UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

¨ 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)
 
Indicate by check mark whether the issuer: (1) has 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 ¨
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large Accelerated Filer ¨
Accelerated Filer ¨
Non-Accelerated Filer  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨                      No x
 
The issuer had 48,964,803 shares of its $.001 par value Common Stock and no shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of November 8, 2010.

 

 

NETSOL TECHNOLOGIES, INC.
INDEX
 
   
Page No.
PART I. FINANCIAL INFORMATION
   
Item 1. Financial Statements
   
Consolidated Unaudited Balance Sheet as of September 30, 2010 and as of June 30, 2010
 
2
Comparative Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2010 and 2009
 
3
Comparative Unaudited Consolidated Statements of Cash Flow for the Three Months Ended September 30, 2010 and 2009
 
4
Notes to the Unaudited Consolidated Financial Statements
 
6
Item 2.  Management's Discussion and Analysis or Plan of Operation
 
22
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
32
Item 4.  Controls and Procedures
 
32
PART II. OTHER INFORMATION
   
Item 1.  Legal Proceedings
 
33
Item 2.  Unregistered Sales of Equity and Use of Proceeds
 
33
Item 3.  Defaults Upon Senior Securities
 
34
Item 4.  Submission of Matters to a Vote of Security Holders
 
34
Item 5.  Other Information
 
34
Item 6.  Exhibits
 
34
 
 
Page | 1

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
As of September 30,
   
    As of June 30,    
 
   
2010
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 2,154,813     $ 4,075,546  
Restricted Cash
    5,700,000       5,700,000  
Accounts receivable, net of allowance for doubtful accounts
    15,824,893       12,280,331  
Revenues in excess of billings
    10,556,037       9,477,278  
Other current assets
    2,174,872       1,821,661  
Total current assets
    36,410,614       33,354,816  
Investment under equity method
    130,068       200,506  
Property and equipment, net of accumulated depreciation
    9,582,056       9,472,917  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights,
               
trademarks, and tradenames, net
    20,070,648       19,002,081  
Customer lists, net
    541,110       666,575  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    30,051,043       29,107,941  
Total assets
  $ 76,173,782     $ 72,136,180  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 5,567,954     $ 4,890,921  
Due to officers
    -       10,911  
Current portion of loans and obligations under capitalized leases
    6,072,547       7,285,773  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    2,930,308       2,545,314  
Deferred liability
    32,066       47,066  
Convertible notes payable , current portion
    5,360,018       3,017,096  
Loans payable, bank
    2,302,291       2,327,476  
Common stock to be issued
    1,450,825       239,525  
Total current liabilities
    23,819,235       20,467,308  
Obligations under capitalized leases, less current maturities
    167,312       204,620  
Convertible notes payable less current maturities
    -       4,066,109  
Long term loans; less current maturities
    719,465       727,336  
Lease abandonment liability; long term
    867,583       867,583  
Total liabilities
    25,573,595       26,332,956  
Commitments and contingencies
               
Stockholders' equity:
               
Common stock, $.001 par value; 95,000,000 shares authorized; 43,003,980 &
         
37,103,396 issued and outstanding as of 2010 & 2009, respectively
    43,004       37,104  
Additional paid-in-capital
    89,365,991       86,002,648  
Treasury stock
    (396,008 )     (396,008 )
Accumulated deficit
    (38,292,049 )     (39,859,030 )
Stock subscription receivable
    (2,174,460 )     (2,007,960 )
Other comprehensive loss
    (8,665,100 )     (8,396,086 )
      39,881,378       35,380,668  
Non-controlling interest
    10,718,808       10,422,557  
Total stockholders' equity
    50,600,186       45,803,224  
Total liabilities and stockholders' equity
  $ 76,173,782     $ 72,136,180  

See accompanying notes to these unaudited consolidated financial statements.

 
Page | 2

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
For the Three Months
 
   
Ended September 30,
 
   
2010
   
2009
 
Net Revenues:
           
License fees
  $ 3,477,793     $ 2,551,593  
Maintenance fees
    1,669,919       1,807,716  
Services
    3,255,360       3,262,764  
Total revenues
    8,403,071       7,622,073  
Cost of revenues:
               
Salaries and consultants
    1,986,888       2,013,753  
Travel
    231,612       60,200  
Repairs and maintenance
    57,058       67,611  
Insurance
    30,992       36,679  
Depreciation and amortization
    630,941       498,504  
Other
    243,138       882,338  
Total cost of revenues
    3,180,629       3,559,085  
Gross profit
    5,222,442       4,062,988  
Operating expenses:
               
Selling and marketing
    483,970       493,629  
Depreciation and amortization
    266,443       512,362  
Bad debt expense
    254,632       -  
Salaries and wages
    920,264       714,899  
Professional services, including non-cash compensation
    139,085       96,106  
General and adminstrative
    1,132,519       1,099,806  
Total operating expenses
    3,196,913       2,916,802  
Income from operations
    2,025,530       1,146,186  
Other income and (expenses)
               
Gain (loss) on sale of assets
    (14,794 )     18  
Interest expense
    (315,644 )     (468,615 )
Interest income
    84,461       117,810  
Gain on foreign currency exchange transactions
    1,073,894       383,825  
Share of net loss from equity investment
    (70,438 )     -  
Beneficial conversion feature
    (177,411 )     (297,999 )
Other expense
    (55,554 )     (31,150 )
Total other income (expenses)
    524,515       (296,111 )
Net income before non-controlling interest in subsidiary and income taxes
    2,550,045       850,075  
Non-controlling interest
    (974,508 )     (1,108,975 )
Income taxes
    (8,556 )     (5,017 )
Net income (loss)
    1,566,981       (263,917 )
                 
Other comprehensive income (loss):
               
Translation adjustment
    (269,014 )     (315,864 )
Comprehensive income (loss)
  $ 1,297,967     $ (579,781 )
                 
Net income (loss) per share:
               
Basic
  $ 0.04     $ (0.01 )
Diluted
  $ 0.04     $ (0.01 )
Weighted average number of shares outstanding
               
Basic
    39,544,096       31,636,379  
Diluted
    43,251,519       31,636,379  

See accompanying notes to these unaudited consolidated financial statements.

