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, 2008
(
) |
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
Incorporation
or Organization)
|
|
(I.R.S.
Employer
NO.)
|
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
The
issuer had 25,502,332 shares of its $.001 par value Common Stock and 1,920
shares of Series A 7% Cumulative Convertible Preferred Stock issued and
outstanding as of May 12, 2008.
Transitional
Small Business Disclosure Format (check one)
Yes
No
X
NETSOL
TECHNOLOGIES, INC.
INDEX
PART
I.
|
FINANCIAL
INFORMATION
|
Page
No.
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
Unaudited
Consolidated Balance Sheet as of March 31, 2008
|
3
|
|
|
Unaudited
Consolidated Statements of Operations
|
4
|
for
the Three Months and Nine Months Ended March 31, 2008 and
2007
|
|
|
|
Unaudited
Consolidated Statements of Cash Flow
|
5
|
for
the Nine Months Ended March 31, 2008 and 2007
|
|
|
|
Notes
to the Unaudited Consolidated Financial Statements
|
7
|
|
|
Item
2.
|
Management's
Discussion and Analysis or Plan of Operation
|
24
|
|
|
|
Item
3.
|
Controls
and Procedures
|
37
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
37
|
|
|
|
Item
2.
|
Changes
in Securities
|
37
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
37
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
37
|
|
|
|
Item
5.
|
Other
Information
|
37
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
38
|
|
|
|
|
(a)
Exhibits
|
|
|
(b)
Reports on Form 8-K
|
|
CONSOLIDATED
BALANCE SHEET — MARCH 31, 2008
(UNAUDITED)
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,848,513
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$168,443
|
|
|
10,227,903
|
|
|
|
|
Revenues
in excess of billings
|
|
|
12,006,231
|
|
|
|
|
Other
current assets
|
|
|
2,933,047
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
30,015,694
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
|
|
|
8,153,405
|
|
Other
assets, long-term
|
|
|
|
|
|
800,435
|
|
Intangibles:
|
|
|
|
|
|
|
|
Product
licenses, renewals, enhancements, copyrights,
|
|
|
|
|
|
|
|
trademarks,
and tradenames, net
|
|
|
9,137,381
|
|
|
|
|
Customer
lists, net
|
|
|
1,906,422
|
|
|
|
|
Goodwill
|
|
|
7,786,032
|
|
|
|
|
Total
intangibles
|
|
|
|
|
|
18,829,835
|
|
Total
assets
|
|
|
|
|
$
|
57,799,369
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,323,046
|
|
|
|
|
Current
portion of loans and obligations under capitalized leases
|
|
|
605,551
|
|
|
|
|
Other
payables - acquisitions
|
|
|
83,399
|
|
|
|
|
Unearned
revenues
|
|
|
3,616,555
|
|
|
|
|
Due
to officers
|
|
|
184,173
|
|
|
|
|
Dividend
to preferred stockholders payable
|
|
|
33,508
|
|
|
|
|
Loans
payable, bank
|
|
|
1,977,689
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
9,823,921
|
|
Obligations
under capitalized leases, less
current maturities
|
|
|
|
|
|
270,927
|
|
Long
term loans; less
current maturities
|
|
|
|
|
|
552,166
|
|
Total
liabilities
|
|
|
|
|
|
10,647,014
|
|
Minority
interest
|
|
|
|
|
|
5,834,732
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
1,920
issued and outstanding
|
|
|
1,920,000
|
|
|
|
|
Common
stock, $.001 par value; 45,000,000 shares authorized;
|
|
|
|
|
|
|
|
25,247,568
issued and outstanding
|
|
|
25,248
|
|
|
|
|
Additional
paid-in-capital
|
|
|
75,299,379
|
|
|
|
|
Treasury
stock
|
|
|
(35,681
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(33,477,767
|
)
|
|
|
|
Stock
subscription receivable
|
|
|
(600,907
|
)
|
|
|
|
Common
stock to be issued
|
|
|
64,612
|
|
|
|
|
Other
comprehensive loss
|
|
|
(1,877,261
|
)
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
41,317,623
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
57,799,369
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
Licence
fees
|
|
$
|
2,998,867
|
|
$
|
2,554,289
|
|
$
|
7,769,226
|
|
$
|
6,851,496
|
|
Maintenance
fees
|
|
|
1,482,654 |
|
|
1,335,893 |
|
|
4,556,450
|
|
|
3,990,096
|
|
Services
|
|
|
4,585,292 |
|
|
3,725,784 |
|
|
13,800,844
|
|
|
9,864,055
|
|
Total
revenues
|
|
|
9,066,813 |
|
|
7,615,966 |
|
|
26,126,520
|
|
|
20,705,647
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
2,620,722 |
|
|
2,234,809 |
|
|
7,342,743
|
|
|
6,608,606
|
|
Travel
|
|
|
394,841 |
|
|
447,288 |
|
|
972,998
|
|
|
1,195,315
|
|
Repairs
and maintenance
|
|
|
99,262 |
|
|
133,961 |
|
|
332,448
|
|
|
313,514
|
|
Insurance
|
|
|
30,005 |
|
|
51,294 |
|
|
153,760
|
|
|
153,595
|
|
Depreciation
and amortization
|
|
|
316,652 |
|
|
279,405 |
|
|
847,288
|
|
|
693,703
|
|
Other
|
|
|
522,013 |
|
|
790,927 |
|
|
1,341,513
|
|
|
1,479,478
|
|
Total
cost of sales
|
|
|
3,983,495 |
|
|
3,937,684 |
|
|
10,990,750
|
|
|
10,444,211
|
|
Gross
profit
|
|
|
5,083,318 |
|
|
3,678,282 |
|
|
15,135,770
|
|
|
10,261,436
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
898,686 |
|
|
825,586 |
|
|
2,817,908
|
|
|
2,105,920
|
|
Depreciation
and amortization
|
|
|
477,630 |
|
|
483,801 |
|
|
1,422,181
|
|
|
1,389,704
|
|
Bad
debt expense
|
|
|
- |
|
|
(231 |
) |
|
3,277
|
|
|
117,267
|
|
Salaries
and wages
|
|
|
1,034,784 |
|
|
915,481 |
|
|
2,758,434
|
|
|
2,914,707
|
|
Professional
services, including non-cash compensation
|
|
|
114,436 |
|
|
254,359 |
|
|
413,437
|
|
|
774,203
|
|
General
and adminstrative
|
|
|
792,499 |
|
|
687,881 |
|
|
2,287,693
|
|
|
2,202,182
|
|
Total
operating expenses
|
|
|
3,318,035 |
|
|
3,166,877 |
|
|
9,702,930
|
|
|
9,503,983
|
|
Income
from operations
|
|
|
1,765,283 |
|
|
511,405 |
|
|
5,432,840
|
|
|
757,453
|
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
(891 |
) |
|
(6,729 |
) |
|
(33,044
|
)
|
|
(19,067
|
)
|
Beneficial
conversion feature
|
|
|
- |
|
|
- |
|
|
- |
|
|
(2,208,334
|
)
|
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 |
) |
|
- |
|
|
(33,987
|
)
|
Interest
expense
|
|
|
(121,651 |
) |
|
(83,819 |
) |
|
(544,597
|
)
|
|
(543,342
|
)
|
Interest
income
|
|
|
84,363 |
|
|
46,867 |
|
|
159,801
|
|
|
265,916
|
|
Gain
on sale of subsidiary shares
|
|
|
1,240,808 |
|
|
- |
|
|
1,240,808
|
|
|
-
|
|
Other
income and (expenses)
|
|
|
447,889 |
|
|
10,081 |
|
|
709,113
|
|
|
88,935
|
|
Total
other income (expenses)
|
|
|
1,650,518 |
|
|
(114,644 |
) |
|
1,532,081
|
|
|
(5,434,460
|
)
|
Net
income (loss) before minority interest in
subsidiary
|
|
|
3,415,801 |
|
|
396,761 |
|
|
6,964,921
|
|
|
(4,677,007
|
)
|
Minority
interest in subsidiary
|
|
|
(1,098,703 |
) |
|
(568,237 |
) |
|
(1,756,509
|
)
|
|
(1,374,081
|
)
|
Income
taxes
|
|
|
(15,314 |
) |
|
(57,655 |
) |
|
(46,272
|
)
|
|
(126,620
|
)
|
Net
income (loss)
|
|
|
2,301,784 |
|
|
(229,131 |
) |
|
5,162,140
|
|
|
(6,177,708
|
)
|
Dividend
required for preferred stockholders
|
|
|
(33,508 |
) |
|
(94,088 |
) |
|
(145,033
|
)
|
|
(159,686
|
)
|
Subsidiary
dividend (minority holders portion)
|
|
|
- |
|
|
- |
|
|
(817,173
|
)
|
|
-
|
|
Bonus
stock distribution (minority holders portion)
|
|
|
- |
|
|
- |
|
|
(545,359
|
)
|
|
-
|
|
Net
income (loss) applicable to common
shareholders
|
|
|
2,268,276 |
|
|
(323,219 |
) |
|
3,654,575
|
|
|
(6,337,394
|
)
|
Other
comprehensive gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(910,838 |
) |
|
81,564 |
|
|
(1,401,831
|
)
|
|
203,343
|
|
Comprehensive
income (loss)
|
|
$
|
1,357,438
|
|
$
|
(241,655
|
)
|
$
|
2,252,744
|
|
$
|
(6,134,051
|
)
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
$
|
(0.02
|
)
|
$
|
0.21
|
|
$
|
(0.36
|
)
|
Diluted
|
|
$
|
0.09
|
|
$
|
(0.01
|
)
|
$
|
0.21
|
|
$
|
(0.35
|
)
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,205,995 |
|
|
18,311,290
|
|
|
23,686,204
|
|
|
17,680,115
|
|
Diluted
|
|
|
25,665,924 |
|
|
18,311,290
|
|
|
24,146,133
|
|
|
17,680,115
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss) applicable to common shareholders
|
|
$
|
5,162,140
|
|
$
|
(6,177,708
|
)
|
Adjustments
to reconcile net income (loss) applicable to common
|
|
|
|
|
|
|
|
shareholders
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,269,469
|
|
|
2,083,407
|
|
Bad
debt expense
|
|
|
3,277
|
|
|
117,267
|
|
Loss
on sale of assets
|
|
|
33,044
|
|
|
19,067
|
|
Gain
on sale of subsidiary shares in Pakistan
|
|
|
(1,240,808
|
)
|
|
-
|
|
Minority
interest in subsidiary
|
|
|
1,756,509
|
|
|
1,374,081
|
|
Stock
issued for services
|
|
|
48,163
|
|
|
88,099
|
|
Stock
issued for convertible note payable interest
|
|
|
-
|
|
|
311,868
|
|
Fair
market value of warrants and stock options granted
|
|
|
24,320
|
|
|
33,987
|
|
Beneficial
conversion feature
|
|
|
-
|
|
|
2,208,334
|
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
-
|
|
|
2,803,691
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease/(increase)
in accounts receivable
|
|
|
(2,087,736
|
)
|
|
(1,913,135
|
)
|
Increase
in other current assets
|
|
|
(4,885,181
|
)
|
|
(2,793,410
|
)
|
(Decrease)/increase
in accounts payable and accrued expenses
|
|
|
(510,968
|
)
|
|
1,716,251
|
|
Net
cash provided by (used in) operating activities
|
|
|
572,229
|
|
|
(128,201
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,985,651
|
)
|
|
(1,282,427
|
)
|
Sales
of property and equipment
|
|
|
120,436
|
|
|
208,419
|
|
Net
proceeds of certificates of deposit
|
|
|
-
|
|
|
1,737,481
|
|
Payment
for acquisition
|
|
|
(879,007
|
)
|
|
(4,027,753
|
)
|
Increase
in intangible assets
|
|
|
(2,219,673
|
)
|
|
(2,001,502
|
)
|
Net
cash used in investing activities
|
|
|
(4,963,895
|
)
|
|
(5,365,782
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
1,500,000
|
|
|
30,093
|
|
Proceeds
from the exercise of stock options
|
|
|
2,800,917
|
|
|
704,250
|
|
Proceeds
from sale of subsidiary stock
|
|
|
1,765,615
|
|
|
-
|
|
Finance
costs incurred for sale of common stock
|
|
|
(10,000
|
)
|
|
-
|
|
Purchase
of treasury stock
|
|
|
(25,486
|
)
|
|
-
|
|
Reduction
in restricted cash
|
|
|
-
|
|
|
4,533,555
|
|
Proceeds
from loans from officers
|
|
|
-
|
|
|
165,000
|
|
Proceeds
from bank loans
|
|
|
3,862,759
|
|
|
-
|
|
Payments
on bank loans
|
|
|
(1,245,846
|
)
|
|
-
|
|
Capital
lease obligations & loans (net)
|
|
|
(3,462,334
|
)
|
|
874,128
|
|
Net
cash provided by financing activities
|
|
|
5,185,625
|
|
|
6,307,026
|
|
Effect
of exchange rate changes in cash
|
|
|
44,390
|
|
|
76,159
|
|
Net
increase in cash and cash equivalents
|
|
|
838,349
|
|
|
889,202
|
|
Cash
and cash equivalents, beginning of period
|
|
|
4,010,164
|
|
|
2,493,768
|
|
Cash
and cash equivalents, end of period
|
|
$
|
4,848,513
|
|
$
|
3,382,970
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
378,802
|
|
$
|
154,478
|
|
Taxes
|
|
$
|
79,070
|
|
$
|
20,148
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Common
stock issued for intangible assets
|
|
$
|
-
|
|
$
|
269,128
|
|
Common
stock issued for acquisition of 100% of subsidiary
|
|
$
|
76,750
|
|
$
|
1,584,009
|
|
Common
stock issued for payment of note payable and related
interest
|
|
$
|
-
|
|
$
|
339,368
|
|
Common
stock issued for dividend payable
|
|
$
|
189,165
|
|
$
|
-
|
|
Bonus
stock distribution issued by subsidiary to minority
holders
|
|
$
|
545,359
|
|
$
|
-
|
|
Stock
issued for the conversion of Preferred Stock
|
|
$
|
2,210,000
|
|
$
|
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, healthcare, and
financial services industries worldwide. The
Company also provides system integration, consulting, IT products and 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, 2007. 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, NetSol Technologies North America,
Inc. (“NTNA”), NetSol Technologies Limited (“NetSol UK”), NetSol-Abraxas
Australia Pty Ltd. (“Abraxas”), NetSol Technologies Europe Limited (“NTE”), and
its majority-owned subsidiaries, NetSol Technologies, Ltd.(“NetSol PK”), NetSol
Connect (Pvt), Ltd. (“Connect”), TIG-NetSol (Pvt) Limited (“NetSol-TIG”),
and
NetSol Omni (Private) Limited (“Omni”).
