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, 2007
o |
For
the transition period from __________ to
__________
|
Commission
file number: 0-22773
NETSOL
TECHNOLOGIES, INC.
(Exact
name of small business issuer as specified in its charter)
NEVADA
|
95-4627685
|
(State
or other Jurisdiction of
|
(I.R.S.
Employer NO.)
|
Incorporation
or Organization)
|
|
23901
Calabasas Road, Suite 2072, 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 o
The
issuer had 19,655,957 shares of its $.001 par value Common Stock issued and
outstanding as of May 4, 2007.
Transitional
Small Business Disclosure Format (check one)
NETSOL
TECHNOLOGIES, INC.
INDEX
PART
I. FINANCIAL INFORMATION
|
|
Page
No.
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
Consolidated
Unaudited Balance Sheet as of March 31, 2007
|
|
|
3
|
|
|
|
|
|
|
Comparative
Unaudited Consolidated Statements of Operations
|
|
|
|
|
for
the Three and Nine Months Ended March 31, 2007 and 2006
|
|
|
4
|
|
|
|
|
|
|
Comparative
Unaudited Consolidated Statements of Cash Flow
|
|
|
|
|
for
the Nine Months Ended March 31, 2007 and 2006
|
|
|
5
|
|
|
|
|
|
|
Notes
to the Unaudited Consolidated Financial Statements
|
|
|
7
|
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis or Plan of
Operation
|
|
|
22
|
|
|
|
|
|
|
Item
3. Controls and Procedures
|
|
|
33
|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
|
34
|
|
|
|
|
|
|
Item
2. Changes in Securities
|
|
|
34
|
|
|
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
|
34
|
|
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
|
34
|
|
|
|
|
|
|
Item
5. Other Information
|
|
|
34
|
|
|
|
|
|
|
Item
6. Exhibits and Reports on Form 8-K
|
|
|
34
|
|
|
|
|
|
|
(a)
Exhibits
|
|
|
|
|
(b)
Reports on Form 8-K
|
|
|
|
|
|
|
|
|
|
Signatures
|
|
|
35
|
|
CONSOLIDATED
BALANCE SHEET — MARCH 31, 2007
(UNAUDITED)
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,382,970
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$106,090
|
|
|
8,054,782
|
|
|
|
|
Revenues
in excess of billings
|
|
|
7,368,794
|
|
|
|
|
Other
current assets
|
|
|
2,588,747
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
21,395,293
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
|
|
|
6,811,887
|
|
Intangibles:
|
|
|
|
|
|
|
|
Product
licenses, renewals, enhancements, copyrights,
|
|
|
|
|
|
|
|
trademarks,
and tradenames, net
|
|
|
6,692,302
|
|
|
|
|
Customer
lists, net
|
|
|
2,601,066
|
|
|
|
|
Goodwill
|
|
|
6,092,906
|
|
|
|
|
Total
intangibles
|
|
|
|
|
|
15,386,274
|
|
Total
assets
|
|
|
|
|
$
|
43,593,454
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
4,219,078
|
|
|
|
|
Current
portion of notes and obligations under capitalized leases
|
|
|
865,554
|
|
|
|
|
Other
payables - acquisitions
|
|
|
58,451
|
|
|
|
|
Billings
in excess of revenues
|
|
|
3,471,434
|
|
|
|
|
Due
to officers
|
|
|
232,165
|
|
|
|
|
Dividend
to preferred stockholders payable
|
|
|
94,088
|
|
|
|
|
Loans
payable, bank
|
|
|
1,562,189
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
10,502,959
|
|
Obligations
under capitalized leases, less
current maturities
|
|
|
|
|
|
224,799
|
|
Total
liabilities
|
|
|
|
|
|
10,727,758
|
|
Minority
interest
|
|
|
|
|
|
2,991,127
|
|
Commitments
and contingencies
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
5,025
issued and outstanding
|
|
|
5,025,000
|
|
|
|
|
Common
stock, $.001 par value; 45,000,000 shares authorized;
|
|
|
|
|
|
|
|
18,809,914
issued and outstanding
|
|
|
18,810
|
|
|
|
|
Additional
paid-in-capital
|
|
|
63,602,452
|
|
|
|
|
Treasury
stock
|
|
|
(10,194
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(38,009,435
|
)
|
|
|
|
Stock
subscription receivable
|
|
|
(736,657
|
)
|
|
|
|
Common
stock to be issued
|
|
|
200,910
|
|
|
|
|
Other
comprehensive loss
|
|
|
(216,317
|
)
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
29,874,569
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
43,593,454
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the Three Months Ended
March 31,
|
|
For
the Nine Months Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Licence
fees
|
|
$
|
2,554,289
|
|
$
|
1,790,149
|
|
$
|
6,851,496
|
|
$
|
3,952,387
|
|
Maintenance
fees
|
|
|
1,335,893
|
|
|
621,305
|
|
|
3,990,096
|
|
|
1,708,538
|
|
Services
|
|
|
3,725,784
|
|
|
2,634,373
|
|
|
9,864,055
|
|
|
8,379,260
|
|
Total
revenues
|
|
|
7,615,966
|
|
|
5,045,827
|
|
|
20,705,647
|
|
|
14,040,185
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
2,234,809
|
|
|
1,610,798
|
|
|
6,608,606
|
|
|
4,097,615
|
|
Travel
|
|
|
447,288
|
|
|
188,833
|
|
|
1,195,315
|
|
|
428,803
|
|
Communication
|
|
|
32,836
|
|
|
30,860
|
|
|
113,836
|
|
|
83,369
|
|
Depreciation
and amortization
|
|
|
241,021
|
|
|
216,361
|
|
|
592,265
|
|
|
494,014
|
|
Other
|
|
|
966,314
|
|
|
271,677
|
|
|
1,898,657
|
|
|
859,112
|
|
Total
cost of sales
|
|
|
3,922,268
|
|
|
2,318,529
|
|
|
10,408,679
|
|
|
5,962,913
|
|
Gross
profit
|
|
|
3,693,698
|
|
|
2,727,298
|
|
|
10,296,968
|
|
|
8,077,272
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
613,760
|
|
|
444,472
|
|
|
1,545,503
|
|
|
1,190,906
|
|
Depreciation
and amortization
|
|
|
522,185
|
|
|
594,385
|
|
|
1,491,142
|
|
|
1,711,771
|
|
Bad
debt expense
|
|
|
-
|
|
|
19,561
|
|
|
117,267
|
|
|
27,289
|
|
Salaries
and wages
|
|
|
1,090,307
|
|
|
597,636
|
|
|
3,361,758
|
|
|
1,686,726
|
|
Professional
services, including non-cash compensation
|
|
|
254,359
|
|
|
126,806
|
|
|
774,203
|
|
|
365,152
|
|
General
and adminstrative
|
|
|
701,682
|
|
|
675,339
|
|
|
2,249,642
|
|
|
1,866,838
|
|
Total
operating expenses
|
|
|
3,182,293
|
|
|
2,458,199
|
|
|
9,539,515
|
|
|
6,848,682
|
|
Income
from operations
|
|
|
511,405
|
|
|
269,099
|
|
|
757,453
|
|
|
1,228,590
|
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
(6,729
|
)
|
|
(38,624
|
)
|
|
(19,067
|
)
|
|
(34,014
|
)
|
Beneficial
conversion feature
|
|
|
-
|
|
|
(2,628
|
)
|
|
(2,208,334
|
)
|
|
(14,389
|
)
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
-
|
|
|
-
|
|
|
(2,803,691
|
)
|
|
-
|
|
Liquidation
damages
|
|
|
(47,057
|
)
|
|
-
|
|
|
(180,890
|
)
|
|
-
|
|
Fair
market value of warrants issued
|
|
|
(33,987
|
)
|
|
(12,016
|
)
|
|
(33,987
|
)
|
|
(21,505
|
)
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
1,318
|
|
|
-
|
|
|
8,294
|
|
Interest
expense
|
|
|
(83,819
|
)
|
|
(75,015
|
)
|
|
(543,342
|
)
|
|
(240,900
|
)
|
Interest
income
|
|
|
46,867
|
|
|
93,376
|
|
|
265,916
|
|
|
272,417
|
|
Other
income and (expenses)
|
|
|
10,081
|
|
|
(2,484
|
)
|
|
88,935
|
|
|
(57,129
|
)
|
Income
taxes
|
|
|
(57,655
|
)
|
|
(24,080
|
)
|
|
(126,620
|
)
|
|
(90,891
|
)
|
Total
other expenses
|
|
|
(172,299
|
)
|
|
(60,153
|
)
|
|
(5,561,080
|
)
|
|
(178,117
|
)
|
Net
income (loss) before minority interest in
subsidiary
|
|
|
339,106
|
|
|
208,946
|
|
|
(4,803,627
|
)
|
|
1,050,473
|
|
Minority
interest in subsidiary
|
|
|
(568,237
|
)
|
|
(187,127
|
)
|
|
(1,374,081
|
)
|
|
(699,872
|
)
|
Net
income (loss)
|
|
|
(229,131
|
)
|
|
21,819
|
|
|
(6,177,708
|
)
|
|
350,601
|
|
Dividend
required for preferred stockholders
|
|
|
(94,088
|
)
|
|
-
|
|
|
(159,686
|
)
|
|
-
|
|
Net
income (loss) applicable to common
shareholders
|
|
|
(323,219
|
)
|
|
21,819
|
|
|
(6,337,394
|
)
|
|
350,601
|
|
Other
comprehensive gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
81,564
|
|
|
(115,740
|
)
|
|
203,343
|
|
|
201,100
|
|
Comprehensive
income (loss)
|
|
$
|
(241,655
|
)
|
$
|
(93,921
|
)
|
$
|
(6,134,051
|
)
|
$
|
551,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
$
|
(0.35
|
)
|
$
|
0.02
|
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
$
|
(0.35
|
)
|
$
|
0.02
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,311,290
|
|
|
14,852,941
|
|
|
17,680,115
|
|
|
14,267,690
|
|
Diluted
|
|
|
18,311,290
|
|
|
14,852,941
|
|
|
17,680,115
|
|
|
14,692,917
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss) applicable to common shareholders
|
|
$
|
(6,337,394
|
)
|
$
|
350,601
|
|
Adjustments
to reconcile net income (loss) applicable to common
|
|
|
|
|
|
|
|
shareholders
to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,083,407
|
|
|
1,988,501
|
|
Bad
debt expense
|
|
|
117,267
|
|
|
27,289
|
|
Gain
on settlement of debt
|
|
|
-
|
|
|
(8,294
|
)
|
Loss
on sale of assets
|
|
|
19,067
|
|
|
34,014
|
|
Minority
interest in subsidiary
|
|
|
1,374,081
|
|
|
699,872
|
|
Stock
issued for services
|
|
|
88,099
|
|
|
165,270
|
|
Stock
issued for convertible note payable interest
|
|
|
311,868
|
|
|
-
|
|
Stock
issued for dividends payable to preferred stockholders
|
|
|
65,598
|
|
|
-
|
|
Fair
market value of warrants and stock options granted
|
|
|
33,987
|
|
|
25,618
|
|
Beneficial
conversion feature
|
|
|
2,208,334
|
|
|
14,389
|
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
2,803,691
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,913,135
|
)
|
|
(1,931,901
|
)
|
Other
current assets
|
|
|
(2,793,410
|
)
|
|
(2,593,864
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,716,251
|
|
|
491,148
|
|
Payment
for acquisition
|
|
|
(4,027,753
|
)
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(4,250,042
|
)
|
|
(737,357
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,282,427
|
)
|
|
(2,063,284
|
)
|
Sales
of property and equipment
|
|
|
208,419
|
|
|
111,417
|
|
Net
(purchases) proceeds of certificates of deposit
|
|
|
1,737,481
|
|
|
(1,892,523
|
)
|
Increase
in intangible assets
|
|
|
(2,001,502
|
)
|
|
(726,408
|
)
|
Cash
brought in at acquisition
|
|
|
|
|
|
2,132
|
|
Net
cash used in investing activities
|
|
|
(1,338,029
|
)
|
|
(4,568,666
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividend
to preferred shareholders payable
|
|
|
94,088
|
|
|
-
|
|
Cash
from the sale of common stock
|
|
|
30,093
|
|
|
1,400,000
|
|
Proceeds
from the exercise of stock options
|
|
|
704,250
|
|
|
384,062
|
|
Capital
contributed from sale of subsidiary stock
|
|
|
-
|
|
|
4,031,001
|
|
Reduction
in restricted cash
|
|
|
4,533,555
|
|
|
-
|
|
Proceeds
from loans from officers
|
|
|
165,000
|
|
|
-
|
|
Capital
lease obligations & loans (net)
|
|
|
874,128
|
|
|
417,678
|
|
Net
cash provided by financing activities
|
|
|
6,401,114
|
|
|
6,232,741
|
|
Effect
of exchange rate changes in cash
|
|
|
76,159
|
|
|
91,800
|
|
Net
increase in cash and cash equivalents
|
|
|
889,202
|
|
|
1,018,518
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,493,768
|
|
|
1,371,727
|
|
Cash
and cash equivalents, end of period
|
|
$
|
3,382,970
|
|
$
|
2,390,245
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
154,478
|
|
$
|
206,141
|
|
Taxes
|
|
$
|
20,148
|
|
$
|
12,454
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Common
stock issued for accrued expenses and accounts payable
|
|
$
|
33,750
|
|
$
|
64,078
|
|
Common
stock issued for conversion of convertible debenture
|
|
$
|
-
|
|
$
|
150,000
|
|
Common
stock issued for acquisition of subsidiary
|
|
$
|
1,584,009
|
|
$
|
-
|
|
Common
stock issued for payment of note payable and related
interest
|
|
$
|
339,368
|
|
$
|
71,018
|
|
Stock
issued for the conversion of Preferred Stock
|
|
$
|
475,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued for conversion of convertible note payable
|
|
$
|
5,500,000
|
|
$
|
-
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The
Company designs, develops, markets, and exports proprietary software products
to
customers in the automobile finance and leasing, banking and financial services
industries worldwide. The Company also provides consulting services in exchange
for fees from customers.
