XFRA:NS9B Netsol Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012
 
( ) 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
Incorporation or Organization)
(I.R.S. Employer NO.)
 
24025 Park Sorrento, Suite 410, 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 _X__
Non-Accelerated Filer  __                                                      Small Reporting Company  ___
 
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 74,771,668 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 4, 2012.
 
 
 

 
NETSOL TECHNOLOGIES, INC.
 
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
   
PART II. OTHER INFORMATION
 
 
 
 

 
Page 1

 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
As of March 31,
   
As of June 30,
 
ASSETS
 
2012
   
2011
 
Current assets:
           
Cash and cash equivalents
  $ 9,118,206     $ 4,172,802  
Restricted Cash
    90,000       5,700,000  
Accounts receivable, net
    14,654,748       15,062,503  
Revenues in excess of billings
    9,310,578       7,601,230  
Other current assets
    2,631,360       2,053,904  
Total current assets
    35,804,892       34,590,439  
Property and equipment, net
    16,877,321       16,014,461  
Intangible assets, net
    29,077,051       25,602,195  
Goodwill
    9,653,330       9,439,285  
Total intangibles
    38,730,381       35,041,480  
Total assets
  $ 91,412,594     $ 85,646,379  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,624,876     $ 4,730,027  
Current portion of loans and obligations under capitalized leases
    1,955,872       7,062,535  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    3,359,913       2,653,460  
Convertible notes payable , current portion
    -       2,745,524  
Loans payable, bank
    2,198,769       2,319,377  
Common stock to be issued
    106,700       400,700  
Total current liabilities
    12,349,356       20,014,849  
Obligations under capitalized leases, less current maturities
    196,137       285,472  
Convertible notes payable less current maturities
    3,692,792       -  
Long term loans; less current maturities
    1,950,165       434,884  
Total liabilities
    18,188,450       20,735,205  
Commitments
               
Stockholders' equity:
               
Common stock, $.001 par value; 95,000,000 shares authorized;  74,746,688 & 55,531,855 issued and outstanding as of March 31, 2012 and June 30, 2011
    74,747       55,532  
Additional paid-in-capital
    105,787,566       97,886,492  
Treasury stock
    (415,425 )     (396,008 )
Accumulated deficit
    (33,585,470 )     (34,130,944 )
Stock subscription receivable
    (2,033,710 )     (2,198,460 )
Other comprehensive loss
    (10,187,687 )     (8,805,922 )
Total NetSol shareholders' equity
    59,640,021       52,410,690  
Non-controlling interest
    13,584,123       12,500,484  
Total stockholders' equity
    73,224,144       64,911,174  
Total liabilities and stockholders' equity
  $ 91,412,594     $ 85,646,379  
 
See accompanying notes to these unaudited consolidated financial statements.
 
 
Page 2

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended March 31,
   
Ended March 31,
 
                         
   
2012
   
2011
   
2012
   
2011
 
Net Revenues:
                       
License fees
    2,968,498       3,652,170       6,092,203       10,259,027  
Maintenance fees
    1,824,585       1,896,318       5,983,073       5,589,746  
Services
    5,817,465       5,278,960       13,370,032       13,806,994  
 Total net revenues
    10,610,548       10,827,448       25,445,308       29,655,767  
                                 
Cost of revenues:
                               
 Salaries and consultants
    2,741,717       2,448,517       7,412,931       6,562,685  
 Travel
    372,578       237,694       912,420       708,082  
 Repairs and maintenance
    109,868       79,068       280,785       207,585  
 Insurance
    40,103       32,924       107,319       95,003  
 Depreciation and amortization
    830,646       840,050       2,432,261       2,150,274  
 Other
    818,804       412,693       1,756,629       1,004,690  
Total cost of revenues
    4,913,716       4,050,946       12,902,345       10,728,319  
Gross profit
    5,696,832       6,776,502       12,542,963       18,927,448  
Operating expenses:
                               
Selling and marketing
    835,153       560,879       2,270,566       2,047,726  
Depreciation and amortization
    403,177       313,865       883,881       848,168  
Bad debt expense
    -       717       -       254,996  
Salaries and wages
    1,099,503       956,465       3,058,090       2,613,627  
Professional services, including non-cash compensation
    138,094       165,010       561,754       455,371  
 Lease abandonment charges
    -       (858,969 )     -       (858,969 )
General and adminstrative
    1,056,725       831,131       3,214,430       2,837,218  
Total operating expenses
    3,532,652       1,969,096       9,988,721       8,198,137  
                                 
Income from operations
    2,164,180       4,807,406       2,554,242       10,729,311  
Other income and (expenses)
                               
Gain (loss) on sale of assets
    (666 )     2,284       (3,940 )     (13,302 )
Interest expense
    (167,972 )     (148,661 )     (587,136 )     (755,781 )
Interest income
    26,672       48,851       66,741       143,270  
Gain on foreign currency exchange transactions
    421,098       224,531       460,317       897,767  
Share of net loss from equity investment
    (140,554 )     (78,269 )     (240,554 )     (220,506 )
Beneficial conversion feature
    (52,665 )     (105,445 )     (126,912 )     (401,019 )
Other (expense)
    139,377       (5,105 )     122,671       (62,406 )
Total other income (expenses)
    225,290       (61,814 )     (308,813 )     (411,977 )
Net income before  income taxes
    2,389,470       4,745,592       2,245,429       10,317,334  
Income taxes
    (32,921 )     (13,735 )     (64,460 )     (25,459 )
Net income after tax
    2,356,549       4,731,857       2,180,969       10,291,875  
Non-controlling interest
    (672,322 )     (1,413,427 )     (1,635,883 )     (3,470,728 )
Net income attibutable to NetSol
    1,684,227       3,318,430       545,086       6,821,147  
                                 
Other comprehensive income (loss):
 
Translation adjustment
    (369,782 )     20,361       (2,383,324 )     460,524  
Comprehensive income (loss)
    1,314,445       3,338,791       (1,838,238 )     7,281,671  
Comprehensive (loss) /income  attributable to non controlling interest
    (146,667 )     98,756       (1,001,560 )     23,780  
Comprehensive income (loss) attributable to NetSol
    1,461,112       3,240,035       (836,678 )     7,257,891  
                                 
Net income per share:
                               
Basic
  $ 0.03     $ 0.06     $ 0.01     $ 0.15  
Diluted
  $ 0.03     $ 0.06     $ 0.01     $ 0.14  
Weighted average number of shares outstanding
 
Basic
    61,359,747       51,263,639       57,953,872       46,355,789  
Diluted
    61,765,073       52,480,900       58,359,198       47,573,050  
                                 
Amounts attributable to NetSol common shareholders
 
Net income / (loss)
  $ 1,684,227     $ 3,318,430     $ 545,086     $ 6,821,147  
 
See accompanying notes to these unaudited consolidated financial statements.
 
