UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2005
|_| For the transition period from __________ to __________
Commission file number: 0-22773
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other Jurisdiction of (I.R.S. Employer NO.)
Incorporation or Organization)
23901 Calabasas Road, Suite 2072, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
The issuer had 15,057,045 shares of its $.001 par value Common Stock issued and
outstanding as of February 6, 2006.
Transitional Small Business Disclosure Format (check one)
Yes |_| No |X|
1
NETSOL TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Unaudited Balance Sheet as of December 31, 2005 3
Comparative Unaudited Consolidated Statements of Operations
for the Three and Six Months Ended December 31, 2005 and 2004 (restated) 4
Comparative Unaudited Consolidated Statements of Cash Flow
for the Three and Six Months Ended December 31, 2005 and 2004 (restated) 5
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 19
Item 3. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
(a) Exhibits
(b) Reports on Form 8-K
Signatures 29
2
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 2005
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,884,573
Certificates of deposit 1,501,752
Restricted cash 206,900
Accounts receivable, net of allowance for
doubtful accounts of $80,000 5,673,145
Revenues in excess of billings 3,379,287
Other current assets 1,448,164
------------
Total current assets 14,093,821
Property and equipment, net of accumulated
depreciation 6,052,896
Intangibles:
Product licenses, renewals, enhancements,
copyrights, trademarks, and tradenames, net 4,740,085
Customer lists, net 1,240,682
Goodwill 1,166,611
------------
Total intangibles 7,147,378
------------
Total assets $ 27,294,095
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,315,622
Current portion of notes and obligations under
capitalized leases 977,382
Billings in excess of revenues 110,397
Due to officers 53,157
Deferred liability 313,397
Loans payable, bank 500,584
------------
Total current liabilities 5,270,539
Obligations under capitalized leases, less
current maturities 145,828
Convertible debenture 97,372
------------
Total liabilities 5,513,739
Minority interest 1,213,277
Commitments and contingencies --
Stockholders' equity:
Common stock, $.001 par value; 45,000,000
share authorized; 14,084,604 issued and
outstanding 14,085
Additional paid-in-capital 50,962,347
Treasury stock (27,197)
Accumulated deficit (29,990,203)
Stock subscription receivable (320,188)
Common stock to be issued 132,086
Other comprehensive loss (203,851)
------------
Total stockholders' equity 20,567,079
------------
Total liabilities and stockholders' equity $ 27,294,095
============
See accompanying notes to these unaudited consolidated financial statements.
3
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Six Months
Ended December 31, Ended December 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Restated) (Restated)
Net revenues $ 4,524,373 $ 2,723,227 $ 8,994,358 $ 4,781,532
Cost of revenues 1,977,034 839,387 3,644,384 1,601,655
------------ ------------ ------------ ------------
Gross profit 2,547,339 1,883,840 5,349,974 3,179,877
Operating expenses:
Selling and marketing 412,570 135,352 731,434 254,700
Depreciation and amortization 564,855 316,982 1,117,386 623,140
Settlement costs -- 43,200 15,953 43,200
Bad debt expense 7,728 -- 7,728 --
Salaries and wages 552,714 447,984 1,089,090 795,221
Professional services, including non-cash
compensation 115,188 140,971 238,346 255,305
General and adminstrative 619,455 282,338 1,190,546 549,232
------------ ------------ ------------ ------------
Total operating expenses 2,272,510 1,366,827 4,390,483 2,520,798
------------ ------------ ------------ ------------
Income from operations 274,829 517,013 959,491 659,079
Other income and (expenses):
Gain (Loss) on sale of assets 4,219 -- 4,610 (620)
Beneficial conversion feature (5,192) (164,465) (11,761) (201,965)
Fair market value of warrants issued -- (221,614) (9,489) (249,638)
Gain on forgiveness of debt 3,335 139,367 6,976 189,641
Interest expense (86,862) (108,425) (165,885) (130,000)
Interest income 94,629 1,236 179,041 1,797
Other income and (expenses) (22,142) 17,303 (54,645) 38,300
Income taxes 7,751 (959) (66,811) (2,473)
------------ ------------ ------------ ------------
Total other expenses (4,262) (337,557) (117,964) (354,958)
------------ ------------ ------------ ------------
Netcome before minority interest in subsidiary 270,567 179,456 841,527 304,121
Minority interest in subsidiary (145,532) (809) (512,745) 14,259
------------ ------------ ------------ ------------
Net income 125,035 178,647 328,782 318,380
Other comprehensive gain/(loss):
Translation adjustment 437,660 (89,720) 316,840 (173,409)
------------ ------------ ------------ ------------
Comprehensive income $ 562,695 $ 88,927 $ 645,622 $ 144,971
============ ============ ============ ============
Net income per share:
Basic $ 0.01 $ 0.02 $ 0.02 $ 0.03
============ ============ ============ ============
Diluted $ 0.01 $ 0.01 $ 0.02 $ 0.02
============ ============ ============ ============
Weighted average number of shares outstanding
Basic 14,064,968 10,643,113 13,981,426 10,073,951
Diluted 14,444,665 13,455,875 14,361,123 12,760,805
See accompanying notes to these unaudited consolidated financial statements.
4
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended December 31,
2005 2004
------------ ------------
(restated)
Cash flows from operating activities:
Net income from continuing operations $ 328,782 $ 318,380
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,334,476 762,688
Provision for uncollectible accounts 7,728 --
Gain on settlement of debt (6,976) (189,641)
(Gain) loss on sale of assets (4,610) 620
Minority interest in subsidiary 512,745 (14,259)
Stock issued for services 126,334 52,835
Fair market value of warrants and stock options granted 9,489 249,638
Beneficial conversion feature 11,761 201,965
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,774,513) (727,132)
Other current assets (1,937,157) (1,391,738)
Decrease in liabilities:
Accounts payable and accrued expenses 679,111 (728,053)
------------ ------------
Net cash used in operating activities (712,830) (1,464,697)
Cash flows from investing activities:
Purchases of property and equipment (1,466,505) (467,586)
Sales of property and equipment 109,483 86,988
Net (purchases) proceeds of certificates of deposit (1,296,272) (158,597)
Increase in intangible assets - development costs (454,228) (299,479)
Capital investments in minority interest of subsidiary -- 287,797
Proceeeds from sale of minority interest of subsidiary -- --
Restricted Cash (206,900) --
------------ ------------
Net cash provided by (used in) investing activities (3,314,422) (550,877)
Cash flows from financing activities:
Proceeds from sale of common stock -- 1,512,000
Proceeds from the exercise of stock options 384,062 343,900
Capital contributed from sale of subsidiary stock 4,031,001 --
Purchase of treasury shares -- (51,704)
Proceeds from loans -- 5,994
Capital lease obligations & loans 0 net 91,541 (236,597)
------------ ------------
Net cash provided by financing activities 4,506,604 1,573,593
Effect of exchange rate changes in cash 33,494 58,930
------------ ------------
Net (decrease) increase in cash and cash equivalents 512,846 (383,051)
Cash and cash equivalents, beginning of period 1,371,727 871,161
------------ ------------
Cash and cash equivalents, end of period $ 1,884,573 $ 488,110
============ ============
See accompanying notes to these unaudited consolidated financial statements.
5
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Six Months
Ended December 31,
2005 2004
------------ ------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 123,581 $ 50,749
============ ============
Taxes $ 12,454 $ 14,083
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services and
compensation $ 73,505 $ 118,770
============ ============
Common stock issued for accrued expenses
and accounts payable $ 52,828 $ 42,808
============ ============
Common stock issued for conversion of
convertible debenture $ 50,000 $ 1,050,000
============ ============
Common stock issued for settlement of debt $ -- $ 45,965
============ ============
Common stock issued for payment of note
payable and related interest $ 71,018 $ --
============ ============
See accompanying notes to these unaudited consolidated financial statements.
