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 March 31, 2010

o 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      o

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 o                          Accelerated Filer o                       Non-Accelerated Filer  x

The issuer had 36,279,383 shares of its $.001 par value Common Stock and no shares of Preferred Stock issued and outstanding as of May 10, 2010.

Transitional Small Business Disclosure Format (check one)

Yes    o       No      x

 

 

NETSOL TECHNOLOGIES, INC.

INDEX

   
Page No.
PART I.           FINANCIAL INFORMATION
   
     
Item 1.  Financial Statements (Unaudited)
   
     
Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009
 
     
Comparative Unaudited Consolidated Statements of Operations for the Three and Nine Month Periods Ended March 31, 2010 and 2010
 
4
     
Comparative Unaudited Consolidated Statements of Cash Flows for the Nine Month Periods Ended March 31, 2010 and 2009
 
5
     
Notes to the Unaudited Consolidated Financial Statements
 
7
     
Item 2.  Management's Discussion and Analysis or Plan of Operation
 
29
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risks
 
42
     
Item 4.  Controls and Procedures
 
42
     
PART II.          OTHER INFORMATION
   
     
Item 1.  Legal Proceedings
 
43
     
Item 2.  Unregistered Sales of Equity and Use of Proceeds
 
43
     
Item 3.  Defaults Upon Senior Securities
 
43
     
Item 4.  Submission of Matters to a Vote of Security Holders
 
43
     
Item 5.  Other Information
 
43
     
Item 6.  Exhibits
 
44

 
Page 2               

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
 
As of March 31, 
2010
   
As of June 30, 
2009
 
             
 
           
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 4,275,443     $ 4,403,762  
Restricted Cash
    5,000,000       5,000,000  
Accounts receivable, net of allowance for doubtful accounts
    13,682,521       11,394,844  
Revenues in excess of billings
    8,497,742       5,686,277  
Other current assets
    2,496,949       2,307,246  
Total current assets
    33,952,656       28,792,129  
Investment under equity method
    244,016       -  
Property and equipment, net of accumulated depreciation
    8,457,622       9,186,163  
Other assets
    -       204,823  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, net
    16,492,134       13,802,607  
Customer lists, net
    792,040       1,344,019  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    26,723,459       24,585,911  
Total assets
  $ 69,377,753     $ 62,769,026  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,642,835     $ 5,106,266  
Due to officers
    13,911       -  
Current portion of loans and obligations under capitalized leases
    7,134,527       6,207,830  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    3,449,817       3,473,228  
Dividend to preferred stockholders payable
    -       44,409  
Convertible notes payable, current portion
    2,983,366       -  
Loans payable, bank
    2,363,507       2,458,757  
Total current liabilities
    20,691,189       17,393,716  
Obligations under capitalized leases, less current maturities
    368,709       1,090,901  
Convertible notes payable; less current maturities
    4,084,024       5,809,508  
Long term loans; less current maturities
    886,316       1,113,832  
Lease abandonment liability; long term
    867,583       -  
Total liabilities
    26,897,821       25,407,957  
Commitments and contingencies
               
                 
Stockholders' equity:
               
Preferred stock,  5,000,000 shares authorized; Nil; 1,920 issued and outstanding
    -       1,920,000  
Common stock, $.001 par value; 95,000,000 shares authorized; 35,961,883; 30,046,987 issued and outstanding
    35,962       30,047  
Additional paid-in-capital
    85,203,134       78,198,523  
Treasury stock
    (396,008 )     (396,008 )
Accumulated deficit
    (41,351,411 )     (41,253,152 )
Stock subscription receivable
    (2,107,960 )     (842,619 )
Common stock to be issued
    251,450       220,365  
Other comprehensive loss
    (8,193,790 )     (6,899,397 )
Total
    33,441,376       30,977,759  
Non-controlling interest
    9,038,556       6,383,310  
Total stockholders' equity
    42,479,932       37,361,069  
Total liabilities and stockholders' equity
  $ 69,377,753     $ 62,769,026  

See accompanying notes to these unaudited consolidated financial statements.

 
Page 3               

 

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

   
For the Three Months
   
For the Nine Months
 
   
Ended March 31,
   
Ended March 31,
 
   
2010
   
2009
   
2010
   
2009
 
Net Revenues:
                       
License fees
  $ 3,644,809     $ 324,845     $ 9,515,338     $ 3,502,632  
Maintenance fees
    1,739,799       1,664,492       5,327,852       4,771,519  
Services
    3,548,348       3,033,684       11,231,648       11,320,846  
Total revenues
    8,932,956       5,023,021       26,074,837       19,594,997  
Cost of revenues:
                               
 Salaries and consultants
    2,154,369       2,629,081       6,173,967       7,652,671  
 Travel
    222,136       280,390       611,343       993,290  
 Repairs and maintenance
    43,364       81,536       180,086       290,436  
 Insurance
    40,235       43,478       112,943       135,390  
 Depreciation and amortization
    578,904       532,099       1,650,676       1,615,853  
 Other
    416,931       917,051       1,884,426       2,208,265  
Total cost of revenues
    3,455,939       4,483,635       10,613,442       12,895,905  
Gross profit
    5,477,017       539,386       15,461,395       6,699,092  
Operating expenses:
                               
Selling and marketing
    651,485       629,145       1,671,866       2,479,509  
Depreciation and amortization
    411,563       501,239       1,341,947       1,476,281  
Bad debt expense
    (3,236 )     1,772,188       209,604       2,420,658  
Salaries and wages
    746,095       773,757       2,214,760       2,697,531  
Professional services, including non-cash compensation
    242,177       257,926       549,078       877,752  
Lease abandonment charges
    (208,764 )     -       867,583       -  
General and adminstrative
    1,056,718       862,623       3,188,901       2,693,451  
Total operating expenses
    2,896,038       4,796,878       10,043,739       12,645,182  
Income (loss) from operations
    2,580,979       (4,257,492 )     5,417,656       (5,946,090 )
Other income and (expenses)
                               
