10-Q 1 f10q_110911.htm FORM 10-Q f10q_110911.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
 
( ) For the transition period from __________ to __________
 
Commission file number: 0-22773
 
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
 
 NEVADA   95-4627685
(State or other Jurisdiction of   (I.R.S. Employer NO.)
Incorporation or Organization)    
  23901 Calabasas Road, Suite 2072, Calabasas, CA 91302  
  Address of principal executive offices) (Zip Code)  
     
    (818) 222-9195 / (818) 222-9197  
  (Issuer's telephone/facsimile numbers, including area code)  
 
 
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X                        No___
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large Accelerated Filer __                                                      Accelerated Filer _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 56,503,855 shares of its $.001 par value Common Stock and no shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of November 7, 2011.

 
 

 
NETSOL TECHNOLOGIES, INC.
INDEX
 
 
Page No.
   
3
 
           
     
   
     
 
   
     

 
Page | 1

 
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
   
As of September 30,
   
As of June 30,
 
ASSETS
 
2011
   
2011
 
Current assets:
           
Cash and cash equivalents
  $ 3,123,686     $ 4,172,802  
Restricted Cash
    2,700,000       5,700,000  
Accounts receivable, net
    13,864,226       15,062,503  
Revenues in excess of billings
    7,038,291       7,601,230  
Other current assets
    2,081,864       2,053,904  
Total current assets
    28,808,066       34,590,439  
Property and equipment, net
    16,469,748       16,014,461  
Intangibles:
               
Product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, net
    26,364,728        25,437,479  
Customer lists, net
    147,067       164,715  
Goodwill
    9,439,285       9,439,285  
Total intangibles
    35,951,080       35,041,480  
Total assets
  $ 81,228,895     $ 85,646,380  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,069,230     $ 4,730,027  
Current portion of loans and obligations under capitalized leases
    4,092,747       7,062,535  
Other payables - acquisitions
    103,226       103,226  
Unearned revenues
    2,475,387       2,653,460  
Convertible notes payable , current portion
    -       2,745,524  
Loans payable, bank
    2,269,632       2,319,378  
Common stock to be issued
    206,625       400,700  
Total current liabilities
    13,216,848       20,014,850  
Obligations under capitalized leases, less current maturities
    257,711       285,472  
Convertible notes payable less current maturities
    3,587,464       -  
Long term loans; less current maturities
    425,556       434,884  
Total liabilities
    17,487,579       20,735,206  
Commitments and contingencies
               
Stockholders' equity:
               
Common stock, $.001 par value; 95,000,000 shares authorized; 56,076,355
   & 55,531,855 issued and outstanding as of September 30, 2011 and June 30, 2011
    56,077        55,532  
Additional paid-in-capital
    98,844,487       97,886,492  
Treasury stock
    (396,008 )     (396,008 )
Accumulated deficit
    (35,589,651 )     (34,130,944 )
Stock subscription receivable
    (2,031,210 )     (2,198,460 )
Other comprehensive loss
    (9,362,762 )     (8,805,922 )
Total NetSol shareholders' equity
    51,520,932       52,410,690  
Non-controlling interest
    12,220,383       12,500,484  
Total stockholders' equity
    63,741,315       64,911,174  
Total liabilities and stockholders' equity
  $ 81,228,895     $ 85,646,380  
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
Page | 2

 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
For the Three Months
 
   
Ended September 30,
 
   
2011
   
2010
 
Net Revenues:
           
License fees
  $ 1,075,850     $ 3,477,793  
Maintenance fees
    2,037,206       1,669,919  
Services
    3,115,652       3,255,360  
Total revenues
    6,228,708       8,403,071  
Cost of revenues:
               
 Salaries and consultants
    2,383,411       1,986,888  
 Travel
    285,673       231,612  
 Repairs and maintenance
    74,194       57,058  
 Insurance
    35,868       30,992  
 Depreciation and amortization
    789,105       630,941  
 Other
    516,409       243,138  
Total cost of revenues
    4,084,660       3,180,629  
Gross profit
    2,144,048       5,222,442  
Operating expenses:
               
Selling and marketing
    700,281       483,970  
Depreciation and amortization
    191,674       266,443  
Bad debt expense
    192,250       254,632  
Salaries and wages
    806,564       920,264  
Professional services, including non-cash compensation
    186,749       139,085  
General and adminstrative
    892,972       1,132,519  
Total operating expenses
    2,970,490       3,196,913  
Income (loss) from operations
    (826,442 )     2,025,530  
Other income and (expenses)
               