6
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Company designs, develops, markets, and exports proprietary software
products to customers in the automobile finance and leasing, banking and
financial services industries worldwide. The Company also provides consulting
services in exchange for fees from customers.
The consolidated condensed interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended June 30, 2005. 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 (Pvt), Limited ("PK Private"),
NetSol Technologies Limited ("UK"), NetSol-Abraxas Australia Pty Ltd.
("Abraxas"), NetSol Altvia, Inc. ("USA") CQ Systems Limited ("CQ"), and its
majority-owned subsidiaries, NetSol Technologies (Pvt), Ltd.("PK Tech"), NetSol
Connect (Pvt), Ltd. ("Connect"), and TIG-NetSol (Pvt) Limited ("TIG"). All
material inter-company accounts have been eliminated in consolidation.
For comparative purposes, prior year's consolidated financial statements have
been reclassified to conform to report classifications of the current year.
NOTE 2 - USE OF ESTIMATES:
The preparation of financial statements, in conformity with generally accepted
accounting principles in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior period's financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes that the adoption of this standard
will have no material impact on its financial statements.
7
NOTE 4 - EARNINGS 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 six months ended December 31, 2005 Net Income Shares Per Share
------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income available to common shareholders $ 328,782 13,981,426 $ 0.02
Effect of dilutive securities
Stock options 378,694
Warrants 1,003
-------------- -------------- --------------
Diluted earnings per share $ 328,782 14,361,123 $ 0.02
============== ============== ==============
For the six months ended December 31, 2004 Net Income Shares Per Share
------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income available to common shareholders $ 318,380 10,073,951 $ 0.03
Effect of dilutive securities
Stock options 1,924,129
Warrants 762,725
-------------- -------------- --------------
Diluted earnings per share $ 318,380 12,760,805 $ 0.02
============== ============== ==============
NOTE 5 - FOREIGN CURRENCY:
The accounts of NetSol Technologies , Ltd. in the United Kingdom and CQ Systems,
Ltd., use the British Pound; NetSol Technologies, (PVT), Ltd, NetSol (Pvt),
Limited and NetSol Connect PVT, Ltd. use Pakistan Rupees; and NetSol Abraxas
Australia Pty, Ltd. uses the Australian dollar as the functional currencies.
NetSol Technologies, Inc., and subsidiary NetSol USA, Inc., use the U.S. dollars
as the functional currencies. 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 $203,851 at December 31, 2005 are classified as an item of accumulated other
comprehensive loss in the stockholders' equity section of the consolidated
balance sheet. During the six months ended December 31, 2005 and 2004,
comprehensive income (loss) in the consolidated statements of operation included
translation income of $316,840 and loss of $173,409, respectively.
NOTE 6 - RESTRICTED CASH
During the quarter ended December 31, 2005 the Company established a Letter of
Credit with its bank in the amount of $206,900 for the purpose of purchasing a
third-party software package to be used in a project for one of its customers.
The funds have been transferred into a separate bank account and will be
released to the vendor when certain criteria are met.
8
NOTE 7 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 2005:
Prepaid Expenses $ 511,065
Advance Income Tax 166,412
Employee Advances 41,104
Security Deposits 75,826
Other Receivables 570,806
Other Assets 82,951
------------
Total $ 1,448,164
============
In August 2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company agreed to pay the consultant a total
of 100,000 shares of its common stock valued at $111,920. This has been recorded
as a prepaid expense and is being amortized over the life of the service
agreement. During the six months ended December 31, 2005 and 2004, $27,980 and
$20,985 was expensed.
NOTE 8 - DEBTS
NOTES PAYABLE
Notes payable as of December 31, 2005 consist of the following:
Balance at Current Long-Term
Name 12/31/05 Maturities Maturities
-------------------------------------------------------------------------------
A. Zaman Settlement $ 16,300 $ 16,300 $ --
Professional Liability Insurance 4,563 4,563 --
Noon Group 543,370 543,370 --
Gulf Crown 271,685 271,685 --
Subsidiary Capital Leases 141,464 141,464 --
------------ ------------ ------------
977,382 977,382 --
============ ============ ============
In June 2002, the Company signed a settlement agreement with a former employee
for payment of past services rendered. The Company agreed to pay the employee a
total of $75,000. The agreement calls for monthly payments of $1,500 per month
until paid. The balance owing at June 30, 2005 and December 31, 2005 was
$16,300. The entire balance has been classified as a current liability in the
accompanying consolidated financials statements.
In February 2005, the Company received a loan from Noon Group in the amount of
$500,000. The note carries an interest rate of 9.75% per annum and is due in one
year. The maturity date of the loan may be extended at the option of the holder
for an additional year. During the six months ended December 31, 2005, $24,575
of accrued interest was recorded for this loan. Total accrued interest added to
the loan at December 30, 2005 was $43,370.
In February 2005, the Company received a loan from Gulf Crown Investments in the
amount of $250,000. The note carries an interest rate of 9.75% per annum and is
due in one year. The maturity date of the loan may be extended at the option of
the holder for an additional year. During the six months ended December 31,
2005, $12,288 of accrued interest was recorded for this loan. Total accrued
interest added to the loan at December 31, 2005 was $21,685.
In May 2005, the Company executed a note in favor of Maxim Group, LLC ("Maxim")
in the amount of $250,000. The funds were due as compensation for mergers and
acquisition related services provided by Maxim Group, LLC, in connection with
the CQ Systems Ltd. transaction. The note is due on July 25, 2005 and carries an
interest rate of 12% starting on the due date and increases 1.5% per month
thereafter. The note called for $150,000 to be paid with 80,214 shares the
Company's common stock and the balance of $100,000 to be paid in cash. In May
2005, the shares were issued. In addition, the loan called for $3,000 worth of
additional shares for each month that the shares are not registered after the
120 day maturity date and a $10,000 penalty for late payment. On October 3,
2005, the Company paid Maxim $50,000 cash, and issued a total of 36,606 shares
valued at $71,018 for the balance of the note of $50,000, accrued interest of
$2,453 and penalties of $16,000.
9
In October 2005, the Company renewed its professional liability insurance for
which the annual premium is $8,050. The Company has arranged for financing with
the insurance company with a down payment of $1,610 and ten monthly payments of
$674 each. During the six months ended December 31, 2005, the Company paid $995.
The balance owing at December 31, 2005 was $4,563 and is classified as a current
liability in the accompanying consolidated financials statements.
In addition, the various subsidiaries had current maturities of capital leases
of $141,464 as of December 31, 2005.
BANK NOTE
The Company's Pakistan subsidiary, NetSol Technologies (Private) Ltd., has one
loan with a bank, secured by the Company's assets. These notes consist of the
following as of December 31, 2005:
TYPE OF MATURITY INTEREST BALANCE
LOAN DATE RATE USD
----------------------------------------------------------------------
Export Refinance Every 6 months 8% $ 500,584
------------
Total $ 500,584
============
DUE TO OFFICERS
The officers of the Company from time to time loan funds to the Company in
addition to deferring compensation. As of June 30, 2005, the officers had a
balance owing to them of $47,636. One of the officers has deferred the increase
in their wages. During the six months ended December 30, 2005, $25,000 of
accrued wages was added to the balance due to officers. In addition, $19,479 was
remitted to one officer against the amounts owing to him. The balance owing as
of December 31, 2005 was $53,157.
NOTE 9 - STOCKHOLDERS' EQUITY:
EQUITY TRANSACTIONS
Private Placements
In August 2004, the Company sold 190,476 shares of the Company's common stock
for $200,000 in a private placement. Of this amount $91,500 had been received
during the fiscal year ended June 30, 2005 and a total of 87,143 shares were
issued to the purchaser. The remaining balance of $108,500 or 103,333 shares are
shown as "Shares to Be Issued" on the accompanying financial statements.