Loss on sale of assets
    (125,419 )     (127,558 )     (214,520 )     (308,256 )
Interest expense
    (312,671 )     (466,276 )     (1,153,557 )     (966,746 )
Interest income
    82,637       177,771       234,200       246,607  
Gain (loss) on foreign currency exchange transactions
    (190,082 )     8,902       190,495       1,821,754  
Share of net loss from equity investment
    (23,984 )     -       (23,984 )     -  
Beneficial conversion feature
    (458,758 )     (17,225 )     (1,351,972 )     (17,225 )
Other income (expense)
    144,609       (984,622 )     62,634       (952,482 )
Total other income (expenses)
    (883,667 )     (1,409,008 )     (2,256,704 )     (176,348 )
Net income (loss) before non-controlling interest in subsidiary & income taxes
    1,697,312       (5,666,500 )     3,160,952       (6,122,438 )
Non-controlling interest
    (1,097,201 )     689,584       (3,235,093 )     (972,238 )
Income taxes
    (11,064 )     (21,594 )     (48,607 )     (79,631 )
Net income (loss)
    589,047       (4,998,510 )     (122,748 )     (7,174,308 )
Dividend required for preferred stockholders
    -       (33,140 )     -       (100,892 )
Net income (loss) applicable to common shareholders
    589,047       (5,031,650 )     (122,748 )     (7,275,200 )
Other comprehensive income (loss):
                               
Translation adjustment
    (439,688 )     (179,358 )     (1,294,393 )     (4,036,926 )
Comprehensive income (loss)
  $ 149,359     $ (5,211,008 )   $ (1,417,141 )   $ (11,312,126 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.02     $ (0.19 )   $ (0.004 )   $ (0.27 )
Diluted
  $ 0.02     $ (0.19 )   $ (0.004 )   $ (0.27 )
Weighted average number of shares outstanding
                               
Basic
    35,636,259       26,601,587       33,893,968       26,350,098  
Diluted
    36,988,542       26,601,587       33,893,968       26,350,098  

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

 
 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Nine Months
 
   
Ended March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ (122,748 )   $ (7,174,308 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    2,992,624       3,092,134  
Provision for bad debts
    209,604       2,420,658  
Loss on foreign currency exchange rates
    25,900       -  
Share of net (income)/loss from associates
    23,984       -  
Loss on sale of assets
    214,520       308,256  
Non controlling interest in subsidiary
    3,235,093       972,238  
Stock issued for interest on notes payable
    30,207       -  
Stock issued for services
    572,184       227,516  
Fair market value of warrants and stock options granted
    791,530       147,639  
Beneficial conversion feature
    1,351,972       17,225  
Changes in operating assets and liabilities:
               
(Increase)/ decrease in accounts receivable
    (2,658,139 )     (3,934,511 )
(Increase)/ decrease in other current assets
    (2,703,402 )     3,175,947  
Increase/ (decrease) in accounts payable and accrued expenses
    (52,914 )     588,689  
Net cash provided by operating activities
    3,910,415       (158,517 )
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,458,050 )     (1,501,508 )
Sales of property and equipment
    232,783       13,376  
Payments of acquisition payable
    -       (742,989 )
Purchase of treasury stock
    -       (360,328 )
Investment in associate
    (268,000 )     -  
Increase in intangible assets
    (4,562,044 )     (5,281,642 )
Net cash used in investing activities
    (6,055,311 )     (7,873,091 )
Cash flows from financing activities:
               
Proceeds from sale of common stock
    754,509       146,652  
Proceeds from the exercise of stock options and warrants
    33,750       526,569  
Purchase of subsidary stock in Pakistan
    -       (250,000 )
Finance costs incurred for sale of common stock
               
Proceeds from convertible notes payable
    3,500,000       6,000,000  
Redemption of preferred stock
    (1,920,000 )        
Restricted cash
    -       (5,000,000 )
Dividend Paid
    (43,988 )     (33,876 )
Bank overdraft
    (176,377 )     161,134  
Proceeds from bank loans
    4,320,534       3,843,541  
Payments on bank loans
    (484,507 )     (235,486 )
Payments on capital lease obligations & loans - net
    (3,664,176 )     (467,397 )
Net cash provided by financing activities
    2,319,746       4,691,137  
Effect of exchange rate changes in cash
    (303,170 )     (453,178 )
Net increase in cash and cash equivalents
    (128,319 )     (3,793,649 )
Cash and cash equivalents, beginning of year
    4,403,762       6,275,238  
Cash and cash equivalents, end of year
  $ 4,275,443     $ 2,481,591  

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 Nine Months
 
   
Ended March 31,
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURES:
           
Cash paid during the period for:
           
Interest
  $ 914,333     $ 805,237  
Taxes
  $ 115,000     $ 4,800  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued for the payment of dividends to Preferred Shareholders
  $ -     $ 33,876  
Bonus stock dividend issued by subsidiary to minority holders
  $ -     $ 615,549  
Stock issued for the conversion of Notes Payable
  $ 1,450,000     $ -  
Purchase of property and equipment under capital lease
  $ 101,376     $ 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 of the Securities and Exchange Commission, 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, 2009.  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”), NTPK (Thailand) Co. Ltd (“NT Thai”) and its majority-owned subsidiaries, NetSol Technologies, Ltd. (“NetSol PK”), NetSol Connect (Pvt), Ltd. (“Connect”), NetSol Innovation (Pvt) Limited (“EI”), 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.
 
 

 
Page 7               

 

NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”) , which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements.

In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. This Statement shall be effective for reporting period that begins after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements.