All
material inter-company accounts have been eliminated in the 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
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 adoption of this statement
will
not have a material impact on our consolidated financial
statements.
In
February 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.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of
this
pronouncement on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for
how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill acquired
in
the business combination or a gain from a bargain purchase; and, c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS
No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
In
March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location
and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.
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, 2008
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
$
|
5,017,107
|
|
|
23,686,204
|
|
$
|
0.21
|
|
Dividend
to preferred shareholders
|
|
|
145,033
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
221,129
|
|
|
|
|
Warrants
|
|
|
|
|
|
180,920
|
|
|
|
|
Convertible
Preferred Shares
|
|
|
|
|
|
57,880
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
5,162,140
|
|
|
24,146,133
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
*
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 UK and NTE use the British Pound; NetSol PK, Connect, Omni,
and NetSol-TiG use Pakistan Rupees; and Abraxas uses the Australian dollar
as
the functional currencies. NetSol Technologies, Inc., and subsidiary, NTNA,
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 $1,877,261 at March 31, 2008 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, 2008 and
2007, comprehensive gain (loss) in the consolidated statements of operations
included translation loss of $1,401,831 and gain of $203,343,
respectively.
NOTE
6 - OTHER CURRENT ASSETS
Other
current assets consist of the following at March 31, 2008:
Prepaid
Expenses
|
|
$
|
1,146,229
|
|
Advance
Income Tax
|
|
|
331,509
|
|
Employee
Advances
|
|
|
198,025
|
|
Security
Deposits
|
|
|
243,952
|
|
Advance
Rent
|
|
|
223,219
|
|
Tender
Money Receivable
|
|
|
336,605
|
|
Other
Receivables
|
|
|
433,443
|
|
Other
Assets
|
|
|
20,065
|
|
Total
|
|
$
|
2,933,047
|
|
NOTE
7 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consist of the following at March 31, 2008:
Office
furniture and equipment
|
|
$
|
1,226,920
|
|
Computer
equipment
|
|
|
7,567,156
|
|
Assets
under capital leases
|
|
|
1,342,001
|
|
Building
|
|
|
3,154,201
|
|
Construction
in process
|
|
|
423,201
|
|
Land
|
|
|
1,005,567
|
|
Autos
|
|
|
251,656
|
|
Improvements
|
|
|
458,805
|
|
Subtotal
|
|
|
15,429,507
|
|
Accumulated
depreciation
|
|
|
(7,276,102
|
)
|
|
|
$
|
8,153,405
|
|
For
the
nine months ended March 31, 2008 and 2007, fixed asset depreciation expense
totaled $1,034,720 and $869,240, respectively. Of these amounts, $661,114 and
$528,111, respectively, are reflected as part of cost of goods sold.
NOTE
8 - 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 has been evaluated in accordance with SFAS No. 142.
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,
2008:
|
|
Product
Licenses
|
|
Customer
Lists
|
|
Total
|
|
Intangible
assets - June 30, 2007
|
|
$
|
14,511,208
|
|
$
|
5,451,094
|
|
$
|
19,962,302
|
|
Additions
|
|
|
2,176,751
|
|
|
-
|
|
|
2,176,751
|
|
Effect
of translation adjustment
|
|
|
(110,168
|
)
|
|
-
|
|
|
(110,168
|
)
|
Accumulated
amortization
|
|
|
(7,440,410
|
)
|
|
(3,544,672
|
)
|
|
(10,985,082
|
)
|
Net
balance - March 31, 2008
|
|
$
|
9,137,381
|
|
$
|
1,906,422
|
|
$
|
11,043,803
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31, 2008
|
|
$
|
713,766
|
|
$
|
520,983
|
|
$
|
1,234,749
|
|
Nine
months ended March 31, 2007
|
|
$
|
693,184
|
|
$
|
520,983
|
|
$
|
1,214,167
|
|
At
March
31, 2008 and 2007, product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, included unamortized software development and
enhancement costs of $7,674,491 and $4,525,955, respectively, as the development
and enhancement is yet to be completed. Software development amortization
expense was $186,174 and $165,592 for the nine months ended March 31, 2008
and
2007, respectively and is shown in “Cost of Goods Sold” in these consolidated
financial statements.
Amortization
expense of intangible assets over the next five years is as
follows:
|
|
|
|
FISCAL
YEAR ENDING |
|
|
|
|
|
Asset
|
|
3/31/09
|
|
3/31/10
|
|
3/31/11
|
|
3/31/12
|
|
3/31/13
|
|
TOTAL
|
|
Product
Licences
|
|
$
|
1,236,736
|
|
$
|
1,070,405
|
|
$
|
501,325
|
|
$
|
27,893
|
|
$ |
- |
|
$
|
2,836,359
|
|
Customer
Lists
|
|
|
694,644
|
|
|
672,696
|
|
|
431,268
|
|
|
107,815
|
|
|
- |
|
|
1,906,423
|
|
|
|
$
|
1,931,380
|
|
$
|
1,743,101
|
|
$
|
932,593
|
|
$
|
135,708
|
|
$ |
- |
|
$
|
4,742,782
|
|
There
were no impairments of the goodwill asset during the nine months ended March
31,
2008 and 2007.
NOTE
9 - OTHER ASSETS - LONG TERM
NetSol
PK
has outgrown its current facility and has looked to other sources to house
its
growing numbers of employees. During the year ended June 30, 2007, the owner
of
the adjacent land agreed to build an office to the Company’s specifications and
the Company agreed to help pay for the development of the land in exchange
for
discounted rent for the next three years. As of March 31, 2008, the Company
has
paid a total of $493,095 in connection with this agreement. Of this amount,
$223,219 has been classified as current, representing one-year of rental
payments, and $128,760 shown as long-term assets. During the nine months ended
March 31, 2008, $133,257 was expensed.
In
addition, NetSol PK has begun work on building a new building behind the current
one. The enhancement of infra-structure is necessary to meet the company’s
growth in local and international business. The balance for advance for
Capital-Work-In-Progress was $671,675.
NOTE
10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at March 31,
2008:
Accounts
Payable
|
|
$
|
966,986
|
|
Accrued
Liabilities
|
|
|
2,014,565
|
|
Accrued
Payroll
|
|
|
2,102
|
|
Accrued
Payroll Taxes
|
|
|
51,143
|
|
Interest
Payable
|
|
|
156,257
|
|
Deferred
Revenues
|
|
|
29,962
|
|
Taxes
Payable
|
|
|
102,031
|
|
Total
|
|
$
|
3,323,046
|
|
NOTE
11 - DEBTS
A)
LOANS AND LEASES PAYABLE
Notes
payable as of March 31, 2008 consist of the following:
|
|
Balance
at
|
|
Current
|
|
Long-Term
|
|
Name
|
|
3/31/08
|
|
Maturities
|
|
Maturities
|
|
D&O
Insurance
|
|
$
|
72,031
|
|
$
|
72,031
|
|
$
|
-
|
|
Professional
Liability Insurance
|
|
|
2,310
|
|
|
2,310
|
|
|
-
|
|
HSBC
Loan
|
|
|
820,746
|
|
|
268,580
|
|
|
552,166
|
|
Subsidiary
Capital Leases
|
|
|
533,557
|
|
|
262,630
|
|
|
270,927
|
|
|
|
$
|
1,428,644
|
|
$
|
605,551
|
|
$
|
823,093
|
|
In
February 2005, the Company received a loan from Noon Group in the amount of
$500,000. The note carried an interest rate of 9.75% per annum and was 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 fiscal year ended June 30, 2007, $48,750 of accrued interest
was recorded for this loan. In April 2006, $51,250 of accrued interest was
paid.
Total unpaid accrued interest at June 30, 2006 was $65,044. In July 2007, the
full principal and interest were paid.
On
July
4, 2007, the Company entered into a debt agreement with AMZ, a brokerage firm,
in Lahore, Pakistan for a total of $2,457,642. AMZ brokered the loan with 2
banks in Pakistan, Bank Islami Pakistan Ltd, and Security Leasing Corporation
Ltd. The loan called for 30% of the value of the loan to be collateralized
by
shares the Company owns in its Pakistan subsidiary, NetSol PK, plus an
additional 10% of the total share pledged to cover any extra margin due to
the
change in value of the pledged shares. Finance costs associated with this debt
totaled $39,445 and the Company received a net balance of $2,418,197. The loan
had a maturity of three months and an interest rate 18.35%, consisting of the
Karachi Interbank Offer Rate (“KIBOR” of 9.09%, a base rate of 4.26%, and a
mark-up rate of 5%. On October 4, 2007, the loan matured and was rolled over
for
an additional three months. The new interest rate was 14.75%. Upon maturity
on
January 4, 2008, payment of the note and accrued interest was extended for
six
weeks. On February 16, 2008, the full balance of the loan and accrued interest
of $256,608 was paid. All pledged shares were returned to the
Company.