Services, Accounts Payable and Notes Payable
During the six months ended December 31, 2005, the Company issued 5,000
restricted Rule 144 common shares in exchange for services rendered valued at
$8,972. Compensation expense was calculated based upon the fair market value of
the freely trading shares as quoted on NASDAQ over the service period.
In July 2004, the Board of Directors and officers were granted the right to
receive shares of the Company's common stock if certain conditions were met
during their 2004 - 2005 term of office. These conditions were met and a total
of 28,000 restricted Rule 144 common shares were issued in August 2005. In
addition, 11,000 shares were recorded as "Shares to be Issued" and are valued at
$16,088. The shares were valued at the fair market value at the date of grant of
$57,034 or $1.46 per share
In October 2005, the Company issued 36,607 restricted Rule 144 common shares
valued at $71,018 in payment of $50,000 in principal, $16,000 in penalties and
$2,453 in accrued interest on a note payable (see Note 7).
10
In October 2005, the Company entered into an agreement with a vendor whereby the
Company issued the vendor 27,231 shares valued at $52,828 for the payment of
outstanding invoices in the amount of $50,923. As a result, the Company recorded
a loss on settlement of debt in the amount of $1,905.
In addition, effective October 2005, the Company entered into an agreement with
a vendor whereby the Company agreed to issue $2,500 worth of stock per month as
payment for services rendered. The stock is to be issued after the end of each
quarter. The Company recorded 3,983 shares of common stock valued at $7,500 to
"Stock to Be Issued" under this agreement during the quarter ended December 31,
2005.
Issuance of shares for Conversion of Debt
During the quarter ended September 30, 2005, one of the convertible debenture
holders elected to convert their note into common stock. The total of the note
converted was $50,000 and the Company issued 26,882 shares of its common stock
to the note holder.
Options and Warrants Exercised
During the six months ended December 31, 2005, the Company issued 130,000 shares
of its common stock for the exercise of options valued at $131,250.
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
process when the quarter ended.
The balance at June 30, 2005 was $616,650. During the six months ended September
30, 2005, the Company received a total of $252,812 as payment on the receivable.
The Company also recorded the cancellation of $43,650 due as a charge to
additional pain-in capital as a result of a review of the records when the
amount was recorded in 2000. It was determined the amount was not due and
therefore was cancelled. The balance at December 31, 2005 was $320,188.
COMMON STOCK PURCHASE WARRANTS AND OPTIONS
From time to time, the Company issues options and warrants as incentives to
employees, officers and directors, as well as to non-employees.
Common stock purchase options and warrants consisted of the following during the
six months ended December 31, 2005
Exercise Exercise
Options Price Warrants Price
--------------- --------------- ------------ ---------------
Outstanding and exercisable, June 30, 2005 5,038,000 $0.75 to $5.00 655,280 $0.50 to $5.00
Granted 1,320,000 $1.65 to $2.89 13,441 $3.30
Exercised (130,000) $0.75 --
Expired - --
-------------- ------------
Outstanding and exercisable, December 31, 2005 6,228,000 668,721
During the six months ended December 31, 2005, a total of 1,320,000 options were
granted to employees of the Company and are fully vested and expire ten years
from the date of grant unless the employee terminates employment, in which case
the options expire within 30 days of their termination. The exercise price of
the options ranges from $1.65 to $2.89. No expense was recorded for the granting
of these options.
During the six months ended December 31, 2004, 498,500 options were granted to
employees of the company and are fully vested and expire ten years from the date
of grant unless the employee terminates employment, in which case the options
expire within 30 days of their termination. No expense was recorded for the
granting of these options.
In compliance with FAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
11
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for six months ended December 31, 2005 as follows:
2005
--------------
Net income - as reported $ 328,782
Stock-based employee compensation expense,
included in reported net loss, net of tax --
Total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (1,496,750)
--------------
Pro forma net loss $ (1,167,968)
==============
Earnings per share:
Basic, as reported 0.02
Diluted, as reported 0.02
Basic, pro forma (0.08)
Diluted, pro forma (0.08)
Pro forma information regarding the effect on operations is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. Pro forma
information using the Black-Scholes method at the date of grant based on the
following assumptions:
Risk-free interest rate 3.25%
Expected life 10 years
Expected volatility 54% - 57%
Dividend yield 0%
During the quarter ended September 30, 2005, one debenture holder converted
their note into common stock. As part of the conversion, warrants to purchase a
total of 13,441 common shares were issued to the note holder. The warrants
expire in five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $9,489 or $0.71 per share and
recorded the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 3.25%
Expected life 5 years
Expected volatility 56%
Dividend yield 0%
NOTE 10- INTANGIBLE ASSETS:
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, customer lists and goodwill. The Company
evaluates intangible assets, goodwill and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets, other
long-lived assets and, goodwill is measured by comparing their net book value to
the related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Potential impairment of goodwill after July 1, 2002 has been
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to the
financial statements of the Company beginning July 1, 2002.
12
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
December 31, 2005:
Product
Licenses Customer Lists Total
-------------- -------------- --------------
Intangible asset - June 30, 2005 $ 8,799,323 $ 3,294,757 $ 12,094,080
Additions 491,714 -- 491,714
Effect of translation adjustment (31,423) (31,423)
Accumulated amortization (4,519,527) (2,054,075) (6,573,602)
-------------- -------------- --------------
Net balance - December 31, 2005 $ 4,740,087 $ 1,240,682 $ 5,980,769
============== ============== ==============
Amortization expense:
Six months ended Dec. 31, 2005 $ 661,360 $ 314,310 $ 975,670
Six months ended Dec. 31, 2004 $ 395,675 $ 157,832 $ 553,507
The above amortization expense includes amounts in "Cost of Goods Sold" for
capitalized software development costs of $25,362 and $21,035 for the six months
ended December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, product licenses, renewals, enhancements,
copyrights, trademarks, and tradenames, included unamortized software
development and enhancement costs of $1,968,081 and $1,208,201, respectively, as
the development and enhancement is yet to be completed. Software development
amortization expense was $55,475 and $38,927 for the six months ended December
31, 2005 and 2004, respectively.
Amortization expense of intangible assets over the next five years is as
follows:
FISCAL PERIOD ENDING
Asset 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 TOTAL
---------- ---------- ---------- ---------- ---------- ----------
Product Licences $ 931,935 $ 591,872 $ 591,872 $ 550,953 $ 105,371 $2,772,003
Customer Lists 406,658 263,376 263,376 263,376 43,896 1,240,682
---------- ---------- ---------- ---------- ---------- ----------
$1,338,593 $ 855,248 $ 855,248 $ 814,329 $ 149,267 $4,012,685
========== ========== ========== ========== ========== ==========
There were no impairments of the goodwill asset in the six months ended December
31, 2005 and 2004.
13
NOTE 11 - SEGMENT INFORMATION
The following table presents a summary of operating information and certain
year-end balance sheet information for the six months ended December 31:
2005 2004
------------ ------------
(restated)
Revenues from unaffiliated customers:
North America $ 3,750 $ 274,119
International 8,990,608 4,507,413
------------ ------------
Consolidated $ 8,994,358 $ 4,781,532
============ ============
Operating loss:
North America $ (1,751,237) $ (1,189,824)
International 2,710,728 1,848,903
------------ ------------
Consolidated $ 959,491 $ 659,079
============ ============
Identifiable assets:
North America $ 5,481,627 $ 3,636,852
International 21,812,468 10,184,386
------------ ------------
Consolidated $ 27,294,095 $ 13,821,238
============ ============
Depreciation and amortization:
North America $ 964,522 $ 530,425
International 369,953 92,715
------------ ------------
Consolidated $ 1,334,475 $ 623,140
============ ============
Capital expenditures:
North America $ -- $ --
International 1,466,505 467,586
------------ ------------
Consolidated $ 1,466,505 $ 467,586
============ ============
NOTE 12 - MINORITY INTEREST IN SUBSIDIARY
NetSol Connect:
In August 2003, the Company entered into an agreement with United Kingdom based
Akhter Group PLC ("Akhter"). Under the terms of the agreement, Akhter Group
acquired 49.9 percent of the Company's subsidiary; Pakistan based NetSol Connect
PVT Ltd. ("Connect"), an Internet service provider ("ISP"), in Pakistan through
the issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The new partnership with Akhter Computers is
designed to rollout connectivity and wireless services to the Pakistani national
market. On signing of this Agreement, the Shareholders agreed to make the
following investment in the Company against issuance of shares of Connect.
