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, 2011
 
¨ For the transition period from __________ to __________
 
Commission file number: 0-22773
 
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
 
NEVADA
95-4627685
(State or other Jurisdiction of
(I.R.S. Employer NO.)
Incorporation or Organization)
 
 
23901 Calabasas Road, Suite 2072, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
 
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x      No  ¨
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large Accelerated Filer  ¨
Accelerated Filer  ¨
Non-Accelerated Filer  ¨
Small Reporting Company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
 
Yes  ¨      No  x
 
The issuer had 55,353,284 shares of its $.001 par value Common Stock and no shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of May 6, 2011.

 
 

 

NETSOL TECHNOLOGIES, INC.
INDEX
 
   
Page No.
PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
   
Consolidated Unaudited Balance Sheets as of March 31, 2011 and as of June 30, 2010
 
2
Comparative Unaudited Consolidated Statements of Operations for the Nine Months Ended March 31, 2011 and 2010
 
3
Comparative Unaudited Consolidated Statements of Cash Flow for the Nine Months Ended March 31, 2011 and 2010
 
4
Notes to the Unaudited Consolidated Financial Statements
 
6
Item 2.  Management's Discussion and Analysis or Plan of Operation
 
25
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
40
Item 4.  Controls and Procedures
 
40
     
PART II. OTHER INFORMATION
   
Item 1.  Legal Proceedings
 
40
Item 2.  Unregistered Sales of Equity and Use of Proceeds
 
40
Item 3.  Defaults Upon Senior Securities
 
41
Item 4.  Submission of Matters to a Vote of Security Holders
 
41
Item 5.  Other Information
 
41
Item 6.  Exhibits
 
41

 
Page | 1

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
As of March 31,
   
As of June 30,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 3,374,608     $ 4,075,546  
Restricted Cash
    5,700,000       5,700,000  
Accounts receivable, net of allowance for doubtful accounts
    18,304,881       12,280,331  
Revenues in excess of billings
    11,207,618       9,477,278  
Other current assets
    2,202,641       1,821,661  
Total current assets
    40,789,748       33,354,816  
Investment under equity method
    -       200,506  
Property and equipment, net of accumulated depreciation
    14,200,127       9,472,917  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, net
    22,659,116       19,002,081  
Customer lists, net
    290,180       666,575  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    32,388,582       29,107,941  
Total assets
  $ 87,378,456     $ 72,136,180  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,567,357     $ 4,890,921  
Due to officers
    -       10,911  
Current portion of loans and obligations under capitalized leases
    6,831,049       7,285,773  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    4,525,017       2,545,314  
Deferred liability
    32,066       47,066  
Convertible notes payable , current portion
    2,692,554       3,017,096  
Loans payable, bank
    2,335,191       2,327,476  
Common stock to be issued
    450,825       239,525  
Total current liabilities
    21,537,285       20,467,308  
Obligations under capitalized leases, less current maturities
    552,715       204,620  
Convertible notes payable less current maturities
    -       4,066,109  
Long term loans; less current maturities
    583,798       727,336  
Lease abandonment liability; long term
    -       867,583  
Total liabilities
    22,673,798       26,332,956  
Commitments and contingencies Stockholders' equity:
               
Common stock, $.001 par value; 95,000,000 shares authorized; 53,897,213 and 37,103,396 issued and outstanding
    53,897       37,104  
Additional paid-in-capital
    95,705,495       86,002,648  
Treasury stock
    (396,008 )     (396,008 )
Accumulated deficit
    (33,037,884 )     (39,859,030 )
Stock subscription receivable
    (2,075,460 )     (2,007,960 )
Other comprehensive loss
    (7,959,341 )     (8,396,086 )
Total NetSol shareholders' equity
    52,290,699       35,380,668  
Non-controlling interest
    12,413,959       10,422,557  
Total stockholders' equity
    64,704,658       45,803,224  
Total liabilities and stockholders' equity
  $ 87,378,456     $ 72,136,180  
 
See accompanying notes to these unaudited consolidated financial statements.

 
Page | 2

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended March 31,
   
Ended March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net Revenues:
                       
License fees
  $ 3,652,170     $ 3,644,809     $ 10,259,027     $ 9,515,338  
Maintenance fees
    1,896,318       1,739,799       5,589,746       5,327,852  
Services
    5,278,960       3,548,348       13,806,995       11,231,648  
Total revenues
    10,827,448       8,932,956       29,655,768       26,074,837  
Cost of revenues:
                               
Salaries and consultants
    2,448,517       2,154,369       6,562,685       6,173,967  
Travel
    237,694       222,136       708,082       611,343  
Repairs and maintenance
    79,068       43,364       207,585       180,086  
Insurance
    32,924       40,235       95,003       112,943  
Depreciation and amortization
    840,050       578,904       2,150,274       1,650,676  
Other
    412,693       416,931       1,004,690       1,884,426  
Total cost of revenues
    4,050,946       3,455,939       10,728,320       10,613,442  
Gross profit
    6,776,502       5,477,017       18,927,448       15,461,395  
Operating expenses:
                               
Selling and marketing
    560,879       651,485       2,047,726       1,671,866  
Depreciation and amortization
    313,865       411,563       848,168       1,341,947  
Bad debt expense
    717       (3,236 )     254,996       209,604  
Salaries and wages
    956,465       746,095       2,613,627       2,214,760  
Professional services, including non-cash compensation
    165,010       242,177       455,371       549,078  
Lease abandonment charges
    (858,969 )     (208,764 )     (858,969 )     867,583  
General and adminstrative
    831,131       1,056,718       2,837,218       3,188,901  
Total operating expenses
    1,969,096       2,896,038       8,198,137       10,043,739  
Income (loss) from operations
    4,807,406       2,580,979       10,729,311       5,417,656  
Other income and (expenses)
                               
Gain (loss) on sale of assets
    2,284       (125,419 )     (13,302 )     (214,520 )
Interest expense
    (148,661 )     (312,671 )     (755,781 )     (1,153,557 )
Interest income
    48,851       82,637       143,270       234,200  
Gain (loss) on foreign currency exchange transactions
    224,531       (190,082 )     897,767       190,495  
Share of net loss from equity investment
    (78,269 )     (23,984 )     (220,506 )     (23,984 )
Beneficial conversion feature
    (105,445 )     (458,758 )     (401,019 )     (1,351,972 )
Other income (expense)
    (5,105 )     144,609       (62,406 )     62,634  
Total other income (expenses)
    (61,815 )     (883,667 )     (411,977 )     (2,256,704 )
Net income before  income taxes
    4,745,591       1,697,312       10,317,334       3,160,952  
Income taxes
    (13,735 )     (11,064 )     (25,459 )     (48,607 )
Net income after tax
    4,731,856       1,686,248       10,291,875       3,112,345  
Non-controlling interest
    (1,413,427 )     (1,097,201 )     (3,470,728 )     (3,235,093 )
Net income (loss) attibutable to NetSol
    3,318,429       589,047       6,821,147       (122,748 )
                                 
Other comprehensive income (loss):
                               
Translation adjustment
    20,361       (594,063 )     460,524       (1,874,242 )
Comprehensive income (loss)
    3,338,790       (5,016 )     7,281,671       (1,996,990 )
Comprehensive income (loss) attributable to non controlling interest
    98,756       (154,375 )     23,780       (579,849 )
Comprehensive income (loss) attributable to NetSol
  $ 3,240,034     $ 149,359     $ 7,257,891     $ (1,417,141 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.06     $ 0.02     $ 0.15     $ (0.004 )
Diluted
  $ 0.06     $ 0.02     $ 0.14     $ (0.004 )
Weighted average number of shares outstanding
                               
Basic
    51,263,639       35,636,259       46,355,789       33,893,968  
Diluted
    52,480,900       36,988,542       47,573,050       33,893,968  
                                 
Amounts attributable to NetSol common shareholders
                               
Net income (loss)
  $ 3,318,429     $ 589,047     $ 6,821,147     $ (122,748 )
 
See accompanying notes to these unaudited consolidated financial statements.