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.
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, 2006. 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.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, McCue Systems, Inc. (“McCue”), NetSol
Technologies Limited (“UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”),
NetSol-CQ Limited (“CQ”), and its majority-owned subsidiaries, NetSol
Technologies (Pvt), Ltd.(“PK Tech”), NetSol Connect (Pvt), Ltd. (now,
NetSol Akhter Pvt. Ltd.) (“Connect”),
TIG-NetSol (Pvt) Limited (“TIG”), and
NetSol Omni (Private) Limited (“Omni”).
All
material inter-company accounts have been eliminated in consolidation.
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform to report classifications of the current
year.
NOTE
2 - USE OF ESTIMATES:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
NOTE
3 - NEW ACCOUNTING PRONOUNCEMENTS:
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. Management is still in the process of determining
the
effect of SFAS No. 155 on the consolidated financial position or results of
operations of the Company.
In
March
2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets” this
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This Statement:
1. |
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
2. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
3. |
Permits
an entity to choose ‘Amortization method’ or ‘Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities.
|
4. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
5. |
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management is still in the process of
determining the effect of the statement on the consolidated financial
position.
In
September 2006, FASB issued SFAS 157 “Fair Value Measurements”. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (“GAAP”), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded status of
a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This Statement also improves financial
reporting by requiring an employer to measure the funded status of a plan as
of
the date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is required
to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit postretirement
plan and to provide the required disclosures as of the end of the fiscal year
ending after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
1. |
A
brief description of the provisions of this Statement
|
2. |
The
date that adoption is required
|
3. |
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. Management is currently
in
the process of evaluating the expected effect of FIN 48 on our results of
operations and financial position.
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
NOTE
4 - EARNINGS/(LOSS) PER SHARE:
Earnings
per share is calculated in accordance with the Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net
income per share is based upon the weighted average number of common shares
outstanding. Diluted net income per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
For
the nine months ended March 31, 2007
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,177,708
|
)
|
|
17,680,115
|
|
$
|
(0.35
|
)
|
Effect
of dilutive securities *
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
-
|
|
|
|
|
Warrants
|
|
|
|
|
|
-
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
(6,177,708
|
)
|
|
17,680,115
|
|
$
|
(0.35
|
)
|
For
the nine months ended March 31, 2006
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
350,601
|
|
|
14,267,690
|
|
$
|
0.02
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
423,865
|
|
|
|
|
Warrants
|
|
|
|
|
|
1,362
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
350,601
|
|
|
14,692,917
|
|
$
|
0.02
|
|
*
As
there is a loss, these securities are anti-dilutive. The basic and diluted
earnings per share is the same for the nine months ended March 31,
2007
NOTE
5 - FOREIGN CURRENCY:
The
accounts of NetSol Technologies UK, Ltd., and NetSol-CQ Ltd. use the British
Pound; NetSol Technologies, (PVT), Ltd, NetSol Connect PVT, Ltd., NetSol Omni,
and NetSol-TiG use Pakistan Rupees; and NetSol Abraxas Australia Pty, Ltd.
uses
the Australian dollar as the functional currencies. NetSol Technologies, Inc.,
and subsidiary McCue Systems, Inc., use the U.S. dollar as the functional
currency. 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. Accumulated translation losses of $216,317 at March
31, 2007 are classified as an item of accumulated other comprehensive loss
in
the stockholders’ equity section of the consolidated balance sheet. During the
nine months ended March 31, 2007 and 2006, comprehensive income (loss) in the
consolidated statements of operation included translation income of $203,343
and
$201,100, respectively.
NOTE
6 - OTHER CURRENT ASSETS
Other
current assets consist of the following at March 31, 2007:
Prepaid
Expenses
|
|
$
|
1,542,715
|
|
Advance
Income Tax
|
|
|
195,767
|
|
Employee
Advances
|
|
|
170,803
|
|
Security
Deposits
|
|
|
97,088
|
|
Other
Receivables
|
|
|
503,242
|
|
Other
Assets
|
|
|
79,132
|
|
|
|
|
|
|
Total
|
|
$
|
2,588,747
|
|
NOTE
7- INTANGIBLE ASSETS:
Intangible
assets consist of product licenses, renewals, enhancements, copyrights,
trademarks, trade names, customer lists and goodwill. The Company evaluates
intangible assets, goodwill and other long-lived assets for impairment, at
least
on an annual basis and whenever events or changes in circumstances indicate
that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill
is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test
is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 has been evaluated in accordance with SFAS
No. 142. The SFAS No. 142 is applicable to the financial statements of
the Company beginning July 1, 2002.
As
part
of intangible assets, the Company capitalizes certain computer software
development costs in accordance with SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred
internally to create a computer software product or to develop an enhancement
to
an existing product are charged to expense when incurred as research and
development expense until technological feasibility for the respective product
is established. Thereafter, all software development costs are capitalized
and
reported at the lower of unamortized cost or net realizable value.
Capitalization ceases when the product or enhancement is available for general
release to customers.
The
Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that
the unamortized software development costs exceed the net realizable value,
the
Company writes off the amount by which the unamortized software development
costs exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis over three
years, whichever method results in a higher level of amortization.
Product
licenses and customer lists were comprised of the following as of March 31,
2007:
|
|
Product
Licenses
|
|
Customer
Lists
|
|
Total
|
|
Intangible
asset - June 30, 2006
|
|
$
|
10,920,327
|
|
$
|
5,438,594
|
|
$
|
16,358,921
|
|
Additions
|
|
|
2,176,493
|
|
|
12,500
|
|
|
2,188,993
|
|
Effect
of translation adjustment
|
|
|
95,602
|
|
|
-
|
|
|
95,602
|
|
Accumulated
amortization
|
|
|
(6,500,120
|
)
|
|
(2,850,028
|
)
|
|
(9,350,148
|
)
|
Net
balance - March 31, 2007
|
|
$
|
6,692,302
|
|
$
|
2,601,066
|
|
$
|
9,293,368
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31, 2007
|
|
$
|
693,184
|
|
$
|
520,983
|
|
$
|
1,214,167
|
|
Nine
months ended March 31, 2006
|
|
$
|
1,048,591
|
|
$
|
471,465
|
|
$
|
1,520,056
|
|
|
|
|
|
|
|
|
|
|
|
|
The
above
amortization expense includes amounts in “Cost of Revenues” for capitalized
software development costs of $64,154 and $56,528 for the nine months ended
March 31, 2007 and 2006, respectively.
At
March
31, 2007 and 2006, product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, included unamortized software development and
enhancement costs of $4,525,955 and $2,169,093, respectively, as the development
and enhancement is yet to be completed. Software development amortization
expense was $165,592 and $83,123 for the nine months ended March 31, 2007 and
2006, respectively.
Amortization
expense of intangible assets over the next five years is as
follows:
|
|
FISCAL
YEAR ENDING
|
|
Asset
|
|
3/31/08
|
|
3/31/09
|
|
3/31/10
|
|
3/31/11
|
|
3/31/12
|
|
TOTAL
|
|
Product
Licences
|
|
$
|
1,119,148
|
|
$
|
1,075,191
|
|
$
|
760,779
|
|
$
|
111,588
|
|
$
|
27,891
|
|
$
|
3,094,597
|
|
Customer
Lists
|
|
|
694,644
|
|
|
694,644
|
|
|
672,696
|
|
|
431,268
|
|
|
107,814
|
|
|
2,601,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,813,792
|
|
$
|
1,769,835
|
|
$
|
1,433,475
|
|
$
|
542,856
|
|
$
|
135,705
|
|
$
|
5,695,663
|
|
There
were no impairments of the goodwill asset in the nine months ended March 31,
2007 and 2006.
NOTE
8 - DEBTS
NOTES
PAYABLE
Notes
payable as of March 31, 2007 consist of the following:
|
|
Balance
at
|
|
Current |
|
Long-
Term
|
|
Name
|
|
3/31/07
|
|
Maturities
|
|
Maturities
|
|
D&O
Insurance
|
|
$
|
114,903
|
|
$
|
114,903
|
|
$
|
-
|
|
Professional
Liability Insurance
|
|
|
2,534
|
|
|
2,534
|
|
|
-
|
|
Noon
Group
|
|
|
552,890
|
|
|
552,890
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
|
195,227
|
|
|
195,227
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
865,554
|
|
$
|
865,554
|
|
$
|
-
|
|
In
June
2002, the Company signed a settlement agreement with a former employee for
payment of past services rendered. The Company agreed to pay the employee a
total of $75,000. The agreement called for monthly payments of $1,500 per month
until paid. The balance owing at June 30, 2006 was $16,300. In July 2006, the
full amount of $16,300 plus $2,934 of interest was paid on this
debt.
In
January 2007, the Company renewed its directors and officers’ liability
insurance for which the annual premium is $163,620. In January 2007, the Company
arranged financing with AFCO Credit Corporation with a down payment of $16,784
with the balance to be paid in nine monthly installments of $16,784 each. The
balance owing as of March 31, 2007 was $114,903.
In
February 2005, the Company received a loan from Noon Group in the amount of
$500,000. The note carries an interest rate of 9.75% per annum and is due in
one
year. The maturity date of the loan may be extended at the option of the holder
for an additional year. In March, 2006, the note was extended for another year.
During the nine months ended March 31, 2007, $36,596 of accrued interest was
recorded for this loan. Total accrued interest added to the loan at March 31,
2007 was $52,890.
In
addition, the various subsidiaries had current maturities of capital leases
of
$195,227 as of March 31, 2007.
BANK
NOTE
The
Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has one loan
with a bank, secured by the Company’s assets. These notes consist of the
following as of March 31, 2007:
TYPE
OF
|
|
MATURITY
|
|
INTEREST
|
|
BALANCE
|
|
LOAN
|
|
DATE
|
|
RATE
|
|
USD
|
|
|
|
|
|
|
|
|
|
Export
Refinance
|
|
|
Every
6 months
|
|
|
9%
|
|
$
|
1,562,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,562,189
|
|
OTHER
PAYABLE - ACQUISITION
CQ
System
In
June
2006, the final installment for the purchase of CQ Systems was determined based
on the audited revenues for the twelve month period ending March 31, 2006.
Based
on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was
due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s
restricted common stock were issued to the former shareholders of CQ Systems.
As
of June 30, 2006, a payable to former CQ Systems shareholders consisting of
the
cash portion of $1,936,530 and an interest expense of $31,810 for a total of
$1,968,340 was shown as “Other Payable - Acquisition” in the consolidated
financial statements. In July 2006, the cash was paid to the former
shareholders.
