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EX-31.1 - NETSOL TECHNOLOGIES INCv210817_ex31-1.htm
EX-32.2 - NETSOL TECHNOLOGIES INCv210817_ex32-2.htm
EX-32.1 - NETSOL TECHNOLOGIES INCv210817_ex32-1.htm
EX-31.2 - NETSOL TECHNOLOGIES INCv210817_ex31-2.htm
 
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 December 31, 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  ¨
Small Reporting Company  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 51,083,285 shares of its $.001 par value Common Stock and no shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of February 8, 2011.

 
 

 

NETSOL TECHNOLOGIES, INC.
INDEX
 
 
Page No.
PART I. FINANCIAL INFORMATION   
Item 1. Financial Statements
 
Consolidated Unaudited Balance Sheet as of December 31, 2010 and as of June 30, 2010
2
Comparative Unaudited Consolidated Statements of Operations for the Six Months Ended December 31, 2010 and 2009
3
Comparative Unaudited Consolidated Statements of Cash Flow for the Six Months Ended December 31, 2010 and 2009
4
Notes to the Unaudited Consolidated Financial Statements
6
Item 2.  Management's Discussion and Analysis or Plan of Operation
23
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.  Controls and Procedures
36
PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
37
Item 2.  Unregistered Sales of Equity and Use of Proceeds
37
Item 3.  Defaults Upon Senior Securities
38
Item 4.  Submission of Matters to a Vote of Security Holders
38
Item 5.  Other Information
38
Item 6.  Exhibits
38
 
 
Page | 1

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
As of December 31,
   
As of June 30,
 
 
 
2010
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 5,856,152     $ 4,075,546  
Restricted Cash
    5,700,000       5,700,000  
Accounts receivable, net of allowance for doubtful accounts
    15,059,935       12,280,331  
Revenues in excess of billings
    11,001,000       9,477,278  
Other current assets
    1,762,098       1,821,661  
Total current assets
    39,379,185       33,354,816  
Investment under equity method
    58,269       200,506  
Property and equipment, net of accumulated depreciation
    10,950,969       9,472,917  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, net
    21,320,814       19,002,081  
Customer lists, net
    415,645       666,575  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    31,175,745       29,107,941  
Total assets
  $ 81,564,168     $ 72,136,180  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,752,181     $ 4,890,921  
Due to officers
    -       10,911  
Current portion of loans and obligations under capitalized leases
    6,509,412       7,285,773  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    3,616,186       2,545,314  
Deferred liability
    32,066       47,066  
Convertible notes payable , current portion
    4,087,109       3,017,096  
Loans payable, bank
    2,321,047       2,327,476  
Common stock to be issued
    263,825       239,525  
Total current liabilities
    21,685,053       20,467,308  
Obligations under capitalized leases, less current maturities
    483,221       204,620  
Convertible notes payable less current maturities
    -       4,066,109  
Long term loans; less current maturities
    580,262       727,336  
Lease abandonment liability; long term
    867,583       867,583  
Total liabilities
    23,616,118       26,332,956  
Commitments and contingencies
               
Stockholders' equity:
               
Common stock, $.001 par value; 95,000,000 shares authorized; 49,685,342 & 37,103,396 issued and outstanding
    49,686       37,104  
Additional paid-in-capital
    93,244,355       86,002,648  
Treasury stock
    (396,008 )     (396,008 )
Accumulated deficit
    (36,356,313 )     (39,859,030 )
Stock subscription receivable
    (2,105,960 )     (2,007,960 )
Other comprehensive loss
    (7,880,946 )     (8,396,086 )
Non-controlling interest
    11,393,236       10,422,557  
Total stockholders' equity
    57,948,049       45,803,224  
Total liabilities and stockholders' equity
  $ 81,564,168     $ 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
   
For the Six Months
 
   
Ended December 31,
   
Ended December 31,
 
   
2010
   
2009
   
2010
   
2009
 
Net Revenues:
                       