 
Page | 3

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Nine Months
 
   
Ended March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
 
 
   
 
 
Net income
  $ 10,291,875     $ 3,112,345  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,998,443       2,992,624  
Provision for bad debts
    254,996       209,604  
Loss on foreign currency exchange transaction
    -       25,900  
Share of net loss from investment under equity method
    220,506       23,984  
Loss on sale of assets
    13,302       214,520  
Stock issued for interest on notes payable
    155,808       30,207  
Stock issued for services
    698,843       572,184  
Fair market value of warrants and stock options granted
    335,918       791,530  
Beneficial conversion feature
    401,019       1,351,972  
Changes in operating assets and liabilities:
               
Increase/ decrease in accounts receivable
    (5,350,512 )     (2,658,139 )
Increase/ decrease in other current assets
    (2,099,813 )     (2,703,402 )
Increase/ decrease in accounts payable and accrued expenses
    (581,418 )     (52,914 )
Net cash provided by operating activities
    7,338,966       3,910,415  
Cash flows from investing activities:
               
Purchases of property and equipment
    (6,242,399 )     (1,458,050 )
Sales of property and equipment
    18,358       232,783  
Purchase of non-controlling interest in subsidiary
    (671,460 )     -  
Short-term investments held for sale
    (258,271 )     -  
Investment in associate
    -       (268,000 )
Increase in intangible assets
    (4,752,261 )     (4,562,044 )
Net cash used in investing activities
    (11,906,032 )     (6,055,311 )
Cash flows from financing activities:
               
Proceeds from sale of common stock
    2,899,250       754,509  
Proceeds from the exercise of stock options and warrants
    1,116,175       33,750  
Proceeds from convertible notes payable
    -       3,500,000  
Redemption of preferred stock
    -       (1,920,000 )
Dividend Paid
    -       (43,988 )
Bank overdraft
    (78,447 )     (176,377 )
Proceeds from bank loans
    2,969,146       4,320,534  
Payments on bank loans
    (46,073 )     (484,507 )
Payments on capital lease obligations & loans - net
    (2,823,969 )     (3,664,176 )
Net cash provided by financing activities
    4,036,081       2,319,746  
Effect of exchange rate changes in cash
    (169,951 )     (303,170 )
Net increase in cash and cash equivalents
    (700,937 )     (128,319 )
Cash and cash equivalents, beginning of year
    4,075,546       4,403,762  
Cash and cash equivalents, end of year
  $ 3,374,608     $ 4,275,443  
 
See accompanying notes to the unaudited consolidated financial statements.

 
Page | 4

 
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 
   
For the Nine Months
 
   
Ended March 31,
 
   
2011
   
2010
 
SUPPLEMENTAL DISCLOSURES:
           
Cash paid during the period for:
           
Interest
  $ 946,467     $ 914,333  
Taxes
  $ 2,421     $ 115,000  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued for the conversion of Notes Payable
  $ 4,803,339     $ 1,450,000  
Purchase of property and equipment under capital lease
  $ 267,947     $ 101,376  
 
See accompanying notes to the unaudited consolidated financial statements.

 
Page | 5

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
 
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile finance and leasing, banking, healthcare, and financial services industries worldwide.  The Company also provides system integration, consulting, IT products and services in exchange for fees from customers.
 
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein.  It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.  The Company follows the same accounting policies in preparation of interim reports.  Results of operations for the interim periods are not indicative of annual results.
 
The accompanying consolidated financial statements include the accounts of NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows:
 
Wholly-owned Subsidiaries
NetSol Technologies North America, Inc. (“NTNA”)
NetSol Technologies Limited (“NetSol UK”)
NetSol Connect (Private), Ltd. (“Connect)
NetSol-Abraxas Australia Pty Ltd. (“Abraxas”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
 
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 - USE OF ESTIMATES:
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
 
In July 2010, the FASB issued an accounting update to provide guidance to enhance disclosures related to the credit quality of a company's financing receivables portfolio and the associated allowance for credit losses. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its allowance for credit loss with the objective of facilitating users' evaluation of the nature of credit risk inherent in the company's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The revised disclosures as of the end of the reporting period are effective for the Company beginning in the second quarter of fiscal 2011, and the revised discourses related to activities during the reporting period are effective for the Company beginning in the third quarter of fiscal 2011. The Company is currently evaluating the impact of this accounting update on its financial disclosures.

 
Page | 6

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.
 
In December 2010, the FASB issued amended guidance related to intangibles—goodwill and other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
 
The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

 
Page | 7

 

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

NOTE 4 – EARNINGS/ (LOSS) PER SHARE:
 
Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, warrants, and stock awards.
 
The components of basic and diluted earnings per share for the nine months ended March 31, 2011 and 2010 were as follows:
 
For the period ended March 31, 2011
 
Net Income
   
Shares
   
Per Share
 
Basic income per share:
  $ 6,821,147       46,355,789     $ 0.15  
Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                       
Effect of dilutive securities
                       
Stock options
            1,069,541          
Warrants
            147,720          
Diluted income per share
  $ 6,821,147       47,573,050     $ 0.14  
                         
For the period 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
            -          
Convertible Note
            -          
Diluted (loss) per share
  $ (122,748 )     33,893,968     $ (0.004 )

* 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

 
Page | 8

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY:
 
The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, and NetSol Innovation use Pakistan Rupees; NTPK Thailand uses Thai Baht and Abraxas uses the Australian dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary, NTNA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet. These were $7,959,341 and $8,396,086 as of March 31, 2011 and June 30, 2010 respectively. During the nine months ended March 31, 2011 and 2010, comprehensive loss in the consolidated statements of operations included translation gain of $436,744 and loss of $1,294,393 respectively.
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following at March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
As of June 30
 
   
2011
   
2010
 
             
Prepaid Expenses
  $ 386,050     $ 237,702  
Advance Income Tax
    598,994       422,028  
Employee Advances
    54,666       57,113  
Security Deposits
    173,130       131,229  
Tender Money Receivable
    137,407       252,826  
Other Receivables
    532,977       535,981  
Other Assets
    319,417       184,782  
Total
  $ 2,202,641     $ 1,821,661  

 
Page | 9

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 7 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consist of the following at March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
As of June 30
 
   
2011
   
2010
 
             
Office furniture and equipment
  $ 1,092,399     $ 1,041,326  
Computer equipment
    11,649,161       8,038,033  
Assets under capital leases
    2,011,034       1,838,217  
Building
    2,321,751       2,314,080  
Land
    563,973       562,109  
Capital work in progress
    4,153,073       1,925,207  
Autos
    858,525       744,586  
Improvements
    163,812       163,365  
Subtotal
    22,813,728       16,626,923  
Accumulated depreciation
    (8,613,601 )     (7,154,005 )
    $ 14,200,127     $ 9,472,917  
 
For the nine months ended March 31, 2011 and 2010, depreciation expense totaled $1,340,134 and $1,117,045 respectively. Of these amounts, $952,051 and $794,603 respectively, are reflected as part of cost of goods sold.
 
The Company’s capital work in progress consists of ongoing enhancements to its facilities and infrastructure as necessary to meet the Company’s expected long-term growth needs. The Company recorded capitalized interest of $391,397 and $158,283 as of March 31, 2011 and June 30, 2010, respectively.