Loss on sale of assets
    (1,641 )     (14,794 )
Interest expense
    (251,430 )     (315,644 )
Interest income
    32,805       84,461  
Gain (loss) on foreign currency exchange transactions
    (120,906 )     1,073,894  
Share of net loss from equity investment
    (100,000 )     (70,438 )
Beneficial conversion feature
    (21,583 )     (177,411 )
Other expense
    (7,718 )     (55,554 )
Total other income (expenses)
    (470,474 )     524,515  
Net income (loss) before  income taxes
    (1,296,916 )     2,550,045  
Income taxes
    (24,534 )     (8,556 )
Net income (loss) after tax
    (1,321,450 )     2,541,489  
Non-controlling interest
    (137,258 )     (974,508 )
Net income (loss) attibutable to NetSol
    (1,458,708 )     1,566,980  
                 
Other comprehensive loss:
               
Translation adjustment
    (974,199 )     (475,902 )
Comprehensive income (loss)
    (2,432,907 )     1,091,078  
Comprehensive loss attributable to non controlling interest
    (417,360 )     (206,888 )
Comprehensive income (loss) attributable to NetSol
  $ (2,015,547 )   $ 1,297,966  
                 
Net income (loss) per share:
               
Basic
  $ (0.03 )   $ 0.04  
Diluted
  $ (0.03 )   $ 0.04  
Weighted average number of shares outstanding
               
Basic
    55,883,268       39,544,096  
Diluted
    55,883,268       43,251,519  
                 
Amounts attributable to NetSol common shareholders
               
Net income (loss)
  $ (1,458,708 )   $ 1,566,980  
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
Page | 3

 
CONDENSED CONSOLIDATED STATMENTS OF CASH FLOW
(UNAUDITED)
 

   
For the Three Months
 
   
Ended September 30,
 
   
2011
   
2010
 
 Cash flows from operating activities:
           
 Net (loss) income
  $ (1,321,451 )   $ 2,541,489  
 Adjustments to reconcile net income
         to net cash provided by operating activities:
               
 Depreciation and amortization
    980,778       897,383  
 Provision for bad debts
    192,250       254,632  
 Share of net loss from investment under equity method
    100,000       70,438  
 Loss on sale of assets
    1,641       14,794  
 Stock issued for interest on notes payable
    -       14,419  
 Stock issued for services
    118,300       383,950  
 Fair market value of warrants and stock options granted
    59,852       53,594  
 Beneficial conversion feature
    21,583       177,411  
 Changes in operating assets and liabilities:
               
 Increase/ decrease in accounts receivable
    1,658,236       (2,708,406 )
 Increase/ decrease in other current assets
    169,558       (1,453,577 )
 Increase/ decrease in accounts payable and accrued expenses
    (1,096,849 )     (359,946 )
 Net cash provided by (used in) operating activities
    883,900       (113,820 )
 Cash flows from investing activities:
               
 Purchases of property and equipment
    (1,427,884 )     (682,676 )
 Sales of property and equipment
    2,591       4,550  
 Purchase of non-controlling interest in subsidiary
    -       (180,000 )
 Short-term investments held for sale
    -       (254,632 )
 Investment under equity method
    (100,000 )     -  
 Increase in intangible assets
    (1,768,681 )     (1,574,143 )
 Net cash used in investing activities
    (3,293,974 )     (2,686,900 )
 Cash flows from financing activities:
               
 Proceeds from sale of common stock
    -       2,021,139  
 Proceeds from the exercise of stock options and warrants
    140,000       186,875  
 Proceeds from convertible notes payable
    4,000,000       -  
 Payments on convertible notes payable
    (2,758,330 )     -  
 Restricted cash
    3,000,000       -  
 Bank overdraft
    40,201       90,944  
 Proceeds from bank loans
    1,731,634       1,064,554  
 Payments on bank loans
    141,852       (45,427 )
 Payments on capital lease obligations & loans - net
    (4,885,224 )     (2,365,852 )
 Net cash provided by financing activities
    1,410,133       952,233  
 Effect of exchange rate changes in cash
    (49,174 )     (72,246 )
 Net increase in cash and cash equivalents
    (1,049,115 )     (1,920,733 )
 Cash and cash equivalents, beginning of year
    4,172,802       4,075,546  
 Cash and cash equivalents, end of year
  $ 3,123,686     $ 2,154,813  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
Page | 4

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
 

   
For the Three Months
 
   
Ended September 30,
 
   
2011
   
2010
 
 SUPPLEMENTAL DISCLOSURES:
           
 Cash paid during the period for:
           
 Interest
  $ 464,156     $ 429,289  
 Taxes
  $ (6,810 )   $ 659  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued for the conversion of Notes Payable
  $ -     $ 1,900,598  

See accompanying notes to the unaudited condensed consolidated financial statements.