McCue
Systems
On
June
30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note
14). As a result, the first installment consisting of $2,117,864 cash and
958,213 shares of the Company’s restricted common stock was recorded. The cash
portion was shown as “Other Payable - Acquisition” and the stock was shown as
“Shares to Be Issued” as of June 30, 2006. During the nine months ended March
31, 2007, $2,059,413 of the cash portion of was paid to the McCue shareholders
leaving a balance to be paid of $58,451. This represents the few remaining
McCue
shareholders that have not been located as of this date. In July 2006 the stock
was issued.
DUE
TO OFFICERS
The
officers of the Company from time to time loan funds to the Company. One of
the
officers had deferred the increase in his wages. During the nine months ended
March 31, 2007, $43,750 of accrued wages was added to the balance due to
officers and $56,981 was remitted to one officer against the amounts owing
to
him. In addition, the board of directors authorized a bonus in the amount of
$50,000 each to the three founding officers for recognition of past service
and
the growth in the Company. During the quarter ended March 31, 2007, the officers
used the bonus to exercise options (see Note 12). In addition, one subsidiary
had $24,833 due to an officer of the subsidiary.
On
September 1, 2006, an officer of the Company loaned $165,000 to the Company
for
its immediate short-term cash needs in the corporate office. The loan has a
maturity date of three months and is interest free and has been automatically
extended. The terms of the loan were approved by the Company’s board of
directors.
The
balance due to officers as of March 31, 2007 was $232,165.
NOTE
9 - DIVIDEND PAYABLE - PREFERRED SHAREHOLDERS
On
October 30, 2006, the convertible notes payable (see note 11) were converted
into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
dividend is to be paid quarterly, either in cash or stock at the Company’s
election. The dividend for the quarter ended December 31, 2006 of $65,598 was
paid in stock in January 2007. The dividend due for the quarter ended March
31,
2007 was $94,088 and is reflected in these consolidated financial statements.
NOTE
10 - CONVERTIBLE DEBENTURE
On
March
24, 2004, the Company entered into an agreement with several investors to
acquire Series A Convertible Debentures (the “Bridge Loan”) whereby a total of
$1,200,000 in debentures were procured through Maxim Group, LLC. The Company
received a net of $1,049,946 after placement expenses. In addition, the
beneficial conversion feature of the debenture was valued at $252,257. The
Company had recorded this as a contra-account against the loan balance and
amortized the beneficial conversion feature over the life of the loan.
Under
the
terms of the Bridge Loan agreements, and supplements thereto, the debentures
bore an interest at the rate of 10% per annum, payable on a quarterly basis
in
common stock or cash at the election of the Company. The maturity date was
24
months from the date of signing, or March 26, 2006. Pursuant to the terms of
a
supplemental agreement dated May 5, 2004 between NetSol and the debenture
holders, the conversion rate was set at one share for each $1.86 of principal.
In
addition, each debenture holder was entitled to receive at the time of
conversion warrants equal to one-half of the total number of shares issued.
The
total number of warrants that may be granted was 322,582. The warrants expire
in
five years and have an exercise price of $3.30 per share. The fair value of
the
warrants was calculated and recorded using the Black-Scholes method at the
time
of granting, when the debenture was converted.
During
the nine months ended March 31, 2006, three of the convertible debenture holders
elected to convert their notes into common stock. As part of the conversion,
warrants to purchase a total of 40,323 common shares were issued to the note
holders. The warrants were valued using the fair value method at $21,505 and
was
recorded as an expense in the accompanying consolidated financial statements
for
the nine months ended March 31, 2006.
NOTE
11 - CONVERTIBLE NOTE PAYABLE
On
June
15, 2006, the Company entered into an agreement with 5 accredited investors
whereby the Company issued 5 convertible notes payable for an aggregate
principal value of $5,500,000. These notes had interest at the rate of 12%
per
annum and were due in full one year from the issuance date or on June 15, 2007
(the “Financing”). The Convertible Notes could immediately convert into
shares of common stock of the Company at the conversion value (initially set
at
one share per $1.65 of principal dollar) to the extent that such conversion
does
not violate Nasdaq Market Place rules. Upon the approval of the
stockholders, to the extent not already converted into common shares, the
Convertible Notes Payable will immediately convert into shares of Preferred
Stock. On October 18, 2006, the shareholders approved the issuance of the shares
and on October 30, 2006 the notes were converted into 5,500 shares of Series
A
7% Cumulative Preferred Stock (see note 12). During the nine months ended March
31, 2007, $251,167 of interest was accrued. On December 13, 2006, the note
holders agreed to accept shares of the Company’s common stock in payment of the
interest owed to them. In addition, the note holders required the Company to
issue a total of 60,000 shares of the Company’s common stock valued at $88,201
as a premium to receive payment in shares rather than cash. This amount is
included in “interest expense” in the accompanying consolidated financial
statements.
The
beneficial conversion feature expense based on the net value of the loan after
reducing the proceeds by the value of the warrants issued was
$2,208,334.
The
common stock shares issued under this financing agreement, including warrants,
were to be registered within 120 days after closing (or October 19, 2006).
If
the Company did not meet the registration requirement, the Company was to pay
in
cash as liquidated damages for such failure and not as a penalty to each Holder
an amount equal to one percent (1%) of such Holder's Purchase Price paid by
such
Holder pursuant to the Purchase Agreement for each thirty (30) day period until
the applicable Event has been cured. The registration statement became
effective on January 19, 2007. During the nine months ended March 31, 2007,
the Company accrued $168,667 as liquidation damages due and has paid $84,333.
As
of March 31, 2007, the balance was $84,333 and is included in “Accrued
Liabilities” in the accompanying consolidated financial statements. In addition,
the Company agreed to pay the note holders a liquidation penalty on the interest
at the same rate as the principle. As a result, the Company recorded an
additional $12,223 in liquidation damages during the nine months ended March
31,
2007. This amount is included in “Accrued Liabilities” in the accompanying
consolidated financial statements.
As
part
of the agreement, the investors received warrants to purchase 1,666,668 shares
of the Company’s common stock. The warrants have an exercise price of $2.00 and
expire in five years. These warrants were valued using the Black-Scholes model
at $2,108,335 and have been capitalized as a contra-account against the note
balance in these consolidated financial statements. These costs are being
amortized over the life of the loan or a pro-rata basis as the loan is converted
into common or preferred stock. As the loans were converted on October 30,
2006,
the balance of $2,022,363 was amortized and recorded as “amortization of debt
discount” in the accompanying consolidated financial statements.
The
Black-Scholes pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
6.00
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
In
connection with this financing, the Company paid $474,500 in cash for placement
agent fees and legal fees. These costs were capitalized and are being amortized
over the life of the loan or a pro-rata basis as the loan is converted into
common or preferred stock. As the loans were converted on October 30, 2006,
the
balance of $454,729
of these costs were amortized and recorded as “amortization of capitalized cost
of debt” in the accompanying consolidated financial statements.
As
part
of the financing, warrants to purchase 266,666 shares of the Company’s common
stock were issued to the placement agent as part of its fee. The warrants have
an exercise price of $1.65 and expire in two years. These warrants were valued
using the Black-Scholes model at $340,799 and have been capitalized in these
consolidated financial statements. These costs are being amortized over the
life
of the loan or a pro-rata basis as the loan is converted into common or
preferred stock. As the loans were converted on October 30, 2006, the balance
of
$326,599 of these costs were amortized and recorded as “amortization of
capitalized cost of debt” in the accompanying consolidated financial statements.
The
Black-Scholes pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
6.00
|
%
|
Expected
life
|
|
|
2
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
12 - STOCKHOLDERS’ EQUITY:
EQUITY
TRANSACTIONS
PREFERRED
STOCK
On
October 30, 2006, the convertible notes payable (see note 11) were converted
into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
preferred shares are valued at $1,000 per share or $5,500,000. The preferred
shares are convertible into common stock at a rate of $1.65 per common share.
The total shares of common stock that can be issued under these Series A
Preferred Stock is 3,333,333. On January 19, 2007, the Form S-3 statement to
register the underlying common stock and related dividends became effective.
As
of March 31, 2007, 475 of the preferred shares had been converted into 287,878
shares of the Company’s common stock. As of March 31, 2007, 45,454 shares of the
common stock valued at $75,000 had not been issued and are included in “Shares
to Be Issued” in these consolidated financial statements.
The
Series A Convertible Preferred Stock carries certain liquidation and
preferential rights. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, before any distribution of assets
of the Corporation can be made to or set apart for the holders of Common Stock,
the holders of Convertible Preferred Stock shall be entitled to receive payment
out of such assets of the Corporation in an amount equal to $1,000 per share
of
Convertible Preferred Stock then outstanding, plus any accumulated and unpaid
dividends thereon (whether or not earned or declared) on the Convertible
Preferred Stock. In addition, the Convertible Preferred Stock ranks senior
to
all classes and series of Common Stock and existing preferred stock and to
each
other class or series of preferred stock established hereafter by the Board
of
Directors of the Corporation, with respect to dividend rights, redemption
rights, rights on liquidation, winding-up and dissolution and all other rights
in any manner, whether voluntary or involuntary.
Private
Placements:
In
August
2004, the Company sold 190,476 shares of the Company’s common stock for $200,000
in a private placement. As of June 30, 2006, $128,000 had been received and
a
total of 87,143 shares were issued to the purchaser. During the quarter ended
September 30, 2006, 34,762 shares were issued on amounts previously received.
In
March 2007, the remaining balance of $72,000 or 68,571 shares were issued and
$30,093 was received as payment. The balance owing at March 31, 2007 was
$41,907.
In
January 2006, the Company sold 933,334 shares of the Company’s common stock for
$1,400,000 in a private placement.
Services:
In
October 2005, the Company entered into an agreement with a vendor whereby the
Company agreed to issue $2,500 worth of stock per month as payment for services
rendered. The stock is to be issued after the end of each quarter. The Company
issued 12,117 shares of its common stock valued at $21,250 during the nine
months ended March 31, 2007. The agreement was terminated on December 15,
2006.
In
July
2005, the Board of Directors and officers were granted the right to receive
shares of the Company’s common stock if certain conditions were met during their
2005 - 2006 term of office. These conditions were met and a total of 15,000
restricted Rule 144 common shares were issued in August 2006. The shares were
valued at the fair market value at the date of grant of $23,100 or $1.54 per
share.
In
January 2006, the Company entered into an agreement with two consultants whereby
the Company agreed to issue shares of the Company’s restricted common stock for
their services. During the nine months ended March 31, 2007, the Company issued
122,728 shares of restricted common stock valued at $203,188 and recorded 37,896
shares of common stock valued at $65,940 to “Stock to Be Issued” under this
agreement as of March 31, 2007.
In
October 2006, the Company entered into an agreement with a consultant whereby
the Company agreed to issue 25,000 shares of the Company’s restricted common
stock at the signing of the agreement. The shares were valued at $36,250 or
$1.45 per share.
In
October 2006, the Company entered into an agreement with a consultant whereby
the Company agreed to issue a total of 40,000 of the Company’s restricted stock,
to be paid at the end of each quarter of service. As of March 31, 2007, the
first quarter of service was completed and the Company recorded as “Stock to Be
Issued” 10,000 shares valued at $15,000 or $1.50 per share under this
agreement.
Business
Combinations
In
June
2006, the Company completed the acquisition of McCue Systems, Inc. (see Note
14). As part of this agreement, the Company issued 931,770 shares of its
restricted common stock valued at $1,584,009 to the shareholders of McCue
Systems.
Options
and Warrants Exercised
During
the nine months ended March 31, 2007, the Company issued 911,394 shares of
its
common stock for the exercise of options valued at $1,479,723. Of this,
$1,155,000 was recorded as “Stock Subscription Receivable”, $33,750 was a
cashless exercise whereby the exercise price was applied against amounts owed
by
the Company to a Director, and $150,000 was cashless exercise whereby the
exercise price was applied against amounts owed by the Company to a three
officers (see Note 8). In addition, 3,030 shares of the Company’s common stock
valued at $5,000 was issued against payments made in the previous quarter and
was recorded as a reduction in “Shares to Be Issued.”
Payment
of Interest
On
December 13, 2006, the Company issued a total of 230,863 shares of the Company’s
common stock valued at $339,137 or $1.47 per share to the convertible note
holders as payment of the interest due to them (see note 11). This payment
included 60,000 shares valued at $88,201 as premium shares to accept payment
of
the interest in the Company’s common stock rather than cash. These
shares have been registered with the Securities and Exchange
Commission.