 
Page | 10

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 8 - INTANGIBLE ASSETS:
 
Intangible assets consist of the following at March 31, 2011 and June 30, 2010:
 
   
Product Licenses
   
Customer Lists
   
Total
 
Intangible assets - June 30, 2009 - cost
  $ 25,042,331     $ 5,804,057     $ 30,846,388  
Additions
    7,652,707       -       7,652,707  
Effect of translation adjustment
    (2,734,235 )     -       (2,734,235 )
Accumulated amortization
    (10,958,723 )     (5,137,482 )     (16,096,205 )
Net balance - June 30, 2010
  $ 19,002,080     $ 666,575     $ 19,668,655  
                         
Intangible assets - June 30, 2010 - cost
  $ 29,960,803     $ 5,804,057     $ 35,764,860  
Additions
    4,795,391       -       4,795,391  
Effect of translation adjustment
    232,728       -       232,728  
Accumulated amortization
    (12,329,806 )     (5,513,876 )     (17,843,682 )
Net balance - March 31, 2011
  $ 22,659,116     $ 290,180     $ 22,949,296  
                         
Weighted average amortization period
    7.89       5.00       7.48  
                         
Amortization expense for:
                       
Nine months ended March 31, 2011
  $ 1,281,913     $ 376,395     $ 1,658,308  
Nine months ended March 31, 2010
  $ 1,323,599     $ 551,979     $ 1,875,578  
 
(A) Product Licenses
 
Product licenses include original license issue, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses included unamortized software development and enhancement costs of $16,292,019.
 
(B) Customer Lists
 
On October 31, 2008, the Company entered into an agreement to purchase the rights to the customer list of Ciena Solutions, LLC, a California limited liability company (“Ciena”). Under the terms of the agreement, the total consideration for these rights included an initial payment of $350,000 (plus interest of $2,963), and deferred consideration to be paid in cash and the Company’s common stock based on the operational results of Ciena, and certain other factors, over a four-year fiscal period. Each fiscal period is measured from July 1 to June 30 with fiscal period one being the period from July 1, 2008 to June 30, 2009. No other assets or liabilities were acquired by the Company as a result of this transaction.
 
As a result of operational losses of Ciena in the first two fiscal periods, 2009 and 2010, respectively, the first two annual deferred consideration installment payments were determined to be zero.
 
(C) Amortization
 
Amortization expense of intangible assets over the next five years is as follows:
 
   
FISCAL YEAR ENDING
       
Asset
 
3/31/12
   
3/31/13
   
3/31/14
   
3/31/15
   
3/31/16
   
Thereafter
   
TOTAL
 
Product Licences
  $ 1,462,240     $ 1,272,470     $ 1,054,962     $ 872,704     $ 872,704     $ 17,124,036     $ 22,659,117  
Customer Lists
    290,180       -       -       -       -       -       290,180  
                                                         
    $ 1,752,420     $ 1,272,470     $ 1,054,962     $ 872,704     $ 872,704     $ 17,124,036     $ 22,949,297  

 
Page | 11

 

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

NOTE 9 – GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period businesses combinations. Goodwill is comprised of the following amounts as of March 31, 2011 and June 30, 2010:
 
   
As of March 31,
   
As of June 30,
 
   
2011
   
2010
 
Asia Pacific
  $ 1,303,372     $ 1,303,372  
Europe
    3,471,813       3,471,813  
North America
    4,664,100       4,664,100  
                 
Total
  $ 9,439,285     $ 9,439,285  
 
There was no impairment of the goodwill for the periods ended March 31, 2011 and June 30, 2010.
 
NOTE 10 – INVESTMENT UNDER EQUITY METHOD
 
On April 10, 2009, the Company entered into an agreement to form a joint venture with the Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint venture entity, Atheeb NetSol Saudi Company Ltd., is a company organized under the laws of the Kingdom of Saudi Arabia. The venture was formed with an initial capital contribution of $268,000 by the Company and $266,930 by Atheeb with a profit sharing ratio of 50.1:49.9, respectively. The final formation of the company was completed on March 7, 2010. The joint venture was accounted for as an equity method investment as the Company has not established control over the affairs of Atheeb NetSol Saudi Company Ltd. due to its minority representation on the board of directors.
 
The Company's investment in equity for the period ended March 31, 2011 is as follows:
 
Initial investment in Atheeb at cost
  $ 268,000  
Net loss for the period
    (134,719 )
NetSol's share (50.1%)
    (67,494 )
         
Net book value at June 30, 2010
  $ 200,506  
         
Net loss for the nine months ended March 31, 2011
    (440,590 )
NetSol's share (50.1%)
    (220,736 )
Loss adjusted against investment
    (200,506 )
         
Net book value at March 31, 2011
  $ 0  

 
Page | 12

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following at March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
As of June 30
 
   
2011
   
2010
 
             
Accounts Payable
  $ 1,057,808     $ 1,321,212  
Accrued Liabilities
    2,644,144       2,369,153  
Accrued Payroll
    150,681       158,392  
Accrued Payroll Taxes
    189,829       299,908  
Interest Payable
    371,246       602,614  
Deferred Revenues
    703       6,472  
Taxes Payable
    152,945       133,169  
Total
  $ 4,567,357     $ 4,890,921  
 
NOTE 12 - DEBTS
 
(A) LOANS AND LEASES PAYABLE
 
Notes payable consist of the following at March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
Current
   
Long-Term
 
Name
 
2011
   
Maturities
   
Maturities
 
                   
D&O Insurance
  $ 85,093     $ 85,093     $ -  
Habib Bank Line of Credit
    5,665,403       5,665,403       -  
Bank Overdraft Facility
    137,217       137,217       -  
Term Finance Facility
    875,697       291,899       583,798  
Subsidiary Capital Leases
    1,204,152       651,437       552,715  
    $ 7,967,562     $ 6,831,049     $ 1,136,513  
 
   
As of June 30
   
Current
   
Long-Term
 
Name
 
2010
   
Maturities
   
Maturities
 
                   
D&O Insurance
  $ 12,122     $ 12,122     $ -  
E&O Insurance
    7,046       7,046       -  
Habib Bank Line of Credit
    5,677,533       5,677,533       -  
Bank Overdraft Facility
    202,712       202,712       -  
HSBC Loan
    43,306       43,306       -  
Term Finance Facility
    1,163,738       436,402       727,336  
Subsidiary Capital Leases
    1,111,271       906,651       204,620  
Lease abandonment liability
    867,583       -       867,583  
    $ 9,085,311     $ 7,285,773     $ 1,799,538  
 
The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well as Errors and Omissions (“E&O”) liability insurance, for which the total balances are renewed on an annual basis and as such are recorded in current maturities. The interest rate on the insurance financing was 0.49% as of March 31, 2011 and June 30, 2010. Interest paid during the period-ended March 31, 2011 and 2010 was nominal.
 
In April 2008, the Company entered into an agreement with Habib American Bank to secure a line of credit to be collateralized by Certificates of Deposit held at the bank. The interest rate on this line of credit is variable and was 2% and 3.23% as of March 31, 2011 and June 30, 2010, respectively. Interest expense for the nine months ended March 31, 2011 and 2010 was $97,660 and $136,952, respectively.

 
Page | 13

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
During the year ended June 30, 2008, the Company’s subsidiary, NTE, entered into an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £200,000. The annual interest rate is 3.25% over the bank’s sterling base rate, which was 5.00% as of March 31, 2011 and June 30, 2010, respectively.
 
In August 2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC Bank whereby the line of credit outstanding of £500,000 or approximately $801,700 was converted into a loan payable with a maturity of three years. The interest rate is 7.5% with monthly payments of £14,436 or approximately $23,147. The Parent has guaranteed payment of the loan in the event the subsidiary should default. Interest expense for the nine months ended March 31, 2011 and 2010 was $216 and $10,592, respectively. As of March 31, 2011, this loan was paid off in full.
 
The Company’s subsidiary, NetSol PK, entered into a term finance facility from Askari Bank to finance the construction of a new building. The total amount of the facility is Rs. 100,000,000 or approximately $1,167,596 (secured by the first charge of Rs. 580 million over the land, building and equipment of the company). The interest rate is 2.75% above the six-month Karachi Inter Bank Offering Rate.  As on June 30, 2010, the subsidiary had used Rs. 100,000,000 or approximately $1,163,738 of which $727,336 was shown as long term liabilities and the remainder of $436,402 as current maturity. As of the nine months ended March 31, 2011, the Company paid back two installment of Rs. 12,500,000 each reducing the outstanding principal amount to Rs. 75,000,000 or approximately $875,697 of which $583,798 is shown as long term liabilities and the remainder of $291,899 as current maturity. Interest expense for the nine months ended March 31, 2011 and 2010 was $121,867 and $136,234, respectively.
 