 
Page | 5

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
 
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile finance and leasing, banking, healthcare, and financial services industries worldwide.  The Company also provides system integration, consulting, IT products and services in exchange for fees from customers.
 
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein.  It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.  The Company follows the same accounting policies in preparation of interim reports.  Results of operations for the interim periods are not indicative of annual results.
 
The accompanying consolidated financial statements include the accounts of NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows:
 
Wholly-owned Subsidiaries
NetSol Technologies North America, Inc. (“NTNA”)
NetSol Technologies Limited (“NetSol UK”)
NetSol Connect (Private), Ltd. (“Connect)
NetSol-Abraxas Australia Pty Ltd. (“Abraxas”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
Vroozi, Inc. ("Vroozi")
 
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 – 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.
 
Accounting for Convertible Debt with Warrants:
 
The Company accounts for proceeds from convertible debt instruments issued together with warrants by allocating such proceeds between debt and equity components based on their relative fair values, along with a corresponding debt discount. Debt discounts are amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense.
 
 
Page | 6

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
 
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity 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 value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2011-08 on our consolidated financial statements.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for us in our first quarter of fiscal 2013 and should be applied retrospectively. We are currently evaluating the impact of our pending adoption of ASU 2011-05 on our consolidated financial statements.
 
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)—Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements (as defined in Note 3 below). ASU 2011-04 is effective for us in our fourth quarter of fiscal 2012 and should be applied prospectively. We are currently evaluating the impact of our pending adoption of ASU 2011-04 on our consolidated financial statements.
 
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 three months ended September 30, 2011
 
Net Loss
   
Shares
   
Per Share
 
 Basic loss per share:
  $ (1,458,708 )     55,883,268     $ (0.03 )
 Dividend to preferred shareholders
    -                  
Net income available to common shareholders
                 
 Effect of dilutive securities *
                       
 Stock options
                       
 Warrants
                       
 Diluted loss per share
  $ (1,458,708 )     55,883,268     $ (0.03 )
                         
                         
 For the three months ended September 30, 2010   Net Income     Shares     Per Share  
 Basic income per share:
  $ 1,566,980       39,544,096     $ 0.04  
 Dividend to preferred shareholders
    -             $ -  
Net income available to common shareholders
                 
 Effect of dilutive securities
                       
 Stock options
            1,159,964          
 Warrants
            2,547,459          
 Diluted income per share
  $ 1,566,980       43,251,519     $ 0.04  
                         
 
 *As there is a loss, these securities are anti-dilutive. The basic and diluted loss per share is the same for the three months ended September 30, 2011
 
Page | 7

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

 
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY:
 
The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, and NetSol Innovation use Pakistan Rupees; NTPK Thailand uses Thai Baht and Abraxas uses the Australian dollar as the functional currencies.  NetSol Technologies, Inc., and subsidiaries, NTNA and Vroozi, Inc., use the U.S. dollar as the functional currency.  Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period.  Accumulated translation losses of $9,362,762 and $8,805,922 as of September 30, 2011 and June 30, 2011, respectively, are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet. During the three months ended September 30, 2011 and 2010, comprehensive loss in the consolidated statements of operations included translation loss of $556,839 and $269,014 respectively.
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consisted of the following:
 
   
As of September 30
   
As of June 30
 
   
2011
   
2011
 
             
 Prepaid Expenses
  $ 213,399     $ 245,194  
 Advance Income Tax
    686,966       726,979  
 Employee Advances
    36,415       53,404  
 Security Deposits
    163,124       161,263  
 Tender Money Receivable
    123,961       133,166  
 Other Receivables
    502,535       535,597  
 Other Assets
    355,464       198,301  
     Total
  $ 2,081,864     $ 2,053,904  
 
NOTE 7 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consisted of the following:
 
   
As of September 30
   
As of June 30
 
   
2011
   
2011
 
             
Office furniture and equipment
  $ 1,162,054     $ 1,179,993  
Computer equipment
    13,937,589       13,463,560  
Assets under capital leases
    2,075,151       2,024,282  
Building
    2,287,618       2,337,758  
Land
    2,191,991       2,240,036  
Capital work in progress
    3,277,018       2,659,750  
Autos
    643,246       794,617  
Improvements
    160,013       162,896  
Subtotal
    25,734,679       24,862,892  
Accumulated depreciation
    (9,264,932 )     (8,848,431 )
    $ 16,469,748     $ 16,014,461  
 
For the three months ended September 30, 2011 and 2010, depreciation expense totaled $636,568 and $369,565 respectively.  Of these amounts, $462,543 and $256,484 respectively, are reflected as part of cost of goods sold.
 
