Unassociated Document
 


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, 2008

¨    For the transition period from __________ to __________

Commission file number: 0-22773

NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)

NEVADA
 
95-4627685
(State or other Jurisdiction of
 
(I.R.S. Employer NO.)
Incorporation or Organization)
   

23901 Calabasas Road, Suite 2072, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes    x          No ¨

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

The issuer had 26,611,987 shares of its $.001 par value Common Stock and 1,920 shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of February 12, 2009.

Transitional Small Business Disclosure Format (check one)

Yes  ¨             No   x
 
 


 
 
NETSOL TECHNOLOGIES, INC.

INDEX

PART I. FINANCIAL INFORMATION
 
Page No.
     
Item 1.  Financial Statements
   
     
Consolidated Unaudited Balance Sheets as of December 31, 2008 and
   
June 30, 2008
 
3
     
Comparative Unaudited Consolidated Statements of Operations
 
4
for the Three and Six Month Periods Ended December 31, 2008 and 2007
   
     
Comparative Unaudited Consolidated Statements of Cash Flows
 
5
for the Six Month Periods Ended December 31, 2008 and 2007
   
     
Notes to the Unaudited Consolidated Financial Statements
 
7
     
Item 2.  Management's Discussion and Analysis or Plan of Operation
 
25
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risks
 
36
     
Item 4.  Controls and Procedures
 
37
     
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 2

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
December 31,
2008
   
June 30,
2008
 
         
(Restated)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 5,416,302     $ 6,275,238  
Certificates of deposit
    100,859        
Restricted cash
    5,000,000        
Accounts receivable, net of allowance for doubtful accounts
    12,360,726       10,988,888  
Revenues in excess of billings
    8,381,596       11,053,042  
Other current assets
    2,252,715       2,406,407  
Total current assets
    33,512,198       30,723,575  
Property and equipment, net of accumulated depreciation
    9,768,890       10,220,545  
Other assets, non current
    516,406       822,672  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights,
               
trademarks, and tradenames, net
    10,888,876       10,837,856  
Customer lists, net
    1,726,637       1,732,761  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    22,054,798       22,009,902  
Total assets
  $ 65,852,292     $ 63,776,694  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 3,465,444     $ 4,116,659  
Current portion of loans and obligations under capitalized leases
    6,090,445       2,280,110  
Other payables - acquisitions
    103,226       846,215  
Unearned revenues
    3,601,261       3,293,728  
Due to officers
          184,173  
Dividend to preferred stockholders payable
    55,065       33,508  
Loans payable, bank
    2,521,480       2,932,551  
Total current liabilities
    15,836,921       13,686,944  
Obligations under capitalized leases, less current maturities
    1,115,474       332,307  
Convertible notes payable
    5,849,306        
Long term loans; less current maturities
    530,421       411,608  
Total liabilities
    23,332,122       14,430,859  
Minority interest
    6,549,427       7,857,969  
Commitments and contingencies
           
                 
Stockholders' equity:
               
Preferred stock,  5,000,000 shares authorized;
               
1,920 issued and outstanding
    1,920,000       1,920,000  
Common stock, $.001 par value; 95,000,000 shares authorized;
               
26,513,987 issued and 26,285,491 outstanding as of December 31, 2008
               
25,545,482 issued and 25,525,886 outstanding as of June 30, 2008
    26,514       25,545  
Additional paid-in-capital
    76,898,220       74,950,286  
Treasury stock (228,496 and 19,596 shares)
    (396,008 )     (35,681 )
Accumulated deficit
    (35,315,253 )     (33,071,702 )
Stock subscription receivable
    (658,904 )     (600,907 )
Common stock to be issued
    101,665       1,048,249  
Other comprehensive loss
    (6,605,491 )     (2,747,924 )
Total stockholders' equity
    35,970,743       41,487,866  
Total liabilities and stockholders' equity
  $ 65,852,292     $ 63,776,694  

See accompanying notes to these unaudited consolidated financial statements.

 
Page 3

 

 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
For the Three Month Periods
   
For the Six Month Periods
 
   
Ended December 31,
   
Ended December 31,
 
   
2008
   
2007
   
2008
   
2007
 
         
(Restated)
         
(Restated)
 
Net Revenues:
                       
License fees
  $ 647,979     $ 2,866,807     $ 3,177,787     $ 4,770,359  
Maintenance fees
    1,513,293       1,490,376       3,107,027       3,073,796  
Services
    3,109,737       4,049,287       8,287,162       9,215,552  
Total revenues
    5,271,009       8,406,470       14,571,976       17,059,707  
Cost of revenues
                               
 Salaries and consultants
    2,382,877       2,400,991       5,023,590       4,722,021  
 Travel
    226,964       311,329       712,900       578,157  
 Repairs and maintenance
    102,235       119,032       208,900       233,186  
 Insurance
    59,073       85,110       91,912       123,755  
 Depreciation and amortization
    532,429       271,729       1,083,754       530,636  
 Other
    540,146       431,609       1,291,214       819,500  
Total cost of sales
    3,843,724       3,619,800       8,412,270       7,007,255  
Gross profit
    1,427,285       4,786,670       6,159,706       10,052,452  
Operating expenses:
                               
Selling and marketing
    880,846       1,086,729       1,850,364       1,919,222  
Depreciation and amortization
    494,834       479,904       975,042       944,551  
Bad debt expense
    648,470       838       648,470       3,277  
Salaries and wages
    944,520       815,771       1,923,774       1,723,650  
Professional services, including non-cash compensation
    312,940       129,539       619,826       299,001  
General and adminstrative
    962,711       826,033       1,830,828       1,495,194  
Total operating expenses
    4,244,321       3,338,814       7,848,304       6,384,895  
Income (loss) from operations
    (2,817,036 )     1,447,856       (1,688,598 )     3,667,557  
Other income and (expenses):
                               