The Company leases various fixed assets under capital lease arrangements expiring in various years through 2015. 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, 2011 and 2010.
 
Following is the aggregate minimum future lease payments under capital leases as of March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
As of June 30
 
   
2011
   
2010
 
Minimum Lease Payments
           
Due FYE 3/31/12
  $ 704,317     $ 941,406  
Due FYE 3/31/13
    295,279       189,155  
Due FYE 3/31/14
    220,952       27,481  
Due FYE 3/31/15
    70,990       -  
Total Minimum Lease Payments
    1,291,538       1,158,042  
Interest Expense relating to future periods
    (87,387 )     (46,771 )
Present Value of minimum lease payments
    1,204,152       1,111,271  
Less:  Current portion
    (651,437 )     (906,651 )
Non-Current portion
  $ 552,715     $ 204,620  
 
Following is a summary of fixed assets held under capital leases as of March 31, 2011 and June 30, 2010:
 
   
As of March 31
   
As of June 30
 
   
2011
   
2010
 
Computer Equipment and Software
  $ 571,958     $ 473,033  
Furniture and Fixtures
    832,504       830,942  
Vehicles
    304,356       232,026  
Building Equipment
    302,216       302,216  
                 
Total
    2,011,034       1,838,217  
Less:  Accumulated Depreciation
    (830,993 )     (621,567 )
Net
  $ 1,180,041     $ 1,216,650  
 
Interest expense for the nine months ended March 31, 2011 and 2010 was $27,967 and $32,753, respectively.

 
Page | 14

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In 2008, the Company’s subsidiary, NTNA, had acquired an office space in Emeryville on a long term lease. However, due to the unprecedented recession experienced in 2009, the company decided to vacate the office space and terminate the lease in October 2009. The Company recorded a lease abandonment charge of $1,076,347 in the quarter-ended December 31, 2009. However, the office space was leased by another company during the quarter-ended March 31, 2010 and the lease abandonment charge was reduced by $208,764 to $867,583. In addition to this lease abandonment charge, the company had accounted for $652,386 as rent payable in its books of accounts. During quarter ended March 31, 2011, the Company entered into a final settlement agreement with the landlord against payment of $661,000. Since the liability against vacated Emeryville office stands settled as on March 31, 2011, the company recorded a gain of $858,969 against this provision in the consolidated financial statements.

(B) LOANS PAYABLE- BANK
 
The Company’s subsidiary, NetSol PK, has a loan with a bank, secured by the company’s assets. This loan consists of the following as of March 31, 2011 and June 30, 2010:
 
For the period ended March 31, 2011:
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    11.00 %   $ 2,335,191  
                     
Total
              $ 2,335,191  
 
For the year ended June 30, 2010:
TYPE OF
 
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
 
DATE
 
RATE
   
USD
 
                 
Export Refinance
 
Every 6 months
    9.00 %   $ 2,327,476  
                     
Total
              $ 2,327,476  
 
Interest expense for the nine months ended March 31, 2011 and 2010 was $137,771 and $121,332, respectively.
 
(C) OTHER PAYABLE – ACQUISITION
 
On June 30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California corporation (subsequently renamed as NetSol Technologies North America, Inc.) The total purchase price was $7,080,385, including $3,784,635 of cash and 1,712,332 shares of the Company’s common stock. Of the total purchase price, the accompanying consolidated financial statements include certain amounts payable to McCue shareholders that have not been located as of the date of this report.
 
As of the period-ended March 31, 2011 and June 30, 2010, the remaining cash due of $103,226 is shown as “Other Payable – Acquisition” and the remaining stock to be issued of 46,704 shares at an average price of $1.89 is shown in “Shares to be issued” in the accompanying consolidated financial statements. Amounts payable represent the remaining McCue shareholders that have not been located as of the date of this report.

 
Page | 15

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 13 – CONVERTIBLE NOTES PAYABLE
 
The net outstanding balance of convertible notes as of March 31, 2011 and June 30, 2010 is as follows:
 
Issue Date
 
Balance net of BCF @
3/31/11
   
Current
Portion
   
Long Term
 
Maturity
Date
                     
Jul-08
    2,692,554       2,692,554       -  
Jul-11
                           
Total
    2,692,554       2,692,554       -    
 
Issue Date
 
Balance net of BCF @
6/30/10
   
Current
Portion
   
Long Term
 
Maturity
Date
                     
Jul-08
    4,066,109             4,066,109  
Jul-11
Aug-09
    1,517,096       1,517,096          
Aug-10
Mar-10
    1,500,000       1,500,000          
Mar-11
                           
Total
    7,083,205       3,017,096       4,066,109    
 
During the quarter ended March 31, 2011, such portion of the notes which may be converted had been converted.  No remainder of the note is eligible for conversion into equity.  The remaining, outstanding balance is payable in cash.   For the periods ended March 31, 2011 and 2010, the interest expense on convertible notes was $504,676 and $733,633, respectively.
 
(A) 2008 CONVERTIBLE DEBT
 
In July 2008, the Company issued $6,000,000 of 7% convertible debt maturing in 3 years (the “2008 Notes”), with a conversion price of $3.00 per share.
 
In January 2009, the 2008 Notes were amended to remove certain anti-dilution protection provisions and participation rights in future filings in exchange for a reduction in the conversion rate to $0.78, and $1,000,000 in cash, payable to the debt holders in 4 quarterly installments. Pursuant to the terms of the amendment, the Company recorded a beneficial conversion feature (“BCF”) in the amount of $230,769 which is being amortized as a component of interest expense over the maturity period. The related liability of $1,000,000 was recorded as a component of interest expense for the year-ended June 30, 2009.
 
In August 2009, the Company amended the 2008 Notes by reducing the conversion rate to $0.63, and recorded an additional BCF of $715,518, which is being amortized as a component of interest expense over the maturity period.
 
During the year-ended June 30, 2010, Holders of the 2008 Notes elected to convert principal and interest due thereon into a total of 2,513,112 shares of common stock. These conversions reduced the total principal of the 2008 Notes to $4,450,000.
 
During the nine months ended March 31, 2011, Holders of the 2008 Note further elected to convert the principal and interest due thereon into a total of 2,744,042 shares of common stock. These conversions reduced the principal of the 2008 Note to $2,758,330.
 
(B) 2009 CONVERTIBLE DEBT
 
In August 2009, the Company issued $2,000,000 of 9% convertible debt maturing in 1 year (the “2009 Notes”) with a conversion price of $0.63 per share, in exchange for the redemption of preferred shares outstanding. The associated BCF of $1,428,571 is being amortized as a component of interest expense through maturity.
 
During the year-ended June 30, 2010, Holders of the 2009 Notes elected to convert principal and interest due thereon into a total of 645,556 shares of common stock. This conversion reduced the total principal of the 2009 Notes to $1,600,000.
 
During the quarter ended September 30, 2010, Holders of the 2009 Note further elected to convert the remaining principal and interest due thereon into a total of 2,613,333 shares of common stock. These conversions reduced the principal of the 2009 Note to nil.

 
Page | 16

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(C) 2010 CONVERTIBLE DEBT
 
In March 2010, the Company issued $1,500,000 of 8% convertible debt maturing in 1 year (the “2010 Notes”), with a conversion price of $1.15 per share. The maturity dates of the 2010 notes were extendable to an additional year upon agreement of both parties.  In August, 2010, the note conversion prices were adjusted to $.0.85 per share. During the quarter ended March 31, 2011, the holders of the note elected to convert the entire amount of principal and interest due thereon into a total of 1,905,882 shares of common stock reducing the principal of the 2010 Notes to nil.
 