 
Page 3

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Nine Months
 
   
Ended March 31,
 
   
2012
   
2011
 
 Cash flows from operating activities:
           
 Net income
  $ 2,180,969     $ 10,291,875  
 Adjustments to reconcile net income to net cash provided by operating activities:
               
 Depreciation and amortization
    3,316,142       2,998,443  
 Provision for bad debts
    192,250       254,996  
 Share of net loss from investment under equity method
    240,554       220,506  
 Loss on sale of assets
    3,940       13,302  
 Stock issued for interest on notes payable
    -       155,808  
 Stock issued for services
    190,076       698,843  
 Fair market value of warrants and stock options granted
    303,807       335,918  
 Beneficial conversion feature
    126,912       401,019  
 Changes in operating assets and liabilities:
               
 Increase/ decrease in accounts receivable
    877,725       (5,350,512 )
 Increase/ decrease in other current assets
    (2,286,804 )     (2,099,813 )
 Increase/ decrease in accounts payable and accrued expenses
    112,422       (581,418 )
 Net cash provided by operating activities
    5,257,993       7,338,965  
 Cash flows from investing activities:
               
 Purchases of property and equipment
    (3,729,571 )     (6,242,399 )
 Sales of property and equipment
    72,516       18,358  
 Purchase of treasury stock
    (19,417 )     -  
 Purchase of non-controlling interest in subsidiary
    -       (671,460 )
 Short-term investments held for sale
    -       (258,271 )
 Investment under equity method
    (100,000 )     -  
 Acquisition, net of cash acquired
    (253,192 )     -  
 Increase in intangible assets
    (5,280,833 )     (4,752,261 )
 Net cash used in investing activities
    (9,310,497 )     (11,906,033 )
 Cash flows from financing activities:
               
 Proceeds from sale of common stock
    5,743,300       2,899,250  
 Proceeds from the exercise of stock options and warrants
    715,500       1,116,175  
 Proceeds from convertible notes payable
    4,000,000       -  
 Payments on convertible notes payable
    (2,758,330 )     -  
 Restricted cash
    5,610,000       -  
 Dividend Paid
    (341,657 )     -  
 Proceeds from bank loans
    4,371,555       2,969,146  
 Payments on capital lease obligations & loans - net
    (7,981,217 )     (2,948,489 )
 Net cash provided by financing activities
    9,359,151       4,036,082  
 Effect of exchange rate changes in cash
    (361,243 )     (169,951 )
 Net increase in cash and cash equivalents
    4,945,404       (700,938 )
 Cash and cash equivalents, beginning of year
    4,172,802       4,075,546  
 Cash and cash equivalents, end of year
  $ 9,118,206     $ 3,374,608  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
Page 4

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 

   
For the Nine Months
 
   
Ended March 31,
 
   
2012
   
2011
 
 SUPPLEMENTAL DISCLOSURES:
           
 Cash paid during the period for:
           
 Interest
  $ 632,181     $ 946,467  
 Taxes
  $ 50,645     $ 2,421  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued against the payment of vendors
  $ 50,000     $ -  
Stock issued for the conversion of Notes Payable
  $ -     $ 4,803,339  
Purchase of property and equipment under capital lease
  $ -     $ 267,947  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
Page 5

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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, 2011.  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”)
Vroozi, Inc. (“Vroozi”)
NetSol Technologies (Beijing) Co. Ltd. (NetSol Beijing)
 
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
Virtual Lease Services Holdings Limited (“VLSH”)
Virtual Lease Services Limited (“VLS”)
Hanover Asset Finance (Ireland) Limited (“HAFL”)
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 – ACCOUNTING POLICIES
 
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.
 
New Accounting Pronouncements
 
In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013.
 
In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.
 
 
Page 6

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance.
 
 
In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance is effective for annual periods beginning after December 15, 2011.
 
NOTE 3 – ACQUISITION
 
On October 4, 2011, NTE, a wholly owned subsidiary of the Company, entered into an agreement with Investec Asset Finance PLC (“Investec”) a UK corporation, in which the Company obtained a 51% controlling interest in a newly-formed entity, Virtual Lease Services Holdings Limited (“VLSH”), which in turn acquired a 100% interest in Virtual Lease Services Limited (“VLS”). The purchase price paid in this transaction was entirely in the form of cash in the amount of $1,008,859.
 
At the time of acquisition the fair value of assets and liabilities acquired were as follows:
 
Cash
  $ 755,667  
Accounts Receivable
    469,970  
Fixed Assets
    200,579  
Customer List
    248,320  
Technology
    242,702  
Liabilities
    (330,071 )
Noncontrolling interest
    (792,351 )
Net Assets Acquired
    794,815  
         
Proceeds
    1,008,859  
Goodwill
  $ 214,044  
 
The acquisition of VLS is in alignment with the Company’s strategic plans and contributes to the continued expansion into technology markets through membership and practice acquisitions.
 
The amounts of acquired entities revenue and net income included in the Company’s consolidated statements of operations for the nine months ended March 31, 2012, and the revenue and net income (loss) of the combined entity had the date of acquisitions been July 1, 2011, or July 1, 2010, are as follows:
 
   
Revenue
   
Net income (loss)
 
             
Actual for nine months from date of acquisition to March 31, 2012
    25,445,308       545,086  
                 
Supplemental pro forma from Jul 1, 2011 through March 31-2012
    25,928,508       601,650  
                 
Supplemental pro forma from Jul 1, 2010 through March 31-2011
    31,197,552       6,886,278  
 
 
Page 7

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 were as follows:
 
 For the nine months ended March 31, 2012
 
Net Income
   
Shares
   
Per Share
 
 Basic income per share:
  $ 545,086       57,953,872     $ 0.01  
 Dividend to preferred shareholders
    -                  
 Net income available to common shareholders
                       
 Effect of dilutive securities
                       
 Stock options
            87,910          
 Warrants
            317,416          
 Diluted loss per share
  $ 545,086       58,359,198     $ 0.01  
                         
                         
 For the nine months 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  
 
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY:
 
The accounts of NetSol UK, NTE, VLSH and VLS use the British Pound; HAFL uses the Euro; NetSol PK, Connect, and NetSol Innovation use Pakistan Rupees; NTPK Thailand uses Thai Baht;  Abraxas uses the Australian dollar; and NetSol Beijing uses Chinese Yuan as the functional currencies.  NetSol Technologies, Inc., and its subsidiaries, NTNA and Vroozi, use the U.S. dollar as the functional currency.  Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period.  Accumulated translation losses are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $10,187,687 and $8,805,922 as of March 31, 2012 and June 30, 2011 respectively. During the nine months ended March 31, 2012 and 2011, comprehensive loss in the consolidated statements of operations included translation gain of $1,381,764 and $436,744 respectively.
 