The Company’s capital work in progress consists of ongoing enhancements to its facilities and infrastructure as necessary to meet the Company’s expected long-term growth needs. The Company recorded capitalized interest of $77,627 and $278,308as of September 30, 2011 and June 30, 2011, respectively.
 
 
Page | 8

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

 
 
NOTE 8 - INTANGIBLE ASSETS:
 
Intangible assets consisted of the following:
 
   
Product Licenses
   
Customer Lists
   
Total
 
 Intangible assets - June 30, 2010 - cost
  $ 29,960,803     $ 5,804,057     $ 35,764,860  
 Additions
    8,159,168       -       8,159,168  
 Effect of translation adjustment
    106,429       -       106,429  
 Accumulated amortization
    (12,788,921 )     (5,639,341 )     (18,428,262 )
     Net balance - June 30, 2011
  $ 25,437,479     $ 164,715     $ 25,602,194  
                         
 Intangible assets - June 30, 2011 - cost
  $ 38,226,400     $ 5,804,057     $ 44,030,457  
 Additions
    1,788,199       -       1,788,199  
 Effect of translation adjustment
    (621,424 )     -       (621,424 )
 Accumulated amortization
    (13,028,447 )     (5,656,990 )     (18,685,436 )
     Net balance - September 30, 2011
  $ 26,364,728     $ 147,067     $ 26,511,795  
                         
                         
 Weighted average amortization period
    8.02       5.00       7.63  
                         
 Amortization expense for:
                       
 Three months ended September 30, 2011
  $ 326,562     $ 17,648     $ 344,210  
 Three months ended September 30, 2010
  $ 402,353     $ 125,465     $ 527,818  
 
(A) Product Licenses
 
Product licenses include original license issue, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses included unamortized software development and enhancement costs of $20,239,681.
 
(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 annual deferred consideration installment payments were determined to be zero.
 
(C) Amortization
 
Amortization expense of intangible assets over the next five years is estimated to be as follows:
 
   
FISCAL YEAR ENDING
       
 Asset
 
9/30/12
   
9/30/13
   
9/30/14
   
9/30/15
   
9/30/16
   
Thereafter
   
TOTAL
 
 Product Licences
  $ 1,498,017     $ 1,367,778     $ 1,237,911     $ 848,608     $ 848,608     $ 20,563,806     $ 26,364,728  
 Customer Lists
    70,592       70,592       5,883       -       -       -       147,067  
    $ 1,568,609     $ 1,438,370     $ 1,243,794     $ 848,608     $ 848,608     $ 20,563,806     $ 26,511,795  

 
Page | 9

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


NOTE 9 – GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period businesses combinations. Goodwill was comprised of the following amounts:
 
   
As of September 30,
   
As of June 30,
 
   
2011
   
2011
 
 Asia Pacific
  $ 1,303,372     $ 1,303,372  
 Europe
    3,471,813       3,471,813  
 North America
    4,664,100       4,664,100  
     Total
  $ 9,439,285     $ 9,439,285  
 
There was no impairment of the goodwill for the periods ended September 30, 2011 and June 30, 2011.
 
NOTE 10 – INVESTMENT UNDER EQUITY METHOD
 
On April 10, 2009, the Company entered into an agreement to form a joint venture with the Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint venture entity, Atheeb NetSol Saudi Company Ltd., is a company organized under the laws of the Kingdom of Saudi Arabia. The venture was formed with an initial capital contribution of $268,000 by the Company and $266,930 by Atheeb with a profit sharing ratio of 50.1:49.9, respectively. The final formation of the company was completed on March 7, 2010. The joint venture was accounted for as an equity method investment as the Company has not established control over the affairs of Atheeb NetSol Saudi Company Ltd. due to its minority representation on the board of directors.
 