In
August
2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC
Bank whereby the line of credit outstanding of £500,000 or approximately
$1,023,850 was converted into a loan payable with a maturity of three years.
The
interest rate is 7.5% with monthly payments of £15,558 or approximately $31,858.
The Parent has guaranteed payment of the loan in the event the subsidiary should
default on it. During the nine months ended March 31, 2008, £88,619 or
approximately $176,803 was paid on the principal of this note and £20,291 or
approximately $40,886 was paid in interest. The loan outstanding as of March
31,
2008 was £411,381 or $820,746; of this amount $268,580 is classified as current
maturities and $552,166 as long-term debt.
In
January 2008, the Company renewed its directors’ and officers’ liability
insurance for which the annual premium is $102,585. This is a reduction from
$163,620 in the prior year. In January 2008, the Company arranged financing
with
AFCO Credit Corporation with a down payment of $10,584 with the balance to
be
paid in nine monthly installments of $10,584 each. The balance owing as of
March
31, 2008 was $72,031.
CAPITAL
LEASE OBLIGATIONS
The
Company leases various fixed assets under capital lease arrangements expiring
in
various years through 2013. The assets and liabilities under capital leases
are
recorded at the lower of the present value of the minimum lease payments or
the
fair value of the asset. The assets are depreciated over the lesser of their
related lease terms or their estimated useful lives and are secured by the
assets themselves. Depreciation of assets under capital leases is included
in
depreciation expense for the nine months ended March 31, 2008 and
2007.
Following
is the aggregate minimum future lease payments under capital leases as of March
31, 2008:
Minimum
Lease Payments
|
|
|
|
Due
FYE 3/31/09
|
|
$
|
242,496
|
|
Due
FYE 3/31/10
|
|
|
243,499
|
|
Due
FYE 3/31/11
|
|
|
119,081
|
|
Due
FYE 3/31/12
|
|
|
10,229
|
|
Due
FYE 3/31/13
|
|
|
10,315
|
|
Total
Minimum Lease Payments
|
|
|
625,620
|
|
Interest
Expense relating to future periods
|
|
|
(92,063
|
)
|
Present
Value of minimum lease payments
|
|
|
533,557
|
|
Less:
Current portion
|
|
|
(262,630
|
)
|
Non-Current
portion
|
|
$
|
270,927
|
|
Following
is a summary of fixed assets held under capital leases as of March 31,
2008:
Computer
Equipment and Software
|
|
$
|
760,419
|
|
Furniture
and Fixtures
|
|
|
49,788
|
|
Vehicles
|
|
|
429,036
|
|
Building
Equipment
|
|
|
102,758
|
|
Total
|
|
|
1,342,001
|
|
Less:
Accumulated Depreciation
|
|
|
(632,919
|
)
|
Net
|
|
$
|
709,082
|
|
B)
BANK LOAN
The
Company’s Pakistan subsidiary, NetSol PK, has one loan with a bank, secured by
the Company’s assets. The note consists of the following as of March 31,
2008:
TYPE
OF
|
|
MATURITY
|
|
INTEREST
|
|
BALANCE
|
|
LOAN
|
|
DATE
|
|
RATE
|
|
USD
|
|
Export
Refinance
|
|
|
Every
6 months
|
|
|
7.50%
|
|
$
|
1,977,689
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,977,689
|
|
C)
OTHER PAYABLE - ACQUISITION
McCue
Systems (now NetSol Technologies North America, Inc.)
As
of
March 31, 2008, Other Payable - Acquisition consists of total payments of
$83,399 due to the former shareholders of McCue Systems, Inc.
On
June
30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note
17). 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 fiscal year ended June 30,
2007, $2,059,413 of the cash portion was paid to the former McCue shareholders
and in July 2006 the stock was issued. In June 2007, the second installment
on
the acquisition consisting of $903,955 in cash and 408,988 shares of the
Company’s restricted common stock became due and was recorded. The cash portion
was shown as “Other Payable - Acquisition” and the stock portion was issued on
June 27, 2007. The balance at June 30, 2007 was $962,406. During the three
months ended September 30, 2007, $879,007 of the cash was paid, leaving a
balance of $83,399 to be paid which represents the few remaining McCue
shareholders that have not been located as of the date of this report.
DUE
TO OFFICERS
The
officers of the Company, from time to time, loan funds to the Company.
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 had a
maturity date of three months and is interest free and had been automatically
extended. The terms of the loan were approved by the Company’s board of
directors. The balance of this loan was repaid in July 2007.
In
2006,
an officer of the Company loaned $150,000 to the Company for its immediate
short-term cash needs in the corporate office.
In
addition, the officers of the Company have advanced $34,173 as working capital.
The balance due to officers as of March 31, 2008 was $184,173.
NOTE
12 - DIVIDEND PAYABLE
PREFERRED
SHAREHOLDERS
The
Company has issued Series A 7% Cumulative Convertible Preferred Stock under
which dividends are payable (see Note 13). The dividend is to be paid quarterly,
either in cash or stock at the Company’s election. The dividend for the three
months ended March 31, 2008 totaled $33,508 and is reflected as a payable in
these consolidated financial statements. This amount was paid with the issuance
of 18,764 shares of the Company’s common stock in April 2008.
SUBSIDIARY
DIVIDEND
On
September 26, 2007, the Company’s joint-venture subsidiary, NetSol-TiG declared
a cash dividend of 100,000,000 Pakistan Rupees (“pkr”) or approximately
$1,651,522. Of this amount, the Company was due 50,520,000 pkr or approximately
$834,349. This amount was paid during the quarter ended December 31, 2007.
The
amount attributable to the minority holders is approximately $817,173 and is
reflected on these unaudited consolidated financial statements. As of December
31, 2007, the dividend had been paid to the Company and to the minority
holders.
NOTE
13 - STOCKHOLDERS’ EQUITY:
EQUITY
TRANSACTIONS
PREFERRED
STOCK
On
October 30, 2006, the convertible notes payable (see note 16) 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 June 30, 2007, the balance of the preferred shares was 4,130 shares. During
the nine months ended March 31, 2008, 2,210 shares of preferred stock were
converted into 1,339,392 shares of common stock valued at
$2,210,000.
During
the nine months ended March 31, 2008, the Company issued 95,824 shares of the
Company’s common stock valued at $189,165 as payment of the dividends
due.
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.
Business
Combinations
McCue
Systems, Inc. (now NetSol Technologies North America, Inc.)
In
June
2006, the Company completed the acquisition of McCue Systems, Inc. A total
of
37,731 shares valued at $64,612 are shown in “Shares to Be Issued” in these
consolidated financial statements representing McCue Systems shareholders that
have not been located as of this date.
NetSol
Omni (“Omni”)
In
December 2007, the Company entered into an agreement with the minority
shareholders of Omni, whereby the Company purchased the remaining 49.9% of
Omni
for 25,000 shares of the Company’s common stock valued at $76,750.
Private
Placements
In
June
2007, the Company sold 757,576 shares of the Company’s common stock to two
institutional investors for $1,250,000. The Company received $1,000,000 of
this
by June 30, 2007 and the remaining $250,000 cash due was received on July 2,
2007. The shares were issued in July 2007. This purchase agreement contained
a
“green shoe” clause whereby the investors had the option to purchase within six
months the same number of shares at the same price and receive the same number
of warrants. In October 2007, the investors exercised the “green shoe” clause
and the Company sold them 757,576 shares of the Company’s common stock valued at
$1,250,000. In addition, as part of the agreement, the investors were granted
378,788 warrants with an exercise price of $1.65 and expires in five
years.
Services
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 June 30, 2007, the
Company had recorded as “Stock to Be Issued” 10,000 shares valued at $15,000 or
$1.50 per share under this agreement. In October 2007, these shares were issued.
As the consultant hasn’t provided the service contracted on a timely basis, the
shares are only due to the consultant upon performance of the service,
therefore, during the quarter ended December 31, 2007, an additional 10,000
shares valued at $15,000 or $1.50 per share have been recorded as “Stock to be
Issued”. These shares were issued in March 2008.
In
October 2006, the Company entered into an agreement with an employee whereby
the
Company agreed to issue a total of 35,000 shares of the Company’s restricted
common stock valued at $132,650; vesting over one year on a quarterly basis.
In
January 2008, the first quarter of shares were vested and 8,750 shares valued
at
$33,162 were issued to the employee.
Options
and Warrants Exercised
During
the nine months ended March 31, 2008, the Company issued 599,538 shares of
its
common stock for the exercise of options valued at $1,023,099.
During
the nine months ended March 31, 2008, the Company issued 1,087,359 shares of
its
common stock for the exercise of warrants valued at $1,754,547.
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, 2008, $542,000 was collected and new receivables
of $211,500 were issued. In addition, the Company wrote-off $70,000 of
receivables as uncollectible from employees who have since left the Company.
The
balance at March 31, 2008 was $600,907.
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 as of March
31,
2008:
|
|
|
|
|
Aggregated
|
|
|
|
Exercise
|
|
Intrinsic
|
|
#
shares
|
|
Price
|
|
Value
|
Options:
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2007
|
7,102,363
|
|
$0.75
to $5.00
|
$
|
129,521
|
Granted
|
20,000
|
|
$1.60
|
|
|
Exercised
|
(599,538
|
)
|
$0.75
to $2.55
|
|
|
Expired
|
(10,000
|
)
|
$0.75
|
|
|
Outstanding
and exercisable, March 31, 2008
|
6,512,825
|
|
$0.75
to $5.00
|
$
|
345,413
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2007
|
3,002,725
|
|
$1.75
to $5.00
|
$
|
58,091
|
Granted
|
378,788
|
|
$1.65
|
|
|
Exercised
|
(1,269,199
|
)
|
$1.65
to $3.30
|
|
|
Expired
|
(120,000
|
)
|
$2.50
to $5.00
|
|
|
Outstanding
and exercisable, March 31, 2008
|
1,992,314
|
|
$1.65
to $5.00
|
$
|
304,780
|
Following
is a summary of the status of options and warrants outstanding at March 31,
2008:
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
Average
|
|
Weighted
|
|
|
|
Outstanding
|
|
Remaining
|
|
Ave
|
|
|
|
|
|
Contractual
|
|
Exericse
|
|
Exercise
Price
|
|
Exercisable
|
|
Life
|
|
Price
|
|
OPTIONS:
|
|
|
|
|
|
|
|
$0.01
- $0.99
|
|
|
14,000
|
|
|
3.82
|
|
|
0.75
|
|
$1.00
- $1.99
|
|
|
2,513,825
|
|
|
7.27
|
|
|
1.86
|
|
$2.00
- $2.99
|
|
|
3,155,000
|
|
|
6.98
|
|
|
2.68
|
|
$3.00
- $5.00
|
|
|
830,000
|
|
|
6.03
|
|
|
4.27
|
|
Totals
|
|
|
6,512,825
|
|
|
6.96
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
WARRANTS:
|
|
|
|
|
|
|
|
|
|
|
$1.00
- $1.99
|
|
|
1,527,652
|
|
|
3.68
|
|
|
1.79
|
|
$2.00
- $2.99
|
|
|
-
|
|
|
-
|
|
|
0
|
|
$3.00
- $5.00
|
|
|
464,662
|
|
|
1.39
|
|
|
3.31
|
|
Totals
|
|
|
1,992,314
|
|
|
3.14
|
|
|
2.15
|
|
Options:
During
the quarter ended September 30, 2007, 20,000 options were granted to two
officers with an exercise price of $1.60 per share and an expiration date of
ten
years, vesting immediately. Using the Black-Scholes method to value the options,
the Company recorded $24,320 in compensation expense for these options in the
accompanying consolidated financial statements.
