<PAGE>
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, 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)
233 WILSHIRE BOULEVARD, SUITE 510, SANTA MONICA CA 90401
(Address of principal executive offices) (Zip Code)
(310) 395-4073 / (310) 395-0891
(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 8,159,565 shares of its $.001 par value Common Stock
issued and outstanding as of November 10, 1999.
Transitional Small Business Disclosure Format (check one)
Yes No X
------- -------
<PAGE>
NETSOL INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
-------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1998 3
Comparative Unaudited Consolidated Statements of
Operations for the Three Months Ended September
30, 1999 and 1998 4
Comparative Unaudited Consolidated Statements of
Cash Flow for the Three Months Ended September 30,
1999 and 1998 6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 10
(b) Reports on Form 8-K 10
</TABLE>
2
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 286,270
Accounts receivable 1,080,439
Other current assets 427,377
-----------------------
Total current assets 1,794,086
-----------------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 388,710
-----------------------
OTHER ASSETS:
Deposits 4,415
Product license, renewals, enhancements and copyrights, net 6,118,606
Customer lists, net 1,750,082
Goodwill, net 3,464,164
-----------------------
Total other assets 11,337,267
-----------------------
$ 13,520,063
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,986,667
Current maturities of obligations under capital lease 11,260
Loan payable 100,000
-----------------------
Total current liabilities 2,104,927
-----------------------
OBLIGATIONS UNDER CAPITALIZED LEASES, less current maturities 45,836
-----------------------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares authorized,
8,389,565 shares issued and outstanding 8,390
Common stock receivable (25,000)
Additional paid-in capital 14,561,564
Accumulated deficiency (3,175,654)
-----------------------
Total stockholders' equity 11,369,300
-----------------------
$ 13,520,063
=======================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, September 30,
1999 1998
------ ------
<S> <C> <C>
NET REVENUES $ 1,218,508 $ 1,336,834
COST OF REVENUES 404,544 -
----------------- -----------------
GROSS PROFIT 813,964 1,336,834
OPERATING EXPENSES 1,487,513 1,314,256
OTHER INCOME/(EXPENSE) - 25,197
----------------- -----------------
NET LOSS BEFORE INCOME ALLOCATED
TO MINORITY INTEREST (673,550) 47,775
MINORITY INTEREST IN SUBSIDIARIES EARNINGS - (132,850)
----------------- -----------------
NET LOSS $ (673,550) $ (85,075)
================= =================
NET LOSS PER SHARE -
Basic and diluted ($0.08) ($0.04)
================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING -
Basic and diluted 8,045,336 1,893,450
================= =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Additional stockholders'
Common stock stock paid-in Accumulated equity/
Shares Amount receivable capital Deficiency (deficiency)
-------- -------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 1,774,065 $ 1,774 $ - $ 542,061 $ (875,370) $ (331,535)
Common stock and warrants sold through
initial public offering, net 251,000 251 987,733 - 987,984
Issuance of common stock in
exchange for services rendered 235,000 235 710,631 - 710,866
Common stock options granted for services 199,844 - 199,844
Exercise of common stock options 105,000 105 945 - 1,050
Sale of common stock warrants - - 5,667 5,667
Exercise of warrants to convert to
common stock 397,000 397 294,952 295,349
Issuance of common stock relating to
acquisition of subsidiairies 4,690,000 4,690 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 7,452,065 7,452 - 12,400,643 (2,502,104) 9,905,991
--------------------------------------------------------------------------------------
Sale of common stock
through a private placement 507,500 508 (25,000) 1,014,496 990,004
Issuance of common stock in
exchange for services rendered 25,000 25 74,975 75,000
Issuance of common stock relating to
acquisition of subsidiairies 405,000 405 1,071,450 1,071,855
Net loss for the three months
ended September 30, 1999 (673,550) (673,550)
--------------------------------------------------------------------------------------
8,389,565 $ 8,390 $ (25,000) $ 14,561,564 $(3,175,654) $ 11,369,300
======================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (673,550) $ (85,075)
-------------------- -------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Depreciation and amortization (195,583) 8,516
Non-cash compensation expense 75,000 -
Minority interest income - 132,850
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (561,333) (349,335)
Other current assets (260,307) (26,938)