Akhter US$ 200,000
The Company US$ 50,000
During the quarter ended September 30, 2003, the funds were received by Connect
and a minority interest of $200,000 was recorded for Akhter's portion of the
subsidiary. During the quarter ended December 31, 2003, Akhter paid an
additional $10,000 to the Company for this purchase. Per the agreement, it was
anticipated that Connect would require a maximum of $500,000 for expansion of
its business from each partner. Akhter was to meet the initial financial
requirements of the Connect until November 1, 2003. As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to meet
the expansion requirement of the company. As of June 30, 2005, a total of
$751,356 had been transferred to Connect, of which $410,781 was from Akhter.
14
For the six months ended December 31, 2005 and 2004, the subsidiary had net
income of $53,553 and net losses of $28,575, respectively, of which $26,723 and
($14,259) respectively, was recorded against the minority interest. The balance
of the minority interest at December 31, 2005 was $350,661.
NetSol-TiG:
In December 2004, NetSol forged a formed a joint venture with a UK based public
company TiG Plc. A Joint Venture agreement was signed by the two companies to
create a new company, TiG NetSol Pvt Ltd. ("NetSol-TiG"), with 50.1% ownership
by NetSol Technologies, Inc. and 49.9% ownership by TiG. The agreement
anticipates TiG's technology business to be outsourced to NetSol's offshore
development facility. Both companies, according to this agreement, would invest
a total of $1 million or $500,000 each in the months following the formation of
the joint venture for infrastructure, dedicated personnel and systems in the
NetSol IT campus in Lahore.
During the year ended June 30, 2005, the Company invested $253,635 and TiG
invested $251,626 and the new subsidiary began operations.
For the six months ended December 31, 2005, the subsidiary had net income of
$444,219, of which $221,665 was recorded against the minority interest. The
balance of the minority interest at December 31, 2005 was $598,259.
NetSol Technologies, Limited ("PK Tech")
In August 2005, the Company's wholly-owned subsidiary, NetSol Technologies
(Pvt), Ltd. ("PK Tech") became listed on the Karachi Stock Exchange in Pakistan.
The Initial Public Offering ("IPO") sold 9,982,000 shares of the subsidiary to
the public thus reducing the Company's ownership by 28.13%. Net proceeds of the
IPO were $4,890,224. As a result of the IPO, the Company is required to show the
minority interest of the subsidiary on the accompanying consolidated financial
statements.
For the six months ended December 31, 2005, the subsidiary had net income of
$939,768, of which $264,357 was recorded against the minority interest. The
balance of the minority interest at December 31, 2005 was $264,357.
NOTE 13 - CONVERTIBLE DEBENTURE
On March 24, 2004, the Company entered into an agreement with several investors
to acquire Series A Convertible Debentures (the "Bridge Loan") whereby a total
of $1,200,000 in debentures were procured through Maxim Group, LLC. The Company
received a net of $1,049,946 after placement expenses. In addition, the
beneficial conversion feature of the debenture was valued at $252,257. The
Company has recorded this as a contra-account against the loan balance and is
amortizing the beneficial conversion feature over the life of the loan. The net
balance at September 30, 2005, is $94,745.
Under the terms of the Bridge Loan agreements, and supplements thereto, the
debentures bear interest at the rate of 10% per annum, payable on a quarterly
basis in common stock or cash at the election of the Company. The maturity date
is 24 months from the date of signing. Pursuant to the terms of a supplemental
agreement dated May 5, 2004 between NetSol and the debenture holders, the
conversion rate was set at one share for each $1.86 of principal.
During the quarter ended September 30, 2005, one of the convertible debenture
holders elected to convert its note into common stock. The total of the note
converted was $50,000 and the Company issued 26,882 shares of its common stock
to the note holder.
In addition, each debenture holder is entitled to receive at the time of
conversion warrants equal to one-half of the total number of shares issued. The
total number of warrants that may be granted is 322,582. The warrants expire in
five years and have an exercise price of $3.30 per share. The fair value of the
warrants will be calculated and recorded using the Black-Scholes method at the
time of granting, when the debenture is converted. During the three months ended
September 30, 2005, one debenture holders converted its note into common stock.
As part of the conversion, warrants to purchase a total of 13,441 common shares
were issued to the note holders. The warrants were valued using the fair value
method at $9,489 and was recorded as an expense in the accompanying consolidated
financial statements.
15
NOTE 14 - GAIN ON SETTLEMENT OF DEBT
During the six months ended December 31, 2005, the Company entered into
agreements with several vendors whereby the vendors agreed to accept as payment
in full amounts less than the invoiced amount. As a result of these settlements,
the Company recorded a net gain on settlement of debt of $6,976.
In September 2004, the Company transferred 24,004 of its treasury shares valued
at $45,965 to Brobeck Phleger & Harrison, Llp, in exchange of debt, as part of a
settlement agreement. The Company recorded a gain of $8,285 on the settlement.
During the quarter ended September 30, 2004, the Company evaluated the
liabilities of its discontinued operations and determined that $41,989 was no
longer payable. The Company recorded a gain of $41,989 as a result of the
write-off of these liabilities from its financial statements.
In October 2004, the Company reached an agreement with a vendor to settle the
amounts owing. The vendor agreed to accept $29,642 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of $11,029.
In December 2004, the Company reached an agreement with Cowler to pay the
balance owing on the loan in one lump-sum payment (see Note 7). Cowler agreed to
accept (pound)52,000 or $103,371 as payment in full. As a result, the Company
recorded a gain on forgiveness of debt of $21,148.
During the quarter ended December 31, 2004, a former officer of Abraxas, the
Company's Australian subsidiary, agreed to forgive amounts accrued to him for
long-term service leave prior to the Company's acquisition in 1999. The amounts
accrued were during the period of 1984 to 1999. As a result, the Company
recorded a gain on forgiveness of debt of $107,190.
NOTE 15 - ACQUISITION OF CQ SYSTEMS
On January 19, 2005, the Company entered into an agreement to acquire 100% of
the issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005.
The following is the proforma financial information of the Company for the six
months ended December 31, 2004 assuming the transaction had been consummated at
the beginning of the fiscal year ended June 30, 2005:
For the six
months ended
Dec. 31, 2004
--------------
(Unaudited)
Statement of Operations:
Revenues $ 7,266,798
Cost of Sales 3,151,661
--------------
Gross Profit 4,115,137
Operating Expenses 3,705,427
--------------
Income (loss) from operations 409,710
Other income and (expenses) (348,176)
--------------
Income (loss) before minority interest 61,534
Minority interest in subsidiary 14,259
--------------
Net Income (loss) $ 75,793
==============
Earnings Per Share:
Basic $ 0.01
Diluted $ 0.01
16
NOTE 16- RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the six
months ended December 31, 2004, the Company determined that certain transactions
and presentation in the financial statements had not been accounted for properly
in the Company's financial statements. Specifically, the amount of impairment of
goodwill was over-recorded and classified as amortization expense. In addition,
the beneficial conversion feature of the convertible debenture was overstated
and loans to officers hadn't been properly reflected on the financial statements
and the exercise of options against these loans had been recorded as receivables
as of June 30, 2004.
The Company has restated its financial statements for these adjustments as of
December 31, 2004.