 
Page 8

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consisted of the following:
 
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
             
 Prepaid Expenses
  $ 540,669     $ 245,194  
 Advance Income Tax
    751,960       726,979  
 Employee Advances
    54,159       53,404  
 Security Deposits
    205,778       161,263  
 Tender Money Receivable
    134,949       133,166  
 Other Receivables
    375,601       535,597  
 Other Assets
    568,244       198,301  
     Total
  $ 2,631,360     $ 2,053,904  
 
NOTE 7 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consisted of the following:
 
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
             
Office furniture and equipment
  $ 1,475,951     $ 1,179,993  
Computer equipment
    14,772,723       13,463,560  
Assets under capital leases
    2,126,590       2,024,282  
Building
    2,216,193       2,337,758  
Land
    2,123,552       2,240,036  
Capital work in progress
    3,988,831       2,659,750  
Autos
    617,193       794,617  
Improvements
    237,434       162,896  
Subtotal
    27,558,467       24,862,892  
Accumulated depreciation
    (10,681,146 )     (8,848,431 )
    $ 16,877,321     $ 16,014,461  
 
For the nine months ended March 31, 2012 and 2011, depreciation expense totaled $2,190,274 and $1,340,134 respectively.  Of these amounts, $ 1,386,866 and $952,051 respectively, are reflected in 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 $246,952 and $278,308 as of March 31, 2012 and June 30, 2011, respectively.
 
 
Page 9

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 8 - INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
   
As of March 31
   
As of June 30,
 
   
2012
   
2011
 
 Product licenses
  $ 42,439,300     $ 38,226,400  
 Customer lists
    6,052,377       5,804,057  
 Technology
    242,702       -  
      48,734,379       44,030,457  
 Accumulated amortization
    (19,657,328 )     (18,428,262 )
 Intangible assets, net
  $ 29,077,051     $ 25,602,195  
 
(A) Product Licenses
 
Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses include unamortized software development and enhancement costs of $22,201,278. Product licenses are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 8 years. Amortization expense for the nine-months ended March 31, 2012 and 2011 was $1,022,768 and $1,281,913, respectively.
 
(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 three fiscal periods, 2009, 2010 and 2011, respectively, the first three annual deferred consideration installment payments were determined to be zero.
 
On October 4, 2011, the company entered into an agreement to acquire a UK based company “Virtual Leasing Services Limited” through one of its subsidiaries. As a result of this acquisition, the Company recorded $248,320 of an existing customer list.
 
Customer lists are being amortized based on a straight-line basis, which approximates the anticipated rate of attrition, which is currently a weighted average of approximately 5 years. Amortization expense for the nine-months ended March 31, 2012 and 2011 was $77,776 and $376,395-, respectively.
 
(C) Technology
 
On October 4, 2011, the company entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded $242,702 of existing technology. Technology assets are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 5 years. Amortization expense for the nine-months ended March 31, 2012 and 2011 was $24,270 and $Nil.
 
 
Page 10

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

(D) Future Amortization
 
Estimated amortization expense of intangible assets over the next five years is as follows:
 
 Year ended;
     
 March 31, 2013
    1,871,208  
 March 31, 2014
    1,719,830  
 March 31, 2015
    1,423,551  
 March 31, 2016
    955,152  
 March 31, 2017
    906,032  
 Thereafter
    22,201,278  
 
NOTE 9 – GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in businesses combinations. Goodwill was comprised of the following amounts:
 
   
As of March 31,
   
As of June 30,
 
   
2012
   
2011
 
 Asia Pacific
  $ 1,303,372     $ 1,303,372  
 Europe
    3,685,858       3,471,813  
 USA
    4,664,100       4,664,100  
                 
     Total
  $ 9,653,330     $ 9,439,285  
 
On October 4, 2011, the Company entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded goodwill of $214,044.
 
The Company has determined that there was no impairment of the goodwill for either period presented.
 
 
Page 11

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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.
 
Net book value at June 30, 2010
  $ 200,506  
         
Net loss for the year ended June 30, 2011
    (542,929 )
NetSol's share (50.1%)
    (272,007 )
Loss adjusted against investment
    (200,506 )
         
Net book value at June 30, 2011
  $ -  
         
Investment during the period
    100,000  
Net loss for the nine months ended March 31, 2012
    (377,350 )
NetSol's share (50.1%)
    (189,052 )
Unabsorbed losses brought forward
    (51,731 )
Total loss
    (240,784 )
Loss adjusted against investment
    (100,000 )
Loss adjusted against advance to investee
    (140,784 )
Net book value at March 31, 2012
  $ -  
 
 
Page 12

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consisted of the following:
 
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
             
 Accounts Payable
  $ 1,813,496     $ 1,348,453  
 Accrued Liabilities
    1,955,645       2,364,233  
 Accrued Payroll
    153,927       148,565  
 Accrued Payroll Taxes
    100,265       216,485  
 Interest Payable
    294,051       380,808  
 Deferred Revenues
    32,523       32,066  
 Taxes Payable
    274,969       239,417  
     Total
  $ 4,624,876     $ 4,730,027  
 
NOTE 12 - DEBTS
 
(A) LOANS AND LEASES PAYABLE
 
Notes payable consisted of the following:
 
   
As of March 31
   
Current
   
Long-Term
 
Name
 
2012
   
Maturities
   
Maturities
 
                   
D&O Insurance
  $ 134,154     $ 134,154     $ -  
Bank Overdraft Facility
    251,499       251,499       -  
HSBC Loan
    1,479,075       353,448       1,125,627  
Term Finance Facility
    1,099,384       274,846       824,538  
Subsidiary Capital Leases
    1,138,062       941,925       196,137  
    $ 4,102,174     $ 1,955,872     $ 2,146,302  
                         
                         
   
As of June 30
   
Current
   
Long-Term
 
Name
    2011    
Maturities
   
Maturities
 
                         
D&O Insurance
  $ 21,429     $ 21,429     $ -  
Habib Bank Line of Credit
    5,404,608       5,404,608       -  
Bank Overdraft Facility
    254,502       254,502       -  
Term Finance Facility
    869,767       434,883       434,884  
Subsidiary Capital Leases
    1,232,585       947,113       285,472  
    $ 7,782,891     $ 7,062,535     $ 720,356  
 
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 0.42% and 0.49% as of March 31, 2012 and June 30, 2011, respectively. Interest paid during the period ended March 31, 2012 and 2011 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 1.85%% and 2% as of March 31, 2012 and June 30, 2011, respectively. Interest expense during the nine months ended March 31, 2012 and 2011 was $41,089 and $97,660, respectively. During the period ended March 31, 2012, the Company redeemed all certificates of deposits worth $5.7 million by completely paying off the line of credit.
 
 
Page 13

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In February 2012 the company entered into agreement with HSBC for the issuance of stand by letter of credit worth $90,000 in favor of landlord against the new office space. The company has deposited $90,000 in a saving account with HSBC as collateral against this letter of credit.
 
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, or approximately $310,000. The annual interest rate is 3.25% over the bank’s sterling base rate, which was 5.00% as of March 31, 2012 and June 30, 2011, respectively. Total outstanding balance as of March 31, 2012 was £157,285 or $251,499 approximately.
 
In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,599,000 for a period of 5 years with monthly payments of £18,420, or $29,454 approximately. The interest rate was 4% which is 3.5% above bank sterling base rate. The subsidiary has used this facility up to £925,000, or $1,479,075, of which £703,957, or $1,125,627, was shown as long term and remaining £221,043, or $353,448, as current maturity.  Interest expense, for the period ended March 31, 2012, was £17,101, or $27,110.
 