NOTE 14 - STOCKHOLDERS’ EQUITY:
 
(A) TREASURY STOCK
 
On March 24, 2008, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 1,000,000 of its shares of common stock over the next 6 months. The shares are to be repurchased from time to time in open market transactions or privately negotiated transactions at the Company's discretion. During the year ended June 30, 2008, the Company had repurchased a total of 13,600 shares on the open market valued at $25,486. The balance as of June 30, 2008 was $35,681. In September 2008, the stock repurchase plan was extended an additional 6 months. During the year ended June 30, 2009, the Company purchased an additional 208,900 shares on the open market valued at $360,328. The balance as of December 31, 2010 and June 30, 2010 was $396,008. The stock repurchase plan expired on March 24, 2009.
 
On July 27, 2010, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 2,000,000 of its shares of common stock over the following 6 months.  The shares are to be repurchased from time to time in open market transactions or privately negotiated transactions in the Company’s discretion.  The Company did not repurchase any shares of common stock during the nine months ended March 31, 2011. The stock repurchase plan expired on January 27, 2011.
 
(B) SHARES ISSUED FOR SERVICES TO RELATED PARTIES
 
During the nine months period ended March 31, 2011, and year ended June 30, 2010, the Company issued a total of 442,500 and 187,500 shares of restricted common stock for services rendered by the officers of the company. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $528,900 and 163,125, as of March 31, 2011 and June 30, 2010, respectively.
 
During the nine months period ended March 31, 2011, and year ended June 30, 2010, the Company issued a total of 90,000 and 90,000 shares of restricted common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $135,300 and $78,900, as of March 31, 2011 and June 30, 2010, respectively.
 
During the nine months period ended March 31, 2011 and year ended June 30, 2010, the Company issued a total of 32,699 and 139,881 shares of its common stock to employees as required according to the terms of their employment agreements valued at $33,300 and $130,500, respectively.
 
(C) SHARE-BASED PAYMENT TRANSACTIONS
 
During the period ended March 31, 2011, and year ended June 30, 2010, the Company issued a total of 337,857 and 501,931 shares of its common stock for provision of services to unrelated consultants valued at $152,543 and $275,019, respectively.
 
(D) SHARE ISSUED AGAINST CASH PAYMENTS
 
During the period ended March 31, 2011, and year ended June 30, 2010, the Company issued a total of 4,009,614 and 2,541,929 shares of its common stock against cash valued of $2,606,250 and $1,195,432, respectively.

 
Page | 17

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 15 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
Common stock purchase options and warrants consisted of the following as of March 31, 2011:
 
OPTIONS:
       
Exercise
   
Aggregated
 
   
# shares
   
Price
   
Intrinsic Value
 
                   
Outstanding and exercisable, June 30, 2009
    7,706,917       $0.30 to $5.00     $ -  
Granted
    300,000       $0.75          
Exercised
    (300,000 )     $0.75          
Expired
    -                  
Outstanding and exercisable, June 30, 2010
    7,706,917       $0.30 to $5.00     $ 146,047  
Granted
    1,271,000       $0.65 to $1.25          
Exercised
    (1,233,500 )     $0.65 to $1.25          
Expired / Cancelled
    (487,600 )                
Outstanding and exercisable, March 31, 2011
    7,256,817       $0.30 to $5.00     $ 2,135,484  
                         
WARRANTS:
                       
Outstanding and exercisable, June 30, 2009
    1,777,617       $1.65 to $3.70     $ -  
Granted
    3,274,682       $0.31          
Exercised
    -                  
Expired
    (288,980 )     3.3          
Outstanding and exercisable, June 30, 2010
    4,763,319       $1.65 to $3.70     $ 1,698,387  
Granted
                       
Exercised
    (3,879,028 )     $0.31          
Expired
                       
Outstanding and exercisable, March 31, 2011
    884,291       $0.31 to $3.70     $ 381,783  

The average life remaining on the options and warrants as of March 31, 2011 is as follows:
 
Exercise Price
 
Number
Outstanding
and
Exercisable
   
Weighted
Average
Remaining
Contractual
Life
   
Weighted
Ave
Exericse
Price
 
OPTIONS:
                 
                   
$0.01 - $0.99
    1,593,500       6.85       0.65  
$1.00 - $1.99
    2,183,317       3.88       1.85  
$2.00 - $2.99
    2,830,000       4.07       2.70  
$3.00 - $5.00
    650,000       2.78       4.38  
                         
Totals
    7,256,817       4.51       2.14  
                         
WARRANTS:
                       
$0.31 - $1.99
    871,791       0.96       1.44  
$3.00 - $5.00
    12,500       0.52       3.70  
                         
Totals
    884,291       0.96       1.47  
 
All options and warrants granted are vested and are exercisable as of March 31, 2011, except 187,500 options which will vest in the next quarter.

 
Page | 18

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(A) INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the Board specifically determines otherwise, as provided.
 
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
 
OPTIONS
 
During the quarter ended December 31, 2009, the Company granted 250,000 options to two employees with an exercise price of $0.75 per share and an expiration date of 1 year, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $71,238 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
1.56%
Expected life
1 year
Expected volatility
56%
 
During the quarter ended June 30, 2010, the Company granted 50,000 options to two employees with an exercise price of $0.75 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $3,652 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
1.08%
Expected life
1 month
Expected volatility
39%
 
During the quarter ended September 30, 2010, the Company granted 750,000 options to five employees with an exercise price of $0.65 per share and an expiration date of 1 Year, vesting quarterly. Using the Black-Scholes method to value the options, the Company recorded $156,630 per quarter in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
2.01%
Expected life
1 year
Expected volatility
90%
 
During the quarter ended September 30, 2010, the Company granted 10,000 options to one employee with an exercise price of $0.65 per share and an expiration date of 1 Year, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $2,785 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
2.01%
Expected life
1 year
Expected volatility
90%
 
During the quarter ended September 30, 2010, the Company granted 242,000 options to seven employees with an exercise price of $0.65 per share and an expiration date of 4 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $43,441 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
1.81%
Expected life
4 months
Expected volatility
90%

 
Page | 19

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
During the quarter ended December 31, 2010, the Company granted 15,000 options to one employee with an exercise price of $0.65 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $11,717 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
1.65%
Expected life
1 month
Expected volatility
99%
 
During the quarter ended December 31, 2010, the Company granted 4,000 options to one employee with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $1,040 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
1.65%
Expected life
1 month
Expected volatility
99%
 
During the quarter ended March 31, 2011, the Company granted 250,000 options to three employees with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $102,154 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate
2.16%
Expected life
1 month
Expected volatility
99%
 
WARRANTS
 
During the year ended June 30, 2010, the Company amended the terms of warrant agreements associated with common stock issued in October, 2007. Pursuant to the terms of the amendment, the exercise price was reduced to $0.31 from $0.63, resulting in a corresponding increase in the number of shares of common stock underlying the warrants by 3,274,682. The above holders exercised 1,000,000 warrants and 2,879,028 warrants through a cashless exercise, resulting in 2,384,390 shares issued.
 
(B) EQUITY INCENTIVE PLAN
 
In May 2008, the shareholders approved the 2008 Equity Incentive Plan (the “2008 Plan”) which provides for the grant of equity-based awards, including options, stock appreciation rights, restricted stock awards or performance share awards or any other right or interest relating to shares or cash, to eligible participants. The aggregate number of shares reserved and available for award under the 2008 Plan is 1,000,000 (the Share Reserve). The 2008 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 2008 Plan. Shares issued under the 2008 Plan may be both authorized and unissued shares or previously issued shares acquired by the Company. Upon termination or expiration of an unexercised option, stock appreciation right or other stock-based award under the 2008 Plan, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the 2008 Plan. Any shares of restricted stock forfeited as described below will become available for grant. The maximum number of shares that may be granted to any one participant in any calendar year may not exceed 500,000 shares. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
 
STOCK OPTIONS
 
Options granted under the 2008 Plan are not generally transferable and must be exercised within 10 years, subject to earlier termination upon termination of the option holder's employment, but in no event later than the expiration of the option's term. The exercise price of each option may not be less than the fair market value of a share of the Company’s common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended (the Code). Incentive stock options granted to any participant who owns 10% or more of the Company’s outstanding common stock (a Ten Percent Shareholder) must have an exercise price equal to or exceeding 110% of the fair market value of a share of our common stock on the date of the grant and must not be exercisable for longer than five years. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2008 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years.