Gain (loss) on sale of assets
    (14,960 )     70       (180,698 )     (32,153 )
Interest expense
    (296,578 )     (189,142 )     (500,470 )     (422,946 )
Interest income
    40,895       41,575       68,836       75,438  
Transaction gain (loss) on foreign currency
    (195,030 )     145,325       1,812,852       201,311  
Other income and (expenses)
    132,986       3,952       32,140       59,913  
Total other income (expenses)
    (332,687 )     1,780       1,232,660       (118,437 )
Net income (loss) before minority interest in subsidiary
    (3,149,723 )     1,449,636       (455,938 )     3,549,120  
Minority interest in subsidiary - restated
    (32,062 )     (977,248 )     (1,661,823 )     (2,129,356 )
Income taxes
    (50,855 )     1,483       (58,037 )     (30,958 )
Net income (loss)
    (3,232,640 )     473,871       (2,175,798 )     1,388,806  
Dividend required for preferred stockholders
    (33,876 )     (40,368 )     (67,752 )     (111,525 )
Net income (loss) applicable to common shareholders
    (3,266,516 )     433,503       (2,243,550 )     1,277,281  
Other comprehensive income (loss):
                               
Translation adjustment - restated
    (962,258 )     (538,248 )     (3,857,568 )     (431,333 )
Comprehensive income (loss)
  $ (4,228,774 )   $ (104,745 )   $ (6,101,118 )   $ 845,948  
                                 
Net income (loss) per share:
                               
Basic
  $ (0.12 )   $ 0.02     $ (0.08 )   $ 0.06  
Diluted
  $ (0.12 )   $ 0.02     $ (0.08 )   $ 0.05  
Weighted average number of shares outstanding
                               
Basic
    26,525,259       24,443,901       26,416,217       22,934,568  
Diluted
    27,417,262       27,712,335       27,308,220       26,203,002  

See accompanying notes to these unaudited consolidated financial statements.
 
Page 4

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
   
For the Six Month Periods
 
   
Ended December 31,
 
   
2008
   
2007
 
   
 
   
(Restated)
 
Cash flows from operating activities:
           
Net income (loss)
  $ (2,175,798 )   $ 1,388,806  
Adjustments to reconcile net income  to net cash
               
provided by operating activities:
               
Depreciation and amortization
    2,058,796       1,475,187  
Provision for uncollectible accounts
    648,470       3,277  
Loss on sale of assets
    180,698       32,153  
Minority interest in subsidiary
    1,661,823       2,129,356  
Stock issued for services
    159,867       15,000  
Fair market value of warrants and stock options granted
    89,700       24,320  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (3,563,977 )     715,359  
Increase in other current assets
    1,344,525       (1,749,271 )
Decrease in accounts payable and accrued expenses
    106,229       (1,450,545 )
Net cash provided by operating activities
    510,333       2,583,642  
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,551,217 )     (1,556,424 )
Sales of property and equipment
    40,900       16,076  
Payments of acquisition payable
    (742,989 )     (879,007 )
Purchase of treasury stock
    (360,328 )      
Short-term investments held for sale
    (105,040 )      
Increase in intangible assets
    (3,023,777 )     (1,479,492 )
Net cash used in investing activities
    (5,742,451 )     (3,898,847 )
Cash flows from financing activities:
               
Proceeds from sale of common stock
    150,000       1,500,000  
Proceeds from the exercise of stock options and warrants
    520,569       2,707,167  
Purchase of subsidary shares
    (250,000 )      
Proceeds from convertible notes payable
    5,849,306        
Proceeds from bank loans
    3,618,590       2,702,454  
Payments on bank loans
    (138,975 )     (323,488 )
Bank overdraft
    130,436        
Payments on capital lease obligations & loans - net
    (259,048 )     (760,919 )
Increase in restricted cash
    (5,000,000 )      
Net cash provided by financing activities
    4,620,878       5,825,214  
Effect of exchange rate changes in cash
    (247,696 )     22,936  
Net increase (decrease) in cash and cash equivalents
    (858,936 )     4,532,945  
Cash and cash equivalents, beginning of period
    6,275,238       4,010,164  
Cash and cash equivalents, end of period
  $ 5,416,302     $ 8,543,109  
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 5

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
(UNAUDITED)
 
   
For the Six Month Periods
 
   
Ended December 31,
 
   
2008
   
2007
 
SUPPLEMENTAL DISCLOSURES:
           
Cash paid during the period for:
           
Interest
  $ 477,738     $ 147,996  
Taxes
  $ 4,800     $ 91,659  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Common stock issued for acquisition of 100% of subsidiary
  $     $ 76,750  
Common stock issued for dividend payable
  $ 33,876     $ 155,289  
Bonus stock dividend issued by subsidiary to minority holders
  $ 615,549     $ 545,359  
Stock issued for the conversion of Preferred Stock
  $     $ 2,210,000  
Purchase of property and equipment under capital lease
  $ 1,260,710     $  
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 6

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
 
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile finance and leasing, banking, healthcare, and financial services industries worldwide.  The Company also provides system integration, consulting, IT products and services in exchange for fees from customers.
 
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein.  It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended June 30, 2008.  The Company follows the same accounting policies in preparation of interim reports.  Results of operations for the interim periods are not indicative of annual results.
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NetSol Technologies North America, Inc. (“NTNA”), NetSol Technologies Limited (“NetSol UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”), NetSol Technologies Europe Limited (“NTE”), and its majority-owned subsidiaries, NetSol Technologies, Ltd.(“NetSol PK”), NetSol Connect (Pvt), Ltd. (“Connect”), TIG-NetSol (Pvt) Limited (“NetSol-TIG”), and NetSol Omni (Private) Limited (“Omni”).  All material inter-company accounts have been eliminated in the consolidation.
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 - USE OF ESTIMATES
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009.  Management is currently evaluating the effect of this pronouncement on its consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations.  This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.  This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009.  While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.