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. 175,000,000 or approximately $1,923,923 (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, 2011, the subsidiary had used Rs. 75,000,000, or approximately $869,767, of which $434,883 was shown as long term liabilities, and the remainder of $434,884 as current maturity. As of the nine months ended March 31, 2012, the Company paid back the installment of Rs. 25,000,000 reducing the outstanding principal amount to Rs. 50,000,000 or approximately $549,692. The company also availed another Rs. 50,000,000 increasing the outstanding balance to Rs. 100,000,000 or approximately $1,099,384, of which $824,838 is shown as long term liabilities and the remainder of $274,846 as current maturity.
 
The Company leases various fixed assets under capital lease arrangements expiring in various years through 2017. 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, 2012 and 2011.
 
Following is the aggregate minimum future lease payments under capital leases as of March 31, 2012 and June 30, 2011:
 
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
Minimum Lease Payments
           
Due FYE 3/31/13
  $ -     $ 1,010,836  
Due FYE 3/31/14
    988,817       209,260  
Due FYE 3/31/15
    189,309       115,346  
Due FYE 3/31/16
    26,061       -  
Due FYE 3/31/17
    -       -  
Total Minimum Lease Payments
    1,204,187       1,335,442  
Interest Expense relating to future periods
    (66,125 )     (102,856 )
Present Value of minimum lease payments
    1,138,062       1,232,585  
Less:  Current portion
    (941,925 )     (947,113 )
Non-Current portion
  $ 196,137     $ 285,472  
 
 
Page 14

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

Following is a summary of fixed assets held under capital leases as of March 31, 2012 and June 30, 2011:
 
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
Computer Equipment and Software
  $ 620,528     $ 518,911  
Furniture and Fixtures
    765,405       769,106  
Vehicles
    438,442       434,049  
Building Equipment
    302,216       302,216  
                 
Total
    2,126,590       2,024,282  
Less:  Accumulated Depreciation
    (1,088,621 )     (807,562 )
Net
  $ 1,037,969     $ 1,216,720  
 
Interest expense for the nine months ended March 31, 2012 and 2011 was $54,144 and $27,967, respectively.
 
(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, 2012 and June 30, 2011:
 
For the period ended March 31, 2012:
           
TYPE OF
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
DATE
 
RATE
   
USD
 
               
Export Refinance
Every 6 months
    11.00 %   $ 2,198,769  
                   
Total
            $ 2,198,769  
                   
                   
For the year ended June 30, 2011:
               
TYPE OF
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
DATE
 
RATE
   
USD
 
                   
Export Refinance
Every 6 months
    11.00 %   $ 2,319,378  
                   
Total
            $ 2,319,378  
 
Interest expense for the nine months ended March 31, 2012, and 2011 was $179,167 and $137,771, respectively.
 
NOTE 13 – OTHER PAYABLE AND COMMON STOCK TO BE ISSUED
 
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, 2012 and June 30, 2011, the remaining cash due of $103,226 is shown as “Other Payable” and the remaining stock to be issued of 46,704 shares at an average price of $1.89 is shown in “Common stock to be issued” in the accompanying consolidated financial statements.

 
 
Page 15

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

NOTE 14 – CONVERTIBLE NOTES PAYABLE
 
The net outstanding balance of convertible notes as of March 31, 2012 and June 30, 2011 is as follows:
 
Issue Date
Balance net of BCF @ 3/31/12
Current Portion
Long Term
Maturity Date
         
Sep-2011
3,692,792
-
3,692,792
Sep-2013
         
Total
3,692,792
-
3,692,792
 
         
Issue Date
Balance net of BCF @ 6/30/11
Current Portion
Long Term
 Maturity Date
         
Jul-2008
2,745,524
2,745,524
-
Jul-2011
         
         
         
Total
2,745,524
2,745,524
-
 
 
For the periods ended March 31, 2012 and June 30, 2011, the interest accrued on convertible notes was $281,262 and $248,250, 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 year ended June 30, 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 and unamortized balance of BCF was $12,806 as of June 30, 2011.
 
During the nine months ended March 31, 2012, the remaining balance of 2008 Note was fully paid along with interest due thereon out of the proceeds of a new 2011 Convertible Note.
 
(B) 2011 CONVERTIBLE DEBT
 
On September 13, 2011, NetSol Technologies, Inc. entered into a purchase agreement to sell convertible notes with a total principal value of $4,000,000 and warrants to purchase shares of common stock to an investment fund managed by CIM Investment Management Limited and another accredited investor. The notes have a 2 year maturity date and are convertible into shares of common stock at the initial conversion price of $0.895 per share. The warrants entitle the investors to acquire a total of 1,408,451 shares of common stock, have a 5 year term, and have an initial exercise price of $0.895 per share. The Notes and Warrant terms contain standard anti-dilution protection.  The Company raised new capital through a follow on offering under its registered shelf offering on form S-3 in March 2012 and as a result, the conversion price of note and exercise price of warrants has been adjusted downward from $0.895 to $0.773. Resultantly, the number of warrants has also been increased to 1,630,209.  The proceeds of the Note were assigned between warrants and convertible note per ASC 470-20. The Company recorded $401,648 capitalized financing cost and discount of $19,665 on shares to be issued upon conversion of note into equity. This capitalized finance cost and discount will be amortized over the life of the note.
 
 
Page 16

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 15 - STOCKHOLDERS’ EQUITY
 
(A) TREASURY STOCK
 
On November 11, 2011, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 2,500,000 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 has repurchased 44,300 shares of common stock from open market against cash consideration of $19,417 during the period ended March 31, 2012. The balance as of March 31, 2012 and June 30, 2011 was $415,425 and $396,008 respectively.
 
(B) SHARES ISSUED FOR SERVICES TO RELATED PARTIES
 
During the nine months ended March 31, 2012 and 2011, the Company issued a total of 235,000 and 442,500 shares of restricted common stock for services rendered by the officers of the Company. These shares were valued at the fair market value of $147,075 and $528,900 respectively.
 
The Company recorded an expense of $121,750 and $377,700 against the services rendered by officers during the nine months ended March 31, 2012 and 2011.
 
During the nine months ended March 31, 2012 and 2011, the Company issued a total of 160,000 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. These shares were valued at the fair market value of $173,600 and $135,300 respectively.
 
The Company recorded an expense of $40,000 and $135,300 for services rendered by the independent members of the Board of Directors as part of their board compensation during the nine months ended March 31, 2012 and 2011.
 
During the period ended March 31, 2012 and 2011, the Company issued a total of 12,500 and 32,699 shares of its common stock to employees as required according to the terms of their employment agreements valued at $6,000 and $33,300, respectively.
 
(C) SHARE-BASED PAYMENT TRANSACTIONS
 
During the period ended March 31, 2012, and June 30, 2011, the Company issued a total of 149,000 and 337,857 shares of its common stock for provision of services to unrelated consultants valued at $82,400 and $152,543, respectively.
 
(D) SHARE ISSUED AGAINST CASH PAYMENTS

During the period ended March 31, 2012, the Company issued 16,675,000 new shares through secondary offering under S3 registration against net proceeds of $5,743,300. The shares were issued at the offering price of $0.40 per share. Aegis Capital Corp. acted as sole book-running manager and underwriters for the offering. The Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price.
 