Payment
of Dividend to Preferred Stockholders
On
January 24, 2007, the Company issued a total of 51,380 shares of the Company’s
common stock valued at $65,598 as payment of the dividend owed to the Preferred
Stockholders (see Note 9).
STOCK
SUBSCRIPTION RECEIVABLE
Stock
subscription receivable represents stock options exercised and issued that
the
Company has not yet received the payment from the purchaser as they were in
processing when the quarter ended.
During
the nine months ended March 31, 2007, issued a total of $1,155,000 of new
receivables and received payments of $682,593. In addition, $35,000 was applied
to amounts owing from a subsidiary. The balance at March 31, 2007 was
$736,657.
COMMON
STOCK PURCHASE WARRANTS AND OPTIONS
From
time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
Common
stock purchase options and warrants consisted of the following during the nine
months ended March 31, 2007:
|
|
|
|
Exercise
|
|
Aggregated
Intrinsic
|
|
|
|
#
shares
|
|
Price
|
|
Value
|
|
Options:
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2006
|
|
|
8,585,500
|
|
|
$0.75
to $5.00
|
|
$
|
269,125
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(911,394
|
)
|
|
$0.75
to $1.75
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
and exercisable, March 31, 2007
|
|
|
7,674,106
|
|
|
$0.75
to $5.00
|
|
$
|
209,808
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2006
|
|
|
2,598,937
|
|
|
$1.75
to$5.00
|
|
$
|
13,333
|
|
Granted
|
|
|
25,000
|
|
|
$1.85
to $3.70
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
and exercisable, March 31, 2007
|
|
|
2,623,937
|
|
|
$1.65
to $5.00
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended March 31, 2006, a total of 1,320,000 options were granted
to employees of the Company and are fully vested and expire ten years from
the
date of grant unless the employee terminates employment, in which case the
options expire within 30 days of their termination. The exercise price of the
options ranges from $1.65 to $2.89. No expense was recorded for the granting
of
these options.
During
the nine months ended March 31, 2006, a total of 2,500 options were granted
to a
consultant and are fully vested from the date of grant. The options expire
in
ten years and have an exercise price of $1.98 per share. The options were valued
using the fair value method at $4,113 or $1.65 per share and recorded the
expense in the accompanying consolidated financial statements. The Black-Scholes
option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
10
years
|
|
Expected
volatility
|
|
|
82
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Prior
to
July 1, 2006, the Company measured stock compensation expense using the
intrinsic value method of accounting in accordance with Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations (APB No. 25).
The
company adopted SFAS No. 123-R effective July 1, 2006 using the modified
prospective method. Under this transition method, stock compensation expense
recognized in the six months ended December 31, 2006 includes compensation
expense for all stock-based compensation awards vested during the six months
ended December 31, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123-R. As there were no options
granted or vested since the implementation of SFAS 123-R, no expense has been
recorded during the nine months ended March 31, 2007.
For
periods presented prior to the adoption of SFAS No. 123R, pro forma
information regarding net income and earnings per share as required by SFAS
No. 123R has been determined as if the Company had accounted for its
employee stock options under the original provisions of SFAS No. 123. The
fair value of these options was estimated using the Black-Scholes option pricing
model. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option’s vesting period. The pro forma
expense to recognize and adjusted net earnings per share for the nine months
ended March 31, 2006 is as follows:
|
|
2006
|
|
Net
income - as reported
|
|
$
|
350,601
|
|
Stock-based
employee compensation expense,
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
-
|
|
|
|
|
|
|
Total
stock-based employee compensation
|
|
|
|
|
expense
determined under fair-value-based
|
|
|
|
|
method
for all rewards, net of tax
|
|
|
(1,496,750
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(1,146,149
|
)
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic,
as reported
|
|
|
0.02
|
|
Diluted,
as reported
|
|
|
0.02
|
|
|
|
|
|
|
Basic,
pro forma
|
|
|
(0.08
|
)
|
Diluted,
pro forma
|
|
|
(0.08
|
)
|
Pro
forma
information regarding the effect on operations is required by SFAS 123, and
has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. Pro forma information using
the
Black-Scholes method at the date of grant based on the following
assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
10
years
|
|
Expected
volatility
|
|
|
54%
- 57
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Impact
of
adoption of SFAS No. 123-R for the nine months ended March 31,
2007:
There
was
no stock compensation expense measured in accordance with SFAS No. 123-R since
there were no options granted or vested during the nine months ended March
31,
2007.
Methods
of estimating fair value:
Under
both SFAS No. 123-R and under the fair value method of accounting under
SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of stock
options is determined using the Black-Scholes model.
Under
SFAS No. 123-R, the company's expected volatility assumption is based on the
historical volatility of the Company's stock. The expected life assumption
is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of
the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
SFAS
No. 123-R requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.
Warrants:
On
October 11, 2006, the Company entered into an agreement with a consultant
whereby the Company agreed to grant the consultant a total of 100,000 warrants
with an exercise price of $1.85 and 100,000 warrants with an exercise price
of
$3.70. The warrants vest equally over the term of the agreement on a quarterly
basis commencing on January 11, 2007 and vest only upon completion of the
quarter’s service as earned. The agreement was terminated on March 31, 2007. The
warrants are exercisable until October 10, 2011. During the quarter ended March
31, 2007, a total of 25,000 of the warrants had vested. The warrants were valued
using the fair value method at $33,987 or $1.44 and $1.28 per share and recorded
the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
7.0
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the quarter ended September 30, 2005, one debenture holder converted their
note
into common stock. As part of the conversion, warrants to purchase a total
of
13,441 common shares were issued to the note holder. The warrants expire in
five
years and have an exercise price of $3.30 per share. The warrants were valued
using the fair value method at $9,489 or $0.71 per share and recorded the
expense in the accompanying consolidated financial statements. The Black-Scholes
option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
56
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the quarter ended March 31, 2006, two debenture holders converted their notes
into common stock. As part of the conversion, warrants to purchase a total
of
26,882 common shares were issued to the note holders. The warrants expire in
five years and have an exercise price of $3.30 per share. The warrants were
valued using the fair value method at $12,016 or $0.45 per share and recorded
the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
44
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
13 - SEGMENT INFORMATION
The
following table presents a summary of operating information and certain year-end
balance sheet information for the nine months ended March 31:
|
|
2007
|
|
2006
|
|
Revenues
from unaffiliated customers:
|
|
|
|
|
|
North
America
|
|
$
|
3,259,700
|
|
$
|
45,250
|
|
Europe
|
|
|
4,097,758
|
|
|
6,105,965
|
|
Asia
- Pacific
|
|
|
13,348,189
|
|
|
7,888,970
|
|
Consolidated
|
|
$
|
20,705,647
|
|
$
|
14,040,185
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
North
America
|
|
$
|
(2,956,755
|
)
|
$
|
(2,623,075
|
)
|
Europe
|
|
|
(698,115
|
)
|
|
1,739,199
|
|
Asia
- Pacific
|
|
|
4,412,323
|
|
|
2,112,466
|
|
Consolidated
|
|
$
|
757,453
|
|
$
|
1,228,590
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
13,092,754
|
|
$
|
5,679,763
|
|
Europe
|
|
|
5,582,204
|
|
|
5,136,741
|
|
Asia
- Pacific
|
|
|
24,918,496
|
|
|
18,265,692
|
|
Consolidated
|
|
$
|
43,593,454
|
|
$
|
29,082,196
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,153,914
|
|
$
|
1,445,977
|
|
Europe
|
|
|
187,114
|
|
|
120,137
|
|
Asia
- Pacific
|
|
|
742,379
|
|
|
422,387
|
|
Consolidated
|
|
$
|
2,083,407
|
|
$
|
1,988,501
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
23,923
|
|
$
|
-
|
|
Europe
|
|
|
200,847
|
|
|
180,738
|
|
Asia
- Pacific
|
|
|
1,057,657
|
|
|
1,997,089
|
|
Consolidated
|
|
$
|
1,282,427
|
|
$
|
2,177,827
|
|
The
Company had minority interests in several of its subsidiaries. The balance
of
the minority interest as of March 31, 2007 was as
follows:
|
|
|
|
MIN
INT
|
|
SUBSIDIARY
|
|
MIN
INT %
|
|
|
|
|
|
|
|
|
|
PK
Tech
|
|
|
28.13
|
%
|
$
|
1,526,405
|
|
NetSol-TiG
|
|
|
49.90
|
%
|
|
1,205,165
|
|
Connect
|
|
|
49.90
|
%
|
|
259,557
|
|
Omni
|
|
|
49.90
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
2,991,127
|
|
NetSol
Technologies, Limited (“PK Tech”)
In
August
2005, the Company’s wholly-owned subsidiary, NetSol
Technologies (Pvt), Ltd. (“PK Tech”) became listed on the Karachi Stock Exchange
in Pakistan. The Initial Public Offering (“IPO”) sold 9,982,000 shares of the
subsidiary to the public thus reducing the Company’s ownership by 28.13%. Net
proceeds of the IPO were $4,890,224. As a result of the IPO, the Company is
required to show the minority interest of the subsidiary on the accompanying
consolidated financial statements.
For
the
nine months ended March 31, 2007 and 2006, the subsidiary had net income of
$3,845,363 and $1,300,277, of which $1,025,441 and $365,768 was recorded against
the minority interest. The balance of the minority interest at March 31, 2007
was $1,526,405.
NetSol-TiG:
In
December 2004, NetSol forged a strategic relationship with a UK based public
company TIG Plc. A Joint Venture was signed by the two companies to create
a new
company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), with 50.1% ownership by NetSol
Technologies, Inc. and 49.9% ownership by TiG. The agreement anticipates TiG’s
technology business to be outsourced to NetSol’s CMM Level 5 Center of
Excellence offshore development facility.
During
year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626 and the subsidiary began operations during the quarter ended March
31,
2005.
For
the
nine months ended March 31, 2007 and 2006, the subsidiary had net income of
$777,794 and $622,684, of which $388,118 and $310,719 was recorded against
the
minority interest, respectively. The balance of the minority interest at March
31, 2007 was $1,205,165.
NetSol
Connect:
In
August
2003, the Company entered into an agreement with United Kingdom based Akhter
Group PLC (“Akhter”). Under the terms of the agreement, Akhter Group acquired
49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd.
(“Connect”), an Internet service provider (“ISP”), in Pakistan through the
issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The partnership with Akhter Computers is
designed to rollout connectivity and wireless services to the Pakistani national
market.
As
of
June 30, 2006, a total of $751,356 had been transferred to Connect, of which
$410,781 was from Akhter and a total of $40,000 cash was distributed to each
partner as a return of capital. During the nine months ended March 31, 2007
an
additional $40,000 was distributed as a return of capital.
For
the
nine months ended March 31, 2007 and 2006, the subsidiary had net loss of
$63,165 and net income of $48,838, respectively, of which ($31,519) and $24,370
respectively, was recorded against the minority interest. The balance of the
minority interest at March 31, 2007 was $259,557.
NetSol
Omni
In
February 2006, the Company purchased for $60,012, 50.1% of the outstanding
shares in Talk Trainers (Private) Limited, now known as NetSol Omni (“Omni”), a
Pakistan corporation which provides educational, professional courses, training
and Human Resource services to the corporate sector. The major stockholder
of
Omni was Mr. Ayub Ghuari, brother to the executive officers of the Company,
and
therefore the acquisition was recorded at historical cost as the entities are
under common control. As the effects of this transaction are immaterial to
the
Company overall, no pro forma information is provided. During the quarter ended
June 30, 2006, Talk Trainers changed their name to NetSol Omni.
For
the
nine months ended March 31, 2007 and 2006, the subsidiary had a net loss of
$39,157 and $1,974, of which ($7,959) and ($985), respectively, was recorded
against the minority interest. The balance of the minority interest at March
31,
2007 was
$0.
NOTE
15 - ACQUISITION OF McCUE SYSTEMS
On
May 6,
2006, the Company entered into an agreement to acquire 100% of the issued and
outstanding stock of with McCue Systems, Inc. (“McCue”), a California
corporation. The acquisition closed on June 30, 2006. The initial purchase
price
was estimated at $8,471,455 of which one-half was due at closing payable in
cash
and stock. The other half is due in two installments over the next two years
based on revenues after the audited December 31, 2006 and 2007 financial
statements are completed. On the closing date, $2,117,864 payable and 958,213
shares to be issued valued at $1,628,979, adjusted for the market value at
closing, was recorded. In July 2006, $2,057,227 in cash was paid and 930,781
of
the shares were issued. In November 2006, an additional shareholder of McCue
tendered their shares in exchange for 989 of the Company’s common shares and
$2,186 cash (see note 12).