 
Page | 20

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
PERFORMANCE AWARDS
 
Under the 2008 Plan, a participant may also be awarded a "performance award," which means that the participant may receive cash, stock or other awards contingent upon achieving performance goals established by the Committee. The Committee may also make "deferred share" awards, which entitle the participant to receive our stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with our Company. A participant who is granted a "stock appreciation right" under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the Committee (but in no event less than the fair market value of the stock on the date of grant). Finally, the Committee may make "restricted stock" awards under the 2008 Plan, which is subject to such terms and conditions as the Committee determines and as are set forth in the award agreement related to the restricted stock.  As of March 31, 2011, 917,000 shares have been issued under this plan to non- officers employees.

 
Page | 21

 
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 16 – SEGMENT AND GEOGRAPHIC AREAS
 
The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific.  Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services.  Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location.  We account for intracompany sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation.  The following table presents a summary of operating information and certain balance sheet information for the nine months ended March 31:
 
   
2011
   
2010
 
Revenues from unaffiliated customers:
           
North America
  $ 3,178,726     $ 4,357,077  
Europe
    6,284,120       4,306,032  
Asia - Pacific
    20,192,922       17,411,727  
Consolidated
  $ 29,655,768     $ 26,074,836  
                 
Operating income (loss):
               
Corporate headquarters
  $ (2,716,297 )   $ (3,604,522 )
North America
    1,108,925       (238,867 )
Europe
    3,027,779       901,192  
Asia - Pacific
    9,308,903       8,359,854  
Consolidated
  $ 10,729,311     $ 5,417,657  
                 
Net income (loss) after taxes and before minority interest:
               
Corporate headquarters
  $ (3,843,366 )   $ (5,709,382 )
North America
    1,092,798       (286,254 )
Europe
    2,929,300       876,675  
Asia - Pacific
    10,113,143       8,231,306  
Consolidated
  $ 10,291,875     $ 3,112,345  
                 
Identifiable assets:
               
Corporate headquarters
  $ 17,378,180     $ 18,389,874  
North America
    1,726,918       2,511,971  
Europe
    7,371,237       3,682,922  
Asia - Pacific
    60,902,121       44,792,986  
Consolidated
  $ 87,378,456     $ 69,377,753  
                 
Depreciation and amortization:
               
Corporate headquarters
  $ 460,617     $ 1,012,977  
North America
    383,200       404,879  
Europe
    535,116       483,988  
Asia - Pacific
    1,619,509       1,090,781  
Consolidated
  $ 2,998,442     $ 2,992,625  
                 
Capital expenditures:
               
Corporate headquarters
  $ -     $ -  
North America
    55,098       19,611  
Europe
    1,014       104,522  
Asia - Pacific
    6,186,287       1,333,917  
Consolidated
  $ 6,242,399     $ 1,458,050  
 
 
Page | 22

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Net revenues by our various products and services provided for the period ended March 31, are as follows:
 
   
2011
   
2010
 
Licensing Fees
  $ 10,259,027     $ 9,515,338  
Maintenance Fees
    5,589,746       5,327,852  
Services
    13,806,995       11,231,648  
Total
  $ 29,655,768     $ 26,074,837  
 
NOTE 17 – NON-CONTROLLING INTEREST IN SUBSIDIARY
 
The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest as of March 31, 2011 and June 30, 2010 was as follows:
 
SUBSIDIARY
 
Non Controlling
Interest %
   
Non-Controlling
Interest at
March 31, 2011
 
             
NetSol PK
    39.48 %   $ 11,302,206  
NetSol-Innovation
    49.90 %     1,111,753  
                 
Total
          $ 12,413,959  
 
SUBSIDIARY
 
Non Controlling
Interest %
   
Non-Controlling
Interest at June
30, 2010
 
             
NetSol PK
    42.04 %   $ 9,133,392  
NetSol-Innovation
    49.90 %     1,291,057  
Connect
    49.90 %     (1,891 )
                 
Total
          $ 10,422,557  
 
(A) NETSOL TECHNOLOGIES, LIMITED (“NETSOL PK”)
 
For the nine months ended March 31, 2011 and 2010, NetSol Technologies Ltd. (“NetSol PK”) had net income of $7,596,360 and $7,476,567. The related non-controlling interest was $3,110,567 and $3,143,149, respectively.
 
In April 2009, NetSol PK issued 6,223,209 shares of common stock to the Company in fulfillment of an outstanding loan balance of $1,879,672 provided by the Company.
 
During the fiscal year-ended June 2009, the Company disposed of 3,132,255 shares of NetSol PK in the open market with a value of $558,536. A net gain of $351,522 was recorded as “Other Income” in the consolidated financial statements. As a result of the sale, the corresponding non-controlling interest increased from 41.32% to 42.04%.
 
During the quarter ended March 31, 2011 the company purchased 1,995,309 shares from open market with a value of $491,460. As a result of purchase the corresponding non-controlling interest decreased from 42.04% to 39.48%.
 
During the nine months ended March 31, 2011, NetSol PK declared and paid a cash dividend of $1,125,733, of which the Company’s interest was $653,905. The amount attributable to the minority holders was $471,828.
 
(B) NETSOL INNOVATION (PRIVATE) LIMITED (“NETSOL INNOVATION”)
 
For the nine months ended March 31, 2011 and 2010, NetSol Innovation (Private) Limited (“NetSol Innovation”) had net income of $721,766 and $222,791. The related non-controlling interest was $360,161 and $111,173, respectively.
 
(C) NETSOL CONNECT (“CONNECT”)
 
As on July 01, 2010, the Company acquired the non-controlling interest in NetSol Connect against a payment of $180,000.The balance of non-controlling interest as on June 30, 2010 (the acquisition date) was ($1,891). The company adjusted the additional paid in capital by $181,891.

 
Page | 23

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 18 - SUBSEQUENT EVENTS
 
In April investors were issued 857,143 shares of restricted common stock as part of a private placement to non-U.S. investors at the per share price of $1.40 per share based on a discount from market on the closing date.

Option holders were issued 537,500 shares of common stock through the payment of $559,375 exercise price.

 
Page | 24

 

NETSOL TECHNOLOGIES, INC.
 
Item 2. Management's Discussion and Analysis Or Plan Of Operation
 
The following discussion is intended to assist in an understanding of the Company's financial position and results of operations for the quarter ending March 31, 2011.
 
Forward-Looking Information
 
This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management.  When used in this report, the words  "anticipate",  "believe",  "estimate", "expect",  "intend",  "plan", and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements.  These statements reflect management's current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.  The Company's realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company's technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel,  or the adoption of  technology  standards which are different  from  technologies  around  which the  Company's  business ultimately is built. The Company does not intend to update these forward-looking statements.
 
INTRODUCTION
 
NetSol Technologies, Inc. (“NetSol” or the “Company”) (NasdaqCM: NTWK) (NasdaqDubai: NTWK) is a worldwide provider of IT solutions to the global financing and leasing industry, with world class enterprise software and services.  As a CMMI level 5 Company, a distinction shared by few companies worldwide, NetSol uses its BestShoring® practices and highly-experienced resources in analysis, development, quality assurance, and implementation to deliver high-quality, cost-effective solutions. The Company is organized into two main revenue areas, consisting of its enterprise solutions (NetSol Financial Solutions “NFS™”) for the global financing and leasing industry and its portfolio of IT based global business services (“GBS”).  NetSol’s GBS offerings include portfolio management systems for the financial services industry and, consulting, custom development, systems integration, and technical services for the global healthcare, insurance, real estate and technology markets.  NetSol's commitment to quality is demonstrated by its achievement of the ISO 9001, ISO 279001, and SEI (Software Engineering Institute, Carnegie Mellon University, USA) CMMI (Capability Maturity Model) Level 5 assessments, a distinction shared by fewer than 100 companies worldwide. NetSol’s clients include Fortune 500 manufacturers, global automakers, financial institutions, technology providers, and governmental agencies.
 