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 987,394 155,884
-------------------- -------------------
Total adjustments 45,171 (79,023)
-------------------- -------------------
NET CASH USED FOR OPERATING ACTIVITIES (628,378) (164,098)
-------------------- -------------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from (payments on) notes receivable - (196,812)
Purchase of property, plant and equipment (157,534) (60,307)
-------------------- -------------------
NET CASH USED FOR INVESTING ACTIVITIES (157,534) (257,119)
-------------------- -------------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 990,004 982,273
Proceeds from (payments on) notes and loans payable 100,000 (208,300)
Payments on loan payable, related party (44,750) (100,000)
Deferred offering costs - 203,813
Payments on capital lease obligations (4,785) (2,758)
-------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,040,469 875,028
-------------------- -------------------
NET INCREASE (DECREASE) IN CASH 254,557 453,811
CASH AND EQUIVALENTS, beginning of period 31,713 (5,518)
-------------------- -------------------
CASH AND EQUIVALENTS, end of period $ 286,270 $ 448,293
==================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,500 $ 9,382
==================== ===================
Income taxes paid $ - $ -
==================== ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 405,000 shares of common
stock per stock purchase agreements $ 1,071,855 $ 2,523,500
==================== ===================
Issuance of common stock
shares for services rendered $ 75,000 $ -
==================== ===================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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, Limited, Netsol USA, Inc., Mindsources, Inc. and
Network Solutions Group Limited. All material intercompany 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. 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 507,500 shares of its restricted Rule 144
common stock in the amount of $1,015,000 through a private placement offering
pursuant to Rule 506 of Regulation D of the Securities and Exchange Act of
1933.
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS:
The following unaudited proforma results of activities assume that the
acquisitions of Network Solutions Group Limited (a United Kingdom company) and
Mindsources, Inc. (a United States company) occurred as of the beginning of the
year, after giving effect to proforma adjustment. The proforma adjustment
represents the operating results that would have occurred had these acquisitions
been consummated as of the beginning of each period presented. The proforma
financial information is presented for informational purposes only and is not
indicative of future operating results.
<TABLE>
<CAPTION>
PROFORMA
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------- ------
<S> <C> <C>
Revenues $ 1,430,713 2,053,718
============= ===========
Net loss $ (954,084) $(441,854)
============= ===========
Net loss per share - basic $ (0.12) $ (0.23)
============= ===========
</TABLE>
7
<PAGE>
PART I - FINANCIAL INFORMATION
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 233 Wilshire
Blvd., Suite 510, Santa Monica, California 90401 and its telephone number is
(310) 395-4073.
Effective September 15, 1998, the Company acquired 51% of Network PVT
Solutions Limited ("NetSol PVT"), a software development company in Lahore,
Pakistan, outstanding capital stock. In addition, the Company also purchased 43%
of the outstanding capital stock of NetSol (U.K.) 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 of software. NetSol PVT
also conducts research 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 85 employees, 75 of which specialized in IT. NetSol PVT is the first
company in Pakistan to achieve the 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.
8
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 as compared to the Three Months Ended
September 30, 1998.
NET SALES
Net sales of $1,218,508 for the first quarter of fiscal 2000, which ended
September 30, 1999, were less than the sales of the same quarter for the
previous year of $1,336,834 by $118,326. The sales decrease is solely
attributed to the minority interest, held by the Company and prior to the
100% acquisition, effectuating sales which were not realized by the Company.
Management believes the 100% acquisition of the two subsidiaries centralized
in Europe and Asia will result in increased sales in the upcoming quarters.
COST OF SALES AND GROSS PROFIT
The gross profit was $813,964 in the quarter ending September 30, 1999 in
comparison with $1,336,834 for the same quarter the previous year. Cost of sale
for the quarter ending September 30, 1999 was $404,544. There were no cost of
sales for the period ending September 30, 1998.