The
following is the proforma financial information of the Company for the nine
months ended March 31, 2006 assuming the transaction had been consummated at
the
beginning of the fiscal year ended June 30, 2006:
|
|
For
the nine
months
ended
March
31, 2006
|
|
|
|
(Unaudited)
|
|
Statement
of Operations:
|
|
|
|
Revenues
|
|
$
|
18,548,596
|
|
Cost
of Sales
|
|
|
7,862,072
|
|
Gross
Profit
|
|
|
10,686,524
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
9,658,121
|
|
Income
(loss) from operations
|
|
|
1,028,403
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(120,952
|
)
|
Income
(loss) before minority interest
|
|
|
907,451
|
|
Minority
interest in subsidiary
|
|
|
(699,872
|
)
|
Net
Income (loss)
|
|
$
|
207,579
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.01
|
|
NOTE
16 - GAIN ON SETTLEMENT OF DEBT
During
the nine months ended March 31, 2006, the Company entered into agreements with
several vendors whereby the vendors agreed to accept as payment in full amounts
less than the invoiced amount. As a result of these settlements, the Company
recorded a net gain on settlement of debt of $8,294.
NOTE
17 - SUBSEQUENT EVENTS
On
April
2, 2007, the Company issued 54,209 shares of its common stock in payment of
the
dividend payable to preferred shareholders valued at $94,088.
During
April 2007, 301 shares of preferred stock valued at $301,000 were converted
into
182,424 shares of the Company’s common stock.
During
April 2007, the Company received $54,000 as payment on subscriptions
receivable.
In
April
2007, the Board of Directors of the Company’s subsidiary NetSol
Technologies (Pvt), Ltd. (“PK Tech”) listed on the Karachi Stock Exchange,
has
declared a stock dividend in the amount 1.5 shares for every 10 shares owned
of
the Karachi-listed shares. The stock dividend, which equates to approximately
a
15% benefit, will be distributed on or about May 31, 2007 to shareholders of
record of the Karachi-listed NetSol Technologies Ltd. shares (only) as of the
close of business on May 18, 2007.
Item
2. Management's Discussion and Analysis Or Plan Of
Operation
The
following discussion is intended to assist in an understanding of the Company's
financial position and results of operations for the quarter and nine months
ending March 31, 2007.
Forward-Looking
Information.
This
report contains certain forward-looking statements and information relating
to
the Company that is based on the beliefs of its management as well as
assumptions made by and information currently available to its management.
When
used in this report, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", and similar expressions as they relate to the Company or
its
management, are intended to identify forward-looking statements. These
statements reflect management's current view of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. The Company's
realization of its business aims could be materially and adversely affected
by
any technical or other problems in, or difficulties with, planned funding and
technologies, third party technologies which render the Company's technologies
obsolete, the unavailability of required third party technology licenses on
commercially reasonable terms, the loss of key research and development
personnel, the inability or failure to recruit and retain qualified research
and
development personnel, or the adoption of technology standards which are
different from technologies around which the Company's business ultimately
is
built. The Company does not intend to update these forward-looking
statements.
INTRODUCTION
NetSol
Technologies, Inc. (“NetSol” or the “Company”) is an end-to-end information
technology (“IT”) and business consulting services provider for the lease and
finance, banking and financial services industries. Since it was founded in
1997, the Company has developed enterprise solutions that help clients use
IT
more efficiently in order to improve their operations and profitability and
to
achieve business results. The Company’s focus has remained the lease and
finance, banking and financial services sectors. The Company operates on a
global basis with locations in U.S., China, UK, Australia, Thailand, and
Pakistan. By utilizing its worldwide resources, the Company believes it has
been
able to deliver high quality, cost-effective IT products and IT services. The
Company’s subsidiary, NetSol Technologies Ltd. (“NetSol PK”) develops the
majority of the software for the Company. NetSol PK was the first software
company in Pakistan in 1998 to achieve the ISO 9001 accreditation and was again
the first software company in Pakistan to obtain Carnegie Mellon’s Software
Engineering Institute (“SEI”) Capable Maturity Model (“CMM”) Level 4 assessment
in 2004 and CMMi Level 5 in 2006. The company has launched implementation of
ISO
27001 (previously BS 7799) which is a gold standard and a set of best practices
for Information Security Management.
The
two
recent acquisitions, of CQ Systems in the United Kingdom and McCue Systems,
in
the United States, add an onshore development capacity. The capacity and
capability of these locations provide the Company with contingency development
capability in the event of any unforeseen crises at the Lahore facility. So
far,
the Lahore development facility has operated smoothly without any interruption
since 1996. Currently about 80% of the Company’s software development takes
place in the Lahore technology campus with the remaining 20% in US and
UK.
NetSol
offers a broad spectrum of IT products and IT services which management believes
deliver a high return on investment for its customers. NetSol PK has nearly
perfected its delivery capabilities by continuously investing in maturing its
software development and Quality Assurance (“QA”) processes. NetSol PK believes
its key competitive advantage is its ability to build high quality enterprise
applications using its offshore development facility in Lahore, Pakistan while
also utilizing our facilities in Beijing, China. A major portion of NetSol’s
revenues are derived from exports in general and LeaseSoft in particular. NetSol
PK was recently awarded the highest “Export of IT Services” award in 2006 by the
prime Minster of Pakistan. The use of the facility in Pakistan as the basis
for
software development, configuration and professional services represents a
cost-effective and economical cost arbitrage model that is based on the globally
acclaimed advantages of outsourcing and offshore development. In the areas
of
professional services, the Company is now changing its focus from just being
a
custom development facility to offering high-end services like systems
integration and technology consulting services. NetSol management believes
that
the use of this model will only further benefit the Company in its penetration
of US, European, developed and developing country markets.
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
IT
enterprise solutions to achieve its customers’ strategic objectives. Its service
offerings include bespoke software development, software analysis and design,
testing services, offshore as well as onsite quality assurance services,
consultancy in quality engineering and process improvement including assistance
in implementation of ISO and CMMi quality standards, business process
reengineering, consultancy in Basel-II, business intelligence, information
security, systems integration, system reengineering, maintenance and support
of
existing systems and project management.
The
Company is divided into two groups, the Global Product Group and the Global
Services Group; and three regions: North America, Europe, Middle East
and Africa (“EMEA”) and
Asia
Pacific (“APAC”).
The North
American Region is headed by John McCue as President, founder and Chief
Executive Officer of the Company’s newly acquired subsidiary, McCue Systems,
Inc. based in Burlingame, California. McCue
has
35 years of experience in developing business solutions for the equipment and
vehicle leasing industry as a provider of lease/loan portfolio management
software for banks, leasing companies and manufacturers. Its flagship product,
LeasePak, simplifies lease/loan administration and asset management by
accurately tracking leases, loans and equipment from origination through
end-of-term and disposition. The LeasePak brand is recognized in the US and
Canadian marketplace and is configured to handle the unique tax and regulation
requirements of North America. LeasePak is complementary to NetSol’s LeaseSoft
offering and its geographic specificity complements LeaseSoft in regions in
which LeaseSoft does not currently have coverage or domain support knowledge.
In
order to best leverage the cost arbitrage and enhance gross margins, NetSol
US
operations, (after the McCue acquisition) has already begun training 15
developers and programmers in the Lahore development facility to reduce
dependency in the high-cost base in Silicon Valley. The integration of both
back
end and front end of McCue with NetSol is on track and the Company expects
to
yield positive results by the end of fiscal year 2007.
NetSol
McCue (formerly McCue Systems) provides the leasing technology industry in
the
development of Web-enabled and Web-based tools to deliver superior customer
service, reduce operating costs, streamline the lease management lifecycle,
and
support collaboration with origination channel and asset partners. LeasePak
can
be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle
and
Sybase users. And for scalability, NetSol McCue offers the LeasePak Bronze,
Silver and Gold Editions for systems and portfolios of virtually all sizes
and
complexities. These solutions provide the equipment and vehicle leasing
infrastructure at leading Fortune 500 banks and manufacturers, as well as for
some of the industry’s leading independent lessors, including Cisco, Hyundai, JP
Morgan/Chase, KeyCorp Leasing, Bank of Tokyo Mitsubishi, La Salle National
Bank,
National City Capital Corp., ORIX, and Volkswagen Credit.
With
common customers and common goals, we believe the acquisition of McCue provides
a complimentary North American presence to our global offering of software
and
services to the lease and finance industry. Not only does this provide a U.S.
base of operations and footprint for NetSol, but makes NetSol the only company
focusing on the commercial and consumer lease/finance marketplace with actual
live implementations within nearly every region of the globe, including, U.S.,
Canada, Europe, Asia-Pacific and the far-East. With McCue’s acquisition NetSol
now has a regional solution to the biggest auto and commercial markets of North
America.
The EMEA
is headed by former NetSol Chief Executive Officer, Naeem Ghauri. The EMEA
region will continue to capitalize on the 2005 acquisition of CQ Systems Ltd.
(now NetSol-CQ). As a result of this acquisition, NetSol has access to a broad
European customer base using IT solutions complementary to NetSol’s LeaseSoft
product. NetSol plans to leverage NetSol-CQ’s knowledge base and strong presence
in the asset finance market to launch LeaseSoft in the UK and continental
Europe. NetSol-CQ’s strong sales and marketing capability would further help
NetSol gain immediate recognition and positioning for the LeaseSoft suite of
products. In November 2005, CQ was re-branded as NetSol-CQ and was launched
into
the UK market with new branding and logo. This was part of a global strategy
to
have consistency in our marketing collateral across the globe. All NetSol-CQ
products have been re-branded as LeaseSoft and the Enterprise product will
now
be known as LeaseSoft Asset.
The
integration of CQ Systems with NetSol has been smooth and consistent with
NetSol’s planned strategy. The Company in the second phase has shifted at least
50% of its development to Lahore from the Horsham facility in 2007 so far.
The
goal in 2007 is to enhance this further and improve productivity and net
margins.
New
products introduced in the last quarter including LeaseSoft Portal and LeaseSoft
Evolve have been well received by the market. LeaseSoft Evolve targeted at
small
portfolio companies in the UK with 250 to 2,500 agreements was implemented
in
record time for Kennet Equipment Finance, the first Evolve customer. LeaseSoft
Portal, a new technology Microsoft.Net development, received initial orders
in
excess of $1 MN for new front end and middle office projects and demand is
increasing.
NetSol-CQ
continues to invest into enhancing its strong product line. A new version of
LeaseSoft Asset was released with DIP (Document Imaging and Processing). A
number of new releases are planned over this year and the management has a
strong commitment to continue to invest into the LeaseSoft product suite.
NetSol
will continue to manage LeaseSoft pre-sales support and deliveries by having
two
specialized pools of resources for each of the four products under LeaseSoft.
One group focuses on software development required for customization and
enhancements. The second group comprises of LeaseSoft consultants concentrating
on implementation and onsite support. Both groups are being continually trained
in the domain of finance and leasing, system functionality, communication
skills, organizational behavior and client management.
Finally,
the APAC region is headed by former President of NetSol and current Chief
Executive Officer of NetSol PK (the Company’s Pakistan subsidiary), Salim
Ghauri. The Asian continent, Australia and New Zealand, from the perspective
of
LeaseSoft marketing, are targeted by NetSol Technologies from its Lahore
subsidiary, its offices in Australia and Beijing, China. NetSol PK has continued
to grow its service contracts within the local Pakistani public and defense
sectors. An important aspect of these contracts is that not all of them focused
solely on software development and engineering.
This
year, NetSol PK has gone a step further by providing both consultancy services
to organizations so as to improve their quality of operations and services
and,
wining strategically important assignments with the E-Governance domains for
organizations of national significance in Pakistan. These clients include
private as well as public sector enterprises. In response, NetSol PK has created
a new division known as NDD - NetSol Defense Division in Islamabad. There is
a
sizable budget allocated by the government of Pakistan to automate and use
new
technologies and systems. NetSol is in a sound position to win some of these
high ticketed projects.
NetSol
PK
has entered into a major new development project at the provincial level to
support the data entry and projects management of Land Revenue Systems. This
is
a very new opportunity that has been funded by Worldbank to reform land
management system in Pakistan. NetSol is in a prime position to win potentially
large-size contracts.