Founded in 1996, NetSol is headquartered in Calabasas, California. NetSol also has operations and/or offices in: Horsham, United Kingdom; Alameda, California, USA; Beijing, China; Lahore, Islamabad and Karachi, Pakistan; Adelaide, Australia; Bangkok, Thailand; and, Riyadh, Kingdom of Saudi Arabia.
 
In today’s highly competitive marketplace, business executives with labor or services-centric budgetary responsibilities are not just encouraged but, in fact, obliged to engage in a “Make or Buy” decision process when contemplating how to support and staff new development, testing, services support and delivery activities.  The Company business offerings are aligned as a BestShoring® solutions strategy.  Simply defined, BestShoring® is NetSol Technologies’ ability to draw upon its global resource base and construct the best possible solution and price for each and every customer.  Unlike traditional outsourcing offshore vendors, NetSol draws upon an international workforce and delivery capability to ensure a “BestShoring® delivers BestSolution™” approach.
 
NetSol combines domain expertise, not only with lowest cost blended rates from its design centers and campuses located around the world, but also with the guarantee of localized program and project management while minimizing any implementation risk associated with a single service center.  Our BestShoring® approach, which we consider a unique and cost effective global development model, is leading the way, providing value added solutions for Global Business Services™ through a win-win partnership, rather than the traditional outsourced vendor framework.  Our focus on “Solutions” serves to ensure the most favorable pricing while delivering in-depth domain experience.  NetSol currently has locations in Bangkok, Beijing, Lahore, London, the San Francisco Bay Area, and Riyadh to best serve its clients and partners worldwide.  This provides NetSol customers with the optimum balance of subject matter expertise, in-depth domain experience, and cost effective labor, all merged into a scalable solution.  In this way, “BestShoring® delivers BestSolution™”.
 
Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol’s expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles.  The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT Consulting & Services; NetSol Defense Division; Business Intelligence, Information Security, Independent System Review, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.

 
Page | 25

 

NETSOL TECHNOLOGIES, INC.
 
In addition to services, our product offerings are fashioned to provide a Best Product for Best Solution model.  Our offerings include our flagship global solution, NetSol Financial Suite (NFS™). NFS™, a robust suite of five software applications, is an end-to-end solution for the lease, finance and broader lending industry covering the complete leasing and finance cycle starting from quotation origination through end of contract. The five software applications under NFS™ have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments.  Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle.  NFS™ is a result of more than eight years of effort resulting in over 60 modules grouped in five comprehensive applications. These five applications are complete systems in themselves and can be used independently to exhaustively address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing / financing cycle.
 
The NetSol Financial Suite™ also includes LeasePak to cater to North American market.  LeasePak provides the leasing technology industry with the development of Web-enabled and Web-based tools to deliver superior customer service, reduce operating costs, streamline the lease management lifecycle, and support collaboration with origination channel and asset partners.  LeasePak can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users.  In terms of scalability, NetSol Technologies North America offers the basic product as well as a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and complexities of operations. These solutions provide the equipment and vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for some of the industry’s leading independent lessors.
 
Our product offerings and services also include: LeaseSoft Portals and Modules through our European operations; LeasePak 6.0b of our NFS™ product suite; enterprise wide information systems, such as or LRMIS, MTMIS and Hospital Management Systems; Accounting Outsourcing Services, and, NetSol Technology Institute, our specialized career and technology program in Pakistan.
 
To further bolster NetSol’s Solutions capabilities, in October 2008, NetSol acquired Ciena Solutions, a preferred SAP and Business Objects integration firm. The Ciena Solutions practice is now integrated into our wholly owned subsidiary, NetSol Technologies North America, Inc.  This acquisition expanded NetSol’s domain and subject matter expertise to include integration and consulting services for:
 
 
·
SAP R/3 System deployments
 
·
NetWeaver
 
·
Exchange Infrastructure Portals
 
·
MySAP Business Suite
 
·
Supplier Relationship Management Module
 
·
Client Relationship Management Module
 
·
SAP/Business Objects Products and related Services
 
In addition to this expansion of SAP-centric integration consulting and services, this practice has developed proprietary intellectual property in the form of designs and source code focused on enhancing SAP-centric procurement activities.
 
The introduction of a major new product, smartOCI™, has emerged from this integration.  smartOCI™ is a new search engine technology developed by NetSol which provides corporate buyers and shoppers a simple and intuitive user interface to search multiple supplier catalogs simultaneously within the SAP SRM application.  The launch of smartOCI™ at the SAP SAPPHIRE Conference in Orlando, Florida, targeting approximately 1,000 SAP SRM platform customers has  strengthened NetSol’s presence in the global SAP Services market.
 
The Company continues its efforts to reduce redundancy and cohesively present services and product operations on a global basis. This consolidation enables the Company to coordinate and streamline product, service and marketing while taking further advantage of the cost arbitrage offered by our highly trained, highly productive, Pakistani resources.  This consolidation follows the successful integration of the operations acquired in the United Kingdom and the San Francisco Bay Area in California and facilitates the use of these regional offices as platforms for presenting an expanding services offering, relying on the experience and resources in Pakistan and our product offerings in North America and Europe.

 
Page | 26

 

NETSOL TECHNOLOGIES, INC.
 
While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the San Francisco Bay area, California for North America and the parent headquarters in Calabasas, California; Horsham, United Kingdom, for Europe; and, our “center of excellence” operation in Lahore, Pakistan for Asia Pacific. The Company continues to maintain services or products and specific sales offices in Australia, China, Thailand, the Kingdom of Saudi Arabia and Pakistan and in any other country on an as needed basis.
 
Marketing and Business Development Activities
 
Management has developed, and the board of directors has ratified, an aggressive 3-5 year growth strategy aimed at increasing competitiveness and financial strength.
 
This plan intends to:
 
●        achieve 20-30% annual revenue growth for next 5 years
●        result in enhanced organic growth.
 
The plan contemplates the following enhanced activities and initiatives will accomplish these goals:
 
 
o
The remarkable success and demand of NFS™ in China has led to long term planning to expand in the Chinese market. The overall steady economic growth in China and historic transformation of the auto sector (China outsold cars against the United States in number of units in 2009) combined with growing consumer spending, warrants hiring additional local Chinese staff and infrastructure improvement. Management is poised to create a ‘proximity development center’ or PDC and clients support team to better serve our growing customers base.

 
o
NetSol’s Beijing office more than doubled its office space on March 1, 2011; new local Chinese staff has been added and additional hiring continues.  The process of forming a new wholly owned subsidiary by the Company, as a Wholly Owned Foreign Enterprise under Chinese laws, is in progress and is expected to be completed in the current calendar year. NetSol is positioning China to become a dominant market for lending enterprise solutions for captive multinationals and local Chinese companies, including equipment finance, big ticket leasing markets and the banking industry. In the lease and finance domain NetSol can claim the de facto leadership position in the rapidly growing Chinese market.
 
 
o
Thailand has emerged as a new market for banking and auto finance. NetSol has formalized its presence in Bangkok by establishing a wholly owned subsidiary, NetSol Thai. The office space in Bangkok has been enhanced with new hires of local and international staff to address and support a very rapidly growing market. The pipeline of new customers is growing from the markets in Japan, South Korea, Australia, India and other regional markets. These markets will be serviced and supported from the Thailand office with strong sales and client support team.
 
 
o
To date, few US-based fortune 500 captive auto finance companies have shown serious interest in NFS™.   We expect, however, to achieve stronger results through strengthening NetSol’s North American operation by augmenting the service levels of the local technical team with effective integration of the NetSol PK center of excellence, resulting in a seamless integration of core project delivery and global support teams., The consolidation period of 2009-2010 is over and we expect this mature and giant industry to add new capital investment.
 
 
o
The new and fast growing manifestations of Ecommerce, such as Cloud computing, are being utilized by some of our offerings and will be further explored by us for other offerings. Our new IP, AKA, smartOCI™ has been demonstrated and presented to major fortune 500 companies in the US as an on-demand, catalogue content management system. The demand of e-procurement search engine seems robust and attractive. Several new license sales activities are in the pipeline and we are analyzing the possibilities of spinning them out as a stand-alone Ecommerce new vertical for NetSol.

 
o
Europe recently experienced a severe recession.  Despite this, NetSol Europe’s operations have been steady.  Further, the business outlook is positive and, if this continues, NTE is expected to expand its product line and hire stronger management personnel. Our relationship with existing clientele is very strong and we are cautiously expanding the sales and marketing efforts in the region.