 
Page | 3

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Three Months
 
   
Ended September 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 1,566,981     $ (263,917 )
Adjustments to reconcile net income (loss)
               
 to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    897,383       1,010,867  
Provision for bad debts
    254,632       -  
Loss on foreign currency exchange transaction
    -       16,429  
Share of net loss from investment under equity method
    70,438       -  
Loss on sale of assets
    14,794       -  
Non controlling interest in subsidiary
    974,508       1,108,975  
Stock issued for notes payable and related interest
    14,419       -  
Stock issued for services
    383,950       226,720  
Fair market value of warrants and stock options granted
    53,594       283,500  
Beneficial conversion feature
    177,411       297,999  
Changes in operating assets and liabilities:
               
Increase/ decrease in accounts receivable
    (2,708,406 )     (693,290 )
Increase/ decrease in other current assets
    (1,453,577 )     (345,240 )
Increase/ decrease in accounts payable and accrued expenses
    (359,946 )     (949,731 )
 Net cash provided by (used in) operating activities
    (113,820 )     692,312  
Cash flows from investing activities:
               
Purchases of property and equipment
    (682,676 )     (95,160 )
Sales of property and equipment
    4,550       -  
Purchase of non-controlling interest in subsidiary
    (180,000 )     -  
Short-term investments held for sale
    (254,632 )     -  
Increase in intangible assets
    (1,574,143 )     (1,612,840 )
Net cash used in investing activities
    (2,686,900 )     (1,708,000 )
Cash flows from financing activities:
               
Proceeds from sale of common stock
    2,021,139       158,906  
Proceeds from the exercise of stock options and warrants
    186,875       -  
Proceeds from convertible notes payable
    -       2,000,000  
Redemption of preferred stock
    -       (1,920,000 )
Dividend Paid
    -       (41,740 )
Bank overdraft
    90,944       86,922  
Proceeds from bank loans
    1,064,554       2,617,881  
Payments on bank loans
    (45,427 )     (215,144 )
Payments on capital lease obligations & loans - net
    (2,365,852 )     (2,043,769 )
Net cash provided by financing activities
    952,233       643,057  
Effect of exchange rate changes in cash
    (72,246 )     (74,852 )
Net decrease in cash and cash equivalents
    (1,920,733 )     (447,483 )
Cash and cash equivalents, beginning of year
    4,075,546       4,403,762  
Cash and cash equivalents, end of year
  $ 2,154,813     $ 3,956,279  

See accompanying notes to the unaudited consolidated financial statements.

 
Page | 4

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 
   
For the Three Months
 
   
Ended September 30,
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURES:
           
Cash paid during the period for:
           
Interest
  $ 429,289     $ 247,449  
Taxes
  $ 659     $ 92,618  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued for the conversion of Notes Payable
  $ 1,900,598     $ -  
 
See accompanying notes to the unaudited consolidated financial statements.

 
Page | 5

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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-K for the year ended June 30, 2010.  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 NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows:
 
Wholly-owned Subsidiaries
NetSol Technologies North America, Inc. (“NTNA”)
NetSol Technologies Limited (“NetSol UK”)
NetSol Connect (Private), Ltd. (“Connect)
NetSol-Abraxas Australia Pty Ltd. (“Abraxas”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
 
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
 
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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 October 2009, the FASB amended guidance related to revenue recognition that will be effective for the Company beginning July 1, 2010. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB amended guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. Adoption of the new guidance did not have a material impact on our financial statements.
 
In December 2009, the FASB amended guidance related to fair value measurements and Disclosures, which was effective beginning the 2nd quarter of the Company’s 2010 fiscal year, December 31, 2009. These amendments prescribe new disclosures and clarify certain existing disclosure requirements related to fair value measurements. The objective of the amendments was to improve these disclosures and, thus, increase the transparency in financial reporting. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.
 
 
Page | 6

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In February 2010, the FASB amended guidance related to disclosure of subsequent events, which was effective upon issuance. These amendments prescribe that entities that are SEC filers are required to evaluate subsequent events through the date that the financial statements are issued. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.
 
NOTE 4 – EARNINGS/(LOSS) PER SHARE:
 
Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, warrants, and stock awards.
 
The components of basic and diluted earnings per share for the three months ended September 30, 2010 and 2009 were as follows:
 
For the period ended September 30, 2010
 
Net Income
   
Shares
   
Per Share
 
Basic income per share:
  $ 1,566,981       39,544,096     $ 0.04  
Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                 
Effect of dilutive securities*
                       
Stock options
            1,159,964          
Warrants
            2,547,459          
Convertible Note -1
            -          
 Diluted income per share
  $ 1,566,981       43,251,519     $ 0.04  
 
For the period ended September 30, 2009
 
  Net Loss  
   
Shares
   
Per Share
 
Basic (loss) per share:
  $ (263,917 )     31,636,379     $ (0.01 )
Dividend to preferred shareholders
    -             $ -  
Net income available to common shareholders
                 
Effect of dilutive securities*
                       
Stock options
            -          
Warrants
            -          
Convertible Note
            -          
Diluted (loss) per share
  $ (263,917 )     31,636,379     $ (0.01 )

1 During the period ended September 30, 2010, convertible notes payable were not included in the comuptation of diluted earnings per share because the effect of conversion would be anti dilutive.
   
*
As there is a loss, these securities are anti-dilutive.  The basic and diluted loss per share is the same for the three months ended September 30, 2009
             
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY:
 
The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, and NetSol Innovation 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 are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $8,665,100 and $8,396,086 as of September 30, 2010 and June 30, 2010 respectively. During the three months ended September 30, 2010 and 2009, comprehensive loss in the consolidated statements of operations included translation loss of $269,014 and $315,864 respectively.