PLAN
OF OPERATIONS
The
change of senior management on October 1, 2006 resulted in the creation of
three
new geographic regions. The division of the Company into regions is designed
for
better accountability, ownership and results. The regions are comprised of
North
America, EMEA and APAC. This restructuring is designed to provide better
visibility and direction to NetSol’s global operation.
NetSol
also restructured the global business in two groups: Global Products and Global
Services. This is a major change to provide much more focused ownership,
visibility, pipeline and targeted results. The plan is to create very strong
sales and marketing organizations which will work with our key resources spread
out across many countries generating stronger and better coordinated
results.
Management
has set the following new goals for NetSol for the next 12 months:
· |
Fully
integrate management, customers, and regional products of NetSol,
NetSol-CQ, and McCue.
|
· |
Launch
IT services model in the US by leveraging the offshore low-cost
development capabilities.
|
· |
Introduce
and market two LeaseSoft modules i.e WSF and CAPS in the US
markets.
|
· |
Expand
product portfolio by enhancing current products and new releases
to cater
to wider global markets.
|
· |
Enhance
software design, engineering and service delivery capabilities by
increasing investment in training.
|
· |
Continue
to invest in research and development in an amount between 7-10%
of yearly
budgets in financial, banking and various other domains within NetSol’s
core competencies.
|
· |
Recruit
new sales personnel in US to grow the penetration in North American
markets.
|
· |
Aggressively
penetrate the booming Chinese market and continue to exploit NetSol’s
presence in China.
|
· |
Migrate
up to 50% of development costs of US and UK operations to
Lahore.
|
· |
Increase
Capex, to enhance communications and development infrastructure.
Roll out
a second phase of construction of technology campus in Lahore to
respond
to a growth of new orders and
customers.
|
· |
Market
aggressively on a regional basis the Company’s tri-product solutions by
broader marketing efforts for LeaseSoft in APAC and untapped markets;
aggressively grow LeasePak solutions in North America; and, further
establish NetSol-CQ Enterprise solution in the European
markets.
|
Top
Line
Growth through Investment in organic marketing activities. NetSol marketing
activities will continue to:
· |
Expand
the marketing and distributions of regional products solutions in
four
continents: North America, Europe, Asia Pacific and
Africa.
|
· |
Expand
relationships with all 40 customers in the US, Europe and Asia Pacific
by
offering enhanced product offerings.
|
· |
Product
positioning through alliances and partnership.
|
· |
Capitalize
on NetSol, McCue and NetSol-CQ affiliations with ELA (Equipment Leasing
Association of N.A.) and European leasing
forums.
|
· |
Become
a leading IT company in APAC in asset-based applications and capitalize
on
the surge in demand of NetSol
products.
|
· |
Joint
Ventures and new alliances.
|
· |
Be
a dominant IT solutions provider in Pakistan amidst of explosive
growth in
the economy and automation in private and public sectors.
|
· |
Hold
frequent users group meetings in North America and Asia Pacific and
customers road shows to attract bigger value new
contracts.
|
Funding
and Investor Relations:
· |
Retained
a new IR and communications firm in New York to position NetSol as
a
strong IT company with unlimited growth and upside
outlook.
|
· |
Adequately
capitalize NetSol to face challenges and opportunities presented
through
the most economical means and vehicles creating further stability
and
sustainability.
|
· |
Focus
each division level to achieve optimum profitability and efficiencies
to
reduce the need for new external capital other than to fund major
new
initiatives.
|
· |
Aggressive
marketing campaign on Wall Street to get the story of NetSol known
to
retail, institutions, micro cap funds and analysts.
|
· |
Infuse
new capital from potential exercise of outstanding investors’ warrants and
employees’ options for business development and enhancement of
infrastructures.
|
· |
Continuing
to efficiently and prudently manage cash flow and budgets. Subsidiaries
will contribute to support the headquarters and corporate
overheads.
|
· |
Expose
NetSol to various small cap and technology investors’ forum across North
America.
|
· |
Make
every effort to enhance NetSol’s market capitalization in the
US.
|
Improving
the Bottom Line:
· |
Grow
topline, enhance gross profit margins to 60% by leveraging the low-cost
development facility in Lahore.
|
· |
Generate
much higher revenues per developer and service group, enhance productivity
and lower cost per employee
overall.
|
· |
Consolidate
subsidiaries and integrate and combine entities to reduce overheads
and
employ economies of scale.
|
· |
Continue
to review costs at every level to consolidate and enhance operating
efficiencies.
|
· |
Grow
process automation and leverage the best practices of CMMi level
5.
|
· |
Created
3 new geographic regions: North America, EMEA and APAC to leverage
the
infrastructure and resources and to drive direct ownership based
on
revenue and the bottom line. Also broke the company’s business in two
business groups: Global Product Group and Global Services
Group.
|
· |
More
local empowerment and profit and loss ownership in each country office.
Institute performance based compensation structure through three
areas
that includes both top-line and bottom-line
targets.
|
· |
Cost
efficient management of every operation and continue further consolidation
to improve bottom line.
|
· |
Initiated
steps to consolidate some of the new lines of services businesses
to
improve bottom line.
|
Management
continues to be focused on building its delivery capability and has achieved
key
milestones in that respect. Key projects are being delivered on time and on
budget, quality initiatives are succeeding, especially in maturing internal
processes. Management believes that further leverage was provided by the
development ‘engine’ of NetSol, which became CMMi Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMMi Level
4
assessment in December 2004. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced
their
assessment of level 4. Now, as a result of achieving CMMi level 5 on August
11,
2006, the Company is expecting a growing demand for its products and alliances
from blue chip companies worldwide. NetSol plans to further enhance its
capabilities by creating similar development engines in other Southeast Asian
countries with CMMi levels quality standards. This would make NetSol much more
competitive in the industry and provide the capabilities for development in
multiple locations. Increases in the number of development locations with these
CMMi levels of quality standards will provide customers with options and
flexibility based on costs and broader access to skills and technology. NetSol
PK has already launched implementation of ISO 27001, a global standard and
a set
of best practices for Information Security Management
MATERIAL
TRENDS AFFECTING NETSOL
NetSol
has identified the following material trends affecting NetSol
Positive
trends:
· |
Outsourcing
of services and software development is growing
worldwide.
|
· |
The
leasing and finance industry in North America has increased $260
billion
and about the same size for the rest of
world.
|
· |
Recent
outpouring of very positive US press and research coverage by major
banks
such as Lehman Brothers and Merrill Lynch on Pakistan outlook and
NetSol
growing image and name.
|
· |
The
influx of US companies and investors in addition to investors from
all
other parts of world to Pakistan. The US ranked to be the largest
investors in Pakistan economy in current fiscal year
2007.
|
· |
The
levy of Indian IT sector excise tax of 35% (NASSCOM) on software
exports
is very positive for NetSol. In Pakistan there is a 15 year tax holiday
on
IT exports of services. There are 10 more years remaining on this
tax
incentive.
|
· |
Cost
arbitrage, labor costs still very competitive and attractive when
compared
with India. Pakistan is significantly under priced for IT services
and
programmers as compared to India.
|
· |
Pakistan
is one of the fastest growing IT destinations from emerging and new
markets.
|
· |
Chinese
market is burgeoning and wide open for NetSol’s ‘niche’ products and
services. NetSol is gaining a strong foothold in this
market.
|
· |
Only
a handful of IT solutions providers in the world with global distribution
network, complete end-to-end solution, and presence in the world’s key and
strategic markets.
|
· |
One
of the few global IT companies in the leasing and finance domain
with gold
standard CMMi level 5
accreditation.
|
· |
NetSol
and NetSol PK are both listed in one of the most visible stock indexes
in
their respective markets.
|
· |
NetSol
majority owned subsidiary NetSol PK listed on KSE (Karachi Stock
Exchange) has traded at record price of Rs. 66 in May 2007. The IPO
price
was Rs. 25 in August 2005.
|
· |
Overall
economic expansion worldwide and explosive growth in the emerging
markets
specifically.
|
· |
Continuous
improvement of US and Indian relationships with
Pakistan.
|
· |
Economic
turnaround in Pakistan including: a steady increase in gross domestic
product; much stronger dollar reserves, which is at an all time high
of
over $14 billion; stabilizing reforms of government and financial
institutions; improved credit ratings in the western markets, and
elimination of corruption at the highest
level.
|
· |
Robust
growth in outsourcing globally and investment of major US and European
corporations in the developing countries. As demonstrated by the
recently
published book ‘World is Flat’ by Tom Friedman, there is a need for
western companies to expand their businesses in emerging markets.
Both
Pakistan and China are in the
forefront.
|
Negative
trends:
· |
The
disturbance in Middle East and rising terrorist activities post 9/11
worldwide have resulted in issuance of travel advisory in some of
the most
opportunistic markets. In addition, travel restrictions and new
immigration laws provide delays and limitations on business travel.
|
· |
Negative
perception and image created by extremism and terrorism in the South
Asian
region.
|
· |
Instability
of oil prices and uncertainty about the geo-political landscape in
the
Middle East.
|
· |
Continuous
impact of Iraq war on US and global
economy.
|
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and related public financial information are based on
the
application of accounting principles generally accepted in the United States
(“GAAP”). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on
the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of NetSol
including information regarding contingencies, risk and financial condition.
Management believes our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. Valuations
based
on estimates are reviewed for reasonableness and conservatism on a consistent
basis throughout NetSol. Primary areas where our financial information is
subject to the use of estimates, assumptions and the application of judgment
include our evaluation of impairments of intangible assets, and the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We
base
our estimates on historical experience and on various other assumptions that
we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions.
We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION
OF LONG-LIVED AND INTANGIBLE ASSETS
The
recoverability of these assets requires considerable judgment and is evaluated
on an annual basis or more frequently if events or circumstances indicate that
the assets may be impaired. As it relates to definite life intangible assets,
we
apply the impairment rules as required by SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of” which requires
significant judgment and assumptions related to the expected future cash flows
attributable to the intangible asset. The impact of modifying any of these
assumptions can have a significant impact on the estimate of fair value and,
thus, the recoverability of the asset.
INCOME
TAXES
We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets generated by the
Company or any of its subsidiaries are reduced by a valuation allowance when,
in
the opinion of management, it is more likely than not that some portion or
all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the
date of enactment. Deferred tax assets resulting from the net operating losses
are reduced in part by a valuation allowance. We regularly review our deferred
tax assets for recoverability and establish a valuation allowance based upon
historical losses, projected future taxable income and the expected timing
of
the reversals of existing temporary differences. During the fiscal years ended
June 30, 2006 and 2005, we estimated the allowance on net deferred tax assets
to
be one hundred percent of the net deferred tax assets
CHANGES
IN FINANCIAL CONDITION
Quarter Ended
March 31, 2007 as compared to the Quarter Ended March 31,
2006:
Net
revenues for the quarters ended March 31, 2007 and 2006 were $7,615,966 and
$5,045,827, respectively. Net revenues are broken out among the subsidiaries
as
follows:
|
|
2007
|
|
|
|
2006
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
Netsol
USA
|
|
$
|
-
|
|
|
0.00
|
%
|
$
|
41,500
|
|
|
0.82
|
%
|
McCue
Systems
|
|
|
907,120
|
|
|
11.91
|
%
|
|
-
|
|
|
0.00
|
%
|
|
|
|
907,120
|
|
|
11.91
|
%
|
|
41,500
|
|
|
0.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
UK
|
|
|
43,082
|
|
|
0.57
|
%
|
|
720,514
|
|
|
14.28
|
%
|
Netsol-CQ
|
|
|
1,088,975
|
|
|
14.30
|
%
|
|
1,480,169
|
|
|
29.33
|
%
|
|
|
|
1,132,057
|
|
|
14.86
|
%
|
|
2,200,683
|
|
|
43.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
Tech
|
|
|
4,580,093
|
|
|
60.14
|
%
|
|
2,127,349
|
|
|
42.16
|
%
|
Netsol
Connect
|
|
|
245,102
|
|
|
3.22
|
%
|
|
201,375
|
|
|
3.99
|
%
|
Netsol-TiG
|
|
|
654,356
|
|
|
8.59
|
%
|
|
431,046
|
|
|
8.54
|
%
|
Netsol
- Omni
|
|
|
17,725
|
|
|
0.23
|
%
|
|
8,649
|
|
|
0.17
|
%
|
Netsol-Abraxas
Australia
|
|
|
79,513
|
|
|
1.04
|
%
|
|
35,225
|
|
|
0.70
|
%
|
|
|
|
5,576,789
|
|
|
73.22
|
%
|
|
2,803,644
|
|
|
55.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
$
|
7,615,966
|
|
|
100.00
|
%
|
$
|
5,045,827
|
|
|
100.00
|
%
|
This
reflects an increase of $2,570,139 or 50.94% in the current quarter as compared
to the quarter ended March 31, 2006. The increase is attributable mostly to
growth in services business, several new license sales of LeaseSoft in China,
a
full quarter of revenues attributed by the newly acquired McCue Systems in
the
USA, growing outsourcing business of NetSol-TIG (JV) and additional maintenance
work. In addition, several new business divisions were formed the latter part
of
last year in Lahore. The Company has experienced solid and consistent demand
for
IT services in the domestic sectors of Pakistan. The Company had hoped to close
at least two major service contracts in Pakistan (with an approximate value
of
$3 million). This is now expected to occur in within the next two quarters.