License fees
  $ 3,129,063     $ 3,318,936     $ 6,606,856     $ 5,870,529  
Maintenance fees
    2,023,509       1,780,336       3,693,428       3,588,053  
Services
    5,272,675       4,420,535       8,528,035       7,683,299  
Total revenues
    10,425,247       9,519,808       18,828,319       17,141,881  
Cost of revenues:
                               
  Salaries and consultants
    2,127,280       2,005,845       4,114,168       4,019,598  
  Travel
    238,776       329,007       470,388       389,207  
  Repairs and maintenance
    71,459       69,112       128,517       136,723  
  Insurance
    31,087       36,030       62,079       72,709  
  Depreciation and amortization
    679,284       573,268       1,310,225       1,071,772  
  Other
    348,859       585,157       591,997       1,467,495  
Total cost of revenues
    3,496,745       3,598,418       6,677,374       7,157,503  
Gross profit
    6,928,503       5,921,390       12,150,945       9,984,378  
Operating expenses:
                               
Selling and marketing
    1,002,877       526,751       1,486,847       1,020,381  
Depreciation and amortization
    267,861       418,023       534,303       930,384  
Bad debt expense
    (353 )     212,840       254,279       212,840  
Salaries and wages
    736,898       743,970       1,657,162       1,468,665  
Professional services, including non-cash compensation
    151,276       210,795       290,361       306,901  
Lease abandonment charges
    -       1,076,347       -       1,076,347  
General and adminstrative
    873,569       1,042,172       2,006,088       2,132,183  
Total operating expenses
    3,032,128       4,230,898       6,229,041       7,147,701  
Income (loss) from operations
    3,896,375       1,690,492       5,921,904       2,836,677  
Other income and (expenses)
                               
Loss on sale of assets
    (792 )     (89,119 )     (15,586 )     (89,101 )
Interest expense
    (291,475 )     (372,273 )     (607,119 )     (840,887 )
Interest income
    9,958       33,752       94,419       151,562  
Gain (loss) on foreign currency exchange transactions
    (400,658 )     (3,247 )     673,236       380,577  
Share of net loss from equity investment
    (71,799 )     -       (142,236 )     -  
Beneficial conversion feature
    (118,163 )     (595,215 )     (295,574 )     (893,214 )
Other income (expense)
    (1,748 )     (50,825 )     (57,301 )     (81,975 )
Total other income (expenses)
    (874,677 )     (1,076,927 )     (350,162 )     (1,373,038 )
Net income before non-controlling interest in subsidiary and income taxes
    3,021,698       613,565       5,571,742       1,463,639  
Income taxes
    (3,168 )     (32,526 )     (11,724 )     (37,543 )
Net income after income tax but before non-controlling interest in subsidiary     3,018,530       581,039       5,560,018       1,426,096  
Non-controlling interest
    (1,082,792 )     (1,028,917 )     (2,057,301 )     (2,137,892 )
Net income (loss) attibutable to NetSol
    1,935,737       (447,878 )     3,502,718       (711,796 )
                                 
Other comprehensive income (loss):
                               
Translation adjustment
    784,153       (538,141 )     515,139       (854,005 )
Comprehensive income (loss)
  $ 2,719,890     $ (986,019 )   $ 4,017,857     $ (1,565,801 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.04     $ (0.01 )   $ 0.08     $ (0.02 )
Diluted
  $ 0.04     $ (0.01 )   $ 0.08     $ (0.02 )
Weighted average number of shares outstanding
                               
Basic
    48,366,323       34,447,142       43,955,210       33,041,760  
Diluted
    51,058,140       34,447,142       46,647,027       33,041,760  
 
See accompanying notes to these unaudited consolidated financial statements.