The
Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate
Expected life
Expected volatility
|
4.5%
10
years
65%
|
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
25,000 warrants vested are exercisable until October 10, 2011 and all non-vested
warrants were cancelled at the time of the agreement termination. 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
Expected life
Expected volatility
Dividend yield
|
7.0%
5 years
100%
0%
|
In
October 2007, the investors exercised the “green shoe” clause and the Company
sold them 757,576 shares of the Company’s common stock valued at $1,250,000. In
addition as part of the agreement, the investors were granted 378,788 warrants
with an exercise price of $1.65 and expire in five years.
NOTE
14 - SEGMENT INFORMATION
The
Company has identified three global regions or segments for its products and
services; North America, Europe, and Asia-Pacific. Our reportable segments
are
business units located in different global regions. Each business unit provides
similar products and services; license fees for leasing and asset-based
software, related maintenance fees, and implementation and IT consulting
services. Separate management of each segment is required because each business
unit is subject to different operational issues and strategies due to their
particular regional location. We account for intercompany sales and expenses
as
if the sales or expenses were to third parties and eliminate them in the
consolidation. The following table presents a summary of operating information
and certain balance sheet information for the nine months ended March
31:
|
|
2008
|
|
2007
|
|
Revenues
from unaffiliated customers:
|
|
|
|
|
|
North
America
|
|
$
|
3,153,066
|
|
$
|
3,259,700
|
|
Europe
|
|
|
5,272,598
|
|
|
4,097,758
|
|
Asia
- Pacific
|
|
|
17,700,856
|
|
|
13,348,189
|
|
Consolidated
|
|
$
|
26,126,520
|
|
$
|
20,705,647
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
(2,617,524
|
)
|
$
|
(2,529,923
|
)
|
North
America
|
|
|
(252,458
|
)
|
|
(426,832
|
)
|
Europe
|
|
|
925,421
|
|
|
(698,115
|
)
|
Asia
- Pacific
|
|
|
7,377,401
|
|
|
4,412,323
|
|
Consolidated
|
|
$
|
5,432,840
|
|
$
|
757,453
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
(1,557,051
|
)
|
$
|
(8,115,730
|
)
|
North
America
|
|
|
(253,215
|
)
|
|
(417,691
|
)
|
Europe
|
|
|
867,620
|
|
|
(789,235
|
)
|
Asia
- Pacific
|
|
|
6,104,786
|
|
|
3,144,948
|
|
Consolidated
|
|
$
|
5,162,140
|
|
$
|
(6,177,708
|
)
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
14,204,166
|
|
$
|
11,089,939
|
|
North
America
|
|
|
2,250,831
|
|
|
2,002,815
|
|
Europe
|
|
|
5,278,163
|
|
|
5,582,204
|
|
Asia
- Pacific
|
|
|
36,066,209
|
|
|
24,918,496
|
|
Consolidated
|
|
$
|
57,799,369
|
|
$
|
43,593,454
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
1,051,595
|
|
$
|
1,056,482
|
|
North
America
|
|
|
121,525
|
|
|
97,432
|
|
Europe
|
|
|
211,523
|
|
|
187,114
|
|
Asia
- Pacific
|
|
|
884,826
|
|
|
742,379
|
|
Consolidated
|
|
$
|
2,269,469
|
|
$
|
2,083,407
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
4,189
|
|
$
|
3,103
|
|
North
America
|
|
|
51,882
|
|
|
20,820
|
|
Europe
|
|
|
52,570
|
|
|
200,847
|
|
Asia
- Pacific
|
|
|
1,877,010
|
|
|
1,057,657
|
|
Consolidated
|
|
$
|
1,985,651
|
|
$
|
1,282,427
|
|
Net
revenues by our various products and services provided are as
follows:
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Licensing
Fees
|
|
$
|
7,769,226
|
|
$
|
6,851,496
|
|
Maintenance
Fees
|
|
|
4,556,450
|
|
|
3,990,096
|
|
Services
|
|
|
13,800,844
|
|
|
9,864,055
|
|
Total
|
|
|
26,126,520
|
|
|
20,705,647
|
|
NOTE
15 - MINORITY INTEREST IN SUBSIDIARY
The
Company had minority interests in several of its subsidiaries. The balance
of
the minority interest as of March 31, 2008, was as follows:
|
|
|
|
MIN
INT
|
|
|
|
|
|
BALANCE
AT
|
|
SUBSIDIARY
|
|
MIN
INT
|
%
|
3/31/08
|
|
PK
Tech
|
|
|
39.11
|
%
|
$
|
4,283,250
|
|
NetSol-TiG
|
|
|
49.90
|
%
|
|
1,282,724
|
|
Connect
|
|
|
49.90
|
%
|
|
268,758
|
|
Total
|
|
|
|
|
$
|
5,834,732
|
|
NetSol
PK
In
August
2005, the Company’s wholly-owned subsidiary, NetSol
PK
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%. During the three months ended
September 30, 2007, the Company was notified by an affiliate party that they
had
sold their shares; therefore, the adjusted minority ownership was increased
to
37.21%. 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, 2008 and 2007, the subsidiary had net income of
$6,257,479 and $3,845,363, of which $1,882,231 and $1,375,247, respectively,
was
recorded against the minority interest. The balance of the minority interest
at
March 31, 2008 was $4,283,250
On
May 18
2007, the subsidiary’s board of directors authorized a 15% stock bonus dividend
to all its stockholders as of that date. The net value of shares issued to
minority holders was $345,415.
On
October 19, 2007, the subsidiary’s board of directors authorized a 22% stock
bonus dividend to all its stockholders as of that date. The net value of shares
issued to minority holders was $545,359.
In
February 2008, the Parent sold 948,100 shares of its ownership in NetSol PK
on
the open market with a value of $1,765,615. A net gain of $1,240,808 was
recorded as “Other Income” on these consolidated financial statements. As a
result of the sale, the minority interest percentage increased 1.9% to
39.11%.
NetSol-TiG:
In
December 2004, NetSol forged a new and a strategic relationship with a UK based
public company TiG Plc. A Joint Venture was established 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 offshore
development facility.
During
year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626 and the new subsidiary began operations during the quarter ended March
31, 2005.
For
the
nine months ended March 31, 2008 and 2007, the subsidiary had net income of
$1,609,396 and $777,794, of which $(131,124), after considering cash dividends
of $1,651,522, and $333,036 was recorded against the minority interest,
respectively. The balance of the minority interest at March 31, 2008 was
$1,282,724.
On
September 26, 2007, the subsidiary’s board of directors authorized a cash
dividend of 100,000,000 Pakistan Rupees (“pkr”) or approximately $1,651,522. Of
this amount, the Company is due 50,520,000 pkr or approximately $834,349. The
net value to the minority holders is approximately $817,173 and is reflected
on
these unaudited consolidated financial statements.
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. The partnership with Akhter Computers
is
designed to rollout connectivity and wireless services to the Pakistani national
market.
As
of
June 30, 2005, a total of $751,356 had been transferred to Connect, of which
$410,781 was from Akhter. In June 2006, a total of $40,000 cash was distributed
to each partner as a return of capital.
For
the
nine months ended March 31, 2008 and 2006, the subsidiary had net income of
$12,391 and net loss of $63,165, respectively, of which $6,183 and ($31,519)
respectively, was recorded against the minority interest. The balance of the
minority interest at March 31, 2008 was $268,758.
Omni
In
February 2006, the Company purchased for $60,012 50.1% of the outstanding shares
in Talk Trainers (Private) Limited, (“Talk Trainers”), a Pakistan corporation
for $60,012. Talk Trainers provides educational services, professional courses,
training and human resource services to the corporate sector. During the quarter
ended June 30, 2006, Talk Trainers changed their name to NetSol Omni. The major
stockholder of Talk Trainers was Mr. Ayub Ghauri, 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.
In
December 2007, the Company purchased the remaining 49.9% of the outstanding
shares from the minority shareholders with a historical value of $12,399 for
25,000 shares of the Company’s common stock valued at $76,750 (see note 13).
Also in December, the operations of the subsidiary were merged into the
operations of NetSol PK and will be reported under that subsidiary in the
future.
For
the
nine months ended March 31, 2008 and 2007, the subsidiary had a net loss of
$10,224 and $39,157, of which $0 and ($7,959) was recorded against the minority
interest. The balance of the minority interest at March 31, 2008 was
$0.
NOTE
16 - CONVERTIBLE NOTE PAYABLE
On
June
15, 2006, the Company entered into an agreement with five accredited investors
whereby the Company issued five convertible notes payable for an aggregate
principal value of $5,500,000. These notes bore 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 have immediately converted
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 did not violate Nasdaq Market Place rules. Due to the
limitation rule, none of the note was convertible as of September 30, 2006.
Upon
the approval of the stockholders, to the extent not already converted into
common shares, the Convertible Notes Payable would be immediately converted
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 Preferred Stock. During the quarter ended September 30, 2006,
$167,489 of interest was accrued. As of September 30, 2006, a total of $194,989
in accrued interest had been recorded on the notes and was added to the
principal of the notes. During the fiscal year ended June 30, 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 fiscal year ended June 30, 2007, the Company
accrued $168,667 as liquidation damages due and has paid the full amount. As
a
result, the Company recorded an additional $12,223 in liquidation damages during
the fiscal year ended June 30, 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
Expected life
Expected volatility
Dividend yield
|
6.00%
5 years
100%
0%
|
Under
the
agreement, any future financing whereby warrants are issued at an exercise
price
lower than the exercise price of the warrants in the agreement, an adjustment
to
the exercise price is to be made. During the fiscal year ended June 30, 2007,
a
financing was completed which included the issuance of warrants at an exercise
price of $1.65. Following the formula set out in the agreement, it was
determined that the adjusted exercise price was $1.93 per share. As a result,
the Company revalued the warrants for the adjusted exercise price using the
Black-Scholes model at $2,120,000 and recorded an expense of $11,667 for the
repricing of the warrants. The Black-Scholes pricing model used the same
assumptions as for the original valuation of the warrants.
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
Expected life
Expected volatility
Dividend yield
|
6.00%
2 years
100%
0%
|
NOTE
17 - ACQUISITION OF McCUE SYSTEMS (now NetSol Technologies North America,
Inc.)
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
June
2007, the second installment for the purchase of McCue was determined based
on
the audited revenues for the twelve month period ending December 31, 2006.
Based
on the earn-out formula in the purchase agreement, $1,807,910 was due in cash
and stock. On June 27, 2007, 397,700 shares of the 408,988 shares due of the
Company’s restricted common stock were issued to the former shareholders of
McCue. The balance represents former shareholders of McCue that haven’t been
located as of this date. In July and August 2007, $450,000 and $429,007 of
the
cash portion was paid to the shareholders. As a result of the second payment
the
Company recorded an addition of $1,615,595 to goodwill.
NOTE
18 - SUBSEQUENT EVENTS
On
May 2,
2008, the Company held its Annual General meeting at which time the shareholders
voted on amendment of the Company’s articles of incorporation to increase the
number of authorized shares of capital stock from 50,000,000 to 100,000,000
and
to
adopted
the Company’s 2008 Equity Incentive Plan (“2008 Plan”). Both of these proposals
were passed by a majority of the shareholders voting.