The effect of the correction of the error is as follows:
AS
PREVIOUSLY AS
REPORTED RESTATED
------------ ------------
BALANCE SHEET
As of December 31, 2004
----------------------------
Assets:
Other current assets $ 512,494 $ 499,829
Goodwill $ 723,928 $ 1,166,611
Total intangibles $ 3,560,468 $ 4,003,151
Total assets $ 13,391,220 $ 13,821,238
Liabilities:
Due to officers $ -- $ 40,136
Convertible debenture payable $ 112,500 $ 130,292
Total liabilities $ 2,697,137 $ 2,755,065
Stockholder's Equity:
Additional paid-in capital $ 43,350,274 $ 43,072,118
Accumulated deficit $(31,296,539) $(30,663,934)
Subscription receivable $ (1,375,642) $ (1,234,650)
Other comprehensive loss $ (323,619) $ (446,970)
Total stockholder's equity $ 10,594,331 $ 10,966,421
STATEMENT OF OPERATIONS:
For the six months ended
December 31, 2004
----------------------------
Cost of revenues $ 1,580,620 $ 1,601,655
Gross profit $ 3,200,912 $ 3,179,877
Depreciation and amortization $ 838,473 $ 623,140
General and adminstrative $ 570,266 $ 549,232
Total operating expenses $ 2,757,165 $ 2,520,798
Income from operations $ 443,747 $ 659,079
Beneficial conversion feature exp $ 231,916 $ 201,965
Other income (expense) $ 43,219 $ 37,624
Net income $ 78,692 $ 318,380
Net income (loss) per share:
Basic $ 0.01 $ 0.03
Diluted $ 0.01 $ 0.02
17
NOTE 17- SUBSEQUENT EVENTS
In January 2006, the Company entered into a private placement agreement with two
non-US investors to purchase a total of 933,333 restricted shares of the
Company's common stock for $1,400,000.
18
Item 2. Management's Discussion and Analysis Or Plan Of Operation
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the quarter and six
months ending December 31, 2005.
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 is an end-to-end information technology ("IT") and business consulting
services provider for the lease and finance, banking and financial services
sectors. We operate on a global basis with locations in the U.S., Europe, East
Asia and Asia Pacific. We help our clients identify, evaluate, and implement
technology solutions to meet their most critical business challenges and
maximize their bottom line. Our products include sophisticated software
applications for the asset-based lease and financial institutions. By utilizing
our worldwide resources, we believe we are able to deliver high quality,
cost-effective IT services, ranging from consulting and application development
to systems integration and outsourcing. We have achieved the ISO 9001 and SEI
(Software Engineering Institute) Capable Maturity Model ("CMM") Level 4
certifications. Additionally, through our Internet Service Provider ("ISP")
Backbone, located in Karachi, Pakistan, we offer a package of wireless broadband
services, which include high-speed Internet access, support and maintenance.
Our subsidiary, NetSol Technologies Pvt. Ltd., a Pakistan Limited Company,
("NetSol PK"), develops the majority of our software. NetSol PK was the first
company in Pakistan to achieve the ISO 9001 and SEI CMM Level 4 software
development assessment. As maintained by the SEI, maturity levels measure the
maturity of a software company's methodology that in turn ensures enhanced
product quality resulting in faster project turn-a-round and a shortened time to
market. In July 2005, NetSol PK completed a listing of its shares on the Karachi
Stock Exchange.
During recent years, we have focused on developing software applications for the
leasing and financial service sectors. In late 2002, we launched a suite of
software products under the name LeaseSoft. The LeaseSoft suite is comprised of
four major integrated asset-based leasing/financing software applications. The
suite, consisting of a Credit Application Creation System (LeaseSoft.CAC), a
Credit Application Processing System (LeaseSoft.CAP), a Contract Activation &
Management System (LeaseSoft.CAM) and a Wholesale Finance System
(LeaseSoft.WFS), whether used alone or together, provides the user with an
opportunity to address specific sub-domains of the leasing/financing cycle from
the credit approval process through the tracking of the finance contract and
asset.
In February 2005, we acquired 100% of CQ Systems Ltd., an IT products and
service company based in the UK. As a result of this acquisition, we have access
to a broad European customer base using IT solutions complementary to NetSol's
LeaseSoft product. We plan to leverage CQ Systems' knowledge base and strong
presence in the Asset Finance market to launch LeaseSoft in the UK and
continental Europe. CQ's strong sales and marketing capability would further
help us gain immediate recognition and positioning for the LeaseSoft suite of
products. CQ provides sophisticated accounting and administrative software,
along with associated services, to leasing and finance companies located in
Europe, Asia and Africa. The products include software modules for asset
finance, consumer finance, motor finance, general finance and insurance premium
finance. The modules provide an end-to-end contractual solution - from
underwriting, contract administration and accounting, through asset disposal and
remarketing. Customers include notable European companies such as Scania Finance
GB, DaimlerChrysler Services, Broadcastle PLC, Bank of Scotland Equipment
Finance and Deutsche Leasing Ltd.
19
Together with this focus on providing an outsourcing, off-shore solution to
existing and new customers, NetSol has also adopted a dynamic growth strategy
through aggressive acquisitions. In October 2005, NetSol-CQ as a combined
company launched an aggressive marketing campaign under the banner of LeaseSoft
for the European market. Just recently NetSol-CQ signed a multi million dollar
new contract with a major banking institution in London.
PLAN OF OPERATIONS
Management has set the following new goals for NetSol's next 12 months.
Initiatives and Investment to Grow Capabilities
o Achieve CMM Level 5 Accreditation in 2005-2006.
o Enhance Software Design, Engineering and Service Delivery Capabilities by
increasing investment in training and development.
o Enhance and invest in R&D or between 7-10% of yearly budgets in financial,
banking and various other domains within NetSol's core competencies.
o Aggressively expand the sales and marketing organization in all key
locations by hiring senior and successful personnel.
o Recruit additional senior level managers both in Lahore, China and UK to
be able to support potential new customers from the North American, Asia
Pacific and European markets.
o Aggressively exploit the booming Chinese market by strengthening NetSol's
presence in China.
o Launch its marketing presence in the US markets through M&A activities in
the domain of our core competencies.
o Replicate the successful acquisition model and integration of CQ Systems
in the USA.
o Re-brand NetSol and CQ product line with new marketing packaging and
branding for global marketing.
o Increase Capex to enhance Communications and Development Infrastructure.
Top Line Growth through Investment in aggressively marketing organically and by
mergers and acquisition ("M&A") activities:
o Launch LeaseSoft into new markets by assigning new, well-established
companies as distributors in Europe, Asia Pacific and North America.
o Continue aggressive marketing in China for LeaseSoft and related services.
o Expand relationships with key customers in the US, Europe and Asia
Pacific.
o Product positioning through alliances, joint ventures and partnerships.
o Focus on key new fortune 1000 customers globally and grow within existing
key customers.
o Aggressively bid and participate in $5MN plus projects in UK and Asia
Pacific by leveraging NetSol CQ as combined asset.
o Embark on roll up strategy by broadening M&A activities broadly in the
software development domain.
o Enhance the sales and marketing organization by hiring new key executives
in the US, UK and Asia.
Funding and Investor Relations:
o Effectively raise new capital from most economical and emerging markets to
position NetSol for growth to the next level.
o Attract long term institutional investors and partners both in the US and
in Asia.
o Infuse new capital from the potential exercise of employee options for
business development, to enhance balance sheet and further investment in
infrastructures.
o Continue to efficiently and prudently manage cash requirements.
o Continue to raise capital from the markets only as is necessary to execute
the growth strategy both organically and through acquisitions.
o Enhance the visibility of Company's stock amongst US based small to mid
sized funds, institutional investors, market makers and research analysts.