 
Page | 7

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following at September 30, 2010 and June 30, 2010:
 
   
As of September 30,
   
As of June 30,
 
   
2010
   
2010
 
             
Prepaid Expenses
  $ 200,912     $ 237,702  
Advance Income Tax
    434,584       422,028  
Employee Advances
    57,775       57,113  
Security Deposits
    139,498       131,229  
Tender Money Receivable
    127,474       252,826  
Other Receivables
    508,237       535,981  
Other Assets
    706,392       184,782  
Total
  $ 2,174,872     $ 1,821,661  
 
NOTE 7 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consist of the following at September 30, 2010 and June 30, 2010:
 
   
As of September 30,
   
    As of June 30, 
 
   
2010
   
2010
 
             
Office furniture and equipment
  $ 1,053,073     $ 1,041,326  
Computer equipment
    8,079,559       8,038,033  
Assets under capital leases
    1,832,075       1,838,217  
Building
    2,289,040       2,314,080  
Land
    556,027       562,109  
Capital work in progress
    2,391,584       1,925,207  
Autos
    743,882       744,586  
Improvements
    161,906       163,365  
Subtotal
    17,107,143       16,626,923  
Accumulated depreciation
    (7,525,087 )     (7,154,005 )
    $ 9,582,056     $ 9,472,917  
 
For the three months ended September 30, 2010 and 2009, depreciation expense totaled $369,565 and $372,872 respectively.  Of these amounts, $256,484 and $214,760 respectively, are reflected as part of cost of goods sold.

 
Page | 8

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 8 - INTANGIBLE ASSETS:
 
Intangible assets consist of the following at September 30, and June 30, 2010:
 
   
Product Licenses
   
Customer Lists
   
Total
 
Intangible assets - June 30, 2009 - cost
  $ 25,042,331     $ 5,804,057     $ 30,846,388  
Additions
    7,652,707       -       7,652,707  
Effect of translation adjustment
    (2,734,235 )     -       (2,734,235 )
Accumulated amortization
    (10,958,723 )     (5,137,482 )     (16,096,205 )
Net balance - June 30, 2010
  $ 19,002,080     $ 666,575     $ 19,668,655  
                         
Intangible assets - September 30, 2010 - cost
  $ 30,155,176     $ 5,804,057     $ 35,959,233  
Additions
    1,586,115       -       1,586,115  
Effect of translation adjustment
    (259,479 )     -       (259,479 )
Accumulated amortization
    (11,411,164 )     (5,262,947 )     (16,674,111 )
Net balance - September 30, 2010
  $ 20,070,648     $ 541,111     $ 20,611,758  
                         
Amortization expense for:
                       
Quarter ended September 30, 2010
  $ 402,353     $ 125,465     $ 527,818  
Quarter ended September 30, 2009
  $ 446,685     $ 191,309     $ 637,994  
 
(A) Product Licenses
 
Product licenses include original license issue, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses included unamortized software development and enhancement costs of $15,365,962.
 
(B) Customer Lists
 
On October 31, 2008, the Company entered into an agreement to purchase the rights to the customer list of Ciena Solutions, LLC, a California limited liability company (“Ciena”). Under the terms of the agreement, the total consideration for these rights included an initial payment of $350,000 (plus interest of $2,963), and deferred consideration to be paid in cash and the Company’s common stock based on the operational results of Ciena, and certain other factors, over a four-year fiscal period. Each fiscal period is measured from July 1 to June 30 with fiscal period one being the period from July 1, 2008 to June 30, 2009. No other assets or liabilities were acquired by the Company as a result of this transaction.
 
As a result of operational losses of Ciena in the first two fiscal periods, 2009 and 2010, respectively, the first two annual deferred consideration installment payments were determined to be zero.
 
(C) Amortization
 
Software development amortization expense was $374,457 and $283,744 for the periods ended September 30, 2010 and September 30, 2009, respectively, and is recorded in cost of revenues.
 
Amortization expense of intangible assets over the next five years is as follows:
 
   
FISCAL YEAR ENDING
       
Asset
 
9/30/11
   
9/30/12
   
9/30/13
   
9/30/14
   
9/30/15
   
Thereafter
   
TOTAL
 
Product Licences
  $ 1,457,499     $ 780,878     $ 780,878     $ 780,878     $ 780,878     $ 15,489,637     $ 20,070,648  
Customer Lists
    394,043       76,476       70,592       -       -       -       541,111  
                                                         
    $ 1,851,542     $ 857,354     $ 851,470     $ 780,878     $ 780,878     $ 15,489,637     $ 20,611,759  
 
 
Page | 9

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 9 – GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period businesses combinations. Goodwill is comprised of the following amounts as of September 30, 2010 and June 30, 2010:
 
   
As of September 30,
      
As of June 30,
 
   
2010
   
2010
 
NetSol PK
  $ 1,303,372     $ 1,303,372  
CQ Systems
    3,471,813       3,471,813  
McCue Systems
    4,664,100       4,664,100  
                 
Total
  $ 9,439,285     $ 9,439,285  
 
There was no impairment of the goodwill for the periods ended September 30, 2010 and June 30, 2010.
 
NOTE 10 – INVESTMENT UNDER EQUITY METHOD
 
On April 10, 2009, the Company entered into an agreement to form a joint venture with the Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint venture entity Atheeb NetSol Saudi Company Ltd. is a company organized under the laws of the Kingdom of Saudi Arabia. The venture was formed with an initial capital contribution of $268,000 by the Company and $266,930 by Atheeb with a profit sharing ratio of 50.1:49.9, respectively. The final formation of the company was completed on March 7, 2010. The joint venture was accounted for as an equity method investment as the Company has not established control over the affairs of Atheeb NetSol Saudi Company Ltd. due to its minority representation on the board of directors.
 
