraxas. 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: May 11, 2000 /s/ Najeeb U. Ghauri ---------------------------- NAJEEB U. GHAURI PRESIDENT /s/ Syed Husain ---------------------------- SYED HUSAIN CHIEF FINANCIAL OFFICER