In June 2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (ASC 105-10) (formerly Statement of Financial Accounting Standards No. 168),  establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. ASC 105-10 is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10 did not have a material impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective from October 1, 2009, and do not have a significant impact on our consolidated financial statements.

On December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”.  This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting.  The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
 
 
Page 8               

 

In October 2009, the FASB issued guidance on revenue recognition that will become effective for the Company beginning July 1, 2010, with earlier adoption permitted. 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 issued 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. We believe adoption of this new guidance will not have a material impact on our financial statements.

 
Page 9               

 
 
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)(ASC 260), “Earnings per share.”  Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised.  Dilution is computed by applying the treasury stock method.  Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
 
For the nine months ended March 31, 2010
 
Net Loss
   
Shares
   
Per Share
 
Basic (loss) per share:
  $ (122,748 )     33,893,968     $ (0.004 )
Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                       
Effect of dilutive securities*
                       
Stock options
            -          
Warrants
            -          
Diluted (loss) per share
  $ (122,748 )     33,893,968     $ (0.04 )
                         
For the nine months ended March 31, 2009
 
Net Income
   
Shares
   
Per Share
 
Basic (loss) per share:
  $ (7,174,308 )     26,350,098     $ (0.27 )
Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                       
Effect of dilutive securities*
                       
Stock options
            -          
Warrants
            -          
Convertible Preferred Shares
            -          
Diluted (loss) per share
  $ (7,174,308 )     26,350,098     $ (0.27 )
 
* As there is a loss, these securities are anti-dilutive.  The basic and diluted loss per share is the same for the nine months ended March 31, 2010 and 2009
 
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY
 
SFAS 130 (ASC 220) requires unrealized gains and losses on the Company’s available for sale securities, currency translation adjustments, and minimum pension liability, which prior to adoption were reported separately in stockholders’ equity, to be included in other comprehensive income.  The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, Omni, and EI use Pakistan Rupees; Abraxas uses the Australian Dollar, and NT Thai use the Baht 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, classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet, were $8,193,790 and $6,899,397 as of March 31, 2010 and June 30, 2009, respectively.  During the nine months ended March 31, 2010 and 2009, comprehensive gain (loss) in the consolidated statements of operations included translation loss of $(1,294,393) and $(4,036,926), respectively.
 

 
Page 10               

 
 
NOTE 6 – RESTRICTED CASH
 
The Company has certificates of deposits (CDs) in various configurations and maturity dates with Habib American Bank. The company used these CDs as collateral to secure a line of credit for $5.0 million through March 31, 2010. Once we return the used line of credit balances, the CDs will be restriction free. As of March 31, 2010, the restricted cash was $5,000,000.
 
NOTE 7 - OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 
   
As of March 31
   
As of June 30
 
   
2010
   
2009
 
             
Prepaid Expenses
  $ 393,556     $ 316,437  
Advance Income Tax
    374,747       262,703  
Employee Advances
    70,548       18,698  
Security Deposits
    123,426       173,095  
Advance Rent
    -       261,993  
Tender Money Receivable
    280,244       294,211  
Other Receivables
    887,994       527,959  
Other Assets
    366,434       452,150  
Total
  $ 2,496,949     $ 2,307,246  

NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following:
 
   
As of March 31
   
As of June 30
 
   
2010
   
2009
 
             
Office furniture and equipment
  $ 943,790     $ 1,069,156  
Computer equipment
    6,890,938       6,975,575  
Assets under capital leases
    1,943,409       2,058,075  
Building
    2,340,263       2,446,564  
Land
    570,811       1,466,601  
Capital work in progress
    1,917,003       756,945  
Autos
    571,197       308,925  
Improvements
    165,453       170,973  
Subtotal
    15,342,865       15,252,814  
Accumulated depreciation
    (6,885,242 )     (6,066,651 )
    $ 8,457,622     $ 9,186,163  

 
Page 11               

 

For the nine months ended March 31, 2010, and 2009, fixed asset depreciation expense totaled $1,117,045, and $1,391,867, respectively.  Of these amounts, $794,603 and $877,829, 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 March 31, 2010 and June 30, 2009, was $1,917,003 and $756,945, respectively. During the nine months ended March 31, 2010, the Company has capitalized $125,351 in capital work in progress being the borrowing cost incurred on the project. The capital work in progress of $1,917,003 consists of $927,366 against an advance for acquisition of land in NetSol PK.

Due to development work in the area in which Lahore office of NetSol PK is situated, the Government of Punjab has acquired land from NetSol PK on which it has accounted for a loss of $226,906 during the nine months period ended March 31, 2010.

Assets acquired under capital leases were $1,943,409 and $2,058,075 as of March 31, 2010 and June 30, 2009, respectively.  Accumulated amortization related to those leases was $614,681 and $443,992 for the periods ended March 31, 2010 and June 30, 2009, respectively.
 
NOTE 9 - 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(ASC 350).
 
As part of intangible assets, the Company capitalizes certain computer software development costs in accordance with SFAS No. 86 (ASC 985), “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:
 
 
Page 12               

 
 
   
Product Licenses
   
Customer Lists
   
Total
 
Intangible assets - June 30, 2009 - cost
  $ 25,042,331     $ 5,804,057     $ 30,846,388  
Additions
    4,598,160       -       4,598,160  
Effect of translation adjustment
    (2,570,159 )     -       (2,570,159 )
Accumulated amortization
    (10,578,195 )     (5,012,017 )     (15,590,212 )
Net balance - March 31, 2010
  $ 16,492,134     $ 792,040     $ 17,284,174  
                         
Intangible assets - June 30, 2008 - cost
  $ 18,992,284     $ 5,451,094     $ 24,443,378  
Additions
    6,050,047       352,963       6,403,010  
Effect of translation adjustment
    (1,880,317 )     -       (1,880,317 )
Accumulated amortization
    (9,359,407 )     (4,460,038 )     (13,819,445 )
Net balance - June 30, 2009
  $ 13,802,607     $ 1,344,019     $ 15,146,626  
                         
Amortization expense for:
                       
Nine months ended March 31, 2010
  $ 1,323,599     $ 551,979     $ 1,875,578  
Nine months ended March 31, 2009
  $ 1,243,430     $ 530,396     $ 1,773,826  

The above amortization expense includes amounts in “Costs of Goods Sold” for capitalized software development costs of $856,073 and $738,024 for the nine months ended March 31, 2010 and March 31, 2009, respectively.  At March 31, 2010 and 2009, product licenses, renewals, enhancements, copyrights, trademarks, and trade names, included unamortized software development and enhancement costs of $12,471,018 and $8,712,710, respectively, as the development and enhancement is yet to be completed.
 