 
Page 7

 
 
In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

In May 2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.
 
In May 2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60”. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements.

On December 30, 2008 FASB issued FIN 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises”. This FSP defers the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for certain non-public enterprises as defined in paragraph 289, as amended, of FASB Statement No. 109, Accounting for Income Taxes, including non-public not-for-profit organizations. However, non-public consolidated entities of public enterprises that apply U. S. GAAP are not eligible for the deferral. Nonpublic enterprises that have applied the recognition, measurement, and disclosure provisions of Interpretation 48 in a full set of annual financial statements issued prior to the issuance of this FSP also are not eligible for the deferral. This FSP shall be effective upon issuance. The Company does not believe this pronouncement will impact its financial statements.

On January 12, 2009 FASB issued FSP EITF 99-20-01, “Amendment to the Impairment Guidance of EITF Issue No. 99-20”. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The FSP is shall be effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective  application to a prior interim or  annual reporting period is not permitted. The Company does not believe this pronouncement will impact its financial statements.
 
NOTE 4 – EARNINGS/(LOSS) PER SHARE
 
“Earnings per share” is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”.  Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised.  Dilution is computed by applying the treasury stock method.  Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
 
Page 8

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
 
For the six months ended December 31, 2008 (Unaudited)
 
Net Income
   
Shares
   
Per Share
 
Basic earnings per share:
  $ (2,243,550 )     26,416,217     $ (0.08 )
Dividend to preferred shareholders
    67,752                  
Net income available to common shareholders
                       
Effect of dilutive securities*
                       
Stock options
            477,278          
Warrants
            274,731          
Convertible Preferred Shares
            139,994          
Diluted earnings per share
  $ (2,175,798 )     27,308,220     $ (0.08 )

For the six months ended December 31, 2007 (Unaudited)
 
Net Income
   
Shares
   
Per Share
 
Basic earnings per share:
  $ 1,277,281       22,934,568     $ 0.06  
Dividend to preferred shareholders
    111,525                  
Net income available to common shareholders
                       
Effect of dilutive securities
                       
Stock options
            1,971,406          
Warrants
            773,991          
Convertible Preferred Shares
            523,037          
Diluted earnings per share
  $ 1,388,806       26,203,002     $ 0.05  
 
* As there is a loss, these securities are anti-dilutive.  The basic and diluted earnings per share is the same for the six months ended December 31, 2008
 
NOTE 5 - FOREIGN CURRENCY
 
The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, Omni, and NetSol-TiG use Pakistan Rupees; and Abraxas uses the Australian dollar as the functional currencies.  NetSol Technologies, Inc., and subsidiary NTNA, use the U.S. dollar as the functional currency.  Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period.  Accumulated translation losses of $6,605,491 at December 31, 2008 are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet.  During the six months ended December 31, 2008 and 2007, comprehensive gain (loss) in the consolidated statements of operations included translation loss of $(3,857,568) and $(431,333), respectively.

 
Page 9

 
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 
   
As of 12/31/08
   
As of 6/30/08
 
   
(Unaudited)
 
Prepaid Expenses
  $ 718,283     $ 825,640  
Advance Income Tax
    404,161       356,843  
Employee Advances
    46,598       133,954  
Security Deposits
    199,683       244,409  
Advance Rent
          211,828  
Tender Money Receivable
    264,237       293,943  
Other Receivables
    459,855       335,493  
Other Assets
    159,898       4,297  
                 
Total
  $ 2,252,715     $ 2,406,407  
 
NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following:

   
As of 12/31/08
   
As of 6/30/08
 
   
(Unaudited)
 
Office furniture and equipment
  $ 834,931     $ 1,224,340  
Computer equipment
    7,487,456       9,043,307  
Assets under capital leases
    2,536,363       1,511,311  
Building
    2,769,857       2,902,142  
Land
    1,504,014       925,210  
Autos
    327,959       245,855  
Capital work-in-progress
    191,899       1,043,765  
Improvements
    325,978       413,175  
Subtotal
    15,978,457       17,309,105  
Accumulated depreciation
    (6,209,567 )     (7,088,560 )
    $ 9,768,890     $ 10,220,545  

For the six months ended December 31, 2008 and 2007, fixed asset depreciation expense totaled $818,449 and $663,640, respectively.  Of these amounts, $554,223 and $418,140, respectively, are reflected as part of cost of goods sold.

NetSol PK has been enhancing its facilities and infrastructure as necessary to meet the Company’s expected long-term growth needs.  The balance in capital work-in-progress for December 31, 2008 and June 30, 2008, was $191,899 and $1,043,765, respectively.

Assets acquired under capital leases were $2,536,363 and $1,511,311 as of December 31, 2008 and June 30, 2008, respectively.  Accumulated amortization related to those leases was $677,967 and $653,643 for the six month periods ended December 31, 2008 and June 30, 2008, respectively.
 
NOTE 8 - INTANGIBLE ASSETS
 
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, customer lists and goodwill.  The Company evaluates intangible assets, goodwill and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.  Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.  Potential impairment of goodwill has been evaluated in accordance with SFAS No. 142.

 
Page 10

 

As part of intangible assets, the Company capitalizes certain computer software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established.  Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value.  Capitalization ceases when the product or enhancement is available for general release to customers.
 
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product.  If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable value.  Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization.
 