 
Page | 3

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Six Months
 
   
Ended December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 5,560,018     $ 1,426,096  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,844,528       2,002,157  
Provision for bad debts
    254,279       212,840  
Loss on foreign currency exchange transaction
    -       19,582  
Share of net loss from investment under equity method
    142,236       -  
Loss on sale of assets
    15,586       89,101  
Stock issued for notes payable and related interest
    35,808       27,825  
Stock issued for services
    577,943       300,329  
Fair market value of warrants and stock options granted
    175,341       651,018  
Beneficial conversion feature
    295,574       893,214  
Changes in operating assets and liabilities:
               
Increase/ decrease in accounts receivable
    (1,863,668 )     237,431  
Increase/ decrease in other current assets
    (1,377,332 )     (1,632,327 )
Increase/ decrease in accounts payable and accrued expenses
    (353,493 )     147,556  
Net cash provided by operating activities
    5,306,822       4,374,821  
Cash flows from investing activities:
               
Addition to property and equipment
    (2,450,222 )     (1,085,787 )
Disposal of property and equipment
    19,988       227,773  
Purchase of non-controlling interest in subsidiary
    (180,000 )     -  
Short-term investments held for sale
    (256,706 )     -  
Increase in intangible assets
    (3,127,234 )     (3,118,094 )
Net cash used in investing activities
    (5,994,175 )     (3,976,108 )
Cash flows from financing activities:
               
Proceeds from sale of common stock
    2,566,750       514,539  
Proceeds from the exercise of stock options and warrants
    667,300       33,750  
Proceeds from convertible notes payable
    -       2,000,000  
Redemption of preferred stock
    -       (1,920,000 )
Dividend Paid
    -       (44,090 )
Bank overdraft
    (156,849 )     (221,382 )
Proceeds from bank loans
    2,588,773       2,727,657  
Payments on bank loans
    (44,455 )     (352,887 )
Payments on capital lease obligations & loans - net
    (3,035,240 )     (2,183,189 )
Net cash provided by financing activities
    2,586,278       554,399  
Effect of exchange rate changes in cash
    (118,318 )     (145,201 )
Net increase in cash and cash equivalents
    1,780,607       807,911  
Cash and cash equivalents, beginning of period
    4,075,546       4,403,762  
Cash and cash equivalents, end of period
  $ 5,856,152     $ 5,211,674  
 
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 Six Months
 
   
Ended December 31,
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURES:
           
Cash paid during the period for:
           
Interest
  $ 597,347     $ 357,400  
Taxes
  $ 1,729     $ 95,111  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued for the conversion of Notes Payable
  $ 1,900,598     $ 1,200,000  
Purchase of property and equipment under capital lease
  $ -     $ 101,376  
 
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.

 
Page | 6

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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.
 
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 six months ended December 31, 2010 and 2009 were as follows:
 
For the period ended December 31, 2010
 
Net Income
   
Shares
   
Per Share
 
Basic income per share:
  $ 3,502,718       43,955,210     $ 0.08  
Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                       
Effect of dilutive securities*
                       
Stock options
            1,271,378          
Warrants
            1,420,439          
Convertible Note -1
            -          
Diluted (loss) per share
  $ 3,502,718       46,647,027     $ 0.08  
                         
For the period ended December 31, 2009
 
Net Loss
   
Shares
   
Per Share
 
Basic (loss) per share:
  $ (711,796 )     33,041,760     $ (0.02 )
Dividend to preferred shareholders
    -             $ -  
Net income available to common shareholders
                       
Effect of dilutive securities*
                       
Stock options
            -          
Warrants
            -          
Convertible Note
            -          
Diluted (loss) per share
  $ (711,796 )     33,041,760     $ (0.02 )
 
* As there is a loss, these securities are anti-dilutive. The basic and diluted loss per share is the same for the six months ended December 31, 2009.
 
1        During the period ended December 31, 2010, convertible notes payable were not included in the computation of diluted earnings per share because the effect of conversion would be antidilutive.