The Company's investment in equity for the period ended September 30, 2011 was as follows:
 
       
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
  $ 0  
         
Investment during the period
    100,000  
Net loss for the three months ended September 30, 2011
    (134,075 )
NetSol's share (50.1%)
    (67,172 )
Unabsorbed losses brought forward
    (51,731 )
Total loss
    (118,903 )
Loss adjusted against investment
    (100,000 )
Net book value at September 30, 2011
  $ 0  

 
Page | 10

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


 
 
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consisted of the following:
 
   
As of September 30
   
As of June 30
 
   
2011
   
2011
 
             
 Accounts Payable
  $ 1,113,114     $ 1,348,453  
 Accrued Liabilities
    2,200,197       2,364,233  
 Accrued Payroll
    14,289       148,565  
 Accrued Payroll Taxes
    348,987       216,485  
 Interest Payable
    118,560       380,808  
 Deferred Revenues
    32,066       32,066  
 Taxes Payable
    242,017       239,417  
     Total
  $ 4,069,230     $ 4,730,027  
 
NOTE 12 - DEBTS
 
(A) LOANS AND LEASES PAYABLE
 
Notes payable consisted of the following:
 
   
As of September 30
   
Current
   
Long-Term
 
Name
 
2011
   
Maturities
   
Maturities
 
                   
Habib Bank Line of Credit
  $ 2,583,594       2,583,594       -  
Bank Overdraft Facility
    288,475       288,475       -  
Term Finance Facility
    709,260       283,704       425,556  
Subsidiary Capital Leases
    1,194,686       936,975       257,711  
Lease abandonment liability
    -       -       -  
    $ 4,776,014     $ 4,092,747     $ 683,267  
                         
                         
   
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 0.49% as of September 30, 2011 and June 30, 2011. Interest paid during the period-ended September 30, 2011 and 2010 was nominal.
 
In April 2008, the Company entered into an agreement with Habib American Bank to secure a line of credit to be collateralized by Certificates of Deposit held at the bank. The interest rate on this line of credit is variable and was 2% as of September 30, 2011 and June 30, 2011, respectively. Interest expense for the three months ended September 30, 2011 and 2010 was $20,114 and $40,123, respectively. During the quarter ended September 30, 2011, the company redeemed certificate of deposits worth $3 million. Consequently, the line of credit was also reduced to $2,583,594.
 
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, approximately $312,560. The annual interest rate is 3.25% over the bank’s sterling base rate, which was 5.00% as of September 30, 2011 and June 30, 2011, respectively.
 
 
Page | 11

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


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. 200,000,000 or approximately $2,269,632 (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 $851,112 of which $425,556 was shown as long term liabilities and the remainder of $425,556 as current maturity. As of the three months ended September 30, 2011, the Company paid back another installment of Rs. 12,500,000 reducing the outstanding principal amount to Rs. 62,500,000 or approximately $709,260 of which $425,556 is shown as long term liabilities and the remainder of $283,704 as current maturity. Interest expense for the three months ended September 30, 2011 and 2010 was $35,091 and $44,170, respectively which was capitalized by the company.
 
The Company leases various fixed assets under capital lease arrangements expiring in various years through 2015. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the three months ended September 30, 2011 and 2010.
 
Following is the estimated aggregate minimum future lease payments under capital leases:
 
   
As of September 30
   
As of June 30
 
   
2011
   
2011
 
Minimum Lease Payments
           
Due FYE 9/30/11
  $ -     $ 1,010,836  
Due FYE 9/30/12
    995,967       209,260  
Due FYE 9/30/13
    208,513       115,346  
Due FYE 9/30/14
    80,910       -  
Due FYE 9/30/15
    -       -  
Total Minimum Lease Payments
    1,285,389       1,335,442  
Interest Expense relating to future periods
    (90,703 )     (102,856 )
Present Value of minimum lease payments
    1,194,686       1,232,585  
Less:  Current portion
    (936,975 )     (947,113 )
Non-Current portion
  $ 257,711     $ 285,472  

Following is a summary of fixed assets held under capital leases:
 
   
As of September 30
   
As of June 30
 
   
2011
   
2011
 
Computer Equipment and Software
  $ 552,905     $ 518,911  
Furniture and Fixtures
    767,579       769,106  
Vehicles
    452,451       434,049  
Building Equipment
    302,216       302,216  
Total
    2,075,151       2,024,282  
Less:  Accumulated Depreciation
    (905,411 )     (807,562 )
Net
  $ 1,169,740     $ 1,216,720  
 
Interest expense for the three months ended September 30, 2011 and 2010 was $18,688 and $8,790, respectively.
 