20
Improving the Bottom Line:
o Continue to review costs at every level to consolidate and enhance
operating efficiencies.
o Grow process automation.
o Profit Centric Management Incentives.
o More local empowerment and P&L Ownership in each Country Office.
o Improve productivity at the development facility and business development
activities.
o Cost efficient management of every operation and continue further
consolidation to improve bottom line.
o Integrate and centralize the US headquarters and Australian operations and
improve the costs and bottom line.
Management believes that NetSol is in a position to derive higher productivity
based on current capital employed.
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 CMM Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMM Level 3
assessment in July 2003. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced their
assessment of level 3. As a result of achieving CMM level 4, NetSol is
experiencing a growing demand for its products and alliances from blue chip
companies worldwide. NetSol is now aiming for CMM level 5, the highest CMM level
in the next year. NetSol plans to further enhance its capabilities by creating
similar development engines in other Southeast Asian countries with CMM 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 CMM levels of quality standards
will provide customers with options and flexibility based on costs and broader
access to skills and technology.
MATERIAL TRENDS AFFECTING THE COMPANY
NetSol has identified the following material trends affecting the Company.
Positive trends:
o Outsourcing of services and software development is growing worldwide.
o The Global IT budgets are estimated to exceed $1.2 trillion in 2004 and
beyond, according to the internal estimates of Intel Corporation. About
50% of this IT budget would be consumed in the US market alone primarily
on the people and processes.
o Cost arbitrage, labor costs still very competitive and attractive when
compared with India.
o Overall economic expansion worldwide and explosive growth in the merging
markets specifically.
o Regional stability and improving political environment between Pakistan
and India.
o 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 $13 billion; stabilizing reforms of government and financial
institutions; improved credit ratings in the western markets, and
elimination of corruption at the highest level.
o Stronger ties between the US and Pakistan creating new investment and
trade opportunities.
o Robust growth in outsourcing globally and investment of major US and
European corporations in the developing countries.
o Chinese economic boom leading to new market opportunities.
Negative trends:
o Continued political and geographical conflicts in the Middle East and
South-East Asia are creating challenging times for economic development.
In addition, the existence of religious, extremism, and radical elements
are causing tensions in the region.
o The disturbance in Middle East and rising terrorist activities post 9/11
worldwide have resulted in issuance of travel advisory in some of the most
opportunistic markets. In addition, travel restrictions and new
immigration laws provide delays and limitations on business travel.
o The devastating earthquake in northern parts of Pakistan may slow growth
for local business in the short run.
o Negative perception and skepticism of investment and managing a software
development operation in Pakistan.
o Skyrocketing oil prices caused by the unfortunate hurricanes, tensions in
the Middle East and Iran, and the surge in global demand for oil could
affect the US and global economy.
o Continuous impact of Iraq war on US and global economy.
21
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 the
Company 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 the Company. 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. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" 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. 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 fiscal year 2005-2006, 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 December 31, 2005 as compared to the Quarter Ended December 31,
2004:
Net revenues for the quarter ended December 31, 2005 were $4,524,373 as compared
to $2,723,227 for the quarter ended December 31, 2004. Net revenues are broken
out among the subsidiaries as follows:
2005 2004
---------- ----------
Netsol USA $ 3,750 0.08% $ 103,985 3.82%
Netsol Tech 1,352,109 29.89% 1,827,001 67.09%
Netsol Private 269,447 5.96% 164,696 6.05%
Netsol Connect 223,244 4.93% 289,886 10.64%
Netsol-TiG 346,036 7.65% -- 0.00%
Netsol UK 970,480 21.45% 276,806 10.16%
Netsol-CQ 1,290,119 28.51% -- 0.00%
Netsol-Abraxas Australia 69,188 1.53% 60,853 2.23%
------------------- -------------------
Total Net Revenues $4,524,373 100.00% $2,723,227 100.00%
=================== ===================
22
This reflects an increase of $1,801,146 or 66.14% in the current quarter as
compared to the quarter ended December 30, 2004. The increase is attributable
mostly to growth in services business, a full quarter of revenues attributed by
the newly acquired CQ Systems in UK, growing outsourcing business of NetSol-TiG
(JV) and additional maintenance work. The Company's biggest revenue growth was
achieved in the two UK operations and the new joint-venture with TiG, which
generated sales both domestically and internationally. The Company has
experienced a modest decline in domestic business in Pakistan primarily due to
the earthquake on October 8, 2005. However, the demand for its IT services in
Asia Pacific and Europe is consistent and solid.
NetSol made a significant move by acquiring 100% of a UK based software company,
CQ Systems Ltd., in February 2005. The acquisition of CQ Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business. The acquisition of CQ Systems provided tremendous new business
opportunities for NetSol-CQ in the European markets. We have experienced a
seamless integration at every level of both companies. In November 2005, we
launched the combined company as NetSol-CQ and the LeaseSoft brand in European
market. Just recently NetSol-CQ signed off a multi-million dollar LeaseSoft
agreement with a major financial institution. Due to confidentiality agreement
with our new client we are not able to disclose the name of the client.
During the quarter ended December 31, 2005, our Asia Pacific region signed off
new implementations of LeaseSoft at ORIX Leasing Singapore, a new implementation
of LeaseSoft at Daimler Chrysler Auto Finance, China, Mercedes - Benz Finance
Co, Japan and in Daimler Chrysler Leasing Thailand.
NetSol's global frame agreement signed in early 2005 with DaimlerChrysler
Services ("DCS") qualifies NetSol as a preferred vendor to DCS in 40 plus
countries where DCS operates. As a direct result of the successful
implementations of some of our current systems with DaimlerChrysler and the
signing of the global frame agreement, we are noticing a significant increase in
demand for LeaseSoft. Although the sales cycle for LeaseSoft is rather long, we
are experiencing a 100% increase in product demonstration, evaluation and
assessment by blue chip companies in the UK, Australia, Japan, Europe, North
America and Pakistan. In fiscal year 2005, NetSol raised the pricing of its
LeaseSoft licenses significantly due primarily to a surge in demand. In spring
of 2005, one complete system was sold to Toyota Leasing Thailand ("TLT") for
nearly $2.3 million that includes over $1.2 million for license fees.
A number of large leasing companies will be looking to renew legacy
applications. This places NetSol in a very strong position to capitalize on any
upturn in IT spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2006-2007 that could potentially increase
the sales and bottom line. As the Company continues to sell more of these
licenses, management believes it is possible that the margins could increase to
upward of 70%. The license prices of these products vary from $300,000 to an
excess of $1,000,000 with additional charges for customization and maintenance
of between 20%-30% each year.
The gross profit was $2,547,339 in the quarter ending December 31, 2005 as
compared with $1,883,840 for the same quarter of the previous year for an
increase of $663,499. The gross profit percentage decreased slightly to
approximately 56% in the quarter ended December 31, 2005 from approximately 69%
for the quarter ended December 31, 2004. This is mainly due to the increase in
direct costs of hiring new technology personnel as the Company gears up for the
increased demand in its products and services. Our main technology campus in
Lahore hired over 90 new developers and programmers in the last four months. In
addition, several programmers from our Lahore office were temporarily relocated
to the NetSol-CQ office for training on the CQ system resulting in higher costs
for the quarter. In comparison to the prior quarter ended September 30, 2005,
the cost of sales increased approximately $309,684, revenues increased $54,388,
and an overall decrease of 3.25% in gross profit.