Organic sales, sales without the contribution from McCue, increased 33% or
$1,663,019 to $6,708,846 during the quarter. NetSol in Pakistan has been
pre-qualified to participate in several public sector projects. The most
significant is the World Bank funded Land Record Management Information Systems
or LRMIS. This project has a World bank grant of $300 million in
Pakistan and NetSol was given a pilot project in the province of Punjab early
2007 and we anticipate to win the key projects in this area in next few
quarters.
The
activities for NetSol new license sales - LeaseSoft is increasingly on the
rise.
The current pipeline boasts over 30 plus captive auto manufacturers and
non-captives globally at an advance stage of closing or decision
making.
The
Company added over 10 new customers in APAC and EMEA regions including several
new license sales and a few new services clients. We added 2 new major
auto-captive customers in China in addition to Daimler Chrysler and Toyota
Leasing.
Due
to
the revision in our pricing policy, NetSol LeaseSoft license value in APAC
is in
the range of $500,000 to $1.5 million, without factoring in services maintenance
and implementation fees. Normally, NetSol negotiates 25-30% yearly maintenance
contracts with customers. A number of large leasing companies will be looking
to
renew legacy applications. This places NetSol in a very strong position to
capitalize on any upturn in IT spending by these companies. NetSol is well
positioned to sell several new licenses in the second half of fiscal year 2007
that could potentially increase the sales and bottom line. As the Company
continues to sell more of these licenses, management believes it is possible
that the margins could increase to upward of 60%.
We
have
added the following new business divisions in Pakistan to expand our
operations:
· |
BI
Consulting: a consulting division with the initial objective of targeting
the banking industry. The implementation of the new International
Basel II
Accord by local banks has created a huge demand for solutions that
allow
banks to accurately quantify their risks of incurring losses. This
is a
predictive capability offered by business intelligence software;
and, for
that purpose we’ve aligned ourselves with the largest financial services
software company, SunGard, which is also among the top ten software
companies globally.
|
· |
Defense
Division: in light of our coordination with the Pakistan Defense
Sector,
NetSol established its very own Defense Division to cater specifically
to
the growing demands in this domain and to deliver services with the
professionalism and reliability that epitomizes NetSol’s CMMi Level 5
standing. NetSol PK has forged an alliance with a UK company i.e.
Intero
to work in collaboration for major defense projects in
Pakistan.
|
· |
Enterprise
Business Solutions (EBS): due to the dynamic nature of the business
environment and the increasing demand for operational efficiency
in
today’s world, NetSol has built its own Enterprise Business Solutions
(EBS) division partnering with Oracle and DataStream. With EBS,
NetSol
gives companies the ability to manage, maintain and track assets,
plus the ability to use this data to drive decision-making in areas
such
as Maintenance, Inventory, Warranty, Up-time Reliability & Risk
Management.
|
The
gross
profit was $3,693,698 in the quarter ending March 31, 2007 as compared with
$2,727,298 for the same quarter of the previous year for an increase of $966,400
or 35%. The gross profit percentage decreased slightly to approximately 49%
in
the quarter ended March 31, 2007 compared to approximately 54% for the quarter
ended March 31, 2007. The cost of sales was $3,922,268 in the current quarter
compared to $2,318,529 in the prior quarter ended March 31, 2006. The costs
of
sales increased due to the full integration of McCue’s high-cost developers
based in the US. This has adversely affected overall gross margins. As a
percentage of sales, the cost of sales was 52% for the current quarter and
50%
in the prior quarter ended March 31, 2006.
Operating
expenses were $3,182,293 for the quarter ending March 31, 2007 as compared
to
$2,458,199, for the corresponding period last year. The increase is mainly
attributable to increased selling and marketing activities, additional employees
and an increase in overall activities due to our increased marketing efforts.
Also contributing to the higher costs was the full integration of McCue Systems.
As a percentage of sales, operating expenses were 42% and 49% for the quarters
ending March 31, 2007 and 2006, respectively. Depreciation and amortization
expense amounted to $522,185 and $594,385 for the quarter ended March 31, 2007
and 2006, respectively, reflecting the intangible assets purchased from the
CQ
Systems acquisition in February 2005 and the McCue acquisition in June 2006;
as
well as some of the intangibles fully amortized as of June 30, 2006. Combined
salaries and wage costs were $1,090,307 and $597,636 for the comparable periods,
respectively, or an increase of $492,671 from the corresponding period last
year. Salaries, as a percentage of sales, were 14% for the current quarter
as
compared to 12% in the prior period. This increase is due to the addition of
the
new subsidiary, McCue Systems, three new sales offices in Pakistan, the sales
office in China, increased board fees, increased travel and other expenses
that
supporting a large workforce entails.
Selling
and marketing expenses were $613,760 and $444,472, in the quarter ended March
31, 2007 and 2006, respectively, an increase of $169,288. The Company is in
a
growth phase and is increasing its overall sales and marketing activities.
Sales
and marketing was 8% of sales for the current quarter as compared to 9% in
the
corresponding period last year. Professional services expense increased to
$254,359 in the quarter ended March 31, 2006, from $126,806 in the corresponding
period last year. Part of the increase is additional consultants and increased
audit fees. As a percentage of sales professional services was 3.3% and 2.5%
for
the quarters ending March 31, 2007 and 2006, respectively.
Income
from operations was $511,405 compared to $269,099 for the quarters ended March
31, 2007 and 2006, respectively. This represents an increase of $242,306 or
90%
for the quarter compared with the comparable period in the prior year.
Net
loss
applicable to common shareholders was $323,219 compared to net income of $21,819
for the quarters ended March 31, 2007 and 2006, respectively. The current fiscal
quarter amount includes a net reduction of $568,237 compared to $187,127 in
the
prior period for the 49.9% minority interest in NetSol Connect, NetSol-TiG,
and
NetSol Omni owned by another party, and the 28.13% minority interest in NetSol
PK. This increase of $381,110 reflects the increased net profits in the
respective subsidiaries. For the quarters ended March 31, 2007 and 2006,
respectively, the Company recognized an expense of $0 and $3,941 for the
beneficial conversion feature on convertible debentures and a gain of $0 and
$1,318 from the settlement of debts and $33,987 and $12,016 expense for the
fair
value of options and warrants issued. Net loss per share, basic and diluted,
was
$0.01 for the quarter ended March 31, 2007, as compared to income per share
$0.00 for the corresponding period last year.
The
net
earnings before interest, taxes, depreciation and amortization, ( “EBITDA”)
income was $675,639 compared to $715,299 after amortization and depreciation
charges of $763,296 and $594,385, income taxes of $57,655 and $24,080, and
interest expense of $83,819 and $75,015, respectively. Although the net EBITDA
income is a non-GAAP measure of performance, we are providing it because we
believe it to be an important supplemental measure of our performance that
is
commonly used by securities analysts, investors, and other interested parties
in
the evaluation of companies in our industry. It should not be considered as
an
alternative to net income, operating income or any other financial measures
calculated and presented, nor as an alternative to cash flow from operating
activities as a measure of our liquidity. It may not be indicative of the
Company’s historical operating results nor is it intended to be predictive of
potential future results.
Nine
Month Period Ended March 31, 2007 as compared to the Nine Month Period
Ended March 31, 2006:
Net
revenues for the nine months ended March 31, 2007 and 2006 were $20,705,647
and
$14,040,185, respectively. Net revenues are broken out among the subsidiaries
as
follows:
|
|
2007
|
|
|
|
2006
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
Netsol
USA
|
|
$
|
4,500
|
|
|
0.02
|
%
|
$
|
45,250
|
|
|
0.32
|
%
|
McCue
Systems
|
|
|
3,255,200
|
|
|
15.72
|
%
|
|
-
|
|
|
0.00
|
%
|
|
|
|
3,259,700
|
|
|
15.74
|
%
|
|
45,250
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
UK
|
|
|
94,604
|
|
|
0.46
|
%
|
|
1,929,666
|
|
|
13.74
|
%
|
Netsol-CQ
|
|
|
4,003,154
|
|
|
19.33
|
%
|
|
4,176,299
|
|
|
29.75
|
%
|
|
|
|
4,097,758
|
|
|
19.79
|
%
|
|
6,105,965
|
|
|
43.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
Tech
|
|
|
10,488,631
|
|
|
50.66
|
%
|
|
5,888,442
|
|
|
41.94
|
%
|
Netsol
Connect
|
|
|
739,834
|
|
|
3.57
|
%
|
|
676,956
|
|
|
4.82
|
%
|
Netsol-TiG
|
|
|
1,703,982
|
|
|
8.23
|
%
|
|
1,122,787
|
|
|
8.00
|
%
|
Netsol-Omni
|
|
|
43,984
|
|
|
0.21
|
%
|
|
8,649
|
|
|
0.06
|
%
|
Netsol-Abraxas
Australia
|
|
|
371,758
|
|
|
1.80
|
%
|
|
192,136
|
|
|
1.37
|
%
|
|
|
|
13,348,189
|
|
|
64.47
|
%
|
|
7,888,970
|
|
|
56.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Revenues
|
|
$
|
20,705,647
|
|
|
100.00
|
%
|
$
|
14,040,185
|
|
|
100.00
|
%
|
This
reflects an increase of $6,665,462 or 47.47% in the current nine months as
compared to the nine months ended March 31, 2006. The increase is attributable
mostly to growth in services business, several new license sales of LeaseSoft
in
China, a full quarter of revenues attributed by the newly acquired McCue Systems
in the USA, growing outsourcing business of NetSol-TIG (JV), and additional
maintenance work. In addition, several new business divisions were formed in
the
latter part of last year in Lahore. The Company has experienced solid and
consistent demand for IT services in the domestic sectors of Pakistan. The
Company had hoped to close at least two major service contracts in Pakistan
(with an approximate value of $3 million). This is now expected to occur in
within the next two quarters. Organic sales, sales without the contribution
from
McCue, increased 24% or $3,410,262 to $17,450,447 during the nine months ended
March 31, 2007.
The
activities for NetSol new license sales - LeaseSoft is increasingly on the
rise.
The current pipeline boasts over 30 plus captive auto manufacturers and
non-captives globally at an advance stage of closing or decision
making.
NetSol
made a significant move by acquiring the US based software company, McCue
Systems, Inc., in June 2006. The acquisition of McCue Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business with business in the United States.
The
Company added a few major new customers such as DaimlerChrysler in China, Japan,
and New Zealand and Toyota Leasing Thailand and China. In addition, many new
customers were added in Pakistan in both the public and private sectors. In
addition, McCue Systems added Hyundai Motor Financial.
Due
to
the revision in our pricing policy, NetSol LeaseSoft license value in APAC
is in
the range of $500,000 to $1.0MN, without factoring in services maintenance
and
implementation fees. Normally, NetSol negotiates 25-30% yearly maintenance
contracts with customers. A number of large leasing companies will be looking
to
renew legacy applications. This places NetSol in a very strong position to
capitalize on any upturn in IT spending by these companies. NetSol is well
positioned to sell several new licenses in the second half of fiscal year 2007
that could potentially increase the sales and bottom line. As the Company
continues to sell more of these licenses, management believes it is possible
that the margins could increase to upward of 60%.