Amortization expense of intangible assets over the next five years for those which are fully developed and are being amortized is as follows:
 
   
FISCAL YEAR ENDING
       
Asset
 
3/31/11
   
3/31/12
   
3/31/13
   
3/31/14
   
3/31/15
   
TOTAL
 
Product Licences
  $ 1,326,575     $ 999,289     $ 656,076     $ 509,740     $ 358,748     $ 3,850,428  
Customer Lists
    501,860       290,180       -       -       -       792,040  
                                                 
    $ 1,828,435     $ 1,289,469     $ 656,076     $ 509,740     $ 358,748     $ 4,642,468  
 
There were no impairments of the goodwill asset during the nine months ended March 31, 2010 and 2009.
 
NOTE 10 – OTHER ASSETS

During the fiscal year ended June 30, 2009, our North American operations moved its location from Burlingame to Emeryville. As part of the lease agreement, the Company was required to pay two months of rental payments as a security deposit. The security deposit was utilized by the landlord against non-payment of rent by the Company. The deposit was not replenished and accordingly, there was no security deposit balance as on March 31, 2010.
 
Page 13               

 
NOTE 11 – 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 SR 1,002,000 by the Company and SR 998,000 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. As per FASB ASC 323-10-15-8) (formerly APB 18, par. 17), the company uses the equity method for accounting the investment as it has not established control over the affairs of Atheeb NetSol Limited due to its minority representation on the board of directors.

The Company's investment in equity for the nine months ended March 31, 2010 is shown as follows:
 
Initial investment in Atheeb at cost
        $ 268,000  
Net loss for the period
  (47,872 )        
NetSol's share (50.1%)
          (23,984 )
               
Total Investment in equity
        $ 244,016  
 
The Company's loss from equity investment for the nine months ended March 31, 2010 is shown as follows:

Net loss of Atheeb
    47,872  
         
Percentage of ownership in Atheeb
    50.1%  
         
Loss from equity investment
  $ 23,984  
 
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
As of March 31
   
As of June 30
 
   
2010
   
2009
 
             
Accounts Payable
  $ 1,356,653     $ 1,654,974  
Accrued Liabilities
    2,332,212       1,757,282  
Accrued Payroll
    82,969       8,152  
Accrued Payroll Taxes
    268,814       487,180  
Interest Payable
    418,223       985,911  
Deferred Revenues
    57,946       16,388  
Taxes Payable
    126,019       196,379  
Total
  $ 4,642,835     $ 5,106,266  

 
Page 14               

 
 
NOTE 13 - DEBTS
 
A)  LOANS AND LEASES PAYABLE
 
Loans and leases payable consist of the following:
 
   
As of March 31
   
Current
   
Long-Term
 
Name
 
2010
   
Maturities
   
Maturities
 
                   
D&O Insurance
  $ 48,272     $ 48,272     $ -  
E&O Insurance
    27,842     $ 27,842          
Habib Bank Line of Credit
    5,572,313       5,572,313       -  
Bank Overdraft Facility
    33,356       33,356       -  
HSBC Loan
    112,616       112,616       -  
Term Finance Facility
    1,181,754       295,438       886,316  
Subsidiary Capital Leases
    1,413,398       1,044,690       368,709  
Lease abandonment liability
    867,583       -       867,583  
    $ 9,257,134     $ 7,134,527     $ 2,122,607  
                         
   
As of June 30
   
Current
   
Long-Term
 
Name
 
2009
   
Maturities
   
Maturities
 
                       
D&O Insurance
  $ 31,288     $ 31,288     $ -  
E&O Insurance
    22,656       22,656       -  
Habib Bank Line of Credit
    4,966,597       4,966,597       -  
Bank Overdraft Facility
    229,883       229,883       -  
HSBC Loan
    330,667       292,542       38,125  
Term Finance Facility
    1,229,379       153,672       1,075,707  
Subsidiary Capital Leases
    1,602,093       511,192       1,090,901  
    $ 8,412,563     $ 6,207,830     $ 2,204,733  
 
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 $753,600 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 $23,449. The loan outstanding as of June 30, 2009, was £200,162 or $330,667; of this amount $292,542 was classified as current maturities and $38,125 as long-term debt.  During the nine month period ended March 31, 2010, £125,443 or approximately $189,068, was paid on the principal of this note and £5,417 or approximately $8,165 was paid in interest.  The loan outstanding, as of March 31, 2010, was £74,719 or $112,616 which is classified as current maturities.
 
In February 2010, the Company renewed its Directors’ and Officers’ (“D&O”) liability insurance for which the annual premium is $102,936.  The Company arranged financing with AIICO Inc. with a down payment of $30,879 with the balance to be paid in six monthly installments of $12,216 each.  The Company also financed the previous year’s D&O liability insurance.  The balance owing on the previous year’s premium as of June 30, 2009 was $31,288, this balance was paid by the end of the quarter ended December 31, 2009.  The balance owing on the current year’s annual premium at March 31, 2010 was $48,272.
 