OPERATING EXPENSES
Operating expenses were $1,487,513 of net sales during the quarter ending
September 30, 1999. This compares with $1,314,256 for the quarter ending
September 30, 1998.
Operating expenses for the quarter ending September 30, 1999 increased $173,257
compared to the same time period in 1998. The difference was primarily due to an
increase in expenses due to the 100% acquisition of NetSol UK and NetSol PVT
which increased expenses.
INTEREST
Net interest expenses paid were $4,500 of the net sales during the quarter
ending September 30, 1999. This compares with $9,382 for the same time last
year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures and
operating expenses, including labor costs, raw materials purchases, and funding
of accounts receivable. The Company's primary sources of cash have been from
operations of NetSol UK and NetSol PVT. For the fiscal year 2000, the increase
in expense and decrease in cash was attributable to an increase in payable
driven by business growth with decrease in cash resulting from greater capital
expenditures, for the acquisition. In addition, the Company has made adjustments
in its sales for any inter-company sales.
Accounts receivable increased $211,998 this quarter ending September 30, 1999,
as it was $561,333 as compared with $349,335 for quarter ending September 30,
1998. This increase was primarily due to the recent acquisition of Network
Solutions Group Ltd. Other assets in the quarter ending September 30, 1999, were
$260,307 as compared with $26,938 for the same quarter in 1998.
The Company's current plans require additional capital expenditures for the
remainder of the year of approximately $1,000,000. Year to date, the Company
has expended approximately $1,000,000. The Company believes the additional
funds received from the sale of shares and warrants from the Initial Public
Offering as well as private placements will generate sufficient capital to
finance its operations and anticipated capital expenditures through fiscal
2000.
9
<PAGE>
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).
(b) There were seven directors elected for the term of
one year and until their successors are duly elected and qualified: Najeeb
Ghauri, Salim Ghauri, Naeem Ghauri, Shahab Ghauari, Irfan Mustafa, Waheed Akbar
and Cary Burch.
(c) Matters voted upon at the meeting and number of votes
case are as follows:
(1) Election of Seven Directors:
FOR: 4,125,998 AGAINST : -0- ABSTAIN:
BROKER NON-VOTES:
(2) Ratification of the appointment of
Stonefield Josephson, Inc. as the Company's
independent public accountants for the
fiscal year ending June 30, 2000:
FOR: 4,125,998 AGAINST: -0- ABSTAIN:
BROKER NON-VOTES:
(3) Ratification of the Incentive and
Nonstatutory Stock Option Plan:
FOR: 4.125,998 AGAINST: -0-
ABSTAIN: BROKER NON-VOTES:
2. The Company reported the 100% acquisition of Network
Solution Group, Ltd., a Company based in England that designs and markets
computer software.
The Company has not received the final tally of the broker votes and
will file an amendment to properly report the number of broker non-votes.
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:
None.
10
<PAGE>
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: November 12, 1999 /s/ Najeeb U. Ghauri
-------------------------------------
NAJEEB U. GHAURI
President, Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 286,270 0
<SECURITIES> 0 0
<RECEIVABLES> 1,080,439 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 427,377 0
<PP&E> 388,710 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 13,520,063 0
<CURRENT-LIABILITIES> 2,104,927 0
<BONDS> 0 0
0 0
0 0
<COMMON> 8,390 0
<OTHER-SE> 11,360,910 0
<TOTAL-LIABILITY-AND-EQUITY> 13,520,063 0
<SALES> 0 1,336,834
<TOTAL-REVENUES> 1,218,508 1,336,834
<CGS> 0 0
<TOTAL-COSTS> 404,544 0
<OTHER-EXPENSES> 1,487,513 1,412,527
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,500 9,382
<INCOME-PRETAX> (673,550) (85,075)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (673,550) (85,075)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (673,550) (85,075)
<EPS-BASIC> (0.08) (0.04)
<EPS-DILUTED> (0.08) (0.03)
</TABLE>