 
Page | 7

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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; NTPK Thailand uses Thai Baht 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 $7,880,946 and $8,396,086 as of December 31, 2010 and June 30, 2010 respectively. During the six months ended December 31, 2010 and 2009, comprehensive loss in the consolidated statements of operations included translation gain of $515,139 and loss of $854,005 respectively.
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following at December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
As of June 30
 
   
2010
   
2010
 
             
Prepaid Expenses
  $ 147,310     $ 237,702  
Advance Income Tax
    507,078       422,028  
Employee Advances
    47,662       57,113  
Security Deposits
    172,311       131,229  
Tender Money Receivable
    141,873       252,826  
Other Receivables
    566,838       535,981  
Other Assets
    179,026       184,782  
Total
  $ 1,762,098     $ 1,821,661  
 
NOTE 7 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consist of the following at December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
As of June 30
 
   
2010
   
2010
 
             
Office furniture and equipment
  $ 1,053,258     $ 1,041,326  
Computer equipment
    8,450,059       8,038,033  
Assets under capital leases
    1,959,954       1,838,217  
Building
    2,307,688       2,314,080  
Land
    560,557       562,109  
Capital work in progress
    3,561,367       1,925,207  
Autos
    834,343       744,586  
Improvements
    162,993       163,365  
Subtotal
    18,890,219       16,626,923  
Accumulated depreciation
    (7,939,250 )     (7,154,005 )
    $ 10,950,969     $ 9,472,917  
 
For the six months ended December 31, 2010 and 2009, depreciation expense totaled $765,004 and $742,864 respectively. Of these amounts, $537,424 and $520,981 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 December 31, 2010 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 - December 31, 2010 - cost
  $ 29,960,803     $ 5,804,057     $ 35,764,860  
Additions
    3,151,774       -       3,151,774  
Effect of translation adjustment
    21,251       -       21,251  
Accumulated amortization
    (11,813,014 )     (5,388,412 )     (17,201,426 )
Net balance - December 31, 2010
  $ 21,320,814     $ 415,645     $ 21,736,459  
                         
Weighted average amortization period
    7.80       5.00       7.39  
                         
Amortization expense for:
                       
Six months ended December 31, 2010
  $ 828,578     $ 250,930     $ 1,079,508  
Six months ended December 31, 2009
  $ 876,674     $ 382,618     $ 1,259,292  
 
(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 $14,557,253.
 
(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 $772,784 and $550,796 for the periods ended December 31, 2010 and December 31, 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
 
12/31/11
   
12/31/12
   
12/31/13
   
12/31/14
   
12/31/15
   
Thereafter
   
TOTAL
 
Product Licences
  $ 1,404,700     $ 1,053,660     $ 904,260     $ 667,208     $ 667,208     $ 16,623,777     $ 21,320,814  
Customer Lists
    286,226       70,592       58,827       -       -       -       415,645  
                                                         
    $ 1,690,926     $ 1,124,252     $ 963,087     $ 667,208     $ 667,208     $ 16,623,777     $ 21,736,459  

 
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 December 31, 2010 and June 30, 2010:
 
   
As of December 31,
   
As of June 30,
 
   
2010
   
2010
 
Asia Pasific
  $ 1,303,372     $ 1,303,372  
Europe
    3,471,813       3,471,813  
North America
    4,664,100       4,664,100  
                 
Total
  $ 9,439,285     $ 9,439,285  
 
There was no impairment of the goodwill for the periods ended December 31, 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 December 31, 2010 is as follows:
 
Initial investment in Atheeb at cost
  $ 268,000  
Net loss for the period
    (134,719 )
NetSol's share (50.1%)
    (67,494 )
         
Net book value at June 30, 2010
  $ 200,506  
         
Net loss for the half year ended December 31, 2010
    (283,905 )
NetSol's share (50.1%)
    (142,236 )
         
Net book value at December 31, 2010
  $ 58,269  
 
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following at December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
As of June 30
 
   
2010
   
2010
 
             
Accounts Payable
  $ 1,064,280     $ 1,321,212  
Accrued Liabilities
    2,449,327       2,369,153  
Accrued Payroll
    182,576       158,392  
Accrued Payroll Taxes
    287,554       299,908  
Interest Payable
    627,419       602,614  
Deferred Revenues
    2,351       6,472  
Taxes Payable
    138,675       133,169  
Total
  $ 4,752,181     $ 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 December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
Current
   