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 ending March 31,
2008.
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 global information technology
solution provider. NetSol’s global resource base includes diversely qualified
and experienced resources across software development, project management,
operations & multiple products or services offerings. NetSol helps clients
to identify, evaluate and implement technology solutions to meet their strategic
business challenges and maximize their bottom line. By utilizing its worldwide
resources, NetSol delivers high-quality, cost-effective equipment and vehicle
finance portfolio management solutions. The Company also delivers managed IT
services ranging from consulting and application development to systems
integration and development outsourcing. NetSol’s commitment to quality is
demonstrated by its achievement of both ISO 9001 and SEI (Software Engineering
Institute) CMMi (Capability Maturity Model) Level 5 assessment,
a
distinction shared by only 94 companies worldwide. The Company’s clients include
global automakers, financial institutions, technology companies and governmental
agencies.
NetSol’s largest customers, DaimlerChrysler Services and Toyota, rank the
Company as a preferred vendor in more than 40 countries. Founded in 1996, NetSol
is headquartered in Calabasas, California. NetSol Technologies also has
operations and/or offices in: Horsham, United Kingdom; the San Francisco Bay
Area, California, USA; Adelaide, and Sydney, Australia; Beijing, China; Lahore,
Islamabad, Rawalpindi and Karachi, Pakistan; and, Bangkok, Thailand.
NetSol
offers a broad spectrum of IT products and IT services which management believes
deliver a high return on investment for its customers. NetSol has nearly
perfected its delivery capabilities by continuously investing in maturing its
software development and Quality Assurance (“QA”) processes. NetSol 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 facility in Beijing, China. A major portion of NetSol’s
revenues are derived from exports in general and LeaseSoft in particular. 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 has initiated a strategic evolution of it business offerings to provide
its customers a BestShoring (TM) solutions strategy. This strategy yields an
improved return on investment while delivering in-depth globally sourced domain
experience as well as localized support to its clients. BestShoring (TM) is
simply defined as NetSol Technologies’ ability to draw upon its global resource
base and construct the best possible solution and price for each and every
customer. Unlike traditional outsourcing offshore vendors, NetSol draws upon
an
international workforce and delivery capability to ensure a “BestShoring(TM)
delivers a BestSolution(TM)” approach.
Information
technology services are valuable only if they fulfill the business strategy
and
project objectives set forth by the customer. NetSol’s expert consultants have
the technical knowledge and business experience to ensure the optimization
of
the development process in alignment with basic business principles. 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 IT Consulting & Services; NetSol Defense Division;
Business Intelligence, Information Security, Outsourcing Services and Software
Process Improvement Consulting; maintenance and support of existing systems;
and, project management.
In
addition to services, our offerings include our flagship solution, LeaseSoft.
LeaseSoft, a robust suite of four software applications, is an end-to-end
solution for the lease and finance industry covering the complete leasing and
finance cycle starting from quotation origination through end of contract.
The
four software applications under LeaseSoft have been designed and developed
for
a highly flexible setting and are capable of dealing with multinational,
multi-company, multi-asset, multi-lingual, multi-distributor and
multi-manufacturer environments. Each application is a complete system in itself
and can be used independently to address specific sub-domains of the
leasing/financing cycle. NetSol recently added LeaseSoft Fleet Management System
(FMS). The Company has already signed an agreement for FMS with a major
automotive company in the Asia Pacific region.
LeaseSoft
is a result of more than eight years of effort resulting in over 60 modules
grouped in four comprehensive applications. These four applications are complete
systems in themselves and can be used independently to exhaustively address
specific sub-domains of the leasing/financing cycle. When used together, they
fully automate the entire leasing / financing cycle.
Beyond
LeaseSoft, our product offerings include LeasePak. LeasePak provides the leasing
technology industry with 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
North
America 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.
New
product offerings and services include: inBanking, which provides full process
automation and decision support in the front, middle and back offices of
treasury and capital markets operations; LeaseSoft Portals and Modules through
our European operations; LeasePak 6.0a of our LeasePak product suite; and,
NetSol Technology Institute, our specialized career and technology program
in
Pakistan.
The
Company is continuing with its consolidation of operating units, placing up
to
60% of all service and product operations under the direct control of its center
of excellence, in Lahore, Pakistan. This consolidation enables the Company
to
coordinate and streamline product, service and marketing while taking further
advantage of the cost arbitrage offered by our highly trained, highly
productive, Pakistani resources. This consolidation follows the successful
integration of the operations acquired in the United Kingdom and Burlingame,
California and should facilitate the use of these regional offices as platforms
for launching an expanding services offering, relying on the experience and
resources in Pakistan and our product offerings in North America and Europe.
While
the
company will no longer be divided into groups and regions, the Company will
continue to maintain regional offices in Burlingame, California for North
America and the Parent headquarters in Calabasas, California; in Horsham, the
United Kingdom, for Europe and; our “center of excellence” operations in Lahore,
Pakistan for Asia Pacific. The Company will continue to maintain country and/or
services or products specific sales offices in China, Australia, Thailand,
and
Pakistan.
PLAN
OF OPERATIONS
Management
has set the following goals for NetSol for the next 12 months:
|
·
|
Execute
a diversification plan to create multiple development centers in
other
emerging markets such as the Philippines, Eastern Europe, and Central
and
South America.
|
|
· |
Complete
the integration of regional management, customers, and products within
each of NetSol’s regional offices in US, UK, and
Thailand.
|
|
·
|
The
new senior management in the North American division to effectively
steer
the company towards a successful launch of Global Business Services
model,
global solutions, new verticals utiliziing the new concept of
BestShoring(TM) for the BestSolution
model.
|
|
·
|
Efficiency,
cost effectiveness and better leveraging the offshore and near-shore
development capabilities.
|
|
·
|
Invest
aggressively in the North American division’s sales organization,
infrastructure and resources.
|
|
·
|
Continued
management and products reorganization and restructuring in every
NetSol
subsidiary.
|
|
·
|
Introduce
and market two LeaseSoft modules: WSF and CAPS in the US
market.
|
|
·
|
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.
|
|
·
|
Increase
Capex, to enhance communications and development infrastructure.
Roll out
a second phase of construction of a 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-Europe 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, NTNA and NTE affiliations with ELA (Equipment Leasing
Association of North America) 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 explosive growth
in
the economy and automation in private and public sectors.
|
Funding
and Investor Relations goals and activities for the next 12 months:
|
·
|
Continue
to utilize our IR and communications firm in New York to position
NetSol
as a strong IT company with unlimited growth and upside
outlook.
|
|
·
|
Increase
the valuation of NetSol stock price in the US resulting in investors
and
employees exercising options and
warrants.
|
|
·
|
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. Increase activities
to
present NetSol in various investor forums aimed at analysts and micro
cap
funds.
|
|
·
|
Continue
to efficiently and prudently manage cash flow and budgets. Subsidiaries
will contribute to support the headquarters and corporate
overheads.
|
|
·
|
Make
every effort to enhance NetSol’s market capitalization in the US. At least
two research analysts recently upgraded the target price from $4
to
$6.
|
Improving
the Bottom Line goals:
|
·
|
Grow
the top line; enhance gross profit margins to 65% by leveraging the
low-cost development facility in Lahore and by utilizing the
BestShoring(TM) for the BestSolution
model.
|
|
·
|
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.
|
|
·
|
Cost
efficient management of every operation and continue further consolidation
to improve bottom line.
|
|
·
|
Initiate
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
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.
NetSol
PK
was certified as an ISO 27001 company in January 2008. In December 2007,
NetSol’s flagship LeaseSoft solution received the Best
Financial Industry Application Award for 2007 by the Asia Pacific ICT Alliance
(APICTA) located in Singapore.
MATERIAL
TRENDS AFFECTING NETSOL
NetSol
has identified the following material trends affecting NetSol
Positive
trends:
|
·
|
Outsourcing
of services and software development is growing
worldwide.
|
|
·
|
Very
robust and rich financial markets in the UAE and Middle East region
offer
new opportunities for capital and exposure.
|
|
·
|
The
leasing and finance industry in North America has increased to about
$260
billion and $700 billion worldwide.
|
|
·
|
Present
sluggish economy is proving to be a catalyst for low cost solutions
providers, globally.
|
|
·
|
Several
new major captive auto manufacturers such as Nissan Auto Finance
in China
and BMW in Hong Kong went live, signaling very positive demand for
LeaseSoft solutions.
|
|
·
|
On
December 17, 2007, a seven page supplement in USA TODAY featuring
Pakistan
highlighted NetSol Technologies, Inc. as a leading IT company in
Pakistan
with focused growth in the US and continued success in the Chinese,
European and emerging markets.
|
|
·
|
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 are 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.
|
|
·
|
Significant
emergence of new IT destination in Central and South America, diversifying
opportunities for lower cost
locations.
|
|
·
|
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 offer a 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.
|
|
·
|
Overall
economic expansion worldwide and explosive growth in the emerging
markets
specifically.
|
|
·
|
Political
stability and formation of newly democratically elected government
in
Pakistan.
|
|
·
|
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 $15 billion; stabilizing reforms of government and financial
institutions; improved credit ratings in the western markets, and
elimination of corruption at the highest
level.
|
Negative
trends:
.
|
·
|
Persistent
negative media coverage and headline news on daily development in
Pakistan
has cautioned the market and investors creating anxiety and
uncertainty.
|
|
·
|
The
challenging times in the US financial sectors as a result of sub-prime
crisis, hike in oil prices and declining home sales has resulted
in slowed
economy and much more cautious IT spending
budgets.
|
|
·
|
The
disturbance in the Middle East, Iraq War, 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.
|
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, 2007 and 2006, 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, 2008 as compared to the Quarter Ended March 31,
2007:
Net
revenues and income for the quarter ended March 31, 2008 and 2007 (unaudited)
are broken out among the subsidiaries as follows:
|
|
2008
|
|
2007
|
|
|
|
Revenue
|
|
%
|
|
Net
Income
|
|
Revenue
|
|
%
|
|
Net
Income
|
|
Corporate
headquarters
|
|
$
|
-
|
|
|
0.00
|
%
|
$
|
405,152
|
|
$
|
-
|
|
|
0.00
|
%
|
$
|
(872,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
- North America
|
|
|
871,548
|
|
|
9.61
|
%
|
|
(293,305
|
)
|
|
907,120
|
|
|
11.91
|
%
|
|
(217,824
|
)
|
|
|
|
871,548
|
|
|
9.61
|
%
|
|
(293,305
|
)
|
|
907,120
|
|
|
11.91
|
%
|
|
(217,824
|
)
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
UK
|
|
|
488,129
|
|
|
5.38
|
%
|
|
429,192
|
|
|
43,082
|
|
|
0.57
|
%
|
|
(192,032
|
)
|
NetSol
- Europe
|
|
|
1,471,989
|
|
|
16.23
|
%
|
|
32,508
|
|
|
1,088,975
|
|
|
14.30
|
%
|
|
(296,591
|
)
|
|
|
|
1,960,118
|
|
|
21.62
|
%
|
|
461,700
|
|
|
1,132,057
|
|
|
14.86
|
%
|
|
(488,623
|
)
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
PK
|
|
|
4,965,464
|
|
|
54.77
|
%
|
|
2,418,136
|
|
|
4,580,093
|
|
|
60.14
|
%
|
|
1,670,550
|
|
NetSol-TiG
|
|
|
989,268
|
|
|
10.91
|
%
|
|
413,454
|
|
|
654,356
|
|
|
8.59
|
%
|
|
277,339
|
|
NetSol
Connect
|
|
|
211,520
|
|
|
2.33
|
%
|
|
6,756
|
|
|
245,102
|
|
|
3.22
|
%
|
|
4,237
|
|
NetSol-Omni
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
17,725
|
|
|
0.23
|
%
|
|
(11,213
|
)
|
NetSol-Abraxas
Australia
|
|
|
68,895
|
|
|
0.76
|
%
|
|
(11,405
|
)
|
|
79,513
|
|
|
1.04
|
%
|
|
(22,547
|
)
|
|
|
|
6,235,147
|
|
|
68.77
|
%
|
|
2,826,941
|
|
|
5,576,789
|
|
|
73.22
|
%
|
|
1,918,366
|
|
Totals
|
|
$
|
9,066,813
|
|
|
100.00
|
%
|
$
|
3,400,488
|
|
$
|
7,615,966
|
|
|
100.00
|
%
|
$
|
339,106
|
|
The
following table sets forth the items in our unaudited consolidated statement
of
operations for the three months ended March 31, 2008 and 2007 as a percentage
of
revenues.