We
have
added the following new business divisions in Pakistan to expand our
operations:
· |
BI
Consulting: a consulting division with the initial objective of targeting
the banking industry. The implementation of the new International
Basel II
Accord by local banks has created a huge demand for solutions that
allow
banks to accurately quantify their risks of incurring losses. This
is a
predictive capability offered by business intelligence software;
and, for
that purpose we’ve aligned ourselves with the largest financial services
software company, SunGard, which is also among the top ten software
companies globally.
|
· |
Defense
Division: in light of our coordination with the Pakistan Defense
Sector,
NetSol established its very own Defense Division to cater specifically
to
the growing demands in this domain, and to deliver services with
the
professionalism and reliability that epitomizes NetSol’s CMMi Level 5
standing.
|
· |
Enterprise
Business Solutions (EBS): due to the dynamic nature of the business
environment and the increasing demand for operational efficiency
in
today’s world, NetSol has built its own Enterprise Business Solutions
(EBS) division partnering with Oracle and DataStream. With EBS,
NetSol
gives companies the ability to manage, maintain and track assets,
plus the ability to use this data to drive decision-making in areas
such
as Maintenance, Inventory, Warranty, Up-time Reliability & Risk
Management.
|
The
gross
profit was $10,296,968 for the nine months ending March 31, 2007 as
compared with $8,077,272 for the same period of the previous year. The gross
profit percentage has decreased 7.8% to 50% in the current fiscal year from
58%
for the nine months ended March 31, 2006. The cost of sales was $10,408,679
in the current nine months compared to $5,962,913 in the prior period ended
March 31, 2006. The costs of sales increased due to the full integration of
McCue’s high-cost developers based in the US. This has adversely affected
overall gross margins. As a percentage of sales, the cost of sales was 50%
for
the nine months and 42% in the prior nine months ended March 31,
2006.
Operating
expenses were $9,539,515 for the nine months ending March 31, 2007 as
compared to $6,848,682, for the corresponding period last fiscal year for an
increase of $2,678,379. The increase is mainly attributable to increased selling
and marketing activities and the full integration of McCue Systems. As
a
percentage of sales, operating expenses decreased to 46% from 49% in the prior
nine-month period. Depreciation
and amortization expense amounted to $1,491,142 and $1,711,771 for the
nine-month period ended March 31, 2007 and 2006, respectively, reflecting
the intangible assets purchased from the CQ Systems acquisition in February
2005
and the McCue acquisition in June 2006; as well as some of the intangibles
fully
amortized as of June 30, 2006. Combined salaries and wage costs were $3,361,758
and $1,686,726 for the nine month period ended March 31, 2007 and 2006,
respectively, or an increase of $1,675,032 from the corresponding period last
year. As a percentage of sales, salaries were 16% as compared to 12% for the
corresponding period last year. The addition of the new subsidiary, McCue
Systems, three new sales offices in Pakistan, the sales office in China,
increased board fees, increased travel and other expenses that supporting a
large workforce entails.
Selling
and marketing expenses were $1,545,503 and $1,190,906 for the nine months ended
March 31, 2007 and 2006, respectively,
an
increase of $359,597. This reflects the Company’s growing sales and marketing
efforts. The Company is in a growth phase and is increasing its overall sales
and marketing activities. Sales and marketing was 7% of sales for the
current nine months as compared to 8% in the corresponding period last
year. Professional services expense increased to $774,203 in the nine-month
period ended March 31, 2007, from $365,152 in the corresponding period last
year. As a percentage of sales, professional services was 3.7% and 2.6% for
the
nine-month period ending March 31, 2007 and 2006, respectively.
Income
from operations was $757,453 compared to $1,228,590 for the nine months ended
March 31, 2007 and 2006, respectively. This represents a decrease of $458,683
or
37% for the nine-month period compared to the prior year.
Net
loss
applicable to common shareholders was $6,337,394 for the nine months ended
March 31, 2007 compared to net income of $350,601 for the nine months ended
March 31, 2006. The current nine-month period amount includes a net reduction
of
$1,374,081 compared to $699,872 in the prior period for the 49.9% minority
interest in NetSol Connect, NetSol-TiG, and NetSol Omni owned by another party,
and the 28.13% minority interest in NetSol PK. For the nine months ended March
31, 2007 and 2006, the Company also recognized $2,208,334 and $14,389 in
beneficial conversion feature expense, $2,803,691 and $0 of amortized costs
of
debt, $180,890 and $0 of liquidation damages, and $33,987and $21,505 expense
for
the fair value of options and warrants issued. Net loss per share was $0.35,
basic and diluted, for the nine months ended March 31, 2007 as compared net
income per share of $0.02, basic and diluted for the corresponding period last
year.
The
net
EBITDA loss was $3,424,338 compared to income of $2,394,163 after amortization
and depreciation charges of $2,083,407 and $1,711,771, income taxes of $126,620
and $90,891, and interest expense of $543,342 and $240,900 respectively. With
the addition of the non-cash charge for the amortized costs of debt of
$2,803,691 and the beneficial conversion feature expense of $2,208,334 the
adjusted proforma EBITDA income would be $1,587,687 for the nine months ended
March 31, 2007 and the adjusted proforma EBITDA earnings per share, basic and
diluted, would be $0.09. Although the net EBITDA income is a non-GAAP measure
of
performance, we are providing it because we believe it to be an important
supplemental measure of our performance that is commonly used by securities
analysts, investors, and other interested parties in the evaluation of companies
in our industry. It should not be considered as an alternative to net income,
operating income or any other financial measures calculated and presented,
nor
as an alternative to cash flow from operating activities as a measure of our
liquidity. It may not be indicative of the Company’s historical operating
results nor is it intended to be predictive of potential future
results.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's cash position was $3,382,970 at March 31, 2007 compared to $2,390,245
at March 31, 2006.
The
Company’s current assets as of March 31, 2007 were 49.08% of total assets,
compared to 54.27% as of March 31, 2006. In addition, our working capital
(current assets minus current liabilities) was $10,892,334.
Net
cash
used for operating activities amounted to $4,250,042 for the nine months ended
March 31, 2007, as compared to $737,357 for the comparable period last fiscal
year. The decrease is mainly due to a decrease in prepaid expenses, other
assets, accounts payable and the other payable - acquisitions.
Net
cash
used by investing activities amounted to $1,338,029 for the nine months ended
March 31, 2007, as compared to $4,568,666 for the comparable period last fiscal
year. The difference lies primarily in the purchase of subsidiary which
increased intangible assets and the purchase property and equipment during
the
current fiscal year. The Company had purchases of property and equipment of
$1,282,427 compared to $2,063,284 for the comparable period last fiscal year.
Net
cash
provided by financing activities amounted to $6,401,114 and $6,232,741 for
the
nine months ended March 31, 2007, and 2006, respectively. The current fiscal
period included the cash inflow of $30,093 compared to $1,400,000 from issuance
of equity and $704,250 compared to $384,062 from the exercising of stock options
and warrants. In addition in the preceding year, the Company received net
proceeds of $4,031,001 from the sale of a subsidiary’s common stock in an IPO on
the Karachi Stock Exchange. In addition the Company had net proceeds on loans
and capital leases of $874,128 as compared to $417,678 in the comparable period
last year.
The
Company plans on pursuing various and feasible means of raising new funding
to
expand its infrastructure, enhance product offerings and beef-up marketing
and
sales activities in strategic markets. The strong growth in earnings and the
signing of larger contracts with Fortune 500 customers largely depends on the
financial strength of NetSol. Generally, the bigger name clients and new
prospects diligently analyze and take into consideration a stronger balance
sheet before awarding big projects to vendors. Therefore, NetSol would continue
its effort to further enhance its financial resources in order to continue
to
attract large name customers and big value contracts. The company attracted
5
new institutional investors in 2006 that invested $5.5 million, raising its
institutional investor base to over 15%. There are over 7.7 million employees
and officers options unexercised and over 2.6 million investor warrants
remaining to be exercised.
As
a
growing company, we have on-going capital expenditure needs based on our short
term and long term business plans. Although our requirements for capital
expenses vary from time to time, for the next 12 months, we have the following
capital needs:
· |
The
second payment of McCue Systems would be due based on the formula
of ‘earn
out’. This could be in the range of $1.0 million to $2.0 million in cash
and common stock. This is based on an earn out structure and the
company
expects to fund it through internal cash
flow;
|
· |
Notes
payable and related interest for approximately $717,890;
|
· |
Liquidity
damages owed to convertible note holders of approximately
$96,556;
|
· |
Working
capital of $1.0 million for UK business expansion, new business
development activities and infrastructure
enhancements.
|
While
there is no guarantee that any of these methods will result in raising
sufficient funds to meet our capital needs or that even if available will be
on
terms acceptable to the Company, we will consider raising capital through equity
based financing and, warrant and option exercises. We would, however, use some
of our internal cash flow to meet certain obligations as mentioned above.
However, the Company is very conscious of the dilution effect and price
pressures in raising equity-based capital.
The
methods of raising funds for capital needs may differ based on the following:
· |
Stock
volatility due to market conditions in general and NetSol stock
performance in particular. This may cause a shift in our approach
to
raising new capital through other sources such as secured long term
debt.
|
· |
Analysis
of the cost of raising capital in the U.S., Europe or emerging markets.
By
way of example only, if the cost of raising capital is high in one
market
and it may negatively affect the company’s stock performance, we may
explore options available in other markets.
|
Should
global or other general macro economic factors cause an adverse climate, we
would defer new financing and use internal cash flow for capital
expenditures.
Item
3. Controls
and Procedures
Management,
under the supervision and with the participation of the chief executive officer
and chief financial officer, conducted an evaluation of the disclosure controls
and procedures as defined by rule 13a-15(e) as of the end of the period covered
by this interim report on Form 10-QSB. Based
upon that evaluation, the Chairman, Chief Financial
Officer and Chief Executive Officer concluded that our disclosure controls
and
procedures are effective.
There
has
been no change, including corrective actions with regard to deficiencies or
weaknesses in the Company’s internal controls or in other factors that has
materially affected, or is reasonably likely to materially affect, these
internal controls over financial reporting.
PART
II OTHER
INFORMATION
Item
1. Legal Proceedings
None.
In
January 2007, 3,942 shares of common stock were issued to an accredited investor
as payment for services provided. The shares were issued in reliance on rule
4(1) of the Securities Act of 1933.
In
March
2007, 68,571 shares of common stock were issued to an individual accredited
investor as part of a private placement of shares of common stock which took
place in August 2004. The shares had not been issued at the time of the
subscription. This issuance was made in reliance on an exemption from
registration pursuant to Regulation S of the Securities Act of 1933, as amended.
In
January 2007, 51,380 shares of common stock were issued to 5 accredited
investors as dividends due under the terms of the Series A 7% Cumulative
Convertible Preferred Stock. This issuance was made in reliance on an exemption
from registration pursuant to rule 4(1) and Regulation S of the Securities
Act
of 1933, as amended.
In
January 2007, 48,402 were issued to two non-U.S. resident consultants as partial
consideration for services rendered. The shares were issued in reliance on
an
exemption from registration available pursuant to Regulation S of the Securities
Act of 1933, as amended.
During
the quarter ended March 31, 2007, the Company issued 396,394 shares of its
common stock for the exercise of options valued at $670,473.
In
March
2007, 242,424 shares of common stock were issued upon the conversion of 400
shares of preferred stock.
Item
3. Defaults Upon Senior Securities
None.
None.
None.
Exhibits:
31.1 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CEO)
|
31.2 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CFO)
|
32.1 |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (CEO)
|
32.2 |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
(CFO)
|
Reports
on Form 8-K.
a)
On
January 3, 2007, NetSol Technologies, Inc. filed a current report announcing
the
departure of Jim Moody as director of the Company and the appointment of Mark
Caton to fill the vacancy left by Mr. Moody.
b)
On
February 5, 2007, NetSol Technologies, Inc. filed a current report containing
the contents of its press release announcing the results of operations and
financial conditions of it subsidiary, NetSol Technologies, Ltd., for the
quarter ended December 31, 2006.
c)
On
February 13, 2007, NetSol Technologies, Inc. filed a current report containing
the contents of its press release announcing the results of operations and
financial conditions for the quarter ended December 31, 2006.
d)
On
March 14, 2007, NetSol Technologies, Inc. filed a current report on Form 8-K
including a power point presentation used by the Company to a potential group
of
investors at the B. Riley & Company’s annual investor conference.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
amended report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
NETSOL
TECHNOLOGIES, INC. |
|
|
|
|
Date: May
8 , 2007 |
|
/s/ Najeeb
Ghauri |
|
NAJEEB GHAURI
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
Date: May
8, 2007 |
|
/s/ Tina
Gilger |
|
TINA
GILGER |
|
Chief
Financial Officer |