In January 2010, the Company purchased an Errors and Omissions (“E&O”) liability insurance for an annual premium of $59,371.  The Company arranged financing with AIICO Inc. with a down payment of $17,810 with the balance to be paid in six monthly installments of $7,046 each.  The balance on this year’s policy as of March 31, 2010 was $27,842.  The balance owing on the previous year’s E&O policy as of June 30, 2009 was $22,656.
 
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.  Fiscal year end June 30, 2008 balance was $1,501,998.  During the year ended June 30, 2009, $3,683,769 was drawn down on this line of credit and $414,167 was repaid.  The interest rate on this account is variable and was 4.571% at June 30, 2009.  Interest paid during the year ended June 30, 2009 was $194,988 and the balance was $4,966,597. During the nine months ended March 31, 2010, the Company increased the line of credit and an additional $4,320,534 was drawn down and $3,577,867 of principal and $136,952 of interest was paid.  The interest rate, as of March 31, 2010, was 3.23% and the balance was $5,572,313.
 
 
Page 15               

 
 
During the year ended June 30, 2008, 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 is currently 5.00%, for an effective annual rate of 8.25%.  As of June 30, 2009, NTE had used £139,154 or approximately $229,883.  At the end of nine months ended March 31, 2010, the balance was £22,131 or approximately $33,356.
 
The Company’s Pakistan based subsidiary, NetSol PK, availed a term finance facility from Askari Bank to finance the construction of a new building. The total amount of the facility is Rs. 200,000,000 or approximately $2,398,369 (secured by the first of Rs. 580 million over the land, building and equipment of the company).  The interest rate is 3% above the six months Karachi Inter Bank Offering Rate.  As on June 30, 2009, the subsidiary had used Rs. 100,000,000 or approximately $1,229,379 of which $1,075,707 was shown as long term liabilities and the remainder of $153,672 as current maturity.  As of the nine months ended March 31, 2010, the Company has used Rs. 100,000,000 or approximately $1,181,754 of which $886,316 is shown as long term liabilities and the remainder of $295,438 as current maturity.
 
In 2008, the Company’s North American subsidiary, NTNA, had acquired an office space in Emeryville on a long term lease. However, due to the unprecedented recession in the year 2009, the company decided to cut costs by vacating the Emeryville office in October 2009 by terminating the lease. According to the requirements of SFAS 146 (ASC 420), the Company accounted for lease abandonment charge of $1,076,347 in the quarter ended December 31, 2009. However, as the vacated space has been leased by another company in the current quarter, an adjustment of $208,765 is made in the lease abandonment charge already provided in December 2009 resulting in reduction of the liability to $867,583 as of March 31, 2010.
 
Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of certain instruments held by the Company.  ASC Topic 820 et. seq., defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The three levels of valuation hierarchy are defined as follows:

 
·
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 
·
Level 3 inputs to the valuation methodology are unobservable and insignificant to the fair value measurement.

The Company’s Lease Abandonment Liability is carried at fair value totaling $867,583 and zero as of March 31, 2010 and June 30, 2009, respectively.  The Company used Level 2 inputs for its valuation methodology for this liability, as their fair values were determined based on various assumptions.
 
   
Fair Value as of
March 31, 2010
 
Fair Value Measurements at December 31, 2009 Using
Fair Value Hierarchy
Liabilities
     
Level 1
 
Level 2
 
Level 3
                 
Lease Abandonment Liability
  $ 867,583       $ 867,583    

 
Page 16               

 

CAPITAL LEASE OBLIGATIONS

The Company leases various fixed assets under capital lease arrangements expiring in various years through 2013.  The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset.  The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves.  Depreciation of assets under capital leases is included in depreciation expense for the nine months ended March 31, 2010 and 2009.

Following is the aggregate minimum future lease payments under capital leases as of March 31, 2010:

   
As of March 31, 2010
   
As of June 30, 2009
 
Minimum Lease Payments
           
            -  
Due FYE 3/31/11
  $ 1,078,147     $ 545,992  
Due FYE 3/31/12
    300,046       505,004  
Due FYE 3/31/13
    148,422       432,545  
Due FYE 3/31/14
            201,490  
Due FYE 3/31/15
            176,512  
Total Minimum Lease Payments
    1,526,616       1,861,543  
Interest Expense relating to future periods
    (113,217 )     (259,450 )
Present Value of minimum lease payments
    1,413,399       1,602,093  
Less:  Current portion
    (1,044,690 )     (511,192 )
Non-Current portion
  $ 368,708     $ 1,090,901  

Following is a summary of fixed assets held under capital leases:
 
   
As of March 31, 2010
   
As of June 30, 2009
 
           
Computer Equipment and Software
  $ 594,343     $ 607,394  
Furniture and Fixtures
    833,001       733,277  
Vehicles
    213,849       310,021  
Building Equipment
    302,216       407,383  
                 
Total
    1,943,409       2,058,075  
Less:  Accumulated Depreciation
   
(614,681
)     (443,992 )
Net
  $ 1,328,728     $ 1,614,083  

 
Page 17               

 
 
B)  LOANS PAYABLE -BANK
 
The Company’s Pakistan subsidiary, NetSol PK, has a loan with a bank, secured by a first lien, amount to Rs. 285.71 million on NetSol PK’s current assets including stocks, receivables and book debts.  The note consists of the following
 
For the nine months ended March 31, 2010:
 
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    8.50 %   $ 2,363,507  
                     
Total
              $ 2,363,507  
                     
For the year ended June 30, 2009:
 
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                     
Export Refinance
 
Every 6 months
    7.50 %   $ 2,458,757  
                     
Total
              $ 2,458,757  

C)  OTHER PAYABLE – ACQUISITION

McCue Systems – (now NetSol Technologies North America, Inc.)