Product licenses and customer lists were comprised of the following:
 
   
Product Licenses
   
Customer Lists
   
Total
 
Intangible assets - June 30, 2007 - cost
  $ 14,511,208     $ 5,451,094     $ 19,962,302  
Additions
    4,481,077             4,481,077  
Effect of translation adjustment
    (381,578 )           (381,578 )
Accumulated amortization
    (7,772,851 )     (3,718,333 )     (11,491,184 )
Net balance - June 30, 2008 (Unaudited)
  $ 10,837,856     $ 1,732,761     $ 12,570,617  
                         
Intangible assets - June 30, 2008 - cost
  $ 18,992,284     $ 5,451,094     $ 24,443,378  
Additions
    2,521,695       352,963       2,874,658  
Effect of translation adjustment
    (2,102,672 )           (2,102,672 )
Accumulated amortization
    (8,522,431 )     (4,077,420 )     (12,599,851 )
Net balance - December 31, 2008 (Unaudited)
  $ 10,888,876     $ 1,726,637     $ 12,615,513  
                         
Amortization expense (Unaudited):
                       
Six months ended December 31, 2008
  $ 881,260     $ 359,087     $ 1,240,347  
Six months ended December 31, 2007
  $ 464,225     $ 347,322     $ 811,547  
 
At December 31, 2008 and 2007, product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, included unamortized software development and enhancement costs of $9,953,579 and $7,108,247, respectively, as the development and enhancement is yet to be completed.  Software development amortization expense was $529,531 and $112,497 for the six months ended December 31, 2008 and 2007, respectively and is shown in “Cost of Goods Sold” in these consolidated financial statements.
 
Amortization expense of intangible assets over the next five years is as follows:

   
FISCAL YEAR ENDING
       
Asset
 
12/31/09
   
12/31/10
   
12/31/11
   
12/31/12
   
12/31/13
   
TOTAL
 
Product Licences
  $ 1,600,208     $ 1,007,635     $ 699,314     $ 442,940     $ 926,306     $ 4,676,403  
Customer Lists
    765,240       545,760       286,229       70,596       58,813       1,726,638  
                                                 
    $ 2,365,448     $ 1,553,395     $ 985,543     $ 513,536     $ 985,119     $ 6,403,041  
 
There were no impairments of the goodwill asset during the six months ended December 31, 2008 and 2007.

 
Page 11

 
 
NOTE 9 – OTHER ASSETS – LONG TERM

As of December 31, and June 30, 2008, one of the Company’s subsidiaries classified two of its long-term accounts receivables as other assets in the discounted net present value amounts of $367,522 and $614,446, respectively.

Total other assets, long term as of December 31, and June 30, 2008 was $516,406 and $822,672, respectively.

NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
As of 12/31/08
   
As of 6/30/08
 
   
(Unaudited)
 
Accounts Payable
  $ 1,100,957     $ 1,468,491  
Accrued Liabilities
    1,836,001       2,099,693  
Accrued Payroll
          2,203  
Accrued Payroll Taxes
    150,313       176,916  
Interest Payable
    149,290       158,627  
Deferred Revenues
    53,270       72,240  
Taxes Payable
    175,613       138,489  
                 
Total
  $ 3,465,444     $ 4,116,659  
 
NOTE 11 - DEBTS
 
A)  LOANS AND LEASES PAYABLE
 
Notes payable consist of the following:
 
   
Balance at
   
Current
   
Long-Term
 
Name
 
12/31/08
   
Maturities
   
Maturities
 
   
(Unaudited)
             
Habib Bank Line of Credit
    5,021,534       5,021,534        
Bank Overdraft Facility
    324,101       324,101        
HSBC Loan
    420,659       205,423       215,236  
Subsidiary Capital Leases
    1,654,861       539,387       1,115,474  
Loan Payable
    315,185             315,185  
                         
    $ 7,736,340     $ 6,090,445     $ 1,645,895  

Name
 
6/30/08
   
Maturities
   
Maturities
 
   
(Unaudited)
             
D&O Insurance
  $ 41,508     $ 41,508     $  
E&O Insurance
    28,518       28,518        
Habib Bank Line of Credit
    1,501,998       1,501,998        
Bank Overdraft Facility
    84,952       84,952        
HSBC Loan
    739,428       327,820       411,608  
Subsidiary Capital Leases
    627,621       295,314       332,307  
                         
    $ 3,024,025     $ 2,280,110     $ 743,915  

 
Page 12

 
 
On July 4, 2007, the Company entered into a debt agreement with AMZ, a brokerage firm, in Lahore, Pakistan for a total of $2,457,642.  AMZ brokered the loan with 2 banks in Pakistan, Bank Islami Pakistan Ltd, and Security Leasing Corporation Ltd.  The loan calls for 30% of the value of the loan to be collateralized by shares the Company owns in its Pakistan subsidiary, NetSol PK, plus an additional 10% of the total share pledged to cover any extra margin due to the change in value of the pledged shares.  A total of 964,862 shares have been pledged as collateral.  Finance costs associated with this debt totaled $39,445 and the Company received a net balance of $2,418,197.  The loan had a maturity of three months and an interest rate 18.35%, consisting of the Karachi Interbank Offer Rate (“KIBOR” of 9.09%, a base rate of 4.26%, and a mark-up rate of 5%.  On October 4, 2007, the loan matured and was rolled over for an additional three months.  The new interest rate was 14.75%.  As of December 31, 2007, the accrued interest payable was $206,388 and was added to the principal of the note for a total owing of $2,695,655.  Upon maturity on January 4, 2008, payment of the note and accrued interest was extended for six weeks.  As of December 31, 2008 and June 30, 2008, the loan balance was $0.
 
In August 2007, NetSol UK, entered into an agreement with HSBC Bank whereby the line of credit outstanding of £500,000 or approximately $1,023,850 was converted into a loan payable with a maturity of three years.  The interest rate is 7.5% with monthly payments of £15,558 or approximately $31,858.   The loan outstanding as of December 31, and June 30, 2008, was $420,659 and $739,428, respectively.  Interest expense on this line of credit during the six month periods ending December 31, 2008 and 2007, was $21,806 and $37,600, respectively.
 
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 5.30% and 4.57% at December 31, and June 30, 2008, respectively.  The amount outstanding as of December 31, and June 30, 2008 was $5,021,534 and $1,501,998, respectively.  Interest expense on this line of credit during the six month periods ending December 31, 2008 and 2007, was $109,700 and $0, respectively.
 