The Company's investment in equity for the period ended September 30, 2010 is as follows:
 
Initial investment in Atheeb NetSol at cost
  $ 268,000  
Net loss for the period
    (134,719 )
NetSol's share (50.1%)
    (67,494 )
                                  
Net book vale @ 6-30-10
  $ 200,506  
         
Net loss for the quarter
    (140,594 )
NetSol's share (50.1%)
    (70,438 )
         
Net book vale @ 9-30-10
  $ 130,068  
 
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following at September 30, 2010 and June 30, 2010:
 
   
As of September 30,
   
As of June 30,
 
   
2010
   
2010
 
             
Accounts Payable
  $ 1,305,406     $ 1,321,212  
Accrued Liabilities
    3,119,128       2,369,153  
Accrued Payroll
    89,296       158,392  
Accrued Payroll Taxes
    378,171       299,908  
Interest Payable
    534,803       602,614  
Deferred Revenues
    5,721       6,472  
Taxes Payable
    135,427       133,169  
Total
  $ 5,567,954     $ 4,890,921  

 
Page | 10

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 12 - DEBTS
 
(A) LOANS AND LEASES PAYABLE
 
Notes payable consist of the following at September 30, 2010 and June 30, 2010:
 
   
As of
September 30,
   
Current
   
Long-Term
 
Name
 
2010
   
Maturities
   
Maturities
 
                   
Habib Bank Line of Credit
  $ 4,407,923     $ 4,407,923     $ -  
Bank Overdraft Facility
    303,582       303,582       -  
Term Finance Facility
    1,151,145       431,680       719,465  
Subsidiary Capital Leases
    1,096,675       929,362       167,312  
Lease abandonment liability
    867,583       -       867,583  
    $ 7,826,907     $ 6,072,547     $ 1,754,360  
 
   
As of 
June 30,
   
Current
   
Long-Term
 
Name
 
2010
   
Maturities
   
   Maturities   
 
                   
D&O Insurance
  $ 12,122     $ 12,122     $ -  
E&O Insurance
    7,046       7,046          
Habib Bank Line of Credit
    5,677,533       5,677,533       -  
Bank Overdraft Facility
    202,712       202,712       -  
HSBC Loan
    43,306       43,306       -  
Term Finance Facility
    1,163,738       436,402       727,336  
Subsidiary Capital Leases
    1,111,271       906,651       204,620  
      867,583       -       867,583  
    $ 9,085,311     $ 7,285,773     $ 1,799,538  
 
The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well as Errors and Omissions (“E&O”) liability insurance, for which the total balances are renewed on an annual basis and as such are recorded in current maturities. The interest rate on the insurance financing was 0.49% as of September 30, 2010 and June 30, 2010. Interest paid during the quarter-ended September 30, 2010 and 2009 was nominal.
 
In April 2008, the Company entered into an agreement with Habib American Bank to secure a line of credit to be collateralized by Certificates of Deposit held at the bank. The interest rate on this line of credit is variable and was 3.23% as of September 30, 2010 and June 30, 2010, respectively. Interest paid during the quarter ended September 30, 2010 and 2009 was $40,123 and $45,774, respectively.
 
During the year ended June 30, 2008, the Company’s subsidiary, NTE entered into an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £200,000. The annual interest rate is 3.25% over the bank’s sterling base rate, which was 5.00% as of September 30, 2010 and June 30, 2010, respectively.
 
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 $790,450 was converted into a loan payable with a maturity of three years. The interest rate is 7.5% with monthly payments of £14,436 or approximately $22,822. The Parent has guaranteed payment of the loan in the event the subsidiary should default. Interest paid during the quarter ended September 30, 2010 and 2009 was $214 and $5,979, respectively. As of September 30, 2010, this loan was paid off in full.
 
The Company’s subsidiary, NetSol PK, entered into a term finance facility from Askari Bank to finance the construction of a new building. The total amount of the facility is Rs. 200,000,000 or approximately $2,302,291 (secured by the first of Rs. 580 million over the land, building and equipment of the company). The interest rate is 2.75% above the six-month Karachi Inter Bank Offering Rate. As on June 30, 2010, the subsidiary had used Rs. 100,000,000 or approximately $1,163,738 of which $727,336 was shown as long term liabilities and the remainder of $436,402 as current maturity. As of the quarter ended September 30, 2010, the Company has used Rs. 100,000,000 or approximately $1,151,145 of which $719,465 is shown as long term liabilities and the remainder of $431,680 as current maturity.

 
Page | 11

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The Company leases various fixed assets under capital lease arrangements expiring in various years through 2014. 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 quarters ended September 30, 2010 and 2009.
 
Following is the aggregate minimum future lease payments under capital leases as of September 30, 2010 and June 30, 2010:
 
   
As of September 30,
      
As of June 30,
 
   
2010
   
2010
 
Minimum Lease Payments
           
Due FYE 9/30/11
  $ 964,714     $ 941,406  
Due FYE 9/30/12
    159,763       189,155  
Due FYE 9/30/13
    14,636       27,481  
Total Minimum Lease Payments
    1,139,112       1,158,042  
Interest Expense relating to future periods
    (42,438 )     (46,771 )
Present Value of minimum lease payments
    1,096,675       1,111,271  
Less:  Current portion
    (929,362 )     (906,651 )
Non-Current portion
  $ 167,312     $ 204,620  
 
Following is a summary of fixed assets held under capital leases as of June 30, 2010 and 2009:
 
   
As of September 30,
      
As of June 30,
 
   
2010
   
2010
 
             
Computer Equipment and Software
  $ 470,842     $ 473,033  
Furniture and Fixtures
    829,503       830,942  
Vehicles
    229,515       232,026  
Building Equipment
    302,216       302,216  
                 
Total
    1,832,075       1,838,217  
Less:  Accumulated Depreciation
    (702,837 )     (621,567 )
Net
  $ 1,129,238     $ 1,216,650  
 
In 2008, the Company’s subsidiary, NTNA, had acquired an office space in Emeryville on a long term lease. However, due to the unprecedented recession experienced in 2009, the company decided to vacate the office space and terminate the lease in October 2009. The Company recorded a lease abandonment charge of $1,076,347 in the quarter-ended December 31, 2009. However, the office space was leased by another company during the quarter-ended March 31, 2010 and the lease abandonment charge was reduced by $208,765 to $867,583 as of September 30, 2010 and June 30, 2010. The liability as of September 30, 2010 and June 30, 2010 was determined using fair value level 2 methodology and assumptions.