As of March 31, 2010, Other Payable – Acquisition consideration payable consists of total payments of $103,226 due to the shareholders of McCue Systems which are unidentifiable or have not been located to date.
 
On June 30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed.  As a result, the first installment consisting of $2,117,864 cash and 958,213 shares of the Company’s restricted common stock was recorded.  During the fiscal year ended June 30, 2007, $2,059,413 of the cash portion of was paid to the McCue shareholders and in July 2006 the stock was issued.  In June 2007, the second installment on the acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s restricted common stock became due and was recorded.  In July and August 2007, $879,007 of the cash was paid.  In June 2008, the third and final installment became due, consisting of $762,816 in cash and 345,131 shares of the Company’s restricted common stock.  The cash portion is shown as “Other Payable – Acquisition” and the stock portion is shown in “Shares to be issued” on these consolidated financial statements.
 
NOTE 14 – DIVIDEND PAYABLE
 
PREFERRED SHAREHOLDERS
 
The Company had issued Series A 7% Cumulative Convertible Preferred Stock under which dividends were payable (see Note 16).  The dividend was to be paid quarterly, either in cash or stock at the Company’s election.  On August 18, 2009, the Company redeemed all outstanding shares of Preferred Stock (1,920 shares).  The amount of dividend payable as of March 31, 2010 and June 30, 2009 was NIL and $44,409 respectively.
 
 
Page 18               

 

NOTE 15 – 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 had an original conversion price 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.

In January 2009, the Company entered into a waiver agreement (the “Waiver”) with holders of the Convertible Notes (the “Holders”) to modify the terms and conditions of the original note.  Under the Waiver, Holders waived their right to full-ratchet, anti-dilution protection as to strategic investors only for a period of 18 months from the date of the Waiver and permanently waived participation in future financings in consideration of a new conversion rate of $0.78 per common share and four equal quarterly cash installment payments from the Company of $250,000 each, beginning on January 2009.  Since this was an extinguishment of the existing contract, the Company accounted for beneficial conversion feature (“BCF) of $230,769 which is being amortized over the remaining life of the contract. The Company accrued $1,000,000 under the Waiver as loss on extinguishment of debt in the fiscal year ended June 30, 2009.

The Convertible Notes entered into by and between the Company and the Holders includes certain conditions.  Specifically, the Convertible Notes do not permit interest to be paid in shares of common stock if, at the time the interest is due the Equity Conditions, as defined therein, are not met, or there has been an Event of Default.  In such instances, the Company must make cash interest payments.  So long as the principal is due, the Company may not, without prior approval of 75% of the Holders, incur indebtedness senior to the Holders.  A failure to follow this covenant would result in an Event of Default.  If an Event of Default occurs and is continuing with respect to any of the Notes, the Holder may declare all of the then outstanding principal amount of this note and all other notes held by the Holder, including any interest due thereon, to be due and payable immediately.  In the event of such acceleration, the Notes held by the Holder (plus all accrued and unpaid interest, if any) and (2) the product of (A) the highest closing price for the five (5) trading days immediately preceding the Holder’s acceleration and (B) the Conversion Ratio.  In either case, the Company shall pay interest on such amount in cash at the Default Rate to the Holder if such amount is not paid within 7 days of the Holder’s request.  The remedies under this Note shall be cumulative.  Failure to comply with the terms of the Note, the Purchase Agreement and the Investor Rights Agreement may result in an Event of Default hereunder.  These notes carry anti-dilution clauses and, due to the issuance of $2,000,000 notes at a conversion price of $0.63 in August 2009, the conversion price of these notes was also adjusted downwards to $0.63 resulting in an additional BCF of $715,518. As of March 31, 2010, the total amount amortized for these notes was $341,645.

On August 14, 2009, one of the Holders of the Convertible Notes elected, pursuant to the terms therein to convert $200,000 worth of principal value of the notes into 317,460 shares of common stock.  This conversion reduced the total principal of the Convertible Notes to $5,800,000.  On October 12, 2009, three of the Holders of the Convertible Notes elected, pursuant to the terms therein, to convert principal and interest due thereon into a total of 809,393 shares of common stock.  On December 21, 2009, one of the Holders of the Convertible Notes elected, pursuant to the terms therein, to convert principal and interest due thereon into a total of 822,077 shares of common stock.  This conversion reduced the total principal of the Convertible Notes to $4,800,000.  On February 19, 2010, one of the Holders of the Convertible Notes elected, pursuant to the terms therein, to convert principal and interest due thereon into a total of 400,606 shares of common stock.  This conversion reduced the total principal of the Convertible Notes to $4,550,000.

On August 11, 2009, the Company entered into Convertible Notes with a principal value of $2,000,000, bearing interest at 9% per annum and convertible in one year at an initial conversion price of $0.63 per share (the “2009 Convertible Notes”).  The 2009 Convertible Notes are with the same two accredited investors who were the remaining Series A 7% Cumulative Convertible Preferred Stockholders.  The proceeds of the 2009 Convertible Notes were used exclusively for the redemption of the Series A 7% Cumulative Convertible Preferred Stockholders. The Company accounted for a BCF of $1,428,571 which will be amortized over the life of the contract.

 As on March 31, 2010, the total amount of BCF amortized for these notes was $1,253,582. Both of these convertible notes are recorded as net of unamortized BCF of $982,610 at March 31, 2010. During the nine month period ended March 31, 2010, interest was accrued in the amount of $620,186 on these Convertible Notes.

From March 10 to March 23, 2010, the Company entered into convertible promissory notes with five accredited non-U.S. investors.  These investors had pre-existing investor relationships with the Company.  The notes bear a total principal value of $1,500,000 and are due in full on the anniversary of each note.  The notes are convertible into shares of common stock of the Company at the rate of $1.15 per share and interest at the rate of 8% per annum payable at maturity.  The maturity date of the notes may be extended an additional year at the holders' and Company’s agreement. The fair market value of the shares at the date of signing was $0.90; therefore, no BCF expense was recorded on the transaction. These notes are classified as current maturity in the balance sheet.