|
|
For
the Three Months
Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Net
Revenues:
|
|
|
|
%
|
|
|
|
%
|
|
Licence
fees
|
|
$
|
2,998,867
|
|
|
33.08
|
%
|
$
|
2,554,289
|
|
|
33.54
|
%
|
Maintenance
fees
|
|
|
1,482,654
|
|
|
16.35
|
%
|
|
1,335,893
|
|
|
17.54
|
%
|
Services
|
|
|
4,585,292
|
|
|
50.57
|
%
|
|
3,725,784
|
|
|
48.92
|
%
|
Total
revenues
|
|
|
9,066,813
|
|
|
100.00
|
%
|
|
7,615,966
|
|
|
100.00
|
%
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
2,620,722
|
|
|
28.90
|
%
|
|
2,234,809
|
|
|
29.34
|
%
|
Travel
|
|
|
394,841
|
|
|
4.35
|
%
|
|
447,288
|
|
|
5.87
|
%
|
Repairs
and maintenance
|
|
|
99,262
|
|
|
1.09
|
%
|
|
133,961
|
|
|
1.76
|
%
|
Insurance
|
|
|
30,005
|
|
|
0.33
|
%
|
|
51,294
|
|
|
0.67
|
%
|
Depreciation
and amortization
|
|
|
316,652
|
|
|
3.49
|
%
|
|
279,405
|
|
|
3.67
|
%
|
Other
|
|
|
522,013
|
|
|
5.76
|
%
|
|
790,927
|
|
|
10.39
|
%
|
Total
cost of sales
|
|
|
3,983,495
|
|
|
43.93
|
%
|
|
3,937,684
|
|
|
51.70
|
%
|
Gross
profit
|
|
|
5,083,318
|
|
|
56.07
|
%
|
|
3,678,282
|
|
|
48.30
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
898,686
|
|
|
9.91
|
%
|
|
825,586
|
|
|
10.84
|
%
|
Depreciation
and amortization
|
|
|
477,630
|
|
|
5.27
|
%
|
|
483,801
|
|
|
6.35
|
%
|
Bad
debt expense
|
|
|
-
|
|
|
0.00
|
%
|
|
(231
|
)
|
|
0.00
|
%
|
Salaries
and wages
|
|
|
1,034,784
|
|
|
11.41
|
%
|
|
915,481
|
|
|
12.02
|
%
|
Professional
services, including non-cash compensation
|
|
|
114,436
|
|
|
1.26
|
%
|
|
254,359
|
|
|
3.34
|
%
|
General
and adminstrative
|
|
|
792,499
|
|
|
8.74
|
%
|
|
687,881
|
|
|
9.03
|
%
|
Total
operating expenses
|
|
|
3,318,035
|
|
|
36.60
|
%
|
|
3,166,877
|
|
|
41.58
|
%
|
Income
from operations
|
|
|
1,765,283
|
|
|
19.47
|
%
|
|
511,405
|
|
|
6.71
|
%
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
(891
|
)
|
|
-0.01
|
%
|
|
(6,729
|
)
|
|
-0.09
|
%
|
Liquidation
damages
|
|
|
-
|
|
|
0.00
|
%
|
|
(47,057
|
)
|
|
-0.62
|
%
|
Fair
market value of warrants issued
|
|
|
-
|
|
|
0.00
|
%
|
|
(33,987
|
)
|
|
-0.45
|
%
|
Interest
expense
|
|
|
(121,651
|
)
|
|
-1.34
|
%
|
|
(83,819
|
)
|
|
-1.10
|
%
|
Interest
income
|
|
|
84,363
|
|
|
0.93
|
%
|
|
46,867
|
|
|
0.62
|
%
|
Gain
on sale of subsidiary shares
|
|
|
1,240,808
|
|
|
13.69
|
%
|
|
-
|
|
|
0.00
|
%
|
Other
income and (expenses)
|
|
|
447,889
|
|
|
4.94
|
%
|
|
10,081
|
|
|
0.13
|
%
|
Total
other income (expenses)
|
|
|
1,650,518
|
|
|
18.20
|
%
|
|
(114,644
|
)
|
|
-1.51
|
%
|
Net
income (loss) before minority interest in
subsidiary
|
|
|
3,415,801
|
|
|
37.67
|
%
|
|
396,761
|
|
|
5.21
|
%
|
Minority
interest in subsidiary
|
|
|
(1,121,787
|
)
|
|
-12.37
|
%
|
|
(568,237
|
)
|
|
-7.46
|
%
|
Income
taxes
|
|
|
(15,314
|
)
|
|
-0.17
|
%
|
|
(57,655
|
)
|
|
-0.76
|
%
|
Net
income (loss)
|
|
|
2,278,700
|
|
|
25.13
|
%
|
|
(229,131
|
)
|
|
-3.01
|
%
|
Dividend
required for preferred stockholders
|
|
|
(33,508
|
)
|
|
-0.37
|
%
|
|
(94,088
|
)
|
|
-1.24
|
%
|
Net
income (loss) applicable to common
shareholders
|
|
|
2,245,192
|
|
|
24.76
|
%
|
|
(323,219
|
)
|
|
-4.24
|
%
|
Net
revenues for the quarter ended March 31, 2008 were $9,066,813 as compared to
$7,615,966 for the quarter ended March 31, 2007. This reflects an increase
of
$1,450,847or 19% in the current quarter as compared to the quarter ended March
31, 2007. Revenue from services, which includes consulting and implementation,
increased 23% from $3,725,784 to $4,585,292. License and maintenance revenues
both grew between 11-17% over the comparable quarter in fiscal 2007. The
increase is attributable mostly to growth in services business, several new
license sales of LeaseSoft in China, growing outsourcing business of NetSol-TIG
(JV) and additional maintenance work. In addition, several new verticals have
been formed in Lahore and are now producing revenues. 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 $4 million). This is now expected
to
occur in within the next two quarters. 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
two pilot projects in the province of Punjab in 2007, and a recent one in
Islamabad. NetSol anticipates winning 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 globally
at
an advance stage of closing or decision making.
NetSol
made a significant move by acquiring 100% of a US based software company McCue
Systems Inc., (now “NetSol Technologies North America”) (“NTNA”) in June 2006.
The acquisition of NTNA has provided the Company with a very strong customer
base and an established product in the leasing vertical. We have recently hired
a new and very experienced management team in the operations, sales and
marketing areas. This new team has already integrated very effectively with
NetSol at global level. The integration of
a
dedicated offshore team into NTNA Development Department is continuing, with
ongoing projects and management processes in place. In addition, the entire
NTNA
team is working to increase customer satisfaction and improve the quality of
the
product which will have an effect of increasing sales to existing customers
and
greater referrals.
Due
to
the revision in our pricing policy, LeaseSoft license value in APAC is in the
range of $1.0 to $2.0 million, without factoring in services maintenance and
implementation fees. Normally, NetSol negotiates 20-25% 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. As the Company
continues to sell more of these licenses, management believes it is possible
that the margins could increase to upward of 60%.
During
the current quarter, in our APAC division, a major automotive captive in China
went live with our LeaseSoft Solution. NetSol has signed a contract with one
of
the largest leasing companies in Saudi Arabia for LeaseSoft and this contract
marks NetSol’s entry into the lucrative Middle East region. NetSol won a
contract with a leading bank in Pakistan for Basel II advisory services This
opportunity for NetSol represents a new business sector vertical for the
Company. In addition, NetSol has launched a new information security management
initiative in Pakistan, called “Secure Pakistan”. The project aims to secure
critical information, while in storage or transfer, from theft.
Our
joint-venture, NetSol-TiG continues to grow overall. The total programmer
strength is over 130 people dedicated to the joint-venture projects. In
addition, two new projects in the United States of America were signed and
Innovation Group’s release management of five different countries has recently
been given to our Extended Innovation (“EI”) division which works with the
joint-venture.
The
gross
profit was $5,083,318 in the quarter ending March 31, 2008 as compared with
$3,678,282 for the same quarter of the previous year for an increase of 38%
or
$1,405,036. The gross profit percentage for the quarter increased approximately
16% to 56% from 48% in the quarter ended March 31, 2007. The cost of sales
was
$3,983,495 in the current quarter compared to $3,937,684 in the comparable
quarter of fiscal 2007. As a percentage of sales, it decreased 7.8% from 51.7%
for the quarter ended March 31, 2007 to 43.9% in the current quarter. Salaries
and consultant fees increased by $385,913 from $2,234,809 in the prior
comparable quarter to $2,620,722, as a percentage of sales, it decreased
slightly from 29.34% in the prior comparable quarter to 28.9% in the current
quarter. The gross profit margin is expected to continue to improve as the
integration of both the operations in Horsham, UK and Burlingame, US are fully
integrated and cost savings are achieved. The Company has invested heavily
in
its infrastructure, both in people and equipment during the current fiscal
year
as it situated itself for increased growth organically and from the acquisitions
of NTE in February 2005 and NTNA in June 2006.
Operating
expenses were $3,318,035 for the quarter ending March 31, 2008 as compared
to
$3,166,877, for the corresponding period last year for a slight increase of
$151,158. As a percentage of sales it decreased 5% from 42% to 37%. Depreciation
and amortization expense amounted to $477,630 and $483,801 for the quarter
ended
March 31, 2008 and 2007, respectively. Combined salaries and wage costs were
$1,034,784 and $915,481 for the comparable periods, respectively, or an increase
of $119,303 from the corresponding period last year. As a percentage of sales,
these costs decreased slightly from 12% to 11%. General and administrative
expenses were $792,499 and $687,881 for the quarters ended March 31, 2008 and
2007, respectively, an increase of $104,618 or 15%. As a percentage of sales,
these expenses were 8.7% in the current quarter compared to 9.0% in the
comparable quarter.
Selling
and marketing expenses were $898,686 and $825,586, in the quarter ended March
31, 2008 and 2007, respectively, reflecting the growing sales activity of the
Company. This reflects a 9% increase or $73,100. As a percentage of sales,
it
decreased 1% to 10% from 11%. Professional services expense decreased 55% to
$114,436 in the quarter ended March 31, 2008, from $254,359 in the corresponding
period last year.
Income
from operations was $1,765,283 compared to $511,405 for the quarters ended
March
31, 2008 and 2007, respectively. This represents an increase of $1,253,878
for
the quarter compared with the comparable period in the prior year. As a
percentage of sales, net income from operations was 19% in the current quarter
compared to 7% in the prior period.