During the year ended June 30, 2008, NTE entered into an overdraft facility with HSBC Bank plc whereby the bank would cover Company overdrafts up to £200,000.  The annual interest rate is 3.25% over the bank’s sterling base rate, which is currently 5.00%, for an effective annual rate of 8.25%.  The amount outstanding as of December 31, 2008 and June 30, 2008, was $324,101 and $84,952, respectively.  Interest expense on this facility during the six month periods ending December 31, 2008 and 2007, was $12,754 and $7,175, respectively.

CAPITAL LEASE OBLIGATIONS

The Company leases various fixed assets under capital lease arrangements expiring in various years through 2012.  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, 2008 and 2007.

Following is the aggregate minimum future lease payments under capital leases as of December 31, 2008:

Minimum Lease Payments
     
Due FYE 12/31/09
  $ 696,255  
Due FYE 12/31/10
    543,000  
Due FYE 12/31/11
    403,362  
Due FYE 12/31/12
    168,209  
Due FYE 12/31/13
    125,086  
Total Minimum Lease Payments
    1,935,912  
Interest Expense relating to future periods
    (281,051 )
Present Value of minimum lease payments
    1,654,861  
Less:  Current portion
    (539,387 )
Non-Current portion
  $ 1,115,474  

 
Page 13

 

Following is a summary of fixed assets held under capital leases:
 
   
As of 12/31/08
   
As of 6/30/08
 
   
(Unaudited)
 
Computer Equipment and Software
  $ 752,619     $ 895,235  
Furniture and Fixtures
    1,005,166       62,054  
Vehicles
    337,677       392,727  
Building Equipment
    440,901       161,295  
                 
Total
    2,536,363       1,511,311  
Less:  Accumulated Depreciation
    (677,967 )     (653,643 )
Net
  $ 1,858,396     $ 857,668  
 
B)  BANK LOAN
 
 
The Company’s Pakistan subsidiary, NetSol PK, has a loan with a bank.  The loan is secured by the Subsidiary’s assets.  The note consists of the following:
 
For the six months ended December 31, 2008 (Unaudited):

TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    7.50 %   $ 2,521,480  
                     
Total
              $ 2,521,480  

For the year ended June 30, 2008 (Unaudited):

TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    7.50 %   $ 2,932,551  
                     
Total
              $ 2,932,551  
 
C)  OTHER PAYABLE – ACQUISITION
 
McCue Systems (now NetSol Technologies North America, Inc.)

On June 2006, the Company acquired McCue Systems, Inc. (“McCue”).   The final installment payment due to McCue shareholders is recorded in Other Payable – Acquisition.  The remaining balance as of December 31, and June 30, 2008, was $103,226 and $846,215, respectively.

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, and June 30, 2008 was $0 and $184,173, respectively.

 
Page 14

 
 
NOTE 12 – DIVIDEND PAYABLE
 
PREFERRED SHAREHOLDERS
 
The Company has issued Series A 7% Cumulative Convertible Preferred Stock under which dividends are payable (see Note 14).  The dividend is to be paid quarterly, either in cash or stock at the Company’s election.
 
The dividend for the six months ended December 31, 2008 totaled $67,752.  As of December 31, 2008, $33,876 was paid with the issuance of 19,217 shares of the Company’s common stock, and the remaining balance of $33,876 remains unpaid.
 
NOTE 13 – CONVERTIBLE NOTE PAYABLE

On July 23, 2008, the Company entered into a Convertible Note with three investors with a total value of $6,000,000. The note matures in 3 years and has an interest rate of 7% per annum that is payable semi-annually. The note can be converted into common shares at a conversion rate of $3.00 per share. The fair market value of the shares at the date of signing was $2.90; therefore, no beneficial conversion feature expense was recorded on the transaction. No warrants were issued in connection with this note. The Convertible Note contains full-ratchet anti-dilution protection.  However, despite this protection, at no time shall the Company issue shares as part of a conversion or other event contained in the Convertible Note where the resulting issuance would require issuance in violation of Nasdaq rules.

The Company incurred $175,000 in finder’s fees and consulting costs and amortized $24,306 during the six month period ended December 31, 2008. The convertible note payable is recorded net of $150,694 in unamortized cost as of December 31, 2008.

During the six month period ended December 31, 2008, interest expense on these notes was $184,333.

See also Note 18 - Subsequent Events.

NOTE 14 - STOCKHOLDERS’ EQUITY
 
EQUITY TRANSACTIONS
 
PREFERRED STOCK
 
On October 30, 2006, the convertible notes payable were converted into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock.  The preferred shares are valued at $1,000 per share or $5,500,000.  The preferred shares are convertible into common stock at a rate of $1.65 per common share.  The total shares of common stock that can be issued under these Series A Preferred Stock is 3,333,333.  On January 19, 2007, the Form S-3 statement to register the underlying common stock and related dividends became effective.  As of June 30, 2007, the balance of the preferred shares was 4,130 shares.  During the six months ended December 31, 2007, 2,210 shares of preferred stock were converted into 1,339,392 shares of common stock valued at $2,210,000.

The Series A Convertible Preferred Stock carries certain liquidation and preferential rights.  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any distribution of assets of the Corporation can be made to or set apart for the holders of Common Stock, the holders of Convertible Preferred Stock shall be entitled to receive payment out of such assets of the Corporation in an amount equal to $1,000 per share of Convertible Preferred Stock then outstanding, plus any accumulated and unpaid dividends thereon (whether or not earned or declared) on the Convertible Preferred Stock.  In addition, the Convertible Preferred Stock ranks senior to all classes and series of Common Stock and existing preferred stock and to each other class or series of preferred stock established hereafter by the Board of Directors of the Corporation, with respect to dividend rights, redemption rights, rights on liquidation, winding-up and dissolution and all other rights in any manner, whether voluntary or involuntary.