 
Page 19               

 

Issue Date
 
Balance net of BCF as
on March 31, 2010
   
Current
Portion
   
Long Term
 
                   
Jul-08
    4,084,024       -       4,084,023  
Aug-09
    1,483,366       1,483,365       -  
Mar-10
    1,500,000       1,500,000       -  
                         
Total
    7,067,390       2,983,366       4,084,024  

NOTE 16 - STOCKHOLDERS’ EQUITY
 
EQUITY TRANSACTIONS
 
PREFERRED STOCK
 
On October 30, 2006, the convertible notes payable (see note 14) 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 were convertible into common stock at a rate of $1.65 per common share.  The total shares of common stock that were issuable under these Series A Preferred Stock was 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, 2008 a total of 3,580 of the preferred shares had been converted into 2,169,694 shares of the Company’s common stock.  On August 18, 2009, the Company redeemed all outstanding shares of Preferred Stock (1,920 shares) of the Series A 7% Cumulative Convertible Preferred Stock. As of March 31, 2010, there were no shares of preferred stock outstanding.

PRIVATE PLACEMENTS

From April to July 11, 2009, the Company sold a total of 5,309,929 shares to unrelated employees under the Employee Stock Purchase Agreement approved by the Board on April 9, 2009. Pursuant to the terms of the Stock Purchase Agreement, only unregistered shares of stock were sold at a discount from the market price as of the board approval date of $0.20 per share.  The agreements were subsequently amended to adjust the issue price at the closing bid price on the date before the agreement is fully executed with each employee. To accomplish this, the employees who had already purchased the shares were given the option to either adjust the consideration by decreasing the number of shares purchased to match the adjusted issue price, or by paying more money.  As a result of the adjustment a total of $1,866,100 would be due based on the shareholders elected adjustment.

BUSINESS COMBINATIONS

On October 31, 2008, the Company entered into an agreement to purchase 100% of the membership interests of Ciena Solutions, LLC, a California limited liability company.  Under the terms of the agreement, the Company paid a deposit of $350,000 to the members for the purchase with the full purchase price to be determined based on the performance of the business unit over the next four years.  No assets or liabilities were acquired by the Company at the acquisition, excluding the rights to the existing contracts.  As the effects of this transaction are insignificant to the consolidated financial statements, no pro forma information has been provided. Ciena Solutions, LLC has been merged into NTNA.

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.

 
Page 20               

 

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 2 financial 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.


 
Page 21               

 

NTPK (THAILAND) CO. LIMITED

The Company formed a company under the laws of Thailand, NTPK (Thailand) Company Limited, as an Amity Treaty Company.  While formally completed during the quarter ended March 31, 2010, registration of the Company was recorded retroactively to the date of submission of all final documents, or December 18, 2009.  The Company was formed with an initial contribution of 4 million baht or $123,258.

 
SERVICES, ACCRUED EXPENSES, AND PAYABLES

In July 2009, a total of 20,000 shares of restricted common stock were issued for services rendered to 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.

In August 2009, one of the holders of the $6 million convertible note converted $200,000 worth of principal from the note into 317,460 shares of common stock all according to the terms of the original note.

In August 2009, a total of 361,931 shares of restricted common stock were issued to 3 consultants in exchange for services to the Company. These shares were valued at the fair market value of $162,419, pursuant to ASC 505-50.

In August 2009, two employees were issued 12,500 shares each as required according to the terms of their employment agreements.  An additional 25,000 shares of restricted common stock was issued to another employee as part of his employment agreement with the Company.

In October, 2009, holders of a convertible note with the Company converted principal and interest of the note into 809,211 shares of common stock of the Company, consistent with the terms of the convertible note.

In October 2009, an employee of the Company received 25,000 shares of common stock as required according to the terms of his employment agreement.

In November 2009, two employees were issued 12,500 shares each as required according to the terms of their employment agreements.  Each of these employees is an accredited investor.   An additional 14,000 shares of restricted common stock was issued to employees as a year-end bonus for services performed in 2009. Subsequent to the close of the quarter ended December 31, 2009, 500 shares of these bonus shares were canceled, resulting in a total issuance of 13,500 shares.  In December 2009, 30,000 shares were issued to an accredited consultant in exchange for services rendered.

In December 2009, a holder of a convertible note with the Company converted principal and interest of the note into 822,077 shares of common stock of the Company, consistent with the terms of the convertible note.

In February 2010, 30,000 shares were issued to an accredited consultant in exchange for services rendered.

In February 2010, a total of 40,000 shares of restricted common stock were issued for services rendered to 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 issued in reliance on exemptions from registration available under Regulation S and D of the Securities Act of 1933, as amended.

In February 2010, a holder of a convertible note with the Company converted principal and interest of the note into 400,606 shares of common stock of the Company, consistent with the terms of the convertible note.

In March 2010, two employees were issued 12,500 shares each as required according to the terms of their employment agreements.

In March 2010, 30,000 shares were issued to a consultant in exchange for services rendered.

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.

 
Page 22               

 

The balance at June 30, 2009 was $842,619. During the nine months ended March 31, 2010, $754,509 was collected and $2,019,850 of new receivables was issued. The balance at March 31, 2010 was $2,107,960.

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 June 30, 2009 and March 31, 2010 was $396,008.  The stock repurchase plan expired on March 24, 2009.

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. During the nine months ended March 31, 2010, Company’s Pakistan based subsidiary, NetSol PK, also issued certain options to purchase its shares to its employees.