 
Page | 12

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(B) LOANS PAYABLE- BANK
 
The Company’s subsidiary, NetSol TPK, has a loan with a bank, secured by the Company’s assets. This loan consists of the following as of September 30, 2010 & June 30, 2010:
 
For the period ended September 30, 2010:
       
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    9.00 %   $ 2,302,291  
                     
Total
              $ 2,302,291  
 
For the year ended June 30, 2010:
           
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    9.00 %   $ 2,327,476  
                     
Total
              $ 2,327,476  
 
(C) OTHER PAYABLE – ACQUISITION
 
On June 30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California corporation (subsequently renamed as NetSol Technologies North America, Inc.) The total purchase price was $7,080,385, including $3,784,635 of cash and 1,712,332 shares of the Company’s common stock. Of the total purchase price, the accompanying consolidated financial statements include certain amounts payable to McCue shareholders that have not been located as of the date of this report.
 
As of the period-ended September 30, 2010 and June 30, 2010, the remaining cash due of $103,226 is shown as “Other Payable – Acquisition” and the remaining stock to be issued of 46,704 shares at an average price of $1.89 is shown in “Shares to be issued” in the accompanying consolidated financial statements. Amounts payable represent the remaining McCue shareholders that have not been located as of the date of this report.
 
(D) DUE TO OFFICERS
 
The officers of the Company, from time to time, loan funds to the Company. The balance due to officers as of September 30, 2010 and June 30, 2010 was Nil and $10,911 respectively.

 
Page | 13

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 13 – CONVERTIBLE NOTES PAYABLE
 
The net outstanding balance of convertible notes as of June 30, 2010 and 2009 is as follows:
 
Issue Date
    
Balance net of BCF @
September 30, 2010
   
Current
Portion
   
Long Term
    
Maturity
Date
 
                       
Jul-08
    3,860,018       3,860,018       -  
Jul-11
 
Mar-10
    1,500,000       1,500,000       -  
Mar-11
 
                             
Total
    5,360,018       5,360,018       -      
 
Issue Date
    
Balance net of BCF @
June 30, 2010
   
Current
Portion
   
Long Term
    
Maturity
Date
 
                       
Jul-08
    4,066,108             4,066,108  
Jul-11
 
Aug-09
    1,517,096       1,517,096          
Aug-10
 
Mar-10
    1,500,000       1,500,000          
Mar-11
 
                             
Total
    7,083,204       3,017,096       4,066,108      
 
For the periods ended September 30, 2010 and September 30, 2009, the interest expense on convertible notes was $192,370 and $158,064, respectively.
 
(A) 2008 CONVERTIBLE DEBT
 
In July 2008, the Company issued $6,000,000 of 7% convertible debt maturing in 3 years (the “2008 Notes”), with a conversion price of $3.00 per share.
 
In January 2009, the 2008 Notes were amended to remove certain anti-dilution protection provisions and participation rights in future filings in exchange for a reduction in the conversion rate to $0.78, and $1,000,000 in cash, payable to the debt holders in 4 quarterly installments. Pursuant to the terms of the amendment, the Company recorded a beneficial conversion feature (“BCF”) in the amount of $230,769 which is being amortized as a component of interest expense over the maturity period. The related liability of $1,000,000 was recorded as a component of interest expense for the year-ended June 30, 2009.
 
In August 2009, the Company amended the 2008 Notes by reducing the conversion rate to $0.63, and recorded an additional BCF of $715,518, which is being amortized as a component of interest expense over the maturity period.
 
During the year-ended June 30, 2010, Holders of the 2008 Notes elected to convert principal and interest due thereon into a total of 2,513,112 shares of common stock. These conversions reduced the total principal of the 2008 Notes to $4,450,000.
 
During the quarter ended September 30, 2010, Holders of the 2008 Note further elected to convert the principal and interest due thereon into a total of 310,435 shares of common stock. These conversions reduced the principal of the 2008 Note to $4,149,402.
 
(B) 2009 CONVERTIBLE DEBT
 
In August 2009, the Company issued $2,000,000 of 9% convertible debt maturing in 1 year (the “2009 Notes”) with a conversion price of $0.63 per share, in exchange for the redemption of preferred shares outstanding. The associated BCF of $1,428,571 is being amortized as a component of interest expense through maturity.
 
During the year-ended June 30, 2010, Holders of the 2009 Notes elected to convert principal and interest due thereon into a total of 645,556 shares of common stock. This conversion reduced the total principal of the 2009 Notes to $1,600,000.
 
During the quarter ended September 30, 2010, Holders of the 2009 Note further elected to convert the remaining principal and interest due thereon into a total of 2,613,333 shares of common stock. These conversions reduced the principal of the 2009 Note to nil.

 
Page | 14

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 (C) 2010 CONVERTIBLE DEBT
 
In March 2010, the Company issued $1,500,000 of 8% convertible debt maturing in 1 year (the “2010 Notes”), with a conversion price of $1.15 per share. The maturity date of these notes may be extended an additional year upon agreement of both parties.  In August, 2010, the note conversion prices were adjusted to $.0.85 per share.
 
NOTE 14 - STOCKHOLDERS’ EQUITY:
 
(A) TREASURY STOCK
 
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. During the year ended June 30, 2008, the Company had repurchased a total of 13,600 shares on the open market valued at $25,486. The balance as of June 30, 2008 was $35,681. In September 2008, the stock repurchase plan was extended an additional 6 months. During the year ended June 30, 2009, the Company purchased an additional 208,900 shares on the open market valued at $360,328. The balance as of September 30, 2010 and June 30, 2010 was $396,008. The stock repurchase plan expired on March 24, 2009.
 
On July 27, 2010, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 2,000,000 of its shares of common stock over the following 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.  The Company did not repurchase any shares of common stock during the quarter ended September 30, 2010. The stock repurchase plan will expire on January 27, 2011.
 
(B) SHARES ISSUED FOR SERVICES TO RELATED PARTIES
 
During the three months period ended September 30, 2010, and year ended June 30, 2010, the Company issued a total of 210,000 and 187,500 shares of restricted common stock for services rendered by the officers of the company. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $151,200 and 163,125, as of September 30, 2010 and June 30, 2010, respectively.
 