 
Page 15

 

BUSINESS COMBINATIONS

On October 31, 2008, the Company entered into an agreement to purchase 100% of the member shares of Ciena Solutions, LLC, a California limited liability corporation.  Under the terms of the agreement, the Company will pay a deposit of $350,000 to the two members for the purchase with the full purchase price to be determined based on the performance of the new entity over the next four years.  No assets or liabilities will be picked up by the Company at the acquisition, excluding the rights to the existing contracts.  As the effects of this transaction is insignificant to the consolidated financial statements, no pro forma information has been provided.

The total Purchase Price is comprised of the Initial Consideration and the Deferred Consideration.  The Initial Consideration was Three Hundred Fifty Thousand Dollars ($350,000).  The Deferred Consideration is to be paid in four (4) annual installments, to be calculated based upon future earnings and certain other factors, however, that under no circumstances may the total number of  NetSol Shares issued to Sellers (including those shares issued as part of the Initial Consideration and those shares issued which would be considered aggregated with those issued pursuant to the purchase agreement according to NASDAQ rules) exceed 19% of the issued and outstanding shares of common stock of NetSol, less treasury shares, on the date of the Closing.  In the event NetSol is not permitted to issue as part of the Deferred Consideration, shares of common stock equal in value to 50% of the Deferred Consideration, NetSol may issue such amount as is permitted and the remainder in cash.  Each Fiscal Year shall be measured from July 1 to June 30 with Fiscal Year 1 being the period from July 1, 2008 to June 30, 2009.

Deferred Consideration is to be calculated as follows:

 
1)
After the conclusion of fiscal year 1, the consideration will be comprised of 25% of the lesser of Ciena’s Earnings Before Interest, Tax, Depreciation and Amortization (“EBIDTA”) for Year 1 multiplied by 4.5 or the Gross Revenue of Ciena for Year 1 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena.  All numbers shall be based on audited Fiscal Year 1 financial statements.    Payments are to be made; a) 50% in restricted common stock of NetSol at the 30 day volume weighted average price (“VWAP”)  in the 30 days preceding the end of Fiscal Year 1; and b) 50% in U.S. Dollars.
 
2)
Consideration after the conclusion of the second full year of operations, July 1, 2009 to June 30, 2010 (“Fiscal Year 2”) will be comprised of 25% of the lesser of:  Ciena’s EBIDTA Year 2 multiplied by 4.5 or the Gross Revenue of Ciena for Fiscal Year 2 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less three hundred fifty thousand dollars ($350,000).  If the consideration is a negative number, that negative number shall carry-over to the pay-out for Fiscal Year 3.  All numbers shall be based on the audited Fiscal Year 2financial statements.  Payment  are to  be made; a) 50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2010, in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
3)
Consideration after the conclusion of the third full year of operations from July 1, 2010 to June 30, 2011 (“Fiscal Year 3”) will be comprised of 25% of the lesser of:  Ciena’s EBIDTA for Fiscal Year 3 multiplied by 4.5 or the Gross Revenue of Ciena for Year 3 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less any carry-over from Fiscal Year 2.  All numbers shall be based on the audited Fiscal Year 3 financial statements.  Payment will be made;  a)  50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2011 calculated in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
4)
Consideration after the conclusion of the fourth full year of operations from July 1, 2011 to June 30, 2012 (“Fiscal Year 4”) will be comprised of 25% of the lesser of:  Ciena’s EBIDTA for Fiscal Year 4 multiplied by 4.5 or the Gross Revenue of Ciena for Year 4 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less any carry-over from Fiscal Years 2 and 3.  All numbers shall be based on the audited Fiscal Year 4 financial statements.  Payment will be made; a)  50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2011 calculated in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
PRIVATE PLACEMENTS
 
In June 2007, the Company sold 757,576 shares of the Company’s common stock to two institutional investors for $1,250,000.  The Company received $1,000,000 of this by June 30, 2007 and the remaining $250,000 cash due was received on July 2, 2007.  The shares were issued in July 2007.  This purchase agreement contained a “green shoe” clause whereby the investors had the option to purchase within six months the same number of shares at the same price and receive the same number of warrants.  In October 2007, the investors exercised the “green shoe” clause and the Company sold them 757,576 shares of the Company’s common stock valued at $1,250,000.  In addition, as part of the agreement, the investors were granted 378,788 warrants with an exercise price of $1.65 and expires in five years.  No warrants were exercised as of the date of this report.

 
Page 16

 

OPTIONS AND WARRANTS EXERCISED

During the six months ended December 31, 2008, the Company issued 291,008 shares of its common stock for the exercise of options valued at $515,743.

During the six months ended December 31, 2008, the Company issued 51,515 shares of its common stock for the exercise of warrants valued at $99,424.

STOCK SUBSCRIPTION RECEIVABLE

Stock subscription receivable represents stock options exercised and issued that the Company has not yet received the payment from the purchaser as they were in processing when the quarter ended.

During the six months ended December 31, 2008, $150,000 was collected.  The balance at December 31, 2008 was $658,904.

COMMON STOCK PURCHASE WARRANTS AND OPTIONS

From time to time, the Company issues options and warrants as incentives to employees, officers and directors, as well as to non-employees.