 
Page | 27

 

NETSOL TECHNOLOGIES, INC.
 
 
o
The market of the Kingdom of Saudi Arabia is robust, rich and well capitalized, offering vast opportunities for NetSol through our joint venture. Recently, there have been a few new local IT contracts awarded but our vision is based on long term and high value projects in the defense, public, infrastructure and multinational auto captive markets. In order to be equal partners with a major conglomerate, Atheeb Group, a $2 billion group in revenue, we need to have the serious financial wherewithal and resources to bid on major projects exceeding $100 million each in value. Currently, the joint venture has 10 employees based in Riyadh with direct delivery and implementation support from NetSol PK. The long term plan is to expand staffing levels and provide financial capability to bid in major projects with Atheeb.
 
 
o
NetSol PK, being our most effective and proven ‘Center of Excellence’ delivery model for our global fortune 500 clients, must continue to maintain this position.  Our NFS™ suite of products is currently undergoing a major initiative towards developing the next generation of solutions. The Company believes that this would change the landscape for NetSol and increase both demand and the market. We are in the middle of developing a comprehensive sales and marketing plan requiring new personnel, markets and investment.
 
 
o
In order to maximize the market and product potential of our SAP and Ecommerce line, highlighted by our smartOCI™ product, we are contemplating spinning this line off into its own operational entity. We believe this will better enhance product and market development by providing a dedicated management and fulfillment staff.
 
●            Growth – New Alliances, Mergers & Acquisition

o            Pursue new opportunities in emerging markets of Latin America - such as Brazil and Argentina - through local partners. These focused and niche markets for leasing and finance verticals represent new opportunities to introduce NFS™ and related service offerings.

o           The markets in the US and UK offer a host of complementary companies with impressive client bases to expand the distribution channels for NFS™ and its new generation product line.  There are   established small sized Companies, with relatively low valuations, which can become part of NetSol on an affordable basis. It is important to seek out these companies in order to grow our customer base, revenue and net margins by leveraging our delivery and implementation model.
 
Funding and Investor Relations:
 
The fundamental challenge constantly facing the management is to achieve sustainable growth with a healthy balance sheet, without too much dilution. In light of global opportunities for organic growth and through alliances and M&A, there are certain opportunity costs for an inability to tap into these markets and areas. Therefore, management has the responsibility to broaden its horizon by prudently exploring all available vehicles to adequately capitalize the Company. Smart new capital may be needed to make NetSol a much healthier company with an impressive balance sheet and sufficient size to   participate in and win major projects in key markets. To summarize,   the following areas would need injections of new capital either from internal operations or external injections, dependent, in part, on market conditions.
 
 
·
Expansion in China, Thailand and other emerging markets, including Latin America.
 
 
·
Expanding the North American operation to roll out NetSol new generation solutions and enter Cloud Computing Solutions.
 
 
·
Diversify in Ecommerce space such as smartOCI™ search engine.
 
 
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Support of bigger IT related public and defense sectors projects in the Kingdom of Saudi Arabia with our joint venture partner.
 
 
·
Capital Expenditures for our next generation products, technology and infrastructure.
 
 
·
Improve credit ratings for our new big customers and win the confidence of new and existing investors.
 
 
·
Hiring and training of programmers, engineers, sales and marketing.

Capital may be injected through:  continued exercises of options by the officers in cash; new debt and stock offerings with “friends and family” investors who typically hold for long term investment and can be raised without the necessity of placement agent fees; and, such other capital raising methods that are both reasonable in terms and beneficial to the Company.

 
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NETSOL TECHNOLOGIES, INC.
 
Investor Relations efforts will include:
 
 
·
Working to grow our institutional investor base.
 
·
Sharing the NetSol story with sell side analysts, funds, portfolio managers and the financial media.
 
·
Aggressively positioning NetSol in front of major investors’ conferences and road shows to be organized by RedChip and other major institutions.
 
·
Utilizing US mainstream media to highlight NetSol’s image and ‘niche’ business offering.
 
·
Founding management’s anticipated continued investment in the Company displaying management’s belief in NetSol’s potential to new investors.
 
·
Dedicating and focusing efforts to improve shareholder value.

Improving the Bottom Line:
 
Management believes that these measures will improve the bottom line on an ongoing basis:
 
 
·
Improve pricing, sales volume and fee structures.
 
·
Continue consolidation and reevaluating operating margins as ongoing activities.
 
·
Streamline further cost of goods sold to improve gross margins to historical levels over 70%, as sales ramp up.
 
·
Generate higher revenues per employee, enhance productivity and lower cost per employee.
 
·
Optimize the utilization of NetSol PK resources, infrastructure, processes and disciplines to maximize the bottom-line and fully leverage the cost arbitrage.
 
·
Grow process automation and leverage the best practices of CMMI level 5. Global delivery concept and integration will further improve both gross and net margins.
 
·
Cost efficient management of every operation and continue further consolidation to improve bottom line.
 
·
Implement SAAS model in mature markets to improve visibility and cash flow.
 
·
Retire Debt to reduce the interest cost significantly and to make every effort to avoid any one time charges.
 
Management continues to be focused on building its delivery capability and has achieved key milestones in that respect.  Key projects are being delivered on time and on budget, quality initiatives are succeeding, especially in maturing internal processes.
 
  CMMI level companies are reassessed every three years by independent consultants under the standards of the Carnegie Mellon University to maintain its CMMI Level 5 quality certification.  As required, NetSol was reassessed in 2010 and was successfully recertified as CMMI Level 5.  We believe that the CMMI standards are a key reason in NetSol’s demand surge worldwide. We remain convinced that this trend will continue for all NetSol offerings promoting further beneficial alliances and increasing the number and quality of our global customers.  The quest for quality standards is imperative to NetSol’s overall sustainability and success.  In 2008, NetSol became ISO 27001 certified, a global standard and a set of best practices for Information Security Management.
 
MATERIAL TRENDS AFFECTING NETSOL
 
Management has identified the following material trends affecting NetSol.
 
Positive trends:
 
 
·
The global recession and consolidations have opened doors for low cost solution providers such as NetSol. The BestShoring® model of NetSol is a catalyst in today’s environment.

 
·
Global economic pressures and the recession have shifted users of IT processes and technology to utilize both offshore and onshore solutions providers, to control costs and improve ROIs.
 
 
·
Serious interest in NetSol’s next generation solution has been expressed by a few global companies.  Demonstrations and workshops with key global clients and partners of have been very well received. Hence, the new generation solution appears to be gaining momentum.  
 
 
·
GMAC – China, the implementation of first R2 for Wholesale Finance (WFS) is on track setting a strong foundation for growth. Two other key modules (CMS / CAP) are in the development stage and are expected to be marketed in fiscal 2012.
 
 
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NETSOL TECHNOLOGIES, INC.

 
·
China has become the world’s second largest economy, continuing to grow by over 9%   a year while growth in other industrial nations has declined or grown only marginally.
 
 
·
China’s automobile and banking sectors have been unaffected by the global meltdown and   their recent automobile sales statistics have outperformed all other economies.