 
Page 17

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 16 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
Common stock purchase options and warrants consisted of the following:
 
OPTIONS:
       
Exercise
   
Aggregated
 
Issued by the Company
 
# of shares
   
Price
   
Intrinsic Value
 
                   
Outstanding and exercisable, June 30, 2010
    7,706,917     $ 0.30 to $5.00     $ -  
Granted
    1,471,000     $ 0.65 to $1.25          
Exercised
    (1,771,000 )   $ 0.65 to $1.25          
Expired / Cancelled
    (487,600 )                
Outstanding and exercisable, June 30, 2011
    6,919,317     $ 0.30 to $5.00     $ 1,637,459  
Granted
    3,183,333     $ 0.30 to $0.75          
Exercised
    (1,983,333 )   $ 0.30 to $1.25          
Expired / Cancelled
    (7,400 )   $ 0.75 to $1.00          
Outstanding and exercisable, March 31, 2012
    8,111,917     $ 0.30 to $5.00     $ (392,000 )
                         
WARRANTS:
                       
Outstanding and exercisable, June 30, 2010
    4,763,319     $ 1.65 to $3.70     $ -  
Granted
                       
Exercised
    (3,879,028 )   $ 0.31          
Expired
    (706,061 )   $ 1.68 to $3.70          
Outstanding and exercisable, June 30, 2011
    178,230     $ 0.31 to $3.70     $ 219,119  
Granted
    2,463,959     $ 0.50 to $0.773          
Exercised
                       
Expired
    (25,000 )   $ 1.85 to $3.70          
Outstanding and exercisable, March 31, 2012
    2,617,189     $ 0.31 to $0.773     $ (99,194 )
 
The average life remaining on the options and warrants as of March 31, 2012 is as follows:
 
Exercise Price
 
Number
Outstanding
and Exercisable
   
Weighted
Average
Remaining
Contractual Life
   
Weighted
Ave
Exericse
Price
 
OPTIONS:
                 
Issued by the Company
                 
$0.01 - $0.99
    2,700,000       5.70       0.70  
$1.00 - $1.99
    1,931,917       3.40       1.89  
$2.00 - $2.99
    2,830,000       3.09       2.70  
$3.00 - $5.00
    650,000       1.80       4.38  
                         
Totals
    8,111,917       3.92       1.97  
                         
WARRANTS:
                       
$0.31 - $0.773
    2,617,189       4.49       0.66  
                         
                         
Totals
    2,617,189       4.49       0.66  
 
All options and warrants granted are vested and are exercisable as of March 31, 2012 except 650,000 which will be vesting in next six months.
 
 
Page 18

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(A) INCENTIVE AND NON-STATUTORY STOCK OPTION PLANS
 
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 September 30, 2011, the Company granted 330,000 options to two employees with an exercise price of $0.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $63,763 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 3.13%
Expected life 1 month
Expected volatility 100%
 
During the quarter ended December 31, 2011, the Company granted 200,000 options to one employee with an exercise price of $0.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $13,797 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 0.3%
Expected life 1 month
Expected volatility 99.85%
 
During the quarter ended December 31, 2011, the Company granted 320,000 options to one employee with an exercise price of $0.40 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $24,890 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 0.3%
Expected life 1 month
Expected volatility 83.08%
 
During the quarter ended December 31, 2011, the Company granted 1,300,000 options to three of its officers with an exercise price of $0.75 per share and an expiration date of 5 Years, vesting quarterly. Using the Black-Scholes method to value the options, the Company will record a total of $585,241 in compensation expense for these options on quarterly bases out of which $146,310 was recorded in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate 0.9%
Expected life 5 Years
Expected volatility 213.21%
 
 
Page 19

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
During the quarter ended March 31, 2012, the Company granted 200,000 options to one of its employee with an exercise price of $0.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $4,897 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 0.3%
Expected life 1 month
Expected volatility 42.44%
 
During the quarter ended March 31, 2012, the Company granted 833,333 options to five of its employees with an exercise price of $0.30 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $76,385 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 0.05%
Expected life 1 month
Expected volatility 59.81%
 
WARRANTS
 
During the quarter ended September 30, 2011, the Company entered into an agreement to issue the 2011 Convertible Note together with warrants to purchase 1,408,451 warrants of common stock at an initial exercise price of $0.895 per share with a life of five years. The Notes and Warrants terms contain anti-dilution protection.  The fair market value of these warrants was calculated as $446,480 by using Black Scholes value method. Using this value, the proceeds of Convertible note were allocated between warrants and convertible based on their relative fair values. The Company recorded $401,648 capitalized financing cost which will be amortized over the life of the note. As a result of new capital raised under the shelf registration on form S-3 the conversion price of note and exercise price of warrants has been adjusted downward from $0.895 to $0.773 and number of warrants have been increased to 1,630,209. Moreover, the Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price.
 
(B) EQUITY INCENTIVE PLAN
 
In May 2011, the shareholders approved the 2011 Equity Incentive Plan (the “2011 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 2011 Plan is 5,000,000 (the Share Reserve). The 2011 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 2011 Plan. Shares issued under the 2011 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 2011 Plan, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the 2011 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 2011 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 2011 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
PERFORMANCE AWARDS
 
Under the 2011 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 maybe 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 2011 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, 2012, 57,000 shares have been issued under this plan to non- officers employees.
 
NOTE 17 – 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:
 
 
Page 21

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
   
2012
   
2011
 
 Revenues from unaffiliated customers:
           
 North America
  $ 3,295,569     $ 3,178,726  
 Europe
    4,370,681       6,284,120  
 Asia - Pacific
    17,779,058       20,192,921  
 Consolidated
  $ 25,445,308     $ 29,655,767  
                 
 Operating income (loss):
               
 Corporate headquarters
  $ (2,409,184 )   $ (2,716,297 )
 North America
    272,796       1,108,925  
 Europe
    464,297       3,027,779  
 Asia - Pacific
    4,226,333       9,308,904  
 Consolidated
  $ 2,554,242     $ 10,729,311  
                 
Net income (loss) after taxes and before non-controlling interest:
         
 Corporate headquarters
  $ (3,157,229 )   $ (3,843,366 )
 North America
    272,233       1,092,798  
 Europe
    507,471       2,929,300  
 Asia - Pacific
    4,558,494       10,113,143  
 Consolidated
  $ 2,180,969     $ 10,291,875  
                 
 Identifiable assets:
               
 Corporate headquarters
  $ 15,921,658     $ 17,378,180  
 North America
    3,431,800       1,726,918  
 Europe
    7,190,639       7,371,237  
 Asia - Pacific
    64,868,497       60,902,121  
 Consolidated
  $ 91,412,594     $ 87,378,456  
                 
 Depreciation and amortization:
               
 Corporate headquarters
  $ 53,130     $ 460,617  
 North America
    234,943       383,200  
 Europe
    559,073       535,116  
 Asia - Pacific
    2,468,996       1,619,510  
 Consolidated
  $ 3,316,142     $ 2,998,443  
                 
 Capital expenditures:
               