Common stock purchase options and warrants consisted of the following:
 
               
Aggregated
 
         
        Exercise         
   
Intrinsic
 
   
# shares
   
Price
   
Value
 
Options (Unaudited):
                 
Outstanding and exercisable, June 30, 2007
    7,102,363    
$0.75 to $5.00
    $ 129,521  
Granted
    20,000    
$1.60
         
Exercised
    (869,938 )  
$0.75 to $2.55
         
Expired
    (180,000 )  
$0.75
         
Outstanding and exercisable, June 30, 2008
    6,072,425    
$0.75 to $5.00
    $ 1,717,608  
Granted
    2,150,000    
$0.67 to $3.90
         
Exercised
    (271,008 )  
$0.75 to $2.50
         
Expired
                   
Cancelled/Forfeited
    (1,800,000 )  
$2.62 to $3.90
         
Outstanding and exercisable, December 31, 2008
    6,151,417    
$0.75 to $5.00
    $ 0  
                         
Warrants (Unaudited):
                       
Outstanding and exercisable, June 30, 2007
    3,002,725    
$1.65 to $5.00
    $ 58,091  
Granted
    378,788    
$1.65
         
Exercised
    (1,269,199 )  
$1.65 to $3.30
         
Expired
    (120,000 )  
$2.50 to $5.00
         
Outstanding and exercisable, June 30, 2008
    1,992,314    
$1.65 to $5.00
    $ 1,206,095  
Granted
                     
Exercised
    (51,515 )  
$1.93
         
Expired
                     
Outstanding and exercisable, December 31, 2008
    1,940,799    
$1.65 to $3.70
    $ 0  
 
In September 2008, 1,800,000 stock options were granted to certain employees on the basis of achieving certain performance conditions related to the Company’s revenues and earnings.  A non-cash stock compensation charge of $117,300 was recorded for the three month period ended September 30, 2008.  Subsequently to the issuance of its annual report on Form 10-KSB for the fiscal year 2008, the Company restated its financial statements (see Note 17).  As a result, performance targets achieved prior to the restatement became null and void and the stock options were forfeited by the employees.  The non-cash stock compensation expense previously recorded in the amount of $117,300 was therefore reversed in the three month period ended December 31, 2008, in accordance with SFAS 123R paragraph A50.

 
Page 17

 
 
The following is a summary of the status of options and warrants outstanding at December 31, 2008:
 
Exercise Price
 
Number
Outstanding
and
Exercisable
   
Weighted
Average
Remaining
Contractual
Life
   
Weighted
Ave
Exericse Price
 
OPTIONS (Unaudited):
                 
$0.01 - $0.99
    264,000       9.46       0.67  
$1.00 - $1.99
    2,032,417       6.56       1.88  
$2.00 - $2.99
    3,055,000       6.27       2.69  
$3.00 - $5.00
    800,000       5.29       4.24  
                         
Totals
    6,151,417       7.26       2.81  
                         
WARRANTS (Unaudited):
                       
$1.00 - $1.99
    1,476,137       2.95       1.79  
$3.00 - $5.00
    464,662       0.65       3.31  
                         
Totals
    1,940,799       2.65       2.15  
 
OPTIONS
 
During the six months ended December 31, 2007, 20,000 options were granted to two officers with an exercise price of $1.60 per share and an expiration date of ten years, vesting immediately.  Using the Black-Scholes method to value the options, the Company recorded $24,320 in compensation expense for these options in the accompanying consolidated financial statements.

The Black-Scholes option pricing model used the following assumptions:

Risk-free interest rate
4.5%
Expected life
10 years
Expected volatility
65%

During the six months ended December 31, 2008, the Company granted 100,000 options to an employee with an exercise price of $1.65 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $89,700 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
7.0%
Expected life
.25 years
Expected volatility
106%

During the six months ended December 31, 2008, the Company granted 250,000 options to an employee with an exercise price of $0.67 per share and an expiration date of 10 years, vesting quarterly over two years. These options were not vested as of December 31, 2008.  No compensation expense was recorded.
 

 
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WARRANTS
 
On October 11, 2006, the Company entered into an agreement with a consultant whereby the Company agreed to grant the consultant a total of 100,000 warrants with an exercise price of $1.85 and 100,000 warrants with an exercise price of $3.70.  The warrants vest equally over the term of the agreement on a quarterly basis commencing on January 11, 2007 and vest only upon completion of the quarter’s service as earned.  The warrants are exercisable until October 10, 2011.  As of December 31, 2008, none of the warrants had vested as no services were performed and therefore, no expense was recorded.

In October 2007, the investors exercised the “green shoe” clause and the Company sold them 757,576 shares of the Company’s common stock valued at $1,250,000.  In addition as part of the agreement, the investors were granted 378,788 warrants with an exercise price of $1.65 and expire in five years.  No warrants have been exercised as of December 31, 2008.

NOTE 15 - SEGMENT INFORMATION

The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific.  Our reportable segments are business units located in different global regions.  Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services.  Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location.  We account for intercompany sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation.  The following table presents a summary of operating information and certain balance sheet information for the six months ended December 31:

 
Page 19

 
 
   
2008
   
2007
 
   
(Unaudited)
 
Revenues from unaffiliated customers:
           
North America
  $ 2,610,275     $ 2,281,518  
Europe
    2,564,118       3,312,480  
Asia - Pacific
    9,397,583       11,465,709  
Consolidated
  $ 14,571,976     $ 17,059,707  
                 
Operating income (loss):
               
Corporate headquarters
  $ (2,121,298 )   $ (1,743,969 )
North America
    (1,009,669 )     42,434  
Europe
    (838,103 )     431,462  
Asia - Pacific
    2,280,472       4,937,630  
Consolidated
  $ (1,688,598 )   $ 3,667,557  
                 
Net income (loss) (before dividend):
               
Corporate headquarters
  $ (2,375,281 )   $ (1,985,286 )
North America
    (1,044,677 )     40,090  
Europe
    (867,381 )     405,920  
Asia - Pacific
    2,111,541       2,928,082  
Consolidated
  $ (2,175,798 )   $ 1,388,806  
                 
           
June 30, 2008
 
Identifiable assets:
             
Corporate headquarters
  $ 19,972,905     $ 16,566,612  
North America
    3,276,457       1,920,508  
Europe
    5,121,325       6,233,480  
Asia - Pacific
    37,481,605       39,056,094  
Consolidated
  $ 65,852,292     $ 63,776,694  
                 
Depreciation and amortization:
               