During the three months period ended September 30, 2010, and year ended June 30, 2010, the Company issued a total of 30,000 and 90,000 shares of restricted common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $25,200 and $78,900, as of September 30, 2010 and June 30, 2010, respectively.
 
During the three months period ended September 30, 2010 and year ended June 30, 2010, the Company issued a total of 15,432 and 139,881 shares of its common stock to employees as required according to the terms of their employment agreements valued at $12,500 and $130,500, respectively.
 
(C) SHARE-BASED PAYMENT TRANSACTIONS
 
During the period ended September 30, 2010, and year ended June 30, 2010, the Company issued a total of 25,000 and 501,931 shares of its common stock for provision of services to unrelated consultants valued at $20,750 and $275,019, respectively.

 
Page | 15

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 15 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
Common stock purchase options and warrants consisted of the following as of September 30, 2010:
 
 
       
Exercise
   
Aggregated
 
 
 
# shares
   
Price
   
Intrinsic Value
 
OPTIONS:
                 
Issued by the Company
                 
                   
Outstanding and exercisable, June 30, 2009
    7,706,917    
$0.30 to $5.00 
    $ -  
Granted
    300,000    
$0.75
         
Exercised
    (300,000 )  
$0.75
         
Expired
    -                
Outstanding and exercisable, June 30, 2010
    7,706,917    
$0.30 to $5.00
    $ 146,047  
Granted
    1,002,000    
$0.65
         
Exercised
    (287,500 )  
$0.65
         
Expired
    -                
Outstanding and exercisable, September 30, 2010
    8,421,417    
$0.30 to $5.00
    $ 2,427,620  
                       
WARRANTS:
                     
Outstanding and exercisable, June 30, 2009
    1,777,617    
$1.65 to $3.70
    $ -  
Granted
    3,274,682    
$0.31
         
Exercised
    -                
Expired
    (288,980 )  
3.3
         
Outstanding and exercisable, June 30, 2010
    4,763,319    
$1.65 to $3.70
    $ 1,698,387  
Granted
                     
Exercised
    (600,000 )  
$0.31
         
Expired
                     
Outstanding and exercisable, September 30, 2010
    4,163,319    
$0.63 to $3.70
    $ 4,461,935  
 
The average life remaining on the options and warrants as of September 30, 2010 is as follows:
 
Exercise Price
 
Number
Outstanding
and
Exercisable
   
Weighted
Average
Remaining
Contractual
Life
   
Weighted
Ave
Exericse
Price
 
OPTIONS:
                 
Issued by the Company
                 
$0.01 - $0.99
    2,520,500       6.07       0.65  
$1.00 - $1.99
    2,045,917       4.83       1.88  
$2.00 - $2.99
    3,055,000       4.54       2.69  
$3.00 - $5.00
    800,000       3.56       4.24  
                         
Totals
    8,421,417       4.98       2.03  
                         
WARRANTS:
                       
$0.31 - $1.99
    4,150,819       4.15       0.57  
$3.00 - $5.00
    12,500       1.01       3.70  
                         
Totals
    4,163,319       4.14       0.58  
 
All options and warrants granted are vested and are exercisable as of September 30, 2010, except 375,000 options which will vest in next two quarters.

 
Page | 16

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 (A) INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the Board specifically determines otherwise, as provided.
 
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
 
OPTIONS
 
During the quarter ended December 31, 2009, the Company granted 250,000 options to two employees with an exercise price of $0.75 per share and an expiration date of 1 year, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $71,238 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
    1.56 %
Expected life
 
1 year
 
Expected volatility
    56 %
 
During the quarter ended June 30, 2010, the Company granted 50,000 options to two employees with an exercise price of $0.75 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $3,652 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
    1.08 %
Expected life
 
1 month
 
Expected volatility
    39 %
 
During the quarter ended September 30, 2010, the Company granted 750,000 options to five employees with an exercise price of $0.65 per share and an expiration date of 1 Year, vesting quarterly. Using the Black-Scholes method to value the options, the Company recorded $23,566 per quarter 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
    2.01 %
Expected life
 
1 year
 
Expected volatility
    29 %
 
During the quarter ended September 30, 2010, the Company granted 10,000 options to one employee with an exercise price of $0.65 per share and an expiration date of 1 Year, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $1,257 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
    2.01 %
Expected life
 
1 year
 
Expected volatility
    29 %
 
During the quarter ended September 30, 2010, the Company granted 242,000 options to seven employee with an exercise price of $0.65 per share and an expiration date of 4 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $22,092 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
    1.81 %
Expected life
 
4 months
 
Expected volatility
    29 %
 
 
Page | 17

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
WARRANTS
 
During the year ended June 30, 2010, the Company amended the terms of warrant agreements associated with common stock issued in October, 2007. Pursuant to the terms of the amendment, the exercise price was reduced to $0.31 from $0.63, resulting in a corresponding increase in the number of shares of common stock underlying the warrants by 3,274,682. The above holders opted cashless exercise of 600,000 warrants and as a consequence 466,571 shares were issued.
 
(B) EQUITY INCENTIVE PLAN
 
In May 2008, the shareholders approved the 2008 Equity Incentive Plan (the “2008 Plan”) which provides for the grant of equity-based awards, including options, stock appreciation rights, restricted stock awards or performance share awards or any other right or interest relating to shares or cash, to eligible participants. The aggregate number of shares reserved and available for award under the 2008 Plan is 1,000,000 (the Share Reserve). The 2008 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 2008 Plan. Shares issued under the 2008 Plan may be both authorized and unissued shares or previously issued shares acquired by the Company. Upon termination or expiration of an unexercised option, stock appreciation right or other stock-based award under the 2008 Plan, in whole or in part, the number of shares of common stock subject to such award again become available for grant under the 2008 Plan. Any shares of restricted stock forfeited as described below will become available for grant. The maximum number of shares that may be granted to any one participant in any calendar year may not exceed 500,000 shares. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
 
STOCK OPTIONS
 
Options granted under the 2008 Plan are not generally transferable and must be exercised within 10 years, subject to earlier termination upon termination of the option holder's employment, but in no event later than the expiration of the option's term. The exercise price of each option may not be less than the fair market value of a share of the Company’s common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended (the Code). Incentive stock options granted to any participant who owns 10% or more of the Company’s outstanding common stock (a Ten Percent Shareholder) must have an exercise price equal to or exceeding 110% of the fair market value of a share of our common stock on the date of the grant and must not be exercisable for longer than five years. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2008 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years.
 