 Corporate headquarters
  $ 3,170     $ -  
 North America
    13,686       55,098  
 Europe
    578,537       1,014  
 Asia - Pacific
    3,134,178       6,186,287  
 Consolidated
  $ 3,729,571     $ 6,242,399  
 
Net revenues by our various products and services provided for the period ended March 31, are as follows:
 
   
2012
   
2011
 
 Licensing Fees
  $ 6,092,203     $ 10,259,027  
 Maintenance Fees
    5,983,073       5,589,746  
 Services
    13,370,032       13,806,994  
 Total
  $ 25,445,308     $ 29,655,767  
 
 
Page 22

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 18 – NON-CONTROLLING INTEREST IN SUBSIDIARY
 
The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows:
 
SUBSIDIARY
 
Non Controlling
Interest %
   
Non-Controlling
Interest at
March 31, 2012
 
             
NetSol PK
    39.48 %   $ 11,848,860  
NetSol-Innovation
    49.90 %     960,123  
VLS
    49.00 %     775,140  
                 
Total
          $ 13,584,123  
                 
SUBSIDIARY
 
Non Controlling
Interest %
   
Non-Controlling
Interest at
June 30, 2011
 
                 
NetSol PK
    39.48 %   $ 11,531,694  
NetSol-Innovation
    49.90 %     968,790  
                 
Total
          $ 12,500,484  
 
(A) NETSOL TECHNOLOGIES, LIMITED
 
For the nine months ended March 31, 2012 and 2011, NetSol PK had net income of $3,229,747 and $7,596,360. The related non-controlling interest was $1,275,104 and $2,999,043, respectively.
 
(B) NETSOL INNOVATION (PRIVATE) LIMITED
 
For the nine months ended March 31, 2012 and 2011, NetSol Innovation had net income of $788,053 and $721,766. The related non-controlling interest was $393,238 and $360,161, respectively.
 
(C) VIRTUAL LEASE SERVICES
 
For the period ended March 31, 2012, VLS had a net loss of $66,246. The related 49% non-controlling interest was $32,460.

 
 
Page 23

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 19 – INCOME TAXES
 
Our effective tax rates were approximately 2.87% and 0.25% for the nine months ended March 31, 2012 and 2011, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates.  Also, the Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future.
 
NOTE 20 - SUBSEQUENT EVENTS
 
Officers of the company were issued 25,000 shares of common stock as compensation for which expense was recorded in March 2012.
 
Employees of the company were issued 12,500 shares of common stock as compensation for which expense was recorded in March 2012.
 
One of the employee of the Company exercised options to acquire 200,000 shares of common stock valued at $60,000.
 
 
Page 24

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

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, 2012.
 
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.
 
NetSol Technologies, Inc. (NASDAQCM: NTWK) is a worldwide provider of IT and enterprise application solutions, NetSol Technologies, Inc. executes its mission of focusing technology on the operational needs of its clients. NetSol’s services and solutions enable businesses to streamline their operations and compete more effectively.
 
The Company is organized into two main revenue areas, consisting of enterprise solutions – NetSol Financial Suite (NFS™) – for the global financing, leasing and lending industry and a portfolio of managed services, including customized application development, systems integration, and business process engineering.   In addition, NetSol’s solutions portfolio includes the smartOCI™ e-Procurement search engine for SAP SRM users.
 
NetSol’s clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NetSol delivery locations across the globe.
 
Founded in 1997, NetSol is headquartered in Calabasas, California. 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 and the corporate headquarters in Calabasas, for North America; the London Metropolitan area for Europe; Beijing, China, Bangkok, Thailand and Lahore, Pakistan for Asia Pacific and South East Asia markets.  The Company continues to maintain services, solutions and/or sales specific offices in Australia, China, Thailand, the Kingdom of Saudi Arabia and Pakistan and, in any other country, on an as needed basis.
 
In today’s highly competitive marketplace, business executives with labor or services-centric budgetary responsibilities are not just encouraged but, in fact, obliged to engage in “Make or Buy” decision process when contemplating how to support and staff new development, testing, services support and delivery activities.  The Company business offerings are aligned as a BestShoring® solutions strategy.  Simply defined, BestShoring® is NetSol Technologies’ ability to draw upon its global resource base and construct the best possible solution and price for each and every customer.  Unlike traditional outsourcing offshore vendors, NetSol draws upon an international workforce and delivery capability to ensure a “BestShoring® delivers BestSolution™” approach.
 
NetSol combines domain expertise, not only with competitive cost from its delivery centers and support offices located around the globe, but also with the comfort of localized program and project management while minimizing any implementation risk associated with a single service or delivery 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.  With global delivery model diversification, NetSol currently has locations in Bangkok, Beijing, Lahore, the London metropolitan area and the San Francisco Bay Area to best serve its global clients and partners worldwide.  This provides NetSol customers with the optimum balance of subject matter expertise, in-depth domain experience, and cost effective IT professionals, all merged into a scalable solution.  In this way, “BestShoring® delivers BestSolution™”. We believe this is a major competitive edge over regional competitors.
 
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; 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. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
In addition to services, our solution offerings are fashioned to provide a Best Product for Best Solution model.  Our offerings include our flagship global solution, NetSol Financial Suite (NFS™). NFS™, a robust suite of five software applications, is an end-to-end solution for the lease and finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract. The five software applications under NFS™ have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments.  Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle.  NFS™ is a result of more than eight years of effort resulting in over 60 modules grouped in five comprehensive applications. These five applications are complete systems in themselves and can be used independently to exhaustively address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing / financing cycle.
 
The NetSol Financial Suite™ also includes LeasePak.  LeasePak provides the leasing technology industry with the development of Web-enabled and Web-based tools to deliver superior customer service, reduce operating costs, streamline the lease management lifecycle, and support collaboration with origination channel and asset partners.  LeasePak can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users.  In terms of scalability, NetSol Technologies North America offers the basic product as well as a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and complexities of operations. These solutions provide the equipment and vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for some of the industry’s leading independent lessors.
 
Our product offerings and services also include: LeaseSoft Portals and Modules through our European operations; LeasePak 6.0b of our NFS™ product suite; enterprise wide information systems, such as or LRMIS, MTMIS, business intelligence and information security services.
 
To further bolster NetSol’s Solutions capabilities, in October 2008, NetSol acquired Ciena Solutions, a preferred SAP and Business Objects systems integration firm. The Ciena Solutions practice has been integrated into the newly formed wholly owned subsidiary, Vroozi, Inc.  This acquisition expanded NetSol’s domain and subject matter expertise to include integration and consulting services for the SAP ERP platform as well as intellectual property targeted for the B2B supply chain market.
 
Vroozi develops innovative e-commerce solutions for all business sizes and industry verticals which help companies search, source, negotiate, and order goods and services from suppliers electronically optimizing organization’s procurement and supply chain operations.  Vroozi’s Business to Business search engine, collaborative commerce, and electronic marketplace applications are deployed in the cloud and can integrate seamlessly with major ERP vendor systems such as SAP or deployed independently on the Internet.
 