Net
income was $2,301,785 compared to net loss of $229,131 for the quarters ended
March 31, 2008 and 2007, respectively. This is an increase of $2,483,859
compared to the prior year. The current fiscal quarter amount includes a net
reduction of $1,098,703 compared to $568,237 in the prior period for the 49.9%
minority interest in Connect, and NetSol-TiG owned by another party, and the
39.11%/37.21% minority interest in NetSol PK. Interest expense was $121,651
in
the current quarter as compared to $83,819 in the comparable period. The current
quarter includes a net gain on the sale of some of the Parent’s shares in NTPK
on the open market of $1,240,808. Net income per share, basic and diluted,
was
$0.09 as compared to net loss per share, basic and diluted of $0.01 for the
quarters ended March 31, 2008 and 2007.
The
net
EBITDA income was $3,233,032 compared to $675,549 after amortization and
depreciation charges of $794,282 and $763,206, income taxes of $15,314 and
$57,655, and interest expense of $121,651 and $83,819, respectively. The EBITDA
earning per share, basic and diluted was $0.13 for the quarter ended March
31,
2008 and $0.04 for the quarter ended March 31, 2007. 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
Months Ended March 31, 2008 as compared to the Nine Months Ended
March 31, 2007:
Net
revenues and income for the nine months ended March 31, 2008 and 2007
(unaudited) are broken out among the subsidiaries as follows:
|
|
2008
|
|
2007
|
|
|
|
Revenue
|
|
%
|
|
Net
Income
|
|
Revenue
|
|
%
|
|
Net
Income
|
|
Corporate
headquarters
|
|
$
|
-
|
|
|
0.00
|
%
|
$
|
(1,580,134
|
)
|
$
|
4,500
|
|
|
0.02
|
%
|
$
|
(8,115,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
- North America
|
|
|
3,153,066
|
|
|
12.07
|
%
|
|
(253,215
|
)
|
|
3,255,200
|
|
|
15.72
|
%
|
|
(417,691
|
)
|
|
|
|
3,153,066
|
|
|
12.07
|
%
|
|
(253,215
|
)
|
|
3,255,200
|
|
|
15.72
|
%
|
|
(417,691
|
)
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
UK
|
|
|
647,901
|
|
|
2.48
|
%
|
|
380,136
|
|
|
94,604
|
|
|
0.46
|
%
|
|
(706,443
|
)
|
NetSol
- Europe
|
|
|
4,624,697
|
|
|
17.70
|
%
|
|
487,484
|
|
|
4,003,154
|
|
|
19.33
|
%
|
|
(82,792
|
)
|
|
|
|
5,272,598
|
|
|
20.18
|
%
|
|
867,620
|
|
|
4,097,758
|
|
|
19.79
|
%
|
|
(789,235
|
)
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
PK
|
|
|
13,844,764
|
|
|
52.99
|
%
|
|
6,257,479
|
|
|
10,488,631
|
|
|
50.66
|
%
|
|
3,845,363
|
|
NetSol-TiG
|
|
|
2,940,146
|
|
|
11.25
|
%
|
|
1,609,396
|
|
|
1,703,982
|
|
|
8.23
|
%
|
|
777,794
|
|
NetSol
Connect
|
|
|
616,383
|
|
|
2.36
|
%
|
|
12,391
|
|
|
739,834
|
|
|
3.57
|
%
|
|
(63,165
|
)
|
NetSol-Omni
|
|
|
30,366
|
|
|
0.12
|
%
|
|
(10,224
|
)
|
|
43,984
|
|
|
0.21
|
%
|
|
(39,157
|
)
|
NetSol-Abraxas
Australia
|
|
|
269,197
|
|
|
1.03
|
%
|
|
15,337
|
|
|
371,758
|
|
|
1.80
|
%
|
|
(1,806
|
)
|
|
|
|
17,700,856
|
|
|
67.75
|
%
|
|
7,884,379
|
|
|
13,348,189
|
|
|
64.47
|
%
|
|
4,519,029
|
|
Totals
|
|
$
|
26,126,520
|
|
|
100.00
|
%
|
$
|
6,918,650
|
|
$
|
20,705,647
|
|
|
99.98
|
%
|
$
|
(4,803,627
|
)
|
The
following table sets forth the items in our unaudited consolidated statement
of
operations for the nine months ended March 31, 2008 and 2007 as a percentage
of
revenues.
|
|
|
For
the Nine Months
Ended
March 31,
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
Net
Revenues: |
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
Licence
fees
|
|
$
|
7,769,226
|
|
|
29.74
|
%
|
$
|
6,851,496
|
|
|
33.09
|
%
|
Maintenance
fees
|
|
|
4,556,450
|
|
|
17.44
|
%
|
|
3,990,096
|
|
|
19.27
|
%
|
Services
|
|
|
13,800,844
|
|
|
52.82
|
%
|
|
9,864,055
|
|
|
47.64
|
%
|
Total
revenues
|
|
|
26,126,520
|
|
|
100.00
|
%
|
|
20,705,647
|
|
|
100.00
|
%
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
7,342,743
|
|
|
28.10
|
%
|
|
6,608,606
|
|
|
31.92
|
%
|
Travel
|
|
|
972,998
|
|
|
3.72
|
%
|
|
1,195,315
|
|
|
5.77
|
%
|
Repairs
and maintenance
|
|
|
332,448
|
|
|
1.27
|
%
|
|
313,514
|
|
|
1.51
|
%
|
Insurance
|
|
|
153,760
|
|
|
0.59
|
%
|
|
153,595
|
|
|
0.74
|
%
|
Depreciation
and amortization
|
|
|
847,288
|
|
|
3.24
|
%
|
|
693,703
|
|
|
3.35
|
%
|
Other
|
|
|
1,341,513
|
|
|
5.13
|
%
|
|
1,479,478
|
|
|
7.15
|
%
|
Total
cost of sales
|
|
|
10,990,750
|
|
|
42.07
|
%
|
|
10,444,211
|
|
|
50.44
|
%
|
Gross
profit
|
|
|
15,135,770
|
|
|
57.93
|
%
|
|
10,261,436
|
|
|
49.56
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
2,817,908
|
|
|
10.79
|
%
|
|
2,105,920
|
|
|
10.17
|
%
|
Depreciation
and amortization
|
|
|
1,422,181
|
|
|
5.44
|
%
|
|
1,389,704
|
|
|
6.71
|
%
|
Bad
debt expense
|
|
|
3,277
|
|
|
0.01
|
%
|
|
117,267
|
|
|
0.57
|
%
|
Salaries
and wages
|
|
|
2,758,434
|
|
|
10.56
|
%
|
|
2,914,707
|
|
|
14.08
|
%
|
Professional
services, including non-cash compensation
|
|
|
413,437
|
|
|
1.58
|
%
|
|
774,203
|
|
|
3.74
|
%
|
General
and adminstrative
|
|
|
2,287,693
|
|
|
8.76
|
%
|
|
2,202,182
|
|
|
10.64
|
%
|
Total
operating expenses
|
|
|
9,702,930
|
|
|
37.14
|
%
|
|
9,503,983
|
|
|
45.90
|
%
|
Income
from operations
|
|
|
5,432,840
|
|
|
20.79
|
%
|
|
757,453
|
|
|
3.66
|
%
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
(33,044
|
)
|
|
-0.13
|
%
|
|
(19,067
|
)
|
|
-0.09
|
%
|
Beneficial
conversion feature
|
|
|
-
|
|
|
0.00
|
%
|
|
(2,208,334
|
)
|
|
-10.67
|
%
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
-
|
|
|
0.00
|
%
|
|
(2,803,691
|
)
|
|
-13.54
|
%
|
Liquidation
damages
|
|
|
-
|
|
|
0.00
|
%
|
|
(180,890
|
)
|
|
-0.87
|
%
|
Fair
market value of warrants issued
|
|
|
-
|
|
|
0.00
|
%
|
|
(33,987
|
)
|
|
-0.16
|
%
|
Interest
expense
|
|
|
(544,597
|
)
|
|
-2.08
|
%
|
|
(543,342
|
)
|
|
-2.62
|
%
|
Interest
income
|
|
|
159,801
|
|
|
0.61
|
%
|
|
265,916
|
|
|
1.28
|
%
|
Gain
on sale of subsidiary shares
|
|
|
1,240,808
|
|
|
4.75
|
%
|
|
-
|
|
|
0.00
|
%
|
Other
income and (expenses)
|
|
|
709,113
|
|
|
2.71
|
%
|
|
88,935
|
|
|
0.43
|
%
|
Total
other income (expenses)
|
|
|
1,532,081
|
|
|
5.86
|
%
|
|
(5,434,460
|
)
|
|
-26.25
|
%
|
Net
income (loss) before minority interest in
subsidiary
|
|
|
6,964,921
|
|
|
26.66
|
%
|
|
(4,677,007
|
)
|
|
-22.59
|
%
|
Minority
interest in subsidiary
|
|
|
(1,756,509
|
)
|
|
-6.72
|
%
|
|
(1,374,081
|
)
|
|
-6.64
|
%
|
Income
taxes
|
|
|
(46,272
|
)
|
|
-0.18
|
%
|
|
(126,620
|
)
|
|
-0.61
|
%
|
Net
income (loss)
|
|
|
5,162,140
|
|
|
19.76
|
%
|
|
(6,177,708
|
)
|
|
-29.84
|
%
|
Dividend
required for preferred stockholders
|
|
|
(145,033
|
)
|
|
-0.56
|
%
|
|
(159,686
|
)
|
|
-0.77
|
%
|
Subsidiary
dividend (minority holders portion)
|
|
|
(817,173
|
)
|
|
-3.13
|
%
|
|
-
|
|
|
0.00
|
%
|
Bonus
stock dividend (minority holders portion)
|
|
|
(545,359
|
)
|
|
-2.09
|
%
|
|
-
|
|
|
0.00
|
%
|
Net
income (loss) applicable to common
shareholders
|
|
|
3,654,575
|
|
|
13.99
|
%
|
|
(6,337,394
|
)
|
|
-30.61
|
%
|
Net
revenues for the nine months ended March 31, 2008 were $26,126,520 as compared
to $20,705,647 for the nine months ended March 31, 2007. This reflects an
increase of $5,420,873 or 26% in the current period as compared to the period
ended March 31, 2007. Revenue from services, which includes consulting and
implementation, increased 40% from $9,864,055 to $13,800,844. License and
maintenance revenues both grew about 14% over the comparable period in fiscal
2007. The increase is attributable mostly to growth in services business,
several new license sales of LeaseSoft in China, growing outsourcing business
of
NetSol-TIG (JV) and additional maintenance work. In addition, several new
verticals have been formed in Lahore and are now producing revenues. The Company
has experienced solid and consistent demand for IT services in the domestic
sectors of Pakistan. 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 two pilot projects
in the province of Punjab in 2007, and a recent one in Islamabad. We anticipate
winning additional 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 globally
at
an advance stage of closing or decision making.
NetSol
made a significant move by acquiring 100% of a US based software company McCue
Systems Inc., (now “NetSol Technologies North America”) (“NTNA”) in June 2006.
The acquisition of NTNA has provided the Company with a very strong customer
base and an established product in the leasing vertical. During the current
nine
months, we have hired a new and very experienced management team in the
operations, sales and marketing areas. This new team has integrated very
effectively with NetSol at global level. The integration of
a
dedicated offshore team into NTNA Development Department is continuing, with
ongoing projects and management processes in place. Offshore resources are
now
making significant contribution throughout the development lifecycle. In
addition, the entire NTNA team is working to increase customer satisfaction
and
improve the quality of the product which will have an effect of increasing
sales
to existing customers and greater referrals. A new IT services division is
set
to launch in the next quarter.