Common stock purchase options and warrants consisted of the following:

OPTIONS:
       
Exercise
   
Aggregated
 
Issued by the Company
 
# shares
   
Price
   
Intrinsic Value
 
                   
Outstanding and exercisable, June 30, 2008
    6,072,425     $ 0.75 to $5.00     $ 1,717,608  
Granted
    2,351,500     $ 0.30 to $1.65          
Exercised
    (717,008 )   $ 0.30 to $2.50          
Expired
    -                  
Outstanding and exercisable, June 30, 2009
    7,706,917     $ 0.30 to $5.00     $ -  
Granted
    250,000     $ 0.75          
Exercised
    (250,000 )   $ 0.75          
Expired
    -                  
Outstanding and exercisable, March 31, 2010
    7,706,917     $ 0.30 to $5.00     $ 396,720  
                         
Issued by NTPK
                       
                         
Outstanding and exercisable, June 30, 2009
    -                  
Granted
    4,350,000     $ 0.20          
Exercised
    -                  
Expired
    -                  
Outstanding , March 31, 2010
    4,350,000     $ 0.20     $ 628,599  
                         
WARRANTS:
                       
Outstanding and exercisable, June 30, 2008
    1,992,314     $ 1.65 to $3.70     $ 1,206,095  
Granted
    -                  
Exercised
    (51,515 )   $ 1.93          
Expired
    (163,182 )   $ 2.20 to $3.30          
Outstanding and exercisable, June 30, 2009
    1,777,617     $ 1.65 to $3.70     $ -  
Granted
    1,226,552     $ 0.63          
Exercised
    -                  
Expired
    (288,980 )   $ 3.30          
Outstanding and exercisable, March 31, 2010
    2,715,189     $ 0.63 to $3.70     $ 476,191  

 
Page 23               

 
 
The following is a summary of the status of options and warrants outstanding at March 31, 2010, for both the Company and NetSol PK:
 
Exercise Price
 
Number
Outstanding
and 
Exercisable
   
Weighted
Average
Remaining
Contractual
Life
   
Weighted
Ave
Exericse
Price
 
OPTIONS:
                 
Issued by the Company
                 
$0.01 - $0.99
    1,806,000       8.72       0.65  
$1.00 - $1.99
    2,045,917       5.32       1.88  
$2.00 - $2.99
    3,055,000       5.04       2.69  
$3.00 - $5.00
    800,000       4.06       4.24  
                         
Totals
    7,706,917       5.88       2.16  
                         
Issued by NetSol PK
                       
$0.20
    4,350,000       9.21       0.20  
                         
WARRANTS:
                       
$1.00 - $1.99
    2,702,689       2.07       0.94  
$3.00 - $5.00
    12,500       1.51       3.70  
                         
Totals
    2,715,189       2.06       0.96  
 
Options issued by NetSol PK are convertible into its own shares which will have no impact on the outstanding number of shares of the Company.
 
OPTIONS
 
During the nine months ended March 31, 2010, 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 nine months ended March 31, 2010, NetSol PK granted 4,350,000 options of NetSol PK to its core employees with an exercise price of $0.20 (PKR 16.42) per share and an expiration date of 10 years, out of which only 40% will be vested after the completion of the first year. Using the Black-Scholes method to value the options, the Company recorded $20,448 in compensation expense for the nine months for these options in the accompanying consolidated financial statements.

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

Risk-free interest rate
4.35%
Expected life
10 years
Expected volatility
64.82%
 
 
Page 24               

 

During the nine months ended March 31, 2009, 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 nine months ended March 31, 2009, 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 nine months ended March 31, 2009, the Company granted 45,000 options to two employees with an exercise price of $0.75 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $8,100 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
1.0%
Expected life
.25 years
Expected volatility
141%

On March 9, 2009, the Company entered into a consulting agreement whereby the consultant, in exchange for the services set forth in the agreement, would receive shares of common stock of the Company as compensation.  A total of 300,000 shares were issued as an incentive for signing the agreement and for acting to facilitate the joint venture with the Atheeb Group. These shares of common stock bear the standard restrictive legend.

WARRANTS

Due to the full ratchet anti-dilution protection clauses of the warrant agreements, the Company is required to reduce the warrant exercise price of two warrant holders resulting in a corresponding increase in the number of shares of common stock underlying the warrants by 1,226,552 during the nine months ended March 31, 2010.

During the nine months ended March 31, 2009, the Company issued 324,008 shares of its common stock for the exercise of options valued at $555,493.

During the nine months ended March 31, 2009, the Company issued 51,515 shares of its common stock for the exercise of warrants valued at $99,424.
 
 
Page 25               

 

 NOTE 17 - SEGMENT INFORMATION

The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific.  Our reportable segments are business units located in different global regions.  Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services.  Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location.  We account for intercompany sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation.  The following table presents a summary of operating information and certain balance sheet information for the nine months ended March 31, 2010 and March 31, 2009:
 
   
2010
   
2009
 
Revenues from unaffiliated customers:
           
North America
  $ 4,357,077     $ 4,045,050  
Europe
    4,306,032       3,339,633  
Asia - Pacific
    17,411,727       12,210,314  
Consolidated
  $ 26,074,837     $ 19,594,997  
                 
Operating income (loss):
               
Corporate headquarters
  $ (3,604,522 )   $ (3,189,499 )
North America
    (238,867 )     (1,507,871 )
Europe
    901,192       (1,906,413 )
Asia - Pacific
    8,359,854       657,693  
Consolidated
  $ 5,417,656     $ (5,946,090 )
                 
Net income (loss) after taxes and before minority interest:
               
Corporate headquarters
  $ (5,709,382 )   $ (4,649,335 )
North America
    (286,254 )     (1,585,872 )
Europe
    876,675       (1,939,738 )
Asia - Pacific
    8,231,306       1,972,876  
Consolidated
  $ 3,112,344     $ (6,202,069 )
                 
Identifiable assets:
               
Corporate headquarters
  $ 18,389,874