Vroozi’s first product to market is smartOCI™.  smartOCI™ is a new search engine technology and private procurement content marketplace which provides corporate buyers and shoppers a simple and intuitive user interface to search multiple supplier catalogs simultaneously within the SAP procurement application.  smartOCI™ was officially released to the market in 2011 at the SAP SAPPHIRE Conference in Orlando, Florida, targeting approximately 15,000+ SAP customers and has strengthened NetSol’s presence in the global SAP Services market.
 
Since its’ launch last year, Vroozi has signed nine customers for the smartOCI Marketplace and has established two key reseller partnerships in the European region for the smartOCI solution.
 
While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to focus operational responsibility along two regions, the Americas (including Brazil and Latin America) and Europe Region and the Asia Pacific Region covering, specifically, the markets of Australia, China, Pakistan, Saudi Arabia and Thailand.   The Company continues to maintain services or products and specific sales offices in its current locations and will add new locations if new marketing opportunities present demands for NetSol offerings.
 
The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the quarter and nine months ended March 31, 2012.  It should be read together with our consolidated financial statements and related notes included herein.
 
 
Page 26

 
NETSOL TECHNOLOGIES, INC.
 
 A few of NetSol’s major successes achieved during the nine months ended March 31, 2012 were:
 
•  
NetSol Technologies Pakistan signed a multi-million dollar agreement to implement the NetSol Financial Suite (NFS)™ solution, including its retail platforms, for a major European Bank in China that will provide auto-financing services throughout China. The agreement gives NetSol another NFS client in China which complements its recent expansion in the Asia-Pacific region’.
 
•  
NetSol’s wholly owned subsidiary, NetSol Technologies (Beijing) Co Limited signed an agreement to license and implement the NetSol Financial Suite (NFS) ™ solution with China's first state owned auto finance company, Chongqing Auto Finance Co., Ltd. This new contract further advances NetSol's position as the premier provider of finance and leasing solutions to automotive financing companies in China.
 
•  
NetSol Technologies (NTPK) Thailand has successfully demonstrated and is selected for the proof of concept stage for one of its premier systems which is the “Loan Origination System”. The demonstration and selection as one of the final vendor’s has been done for the oldest commercial bank of Thailand which pioneers the generation of financial and commercial system in the country.
 
•  
NTPK Thailand has signed a consultancy and services agreement for a premier auto manufacturer in Thailand. These services are to be provided in connection with the GAP Analysis Workshop for NetSol Financial Suite (NFS™) Retail (CAP & CMS) applications.
 
•  
NTPK Thailand and NEC India have signed a partnership agreement to jointly develop and support business in the asset finance and leasing industry in India, as well as other markets in the Asia Pacific region. NEC is a global technology solutions provider to financial institutions, automotive and heavy equipment manufacturing companies.
 
•  
NetSol Technologies and ABeam Consulting Ltd. Entered into a strategic partnership agreement that leverages the companies' mutual strengths by jointly developing and supporting business in the asset finance and leasing industry in Japan, as well as cooperating in other key markets to serve Japanese corporations operating throughout the Asia Pacific region. ABeam, an IT consulting services firm with extensive operations in Japan and throughout Asia, the Americas and Europe, is a leader in the asset finance and leasing industry in Japan.
 
•  
Furthered expansion in Chinese market by adding new customers. Formed a local entity in China under WFOE laws aka ‘NetSol Beijing Ltd.’, a wholly owned subsidiary of NetSol Technologies, Inc.
 
•  
Vroozi, Inc. signed a large SRM 7.0 project implementation with long term care service provider in the United States. Project includes complete implementation of the SAP SRM procurement tool, SAP Finance, and the Vroozi smartOCI™ marketplace technology.
 
•  
Vroozi Inc. developed a ‘Big Data’ loader for the smartOCI™ Catalog Manager which allows large supplier catalog files to be loaded via a secure web connection.
 
•  
NTNA signed an enhancement project for an auto finance captive subsidiary of a leading auto manufacturer.
 
•  
NetSol Technologies named Michael Sundell as vice president, Technology of its e-commerce division, known as Vroozi, Inc. Sundell, joined the Vroozi team with an illustrious background in e-commerce, and will lead all technology activities in this division. Earlier he was lead software engineer at Shopzilla, one of the largest B2C price comparison shopping websites, where he was responsible for managing the SEO (search engine optimization) development team.
 
 
Page 27

 
NETSOL TECHNOLOGIES, INC.
 
•  
Vroozi Inc., has signed an agreement with a top U.S. media company to implement a full B2B e-commerce search engine suite, including the smartOCI™ Search Engine, Catalog Manager and Supplier Marketplace.
 
•  
A leading U.S. chipmaker has signed an agreement to implement NetSol’s smartOCI™ search engine in its SAP e-Procurement environment.
 
•  
NTNA completed a new Generally Available Release of LeasePak 6.4 with enhanced performance (marked improvement in end of day, month and year processing routines including functionality enhancements).
 
•  
On the October 4th, 2011, NetSol Technologies Europe Limited jointly acquired United Kingdom-based Virtual Lease Services, Ltd. (“VLS”), together with Investec Asset Finance Plc. The acquisition is owned 51% by NetSol Technologies Europe, Ltd. and 49% by Investec Asset Finance. VLS, with more than 30 customers across the U.K. finance and leasing industry, provides key support to their clients in business areas, including portfolio management, distressed portfolio analysis and recovery, standby servicing requirements and other customer-driven tailored servicing. VLS utilizes NetSol’s Leasesoft system for Lease Accounting and Administration as a key resource for their customer base. A major European Bank gone live with the LeaseSoft Portal application.
 
•  
Signed another agreement with Minsheng Financial Leasing Co. Ltd. (MSFL), a subsidiary of China Minsheng Bank Corporation Limited. MSFL is market leader in China’s thriving financial leasing industry and a leading provider of aircraft leases in Asia.
 
•  
Signed a multi-million dollar agreement to implement the NetSol Financial Suite (NFS) ™ solution, including its retail platforms, to a European Automobile manufacturer for its Malaysian operations.
 
•  
The on-going project of a Fortune 500 company in Korea went live with the state-of-the-art NFS™ solution.
 
•  
Automation of Transport Department of the Province of Khyber Pakhtunkhwa, Pakistan gone live with NetSol’s state of the art “Automation of Transport Department and Route Permits” solution.
 
•  
NetSol Technologies participated in the Australian Equipment Lessors Association (AELA), in Sydney. NetSol has become the regular member of this Association and was among the only 9 exhibitors for this exhibition.
 
•  
NetSol Technologies participated at the 30th China Leasing Business Association Anniversary, held in Beijing.
 
•  
Signed a multi-million dollar agreement to implement the NetSol Financial Suite (NFS) ™ solution, including its retail platforms, for a company that will provide auto-financing services throughout China. The agreement gives NetSol another NFS™ client in China, and is being regarded as the ‘testament to NetSol’s experience and leadership in China which complements its recent expansion in the Asia-Pacific region’.
 
•  
Won a major contract in the area of ‘Information Security’ with a leading Telecom in Pakistan. Under the agreement NetSol will provide a comprehensive solution to the client that includes an ‘Intrusion Prevention System’ and ‘Security Information and Event Management System’.
 