Due
to
the revision in our pricing policy, LeaseSoft license value in APAC is in the
range of $1.0 to $2.0 million, without factoring in services maintenance and
implementation fees. Normally, NetSol negotiates 20-25% 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. As the Company
continues to sell more of these licenses, management believes it is possible
that the margins could increase to upward of 60%.
During
the nine months ended March 31, 2008, NetSol PK was awarded the contract for
the
implementation of the Motor Vehicle Registration System (MVRS) for all the
34
districts of the province of Punjab, Pakistan, with successfull implementation
completed in 16 districts of the Province. In addition, a major automotive
captive in Australia signed a contract to license LeaseSoft’s Retail Finance
Solution, which comprises of Credit Application Processing System (CAP) and
Contract Management System (CMS), as well as its Wholesale solution, Wholesale
Finance System (WFS). In addition to these modules, NetSol PK will provide
software customization, system implementation, and ongoing maintenance and
support services to this client. In addition, a major automotive captive in
China and Hong Kong went live with our LeaseSoft Solution. A major contract
was
signed with one of the largest Leasing companies in Saudi Arabia for LeaseSoft.
This contract marks NetSol’s entry into the lucrative Middle East region. NetSol
also won a contract to design and implement a Hospital Management Systems (HMS)
for a major public sector hospital. In addition, NetSol won a contract with
a
leading bank in Pakistan to provide Basel II advisory services. These
opportunities for NetSol represent new business sector verticals for the
Company.
Our
joint-venture, NetSol-TiG continues to grow. During the current period ten
new
resources were added for a total of 130 dedicated to the joint-venture projects.
In addition, two new projects in the United States of America were signed and
Innovation Group’s release management of five different countries has recently
been given to our Extended Innovation (“EI”) division which works with the
joint-venture.
The
gross
profit was $15,135,770 in the nine months ending March 31, 2008 as compared
with
$10,261,436 for the same quarter of the previous year for an increase of 47.5%
or $4,874,334. The gross profit percentage for the nine months increased
approximately 8% to 58% from 50% in the nine months ended March 31, 2007. The
cost of sales was $10,990,750 in the current period compared to $10,444,211
in
the comparable period of fiscal 2007. As a percentage of sales, it decreased
8%
from 50% for the nine months ended March 31, 2007 to 42% in the current period.
Salaries and consultant fees increased 11% or $734,137 from $6,608,606 in the
prior comparable period to $7,342,743, as a percentage of sales; it decreased
3.8% from 31.9% in the prior comparable period to 28.1% in the current period.
The Company has added several new business verticals in Pakistan hiring the
best
talent in these specialized areas. It takes between 18-24 months for these
new
business units to fully develop their offerings and begin generating revenues.
Several of these units are now producing revenues, the rest of the divisions
are
anticipated to start generating revenues in the next two quarters. The gross
profit margin is expected to continue to improve as the integration of both
the
operations in Horsham, UK and Burlingame, US are fully integrated and cost
savings are achieved. The Company has invested heavily in its infrastructure,
both in people and equipment during the current fiscal year as it situated
itself for increased growth organically and from the acquisitions of NTE in
February 2005 and NTNA in June 2006.
Operating
expenses were $9,702,930 for the nine months ending March 31, 2008 as compared
to $9,503,983, for the corresponding period last year for a slight increase
of
$198,947. As a percentage of sales, it decreased 8.7% from 45.9% to 37.1%.
Depreciation and amortization expense amounted to $1,422,181 and $1,389,704
for
the nine months ended March31, 2008 and 2007, respectively. Combined salaries
and wage costs were $2,758,434 and $2,914,707 for the comparable periods,
respectively, or a decrease of 5% or $156,273 from the corresponding period
last
year. As a percentage of sales, these costs decreased 3.5% from 14.0% to 10.5%.
General and administrative expenses were $2,287,693 and $2,202,182 for the
nine
months ended March 31, 2008 and 2007, respectively, an increase of $85,511
or
4%. As a percentage of sales, these expenses were 8.76% in the current period
compared to 10.64% in the comparable period last fiscal year.
Selling
and marketing expenses were $2,817,908 and $2,105,920, in the nine months ended
March 31, 2008 and 2007, respectively, reflecting the growing sales activity
of
the Company. Although this reflects a 34% increase or $711,988, as a percentage
of sales it decreased 0.62% to 10.79% from 10.17%. Professional services expense
decreased 47% to $413,437 in the nine months ended March 31, 2008, from $774,203
in the corresponding period last year.
Income
from operations was $5,432,840 compared to $757,453 for the nine months ended
March 31, 2008 and 2007, respectively. This represents an increase of $4,675,387
for the nine months compared with the comparable period in the prior year.
As a
percentage of sales, net income from operations was 20.79% in the current fiscal
year compared to 3.66% in the prior period.
Net
income was $5,162,140 compared to net loss of $6,177,708 for the nine months
ended March 31, 2008 and 2007, respectively. This is an increase of $11,339,848
compared to the prior year. The current fiscal period amount includes a net
reduction of $1,756,509 compared to $1,374,081 in the prior period for the
49.9%
minority interest in Connect, and NetSol-TiG owned by another party, and the
39.11%/37.21% minority interest in NetSol PK. During the prior nine months
ended
March 31, 2007, the Company recognized $2,208,334 in beneficial conversion
feature expense, $2,803,691 of amortized costs of debt and $180,890 of
liquidation damages related to the financing done in June 2006. There were
no
such non-cash expenses in the current period. In the current period, a gain
on
the sale of some of the Parent’s shares in NetSol PK of $1,240,808 in other
income was recognized. Interest expense was $544,597in the current nine months
as compared to $543,342 in the comparable period. Net income per share, basic
and diluted, was $0.21, as compared to net loss per share, basic of $0.36 and
diluted of $0.35 for the nine months ended March 31, 2008 and 2007.
The
net
EBITDA income was $8,038,995 compared to loss of $3,424,338 after amortization
and depreciation charges of $2,285,985 and $2,083,407, income taxes of $46,272
and $126,620, and interest expense of $544,597 and $543,342, 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 income would be $1,587,687 for the nine months ended March 31, 2007.
The EBITDA earning per share, basic and diluted was $0.34 and $0.35,
respectively, for the nine months ended March 31, 2008 and the adjusted pro
forma EBITDA earnings per share, basic and diluted, was $0.09 for the nine
months ended March 31, 2007. 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 $4,848,513 at March 31, 2008 compared to $3,382,970
at March 31, 2007.
Net
cash
provided by operating activities amounted to $572,229 for the nine months ended
March 31, 2008, as compared to cash used of $128,201 for the comparable period
last fiscal year. The major change was the increase in accounts receivable,
the
increase in other current assets, which includes the “Revenues in excess of
billings” due to several large contracts signed and progress on the contracts is
over the amount that can be billed per the contract terms and the decrease
in
accounts payable which includes the Unearned Revenues representing the increase
in maintenance contracts.
Net
cash
used by investing activities amounted to $4,963,895 for the nine months ended
March 31, 2008, as compared to $5,365,782 for the comparable period last fiscal
year. The Company had net purchases of property and equipment of $1,985,651
compared to $1,282,427 for the comparable period last fiscal year. In addition,
payments on the acquisition payable have been made of $879,007 and $4,027,753
for the nine months ended March 31, 2008 and 2007, respectively. The increase
in
intangible assets which represents amounts capitalized for the development
of
new products was $2,219,673 and $2,001,502 for the comparable
periods.
Net
cash
provided by financing activities amounted to $5,185,625 and $6,307,026 for
the
nine months ended March 31, 2008, and 2007, respectively. In the current period
the Company sold $1,500,000 of common stock compared to $30,093 in the
comparable prior period. The nine months ended March 31, 2008 included the
cash
inflow of $2,800,917 compared to $704,250 from the exercising of stock options
and warrants. In the current fiscal period, the Company had net use on bank
loans, loans and capital leases of $841,298 as compared to net proceeds of
$874,128 in the comparable period last year and received $165,000 in loans
from
officers during the prior fiscal period. In addition, the Company sold shares
it
held of its subsidiary in Pakistan on the open market and had $1,765,615 in
proceeds from the sale.
The
Company plans on pursuing various and feasible means of raising new funding
to
expand its infrastructure, enhance product offerings and strengthen 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 has achieved
institutional holdings to over 20% ownership by small cap funds. This is a
direct reflection of NetSol’s stellar performance in last trailing 12 months.
Also the effective marketing campaign in the US capital markets has raised
the
shareholdings by these funds and market support.
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:
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·
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The
third and final payment of NTNA will be due in July 08 based on the
earn-out formula. This could be in the range of $1.5 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;
|
|
·
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Working
capital of $3.0 to $5.0 million for US and 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 dilutive effect and price
pressures in raising equity-based capital.
The
methods of raising funds for capital needs may differ based on the following:
|
·
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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.
|
|
·
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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 in rule 13a-15(e) as of the end of the period covered
by this interim report on Form 10-QSB. Based on their evaluation, the chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures are effective.
There
has
been no change in our internal control over financial reporting that occurred
in
the period covered by this report that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.
PART
II OTHER
INFORMATION
Item
1. Legal Proceedings
In
January 2008, 14,568 shares of common stock were issued to 2 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
March
2008, 10,000 shares of common stock were issued to an accredited investor as
compensation for services performed. This issuance was made in reliance on
an
exemption from registration pursuant to rule 4(1) of the Securities Act of
1933,
as amended.
In
March
2008, 8,750 shares of common stock were issued to an employee as part of the
employee’s compensation for services performed. The employee is an accredited
investor. The issuance was made in reliance on an exemption from registration
pursuant to rule 4(1) of the Securities Act of 1933, as amended.
During
the quarter ended March 31, 2008, the Company issued 80,600 shares of its common
stock for the exercise of options valued at $136,939.
The
repurchases provided in the table below were made during the quarter ended
March
31, 2008:
Issuer
Purchases of Equity Securities (1)
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|
|
|
|
|
|
|
Total
Number of
|
|
|
|
|
|
Total
|
|
|
|
Shares
Purchased as
|
|
Maximum
Number of
|
|
|
|
Number
of
|
|
Average
|
|
Part
of Publicly
|
|
Shares
that may be
|
|
|
|
Shares
|
|
Price
Paid
|
|
Announced
Plans or
|
|
Purchased
Under the
|
|
Month
|
|
Purchased
|
|
Per
Share
|
|
Programs
|
|
Plans
or Programs
|
|
January
2008
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
February
2008
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
March
2008
|
|
|
13,600
|
|
$
|
1.89
|
|
|
13,600
|
|
|
986,400
|
|
(1) |
On
March 24, 2008, the Company announced that it had authorized a stock
repurchase program permitting the Company to repurchase up to 1,000,000
of
its shares of common stock over the next 6 months. The shares are
to be
repurchased from time to time in open market transactions or privately
negotiated transactions in the Company's
discretion.
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Item
3. Defaults Upon Senior Securities
None.
None
None.
Item
6. Exhibits
and Reports on Form 8-K
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
February 13, 2008, 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, 2007.
b)
On
March 24, 2008, NetSol Technologies, Inc. filed a current report containing
the
contents of its press release announcing the adoption of a stock repurchase
program permitting the Company to purchase up to 1,000,000 shares of its common
stock .
.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETSOL
TECHNOLOGIES, INC.
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|
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Date:
May 13, 2008 |
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/s/ Najeeb
Ghauri |
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NAJEEB
GHAURI
Chief
Executive Officer
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|
|
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Date: May
13, 2008
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|
/s/ Tina
Gilger |
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TINA
GILGER
Chief
Financial Officer
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