PERFORMANCE AWARDS
 
Under the 2008 Plan, a participant may also be awarded a "performance award," which means that the participant may receive cash, stock or other awards contingent upon achieving performance goals established by the Committee. The Committee may also make "deferred share" awards, which entitle the participant to receive our stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with our Company. A participant who is granted a "stock appreciation right" under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the Committee (but in no event less than the fair market value of the stock on the date of grant). Finally, the Committee may make "restricted stock" awards under the 2008 Plan, which are subject to such terms and conditions as the Committee determines and as are set forth in the award agreement related to the restricted stock. As of September 30, 2010, 789,500 shares have been issued under this plan.

 
Page | 18

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 16 – SEGMENT AND GEOGRAPHIC AREAS
 
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 intracompany 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 three months ended September 30:
 
   
2010
   
2009
 
Revenues from unaffiliated customers:
           
North America
  $ 1,242,982     $ 1,723,954  
Europe
    2,089,979       929,794  
Asia - Pacific
    5,070,110       4,968,325  
Consolidated
  $ 8,403,071     $ 7,622,073  
                 
Operating income (loss):
               
Corporate headquarters
  $ (1,056,548 )   $ (1,185,258 )
North America
    321,093       314,244  
Europe
    1,079,667       (153,291 )
Asia - Pacific
    1,681,317       2,170,491  
Consolidated
  $ 2,025,530     $ 1,146,186  
                 
Net income (loss) after taxes and before minority interest:
         
Corporate headquarters
  $ (1,481,129 )   $ (1,731,335 )
North America
    324,250       277,087  
Europe
    1,016,852       (167,380 )
Asia - Pacific
    2,681,517       2,466,686  
Consolidated
  $ 2,541,489     $ 845,058  
                 
Identifiable assets:
               
Corporate headquarters
  $ 17,043,137     $ 17,597,076  
North America
    2,278,499       2,969,145  
Europe
    4,783,665       3,373,229  
Asia - Pacific
    52,068,480       40,077,357  
Consolidated
  $ 76,173,782     $ 64,016,807  
                 
Depreciation and amortization:
               
Corporate headquarters
  $ 153,724     $ 355,016  
North America
    132,077       135,198  
Europe
    179,440       152,590  
Asia - Pacific
    432,141       368,062  
Consolidated
  $ 897,383     $ 1,010,866  
                 
Capital expenditures:
               
Corporate headquarters
  $ -     $ -  
North America
    3,405       6,168  
Europe
    -       7,428  
Asia - Pacific
    679,271       81,564  
Consolidated
  $ 682,676     $ 95,160  
 
 
Page | 19

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Net revenues by our various products and services provided for the period ended September 30, are as follows:
 
   
2010
   
2009
 
Licensing Fees
  $ 3,477,793     $ 2,551,593  
Maintenance Fees
    1,669,919       1,807,716  
Services
    3,255,360       3,262,764  
Total
  $ 8,403,071     $ 7,622,073  
 
NOTE 17 – NON-CONTROLLING INTEREST IN SUBSIDIARY
 
The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest as of September 30, 2010 and June 30, 2010 was as follows:
 
SUBSIDIARY
 
Non-Controlling
Interest %
   
Non-Controlling
Interest
September 30,
2010
 
                                              
NetSol PK
    42.04 %   $ 9,321,718  
NetSol-Innovation
    49.90 %     1,397,090  
                 
Total
          $ 10,718,808  
 
SUBSIDIARY
 
Non-Controlling
Interest %
   
Non-Controlling
Interest
June 30,
2010
 
                                              
NetSol PK
    42.04 %   $ 9,133,392  
NetSol-Innovation
    49.90 %     1,291,057  
Connect
    49.90 %     (1,891 )
                 
Total
          $ 10,422,557  
 
(A) NETSOL TECHNOLOGIES, LIMITED (“NETSOL PK”)
 
For the fiscal quarters ended September 30, 2010 and 2009, NetSol Technologies Ltd. (“NetSol PK”) had net income of $2,031,123 and $2,411,344. The related non-controlling interest was $853,884 and $1,013,729, respectively.
 
In April, 2009, NetSol PK issued 6,223,209 shares of common stock to the company in fulfillment of an outstanding loan balance of $1,879,672 provided by the Company.
 
During the fiscal year-ended June 2009, the Company disposed of 3,132,255 shares of NetSol PK in the open market with a value of $558,536. A net gain of $351,522 is recorded as “Other Income” in the accompanying consolidated financial statements. As a result of the sale, the corresponding non-controlling interest increased from 41.32% to 42.04%.
 
During the quarter ended September 30, 2010, NetSol PK declared a cash dividend of $1,125,733, of which the Company’s interest was $652,475. The dividend will be paid during the quarter-ended December 31, 2010. The amount attributable to the minority holders was $473,258 and is reflected in the accompanying consolidated financial statements.
 
(B) NETSOL INNOVATION (PRIVATE) LIMITED (“NETSOL INNOVATION”)
 
For the fiscal quarters ended September 30, 2010 and 2009, NetSol Innovation (Private) Limited (“NetSol Innovation”) had net income of $241,731 and $209,405. The related non-controlling interest was $120,624 and $104,493, respectively.
 
(C) NETSOL CONNECT (“CONNECT”)
 
The company has acquired the non-controlling interest in NetSol Connect against a payment of $180,000 in the start of this fiscal quarter. The balance of non-controlling interest as on June 30, 2010 (the acquisition date) was $1,891 (loss). Per Para 33 of SFAS 160 company adjusted the additional paid in capital by $181,891.