Operating expenses were $2,272,510 for the quarter ending December 31, 2005 as
compared to $1,366,827, for the corresponding period last year. The increase is
mainly attributable to increased selling and marketing activities, additional
employees and an increase in overall activities due to our increased marketing
efforts. Also contributing to the higher costs was the full integration of CQ
Systems and the joint-venture NetSol-TiG. In addition, the Company as a whole
contributed over $92,000 to charity organizations for the Earthquake Relief for
Northern Pakistan. Depreciation and amortization expense amounted to $564,855
and $316,982 for the quarter ended December 31, 2005 and 2004, respectively,
reflecting the intangible assets purchased from the CQ Systems acquisition in
February 2005. Combined salaries and wage costs were $552,714 and $447,984 for
the comparable periods, respectively, or an increase of $104,730 from the
corresponding period last year. Salaries, as a percentage of sales, were 12% for
the current quarter as compared to 16% in the prior period. The addition of the
new subsidiary, CQ Systems and the forming of the joint-venture with TiG, as
well as an increase in development, sales and administration employees resulted
in the increase. Approximately 250 new employees were added throughout the
Company during the last fiscal year.
Selling and marketing expenses were $412,570 and $135,352, in the quarter ended
December 31, 2005 and 2004, respectively, reflecting the growing sales activity
of the Company, including the launch of NetSol-CQ as a combined entity to the
European market. The Company is in a growth phase and is increasing its overall
sales and marketing activities. Sales and marketing was 9% of sales for the
current quarter as compared to 5% in the corresponding period last year.
Professional services expense decreased to $115,188 in the quarter ended
December 31, 2005, from $140,971 in the corresponding period last year.
23
Income from operations was $274,829 compared to $517,013 for the quarters ended
December 31, 2005 and 2004, respectively. This represents a decrease of $242,182
for the quarter compared with the comparable period in the prior year. This is
mainly due to the increased cost of sales, marketing expenses and operating
expenses due to growth and the addition of CQ Systems and NetSol-TiG.
Net income was $125,035 compared to $178,647 for the quarters ended December 31,
2005 and 2004, respectively. The current fiscal quarter amount includes a net
reduction of $145,532 compared to $809 in the prior period for the 49.9%
minority interest in NetSol Connect and NetSol-TiG owned by another party, and
the 28.13% minority interest in NetSol PK. During the current quarter, the
Company also recognized an expense of $5,192 for the beneficial conversion
feature on convertible debentures as compared to $164,465, an expense of $0 as
compared to $221,614 for the fair market value of warrants issued and a gain of
$3,335 as compared to $139,367 from the settlement of a debt. Net income per
share, basic and diluted, was $0.01 and $0.02 for the quarter ended December 31,
2005 and 2004, respectively.
The net EBITDA income was $769,001 compared to $605,013 after amortization and
depreciation charges of $564,855 and $316,982, income taxes of $(7,751) and
$959, and interest expense of $86,862 and $108,425, respectively. Although the
net EBITDA income is a non-GAAP measure of performance, we are providing it for
the benefit of our investors and shareholders to assist them in their
decision-making process.
Six Month Period Ended December 31, 2005 as compared to the Six Month Period
Ended December 31, 2004:
Net revenues for the six months ended December 31, 2005 were $8,994,358 as
compared to $4,781,532 for the six months ended December 31, 2004. Net revenues
are broken out among the subsidiaries as follows:
2005 2004
---------- ----------
Netsol USA $ 3,750 0.04% $ 274,119 5.73%
Netsol Tech 3,014,460 33.52% 2,940,860 61.50%
Netsol Private 746,633 8.30% 467,505 9.78%
Netsol Connect 475,581 5.29% 558,220 11.67%
Netsol-TiG 691,741 7.69% -- 0.00%
Netsol UK 1,209,152 13.44% 449,067 9.39%
Netsol-CQ 2,696,130 29.98% -- 0.00%
Netsol-Abraxas Australia 156,911 1.74% 91,761 1.92%
------------------- -------------------
Total Net Revenues $8,994,358 100.00% $4,781,532 100.00%
=================== ===================
This reflects an increase of $4,781,532 or 88% in the current six months as
compared to the six months ended December 31, 2004. The increase is attributable
mostly to growth in services business, a full quarter of revenues attributed by
the newly acquired CQ Systems in UK, growing outsourcing business of NetSol-TiG
(JV) and additional maintenance work. The Company's biggest revenue growth was
achieved in the two UK subsidiaries and the new joint-venture with TiG, which
generated sales both domestically and internationally. The Company has
experienced a modest decline in domestic business in Pakistan primarily due to
the earthquake on October 8, 2005. However, the demand for its IT services in
Asia Pacific and Europe is consistent and solid.
NetSol made a significant move by acquiring 100% of a UK based software company,
CQ Systems Ltd., in February 2005. The acquisition of CQ Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business. The acquisition of CQ Systems provided tremendous new business
opportunities for NetSol-CQ in the European markets. We have experienced a
seamless integration at every level of both companies. In November 2005, we
launched the combined company as NetSol-CQ and the LeaseSoft brand in European
market. Just recently NetSol-CQ signed off a multi-million dollar LeaseSoft
agreement with a major financial institution. Due to confidentiality agreement
with our new client we are not able to disclose the name of the client.
24
During the quarter ended December 31, 2005, our Asia Pacific region signed off
new implementations of LeaseSoft at ORIX Leasing Singapore, a new implementation
of LeaseSoft at Daimler Chrysler Auto Finance, China , Mercedes - Benz Finance
Co, Japan and in Daimler Chrysler Leasing Thailand.
NetSol's global frame agreement signed in early 2005 with DaimlerChrysler
Services ("DCS") qualifies NetSol as a preferred vendor to DCS in 40 plus
countries where DCS operates. As a direct result of the successful
implementations of some of our current systems with DaimlerChrysler and the
signing of the global frame agreement, we are noticing a significant increase in
demand for LeaseSoft. Although the sales cycle for LeaseSoft is rather long, we
are experiencing a 100% increase in product demonstration, evaluation and
assessment by blue chip companies in the UK, Australia, Japan, Europe, North
America and Pakistan. In fiscal year 2005, NetSol raised the pricing of its
LeaseSoft licenses significantly due primarily to a surge in demand. In spring
of 2005, one complete system was sold to Toyota Leasing Thailand ("TLT") for
nearly $2.3 million that includes over $1.2 million for license fees.
A number of large leasing companies will be looking to renew legacy
applications. This places NetSol in a very strong position to capitalize on any
upturn in IT spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2006-2007 that could potentially increase
the sales and bottom line. As the Company continues to sell more of these
licenses, management believes it is possible that the margins could increase to
upward of 70%. The license prices of these products vary from $300,000 to an
excess of $1,000,000 with additional charges for customization and maintenance
of between 20%-30% each year.
The gross profit was $5,349,974 for the six months ending December 31, 2005 as
compared with $3,179,877 for the same period of the previous year. The gross
profit percentage has decreased slightly by 7% to 59.48% in the current fiscal
year from 66.5% for the six months ended December 31, 2004. This is mainly due
to the increase in direct costs of hiring new technology personnel as the
Company gears up for the increased demand in its products and services. Our main
technology campus in Lahore hired over 90 new developers and programmers in the
last four months. In addition, several programmers from our Lahore office were
temporarily relocated to the NetSol-CQ office for training on the CQ system
resulting in higher costs.
Operating expenses were $4,390,483 for the six-month period ending December 31,
2005 as compared to $2,520,798, for the corresponding period last fiscal year
for an increase of $1,869,685. The increase is mainly attributable to increased
selling and marketing activities, additional employees and an increase in
overall activities due to our increased marketing efforts. Also contributing to
the higher costs was the full integration of CQ Systems and the joint-venture
NetSol-TiG. In addition, the Company as a whole contributed over $92,000 to
charity organizations for the Earthquake Relief for Northern Pakistan. As a
percentage of sales, operating expenses decreased 4% to 49% from 53% in the
prior six-month period. Depreciation and amortization expense amounted to
$1,117,386 and $623,140 for the six-month period ended December 31, 2005 and
December 31, 2004, respectively, reflecting the intangible assets purchased from
the CQ Systems acquisition in February 2005. Combined salaries and wage costs
were $1,089,090 and $795,221 for the six month period ended December 31, 2005
and 2004, respectively, or an increase of $293,869 from the corresponding period
last year. As a percentage of sales, salaries was 12% as compared to 17% for the
corresponding period last year. The addition of the new subsidiary, CQ Systems
and the forming of the joint-venture with TiG, as well as an increase in
development, sales and administration employees resulted in the increase.