Long-Term
 
Name
 
2010
   
Maturities
   
Maturities
 
                   
Habib Bank Line of Credit
  $ 5,363,131     $ 5,363,131     $ -  
Bank Overdraft Facility
    51,243       51,243       -  
Term Finance Facility
    1,015,458       435,196       580,262  
Subsidiary Capital Leases
    1,143,063       659,842       483,221  
Lease abandonment liability
    867,583       -       867,583  
    $ 8,440,478     $ 6,509,412     $ 1,931,066  
                         
   
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 December 31, 2010 and June 30, 2010. Interest paid during the quarter-ended December 31, 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 2% and 3.23% as of December 31, 2010 and June 30, 2010, respectively. Interest paid during the six months ended December 31, 2010 and 2009 was $64,718 and $92,733, 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 December 31, 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 $773,550 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 $22,334. The Parent has guaranteed payment of the loan in the event the subsidiary should default. Interest paid during the quarter ended December 31, 2010 and 2009 was $216 and $10,592, respectively. As of December 31, 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. 100,000,000 or approximately $1,163,738 (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 six months  ended December 31, 2010, the Company paid back the first installment of Rs. 12,500,000 reducing the outstanding principal amount to  Rs. 87,500,000 or approximately $1,015,458 of which $580,262 is shown as long term liabilities and the remainder of $435,196 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 six months ended December 31, 2010 and 2009.
 
Following is the aggregate minimum future lease payments under capital leases as of December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
As of June 30
 
   
2010
   
2010
 
Minimum Lease Payments
           
Due FYE 12/31/11
  $ 693,496     $ 941,406  
Due FYE 12/31/12
    235,423       189,155  
Due FYE 12/31/13
    165,361       27,481  
Due FYE 12/31/14
    100,990       -  
Total Minimum Lease Payments
    1,195,270       1,158,042  
Interest Expense relating to future periods
    (52,208 )     (46,771 )
Present Value of minimum lease payments
    1,143,063       1,111,271  
Less:  Current portion
    (659,842 )     (906,651 )
Non-Current portion
  $ 483,221     $ 204,620  
 
Following is a summary of fixed assets held under capital leases as of December 31, 2010 and June 30, 2010:
 
   
As of December 31
   
As of June 30
 
   
2010
   
2010
 
Computer Equipment and Software
  $ 584,255     $ 473,033  
Furniture and Fixtures
    830,575       830,942  
Vehicles
    242,909       232,026  
Building Equipment
    302,216       302,216  
                 
Total
    1,959,954       1,838,217  
Less:  Accumulated Depreciation
    (788,900 )     (621,567 )
Net
  $ 1,171,054     $ 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 $208,764 to $867,583 as of December 31, 2010 and June 30, 2010. The liability as of December 31, 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 PK, has a loan with a bank, secured by the company’s assets. This loan consists of the following as of December 31, 2010 and June 30, 2010:
 
For the period ended December 31, 2010:
       
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    10.00 %   $ 2,321,047  
                     
Total
              $ 2,321,047  
                     
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 December 31, 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 December 31, 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 December 31, 2010 and June 30, 2010 is as follows:
 
Issue Date
 
Balance net of BCF @
12/31/10
   
Current
Portion
   
Long Term
 
Maturity
Date
                     
Jul-08
    2,587,109       2,587,109       -  
Jul-11
Mar-10
    1,500,000       1,500,000       -  
Mar-11
                           
Total
    4,087,109       4,087,109       -    
                           
Issue Date
 
Balance net of BCF @
6/30/10
   
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 December 31, 2010 and 2009, the interest expense on convertible notes was $355,828 and $413,083, 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 six months ended December 31, 2010, Holders of the 2008 Note further elected to convert the principal and interest due thereon into a total of 2,744,042 shares of common stock. These conversions reduced the principal of the 2008 Note to $2,758,330.
 
(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.
 
(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.

 
Page | 14

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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 December 31, 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 six months ended December 31, 2010. The stock repurchase plan expired on January 27, 2011.
 
(B) SHARES ISSUED FOR SERVICES TO RELATED PARTIES
 
During the six months period ended December 31, 2010, and year ended June 30, 2010, the Company issued a total of 420,000 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 $476,700 and 163,125, as of December 31, 2010 and June 30, 2010, respectively.
 