•  
First NextGen – NFS™ went live with Thailand’s Kiatnakin, a leading Bank, and a leading provider of financial services to commercial and corporate sectors in Thailand.
 
The success of the Company, in the near term, will depend, in large part, on the Company's ability to: (a) continue to grow revenues and improve profits, (b) adequately capitalize for growth in various markets and verticals; (c) make progress in the North and South American markets and, (d) continue to streamline sales and marketing efforts in every market we operate. However, management's outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.
 
 
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NETSOL TECHNOLOGIES, INC.

 
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 is designed to:
 
●           Return to annual top line growth with the anticipation of double digit growth from 2013 onwards.
 
●           Achieve net margins in 2013, better than 2011 level of gross and net margins.
 
Result in enhanced organic growth by next generation of NFS™ solutions, SaaS model, e-commerce entry and leveraging new markets based on joint ventures.
 
Build a strong new ecommerce vertical under Vroozi platform to cater to the enormous new market opportunity in online business to business (B2B) space that, according to an article in “E-Commerce Business Concepts”, in the US alone has transacted over $3.6 trillion in volume
 
Continue to enhance delivery and service capabilities in China, Thailand, USA and UK
 
Fully capitalize in marketing NetSol offerings in Japan with our newly formed partnership agreement with Abeam Consulting group
 
Launch a new operation in Brazil upon the completion of local legal entity formation in Brazil with NetSol JV partner Brasilinvest Group. Brazil is one of the four BRIC economies and offers vast opportunities for NetSol core solutions offerings in banking, automotive, public, oil and energy sectors.
 
Further strengthen NetSol brand in the US and European markets by modest marketing budgets and increased sales personnel.
 
The plan contemplates the following enhanced activities and initiatives will accomplish these goals:
 
o  
Continued expansion in the Chinese market. Management is poised to create a ‘proximity development center’ or PDC and clients support team to better serve our growing customers base. The Chinese market offers huge opportunities in the auto sectors in comparison with the US market, thus offers a very strong growth opportunities for NFS™.
 
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 Wholly Foreign Owned Enterprise under Chinese laws has been formed. 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  
Further augmentation of 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. The Bangkok facility is intended to become the prime location for delivery and implementation for global customers and partners particularly in Asia Pacific.
 
o  
The new and fast growing manifestations of e-commerce, such as cloud computing, are being utilized by some of our offerings and will be further explored by us for other offerings. Our e-commerce division’s 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. Continued  new license sales activities are in the pipeline that led to formation of new subsidiary known as Vroozi, Inc. Presently smartOCI™ is the main asset in this entity while we explore other channels of growth in e-commerce and search engine space. There has been a surge of interest amongst fortune 500 corporations for demos and workshops for smartOCI™ in recent months. To date, six new US based major corporations have been signed up for smartOCI™.
 
 
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NETSOL TECHNOLOGIES, INC.
 
o  
Europe continues to experience a severe recession coupled with regional debt crises.  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. The integration of VLS in conjunction with Investec Bank as a JV partner would bolster growth in services sectors complementing core solutions offerings.
 
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. Recently ANSCL has signed four new contracts both in defense and private sector to provide IT services and consulting in the key areas that are valued to over $2.0MN. This is just a beginning as we see very exciting new developments as we close new contracts...
 
o  
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. However, the demand for current NFS has shown robust and impressive traction with some current global clients and some new fortune 500 captive finance companies in China and Japan.
 
o  
In order to maximize the market and product potential of our SAP and Ecommerce line, highlighted by our smartOCI™ product, we spun 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 South 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.
 
 
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NETSOL TECHNOLOGIES, INC.
 
Funding and Investor Relations:
 
We anticipate using proceeds from the offering of shares to the public on:
 
·  
Expansion in China, Thailand and other emerging markets, including Latin America.
 
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Expanding the North American operation to roll out NetSol new generation solutions and enter Cloud Computing Solutions.
 
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Diversify in Ecommerce space such as smartOCI™ search engine and build Vroozi as a winner name in the E-Commerce space.
 
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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.
 
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Capital Expenditures for our next generation products, technology and infrastructure.
 
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Hiring and training of programmers, engineers, sales and marketing to create a bigger bench for technical team to cater to bigger volume new contracts
 
Investor Relations efforts will include:
 
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Working to grow our institutional investor base.
 
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Sharing the NetSol story with sell side analysts, funds, portfolio managers and the financial media.
 
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Aggressively positioning NetSol in front of major investors’ conferences and road shows to be organized by our IR consultants and investment bankers.
 
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Utilizing US mainstream media to highlight NetSol’s image and ‘niche’ business offering.
 
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Founding management continued investment in the Company in the open market reaffirming their commitment to the potential and the future of the Company.
 
Improving the Bottom Line:
 
Management believes that these measures will improve the bottom line on an ongoing basis:
 
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Improve pricing, sales volume and fee structures.
 
·  
Continue consolidation and reevaluating operating margins as ongoing activities.
 
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Streamline further cost of goods sold to improve gross margins to historical levels over 60%, as sales ramp up.
 
·  
Generate higher revenues per employee, enhance productivity and lower cost per employee.
 
·  
Optimize the utilization of NetSol’s best talent and 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.
 
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Cost efficient management of every operation and continue further consolidation to improve bottom line.
 
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Create more visibility and predictability by implementing SaaS model in mature markets. 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.
 
 
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NETSOL TECHNOLOGIES, INC.
 
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.
 
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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.
 
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Serious interest in NetSol’s next generation solution has been expressed by a few global companies.  Demos and workshops with key global clients and partners of have been very well received. Hence, the new generation solution appears to be gaining momentum.
 
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First successful implementation of NextGen – NFS™ solution with a Thai Bank is a very positive indicator for new deals.
 
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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.
 
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China’s automobile and banking sectors have been unaffected by the global meltdown and   their recent automobile sales statistics have outperformed all other economies.
 
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Growing interest in Japan for IT services and NFS applications within banking, equipment finance and general leasing industries.
 
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As reported by the Associated Press, China surpassed the US as the number one automobile market in auto sales.  JD Powers & Associates anticipated further strong growth in future auto sales.  It is anticipated that this market opportunity will result in further penetration by NetSol into China’s burgeoning leasing and finance market.
 
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E-Commerce, new technologies, innovations and online activities are gaining momentum in many verticals.   New areas for diversification are opening for NetSol. The B2B market has never been stronger in the US market alone thereby offering a potentially huge opportunity to grow Vroozi offerings.
 
·  
Strong entry in e-commerce space by way of developing and marketing a new IP and winning series of fortune 500 US customers.
 
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The surviving IT companies, such as NetSol, with price advantage and a global presence, will gain further momentum as economic indicators turn positive. The bigger customers and targeted verticals are much more cost conscious and are seeking a better rate of return on investments in IT services. NetSol has an edge due to its BestShoring® model and proven track record of delivery and implementations worldwide.
 
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The Kingdom of Saudi Arabia is investing billions in healthcare, education, IT, infrastructure and many other new sectors. This makes it a most promising market for the Atheeb NetSol joint venture.
 
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Noticeable new interest emanating from the Latin America markets for NFS™.