Approximately 250 new employees were added throughout the Company during the
last fiscal year.
Selling and marketing expenses increased to $731,434 in the six-month period
ended December 31, 2005 as compared to $254,700 in the six-month period ended
December 31, 2004. This reflects the Company's growing sales and marketing
efforts, including the launch of NetSol-CQ as a combined entity to the European
market. The Company is in a growth phase and is increasing its overall sales and
marketing activities. Sales and marketing was 8% of sales for the current six
months as compared to 5% in the corresponding period last year. Professional
services expense decreased to $238,346 in the six-month period ended December
31, 2004, from $255,305 in the corresponding period last year.
Income from continued operations was $959,491 compared to $659,079 for the six
months ended December 31, 2005 and 2004, respectively. This represents an
increase of $300,412 or 45.58% for the six-month period compared to the prior
year. This is directly due to increased sales activity.
Net income was $328,782 for the six months ended December 31, 2005 compared to
$318,380 for the six months ended December 31, 2004. This is an increase of 3%
compared to the prior year. The current fiscal quarter amount includes a net
reduction of $512,745 compared to an add-back of $14,259 in the prior period for
the 49.9% minority interest in NetSol Connect and NetSol-TiG owned by another
party, and the 28.13% minority interest in NetSol PK. During the current six
months, the Company also recognized an expense of $11,761 for the beneficial
conversion feature on convertible debentures, an expense of $9,489 for the fair
market value of warrants issued and a gain of $6,976 from the settlement of a
debt. Net income per share was $0.02, basic and $0.02 diluted, for the six
months ended December 31, 2005 as compared with $0.03, basic and $0.02 diluted
for the corresponding period last year.
25
The net EBITDA income was $1,678,864 compared to $1,073,993 after amortization
and depreciation charges of $1,117,386 and $623,140, income taxes of $66,811 and
2,473, and interest expense of $165,885 and $130,000, respectively. Although the
net EBITDA income is a non-GAAP measure of performance, we are providing it for
the benefit of our investors and shareholders to assist them in their
decision-making process.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $1,884,573 at December 31, 2005 compared to
$488,110 at December 31, 2004. In addition the Company had $1,501,752 in
certificates of deposit. The total cash position, including the certificates of
deposits, was $3,386,325 as of December 31, 2005. In addition, the Company has
$206,900 in a restricted cash account under a Letter of Credit for a vendor.
The Company's current assets as of December 31, 2005 were 51.64% of total
assets, an increase of 11.54% from 40.1% as of December 31, 2004. In addition,
our working capital (current assets minus current liabilities) was $8,823,282.
Net cash used for operating activities amounted to $712,830 for the six months
ended December 31, 2005, as compared to $1,464,697 for the comparable period
last fiscal year. The decrease is mainly due to an increase in net income as
well as an increase in prepaid expenses and accounts receivable.
Net cash used by investing activities amounted to $3,314,422 for the six months
ended December 31, 2005, as compared to $550,877 for the comparable period last
fiscal year. The difference lies primarily in the purchase of property and
equipment during the current fiscal year. The Company had net purchases of
property and equipment of $1,357,022 compared to $380,598 for the comparable
period last fiscal year. During the prior fiscal year, an additional $287,797
was infused into the Company's minority interest in the Company's subsidiary
NetSol Connect.
Net cash provided by financing activities amounted to $4,506,604 and $1,573,593
for the six months ended December 31, 2005, and 2004, respectively. The current
fiscal period included the cash inflow of $0 compared to $1,512,000 from
issuance of equity and $384,062 compared to $343,900 from the exercising of
stock options and warrants, net proceeds of $91,541 as compared to net payments
on loans and capital leases of $230,603 in the comparable period last year. In
addition, the Company received net proceeds of $4,031,001 from the sale of a
subsidiary's common stock in an IPO on the Karachi Stock Exchange.
The Company plans on pursuing various and feasible means of raising new funding
to expand its infrastructure, enhance product offerings and beef up marketing
and sales activities in strategic markets. The strong growth in earnings and the
signing of larger contracts with Fortune 500 customers largely depends on the
financial strength of NetSol. Generally, the bigger name clients and new
prospects diligently analyze and take into consideration a stronger balance
sheet before awarding big projects to vendors. Therefore, NetSol would continue
its effort to further enhance its financial resources in order to continue to
attract large name customers and big value contracts. Management feels that a
major requirement of institutional investors is a much stronger balance sheet
and a healthy cash position.
Management expects to continue to improve its cash position in the current and
future quarters due to the new business signed up in the last quarter. Since our
newly listed subsidiary on the Karachi Stock Exchange ("KSE") has performed much
better than our own expectation i.e the stock has more than doubled from its IPO
price, we have another vehicle to meet the growing needs of new capital. Any new
capital raise would depend on future M&A initiatives. Management would exercise
its best judgment in choosing the most viable option for financing. In addition,
the Company anticipates additional exercises of employee stock options in the
current and subsequent quarters. The Company has consistently improved its cash
position in last four quarters through employees' exercise of options, the IPO
of the Pakistani subsidiary, private placements, and the signing of new
business. We anticipate this trend to continue in the current and future
quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in July 2005. The company would continue to
inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities.
26
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:
o In next three months the final payment of CQ Systems would be due based on
the formula of `earn out'. This could be in the range of $1.0MN to $3.6MN
o Notes payable for approximately $800,000
o Working capital of $1.0 million for US 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.
The methods of raising funds for capital needs may differ based on the
following:
o 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.
o Analysis of the cost of raising capital in the U.S., Europe or emerging
markets. By way of example only, if the cost of raising capital is high in
one market and it may negatively affect the company's stock performance,
we may explore options available in other markets.
Should global or other general macro economic factors cause an adverse climate,
we would defer new financing and use internal cash flow for capital
expenditures.
Item 3. Controls and Procedures
Management, under the supervision and with the participation of the chief
executive officer and chief financial officer, conducted an evaluation of the
disclosure controls and procedures as defined by rule 13a-15(e) as of the end of
the period covered by this interim report on Form 10-QSB. Based upon that
evaluation, the Chairman, Chief Financial Officer and Chief Executive Officer
concluded that our disclosure controls and procedures are effective.
There has been no change, including corrective actions with regard to
deficiencies or weaknesses in the Company's internal controls or in other
factors that has materially affected, or is reasonably likely to materially
affect, these internal controls over financial reporting.
27
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
In October 2005, we issued 63,838 shares to Maxim Group, an accredited investor,
as compensation for services rendered to the Company. The issuance to Maxim
Group was made in reliance on an exemption from registration under Regulation D
of the Securities Act of 1933, as amended (the "Act").
In November 2005, we issued 2,500 shares to an employee of the Company as
compensation for services rendered. The issuance to this employee was made in
reliance on an exemption from registration under Section 4(2) of the Act.
During the period employees of the Company exercised 65,000 options in exchange
for $82,500.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
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 September 14, 2005, NetSol Technologies, Inc issued a press release
announcing results of operations and financial conditions for the year ended
June 30, 2004 and filed a current report on form 8-K attaching this release.
b) On October 4, 2005, NetSol Technologies, Inc. filed an amendment to a current
report, on form 8-K/A, which included a modified auditor's letter regarding the
accounts of the Company's wholly owned subsidiary, CQ Systems, Ltd..
28
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.
Date: February 9, 2006 /s/ Naeem Ghauri
-----------------------
NAEEM GHAURI
Chief Executive Officer
Date: February 9, 2006 /s/ Tina Gilger
-----------------------
Tina Gilger
Chief Financial Officer
29