During the six months period ended December 31, 2010, and year ended June 30, 2010, the Company issued a total of 60,000 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 $66,600 and $78,900, as of December 31, 2010 and June 30, 2010, respectively.
 
During the six months period ended December 31, 2010 and year ended June 30, 2010, the Company issued a total of 32,699 and 139,881 shares of its common stock to employees as required according to the terms of their employment agreements valued at $33,300 and $130,500, respectively.
 
(C) SHARE-BASED PAYMENT TRANSACTIONS
 
During the period ended December 31, 2010, and year ended June 30, 2010, the Company issued a total of 337,857 and 501,931 shares of its common stock for provision of services to unrelated consultants valued at $152,543 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 December 31, 2010:
 
OPTIONS:
       
Exercise
   
Aggregated
 
   
# shares
   
Price
   
Intrinsic Value
 
                   
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
    1,021,000     $ 0.65 to $1.25          
Exercised
    (636,000 )   $ 0.65 to $1.25          
Expired
    -                  
Outstanding and exercisable, December 31, 2010
    8,091,917     $ 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     $ 0.31 to $3.70     $ 1,698,387  
Granted
                       
Exercised
    (2,253,226 )   $ 0.31          
Expired
                       
Outstanding and exercisable, December 31, 2010
    2,510,093     $ 0.31 to $3.70     $ 2,775,290  

The average life remaining on the options and warrants as of December 31, 2010 is as follows:
 
Exercise Price
 
Number
Outstanding
and
Exercisable
   
Weighted
Average
Remaining
Contractual
Life
   
Weighted
Ave
Exericse
Price
 
OPTIONS:
                 
                   
$0.01 - $0.99
    2,191,000       6.67       0.65  
$1.00 - $1.99
    2,045,917       4.59       1.88  
$2.00 - $2.99
    3,055,000       4.30       2.69  
$3.00 - $5.00
    800,000       3.32       4.24  
                         
Totals
    8,091,917       4.91       2.08  
                         
WARRANTS:
                       
$0.31 - $1.99
    2,497,593       3.53       0.71  
$3.00 - $5.00
    12,500       0.77       3.70  
                         
Totals
    2,510,093       3.51       0.72  
 
All options and warrants granted are vested and are exercisable as of December 31, 2010, except 375,000 options which will vest in the 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 $52,210 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
    90 %
 
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 $2,785 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
    90 %
 
During the quarter ended September 30, 2010, the Company granted 242,000 options to seven employees 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 $43,441 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
    90 %

 
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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
During the quarter ended December 31, 2010, the Company granted 15,000 options to one employee with an exercise price of $0.65 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $11,717 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
    1.65 %
Expected life
 
1 month
 
Expected volatility
    99 %
 
During the quarter ended December 31, 2010, the Company granted 4,000 options to one employee with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $1,040 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
    1.65 %
Expected life
 
1 month
 
Expected volatility
    99 %
 
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 exercised 1,000,000 warrants and  1,253,226 warrants through a cashless exercise, resulting in  998,401 shares 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.
 
Page | 18

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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 December 31, 2010, 864,500 shares have been issued under this plan.

 
Page | 19

 

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 six months ended December 31:
 
   
2010
   
2009
 
Revenues from unaffiliated customers:
           
North America
  $ 2,231,691     $ 3,192,642  
Europe
    4,576,771       3,371,716  
Asia - Pacific
    12,019,857       10,577,523  
Consolidated
  $ 18,828,319     $ 17,141,881  
                 
Operating income (loss):
               
Corporate headquarters
  $ (1,902,704 )   $ (2,395,926 )
North America
    324,948       (538,810 )
Europe
    2,394,818       1,047,738  
Asia - Pacific
    5,104,842       4,723,675  
Consolidated
  $ 5,921,904     $ 2,836,677  
                 
Net income (loss) after taxes and before minority interest:
               
Corporate headquarters
  $ (2,699,654 )   $ (3,816,443 )
North America
    310,018