Corporate headquarters
  $ 713,019     $ 700,970  
North America
    231,539       71,314  
Europe
    339,127       135,558  
Asia - Pacific
    775,111       567,345  
Consolidated
  $ 2,058,796     $ 1,475,187  
                 
Capital expenditures:
               
Corporate headquarters
  $ 1,019     $ 4,189  
North America
    337,731       50,033  
Europe
    49,587       34,874  
Asia - Pacific
    1,162,880       1,467,328  
Consolidated
  $ 1,551,217     $ 1,556,424  

 
Page 20

 
Net revenues by our various products and services provided are as follows:

   
For the Six Months
 
    
Ended December 31,
 
   
2008
   
2007
 
   
(Unaudited)
 
Licensing Fees
  $ 3,177,787     $ 4,770,359  
Maintenance Fees
    3,107,027       3,073,796  
Services
    8,287,162       9,215,552  
Total
  $ 14,571,976     $ 17,059,707  
 
NOTE 16 - MINORITY INTEREST IN SUBSIDIARY
 
The Company had minority interests in several of its subsidiaries.  The balances of the minority interests are as follows:

SUBSIDIARY
 
MIN INT
BALANCE AT
12/31/08
   
MIN INT
BALANCE AT
6/30/08
 
   
(Unaudited)
 
PK Tech
  $ 5,481,825     $ 6,309,918  
NetSol-Innovation
    984,906       1,365,855  
Connect
    82,696       182,196  
                 
Total
  $ 6,549,427     $ 7,857,969  

NetSol PK

In August 2005, the Company’s wholly-owned subsidiary, NetSol PK became listed on the Karachi Stock Exchange in Pakistan.  The Initial Public Offering (“IPO”) sold 13,986,000 shares of the subsidiary to the public thus reducing the Company’s ownership by 39.42%.   Net proceeds of the IPO were $4,890,224.  As a result of the IPO, the Company is required to show the minority interest of the subsidiary on the accompanying consolidated financial statements.  The minority interest percentage as of June 30, 2008 and December 31, 2008 is 41.32%

For the six months ended December 31, 2008 and 2007, the subsidiary had net income of $2,509,688 and $3,839,344, of which $1,446,292 and $1,602,419, respectively, was recorded against the minority interest.  The balance of the minority interest at December 31, 2008 was $5,481,825.

On October 22, 2008, the subsidiary’s board of directors authorized a 20% stock bonus dividend to all its stockholders as of that date.  The net value of shares issued to minority holders was $615,549.

On October 19, 2007, the subsidiary’s board of directors authorized a 22% stock bonus dividend to all its stockholders as of that date.  The net value of shares issued to minority holders was $545,359.
 
NetSol-TiG:
 
In December 2004, the Company forged a new and a strategic relationship with a UK based public company TiG Plc. A Joint Venture was established by the two companies to create a new company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), with 50.1% ownership by NetSol Technologies, Inc. and 49.9% ownership by TiG.  The agreement anticipates TiG’s technology business to be outsourced to NetSol’s offshore development facility.
 
During year ended June 30, 2005, the Company invested $253,635 and TiG invested $251,626 and the new subsidiary began operations during the quarter ended March 31, 2005.

 
Page 21

 

For the six months ended December 31, 2008 and 2007, the subsidiary had net income (loss) of $276,271 and $1,195,942, of which $(236,242), and $524,906 was recorded against the minority interest, respectively.  The balance of the minority interest at December 31, 2008 was $984,906.
 
On October 22, 2008, the subsidiary’s board of directors authorized a cash dividend of 67,446,500 Pakistan Rupees (“pkr”) or approximately $874,817.  Of this amount, the Company is due 34,073,972 pkr or approximately $441,958.  The net value to the minority holders is approximately $432,859.
 
On September 26, 2007, the subsidiary’s board of directors authorized a cash dividend of 100,000,000 Pakistan Rupees (“pkr”) or approximately $1,651,522.  Of this amount, the Company is due 50,520,000 pkr or approximately $834,349.  The net value to the minority holders is approximately $817,173.
 
Connect:
 
In August 2003, the Company entered into an agreement with United Kingdom based Akhter Group PLC (“Akhter”).  Under the terms of the agreement, Akhter Group acquired 49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd. (“Connect”), an Internet service provider (“ISP”), in Pakistan through the issuance of additional Connect shares.  As part of this Agreement, Connect changed its name to NetSol Akhter.  The partnership with Akhter Computers is designed to rollout connectivity and wireless services to the Pakistani national market.
 
As of June 30, 2005, a total of $751,356 had been transferred to Connect, of which $410,781 was from Akhter.  In June 2006, a total of $40,000 cash was distributed to each partner as a return of capital.
 
For the six months ended December 31, 2008 and 2007, the subsidiary had net income (loss) of ($41,506) and of $5,635, respectively, of which ($20,711) and $2,812 respectively, was recorded against the minority interest.  The balance of the minority interest at December 31, 2008 was $82,696.
 
NOTE 17 - RESTATEMENT
 
On November 5, 2008, the management of NetSol Technologies, Inc. (the “Company”) concluded after reviewing the pertinent facts, that the previously issued financial statements contained in the Company's annual Report on Form 10-KSB for the year ended June 30, 2008 should be restated due primarily to computational errors in connection with the allocation of appropriate amounts to minority interest in the statement of operations and calculation of minority interest ownership.
 
Our management determined that the financial statements included therein overstated amount of our reported net income for the year ended June 30, 2008 by approximately $2,229,824.
 
The Company filed its restated financial statements for the year ended June 30, 2008 with the Securities and Exchange Commission on November 10, 2008. As a result of the restatement, the Company determined that the previously issued interim financial statements for the three and six months ended December 31, 2007 should be restated. The net income for the three and six month periods ended December 31, 2007 was overstated by $49,002 and $109,018, respectively.
 
The effect of restatement is shown below:

 
Page 22

 
 
   
As reported
6/30/08
   
As Restated
6/30/08
 
         
(Unaudited)