 
Page | 20

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 18 - SUBSEQUENT EVENTS
 
There were 210,000 shares of common stock granted to executive employees as part of the employment agreements which were earned upon the conclusion of the quarter ended September 30, 2010.

A consultant was issued 233,000 shares as part of the consultant’s agreement with the Company.  The issuance of shares was reliant upon the acquisition of a common stock share price of no less than $1.75.

Holders of warrants with an exercise price of $.31 per share exercised warrants for a total of 1,406,331 shares of common stock.

Accredited investors who participated in an offering of shares of common stock which commenced in August 2010 were issued 1,970,384 shares of common stock as part of the final issuances due in this raise. The per share price of this offering was $.65 based on the offering commencement date of August9, 2010.

An employee was issued 10,000 shares of common stock as compensation due under terms of his employment with the Company.

 
Page | 21

 

NETSOL TECHNOLOGIES, INC.
 
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 September 30, 2010.
 
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”) (NasdaqCM: NTWK) (NasdaqDubai: NTWK) is a worldwide provider of IT solutions to the global financing and leasing industry, with world class enterprise software and services.  As a CMMI level 5 company, a distinction shared by few companies worldwide, NetSol uses its BestShoring® practices and highly-experienced resources in analysis, development, quality assurance, and implementation to deliver high-quality, cost-effective solutions. The Company is organized into two main revenue areas, consisting of its enterprise solutions (NetSol Financial Solutions “NFS™”) for the global financing and leasing industry and its portfolio of IT based global business services (“GBS”).  NetSol’s GBS offerings include portfolio management systems for the financial services industry and, consulting, custom development, systems integration, and technical services for the global healthcare, insurance, real estate and technology markets.  NetSol's commitment to quality is demonstrated by its achievement of the ISO 9001, ISO 279001, and SEI (Software Engineering Institute, Carnegie Mellon University, USA) CMMI (Capability Maturity Model) Level 5 assessments, a distinction shared by fewer than 100 companies worldwide. NetSol’s clients include Fortune 500 manufacturers, global automakers, financial institutions, technology providers, and governmental agencies.
 
Founded in 1996, NetSol is headquartered in Calabasas, California. NetSol also has operations and/or offices in: Horsham, United Kingdom; Alameda, California, USA; Beijing, China; Lahore, Islamabad and Karachi, Pakistan; Adelaide, Australia; Bangkok, Thailand; and, Riyadh, Kingdom of Saudi Arabia
 
In today’s highly competitive marketplace, business executives with labor or services-centric budgetary responsibilities are not just encouraged but, in fact, obliged to engage in “Make or Buy” decision process when contemplating how to support and staff new development, testing, services support and delivery activities.  The Company business offerings are aligned as a BestShoring® solutions strategy.  Simply defined, BestShoring® is 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® delivers BestSolution™” approach.
 
NetSol combines domain expertise, not only with lowest cost blended rates from its design centers and campuses located around the world, but also with the guarantee of localized program and project management while minimizing any implementation risk associated with a single service center.  Our BestShoring® approach, which we consider a unique and cost effective global development model, is leading the way, providing value added solutions for Global Business Services™ through a win-win partnership, rather than the traditional outsourced vendor framework.  Our focus on “Solutions” serves to ensure the most favorable pricing while delivering in-depth domain experience.  NetSol currently has locations in Bangkok, Beijing, Lahore, London, the San Francisco Bay Area, and Adelaide to best serve its clients and partners worldwide.  This provides NetSol customers with the optimum balance of subject matter expertise, in-depth domain experience, and cost effective labor, all merged into a scalable solution.  In this way, “BestShoring® delivers BestSolution™”.

 
Page | 22

 

NETSOL TECHNOLOGIES, INC.
 
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, Independent System Review, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.
 
In addition to services, our product offerings are fashioned to provide a Best Product for Best Solution model.  Our offerings include our flagship global solution, NetSol Financial Suite (NFS™). NFS™, a robust suite of five 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 five software applications under NFS™ 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.  NFS™ is a result of more than eight years of effort resulting in over 60 modules grouped in five comprehensive applications. These five 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.
 
The NetSol Financial Suite™ also includes 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.  In terms of scalability, NetSol Technologies North America offers the basic product as well as a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and complexities of operations. 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.
 
Our product offerings and services also include: LeaseSoft Portals and Modules through our European operations; LeasePak 6.0b of our NFS™ product suite; enterprise wide information systems, such as or LRMIS, MTMIS and Hospital Management Systems; Accounting Outsourcing Services, and, NetSol Technology Institute, our specialized career and technology program in Pakistan.
 
To further bolster NetSol’s Solutions capabilities, in October 2008, NetSol acquired Ciena Solutions, a preferred SAP and Business Objects integration firm. The Ciena Solutions practice is now integrated into our wholly owned subsidiary, NetSol Technologies North America, Inc.  This acquisition expanded NetSol’s domain and subject matter expertise to include integration and consulting services for:
 
 
·
SAP R/3 System deployments
 
·
NetWeaver
 
·
Exchange Infrastructure Portals
 
·
MySAP Business Suite
 
·
Supplier Relationship Management Module
 
·
Client Relationship Management Module
 
·
SAP/Business Objects Products and related Services
 
In addition to this expansion of SAP-centric integration consulting and services, this practice has developed proprietary intellectual property in the form of designs and source code focused on enhancing SAP-centric procurement activities.
 
The introduction of a major new product, smartOCI™, has emerged from this integration.  smartOCI™ is a new search engine technology developed by NetSol which provides corporate buyers and shoppers a simple and intuitive user interface to search multiple supplier catalogs simultaneously within the SAP SRM application.  The launch of smartOCI™ at the SAP SAPPHIRE Conference in Orlando, Florida, targeting approximately 1,000 SAP SRM platform customers has the strengthened NetSol’s presence in the global SAP Services market.
 
The Company continues its efforts to reduce redundancy and cohesively present services and product operations on a global basis. 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 the San Francisco Bay Area in California and facilitates the use of these regional offices as platforms for presenting an expanding services offering, relying on the experience and resources in Pakistan and our pr