 
Page | 12

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

(B) LOANS PAYABLE- BANK
 
The Company’s subsidiary, NetSol PK, has a loan with a bank, secured by the company’s assets. This loan consisted of the following:
 

For the year ended September 30, 2011:
       
TYPE OF
MATURITY
 
INTEREST
   
BALANCE
 
LOAN
DATE
 
RATE
   
USD
 
               
Export Refinance
Every 6 months
    11.00 %   $ 2,269,632  
Total
            $ 2,269,632  
                   
                   
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 three months ended September 30, 2011 and 2010 was $19,776 and $51,812, respectively.
 
(C) OTHER PAYABLE – ACQUISITION
 
On June 30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California corporation (subsequently renamed as NetSol Technologies North America, Inc.) The total purchase price was $7,080,385, including $3,784,635 of cash and 1,712,332 shares of the Company’s common stock. Of the total purchase price, the accompanying consolidated financial statements include certain amounts payable to McCue shareholders that have not been located as of the date of this report.
 
As of the period-ended September 30, 2011 and June 30, 2011, the remaining cash due of $103,226 is shown as “Other Payable – Acquisition” and the remaining stock to be issued of 46,704 shares at an average price of $1.89 is shown in “Shares to be issued” in the accompanying consolidated financial statements. Amounts payable represent the remaining McCue shareholders that have not been located as of the date of this report.
 

 
Page | 13

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


NOTE 13 – CONVERTIBLE NOTES PAYABLE
 
The net outstanding balance of convertible notes as of September 30, 2011 and June 30, 2011 is as follows:
 
                     
                     
Issue Date
 
Balance net of BCF @
 9/30/11
   
Current
 Portion
   
Long Term
 
 Maturity
Date
                     
Sep-11
    3,587,464       -       3,587,464  
Sep-13
Total
    3,587,464       -       3,587,464    
                           
                           
Issue Date
 
Balance net of BCF @
6/30/11
   
Current
Portion
   
Long Term
 
 Maturity
Date
                           
Jul-08
    2,745,524       2,745,524       -  
Jul-11
Total
    2,745,524       2,745,524       -    

For the periods ended September 30, 2011 and June 30, 2011, total interest accrued on convertible notes was $15,583 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 as of June 30, 2010.
 
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 three months ended September 30, 2011 the remaining balance of 2008 Note was fully paid along with interest due thereon out of the proceeds of 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 proceeds of Convertible 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 | 14

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


NOTE 14 - STOCKHOLDERS’ EQUITY:
 
(A)  
Shares Issued for Services to Related Parties
 
During the periods ended September 30, 2011 and June 30, 2011, the Company issued a total of 22,500 and 442,500 shares of restricted common stock for services rendered by the officers of the company. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $37,575 and $528,900 respectively. The expense of $37,575 was recorded in the year ended June 30, 2011.
 
During the periods ended September 30, 2011 and June 30, 2011, the Company issued a total of 80,000 and 90,000 shares of restricted common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. The issuances were approved by both the compensation committee and the board of directors. These shares were valued at the fair market value of $133,600 and $135,300 respectively. The expense of $133,600 was recorded in the year ended June 30, 2011.
 
During the periods ended September 30, 2011 and June 30, 2011, the Company issued a total of nil and 139,881 shares of its common stock to employees as required according to the terms of their employment agreements valued at nil and $33,300, respectively.
 
(B)  
Share-Based Payment Transactions
 
During the periods ended September 30, 2011 and June 30, 2011, the Company issued a total of 12,000 and 337,857 shares of its common stock for provision of services to unrelated consultants valued at $16,200 and $152,543, respectively.
 
(C)  
 Share Issued Against Cash Payments
 
During the periods ended September 30, 2011 and June 30, 2011, the Company issued a total of nil and 5,106,756 shares of its common stock against cash valued of nil and $4,106,250, respectively.
 
 
Page | 15

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


NOTE 15 - 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
    330,000     $ 0.50          
Exercised
    (430,000 )   $ 0.50 to $1.25          
Expired / Cancelled
                       
Outstanding and exercisable, September 30, 2011
    6,819,317     $ 0.30 to $5.00     $ (113,682 )
                         
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          
Outstanding and exercisable, June 30, 2011
    178,230     $ 1.65 to $3.70     $ 219,119  
Granted
    1,408,451     $ 0.895          
Exercised
                       
Expired
                       
Outstanding and exercisable, September 30, 2011
    1,586,681     $ 0.31 to $3.70     $ (417,907 )

The average life remaining on the options and warrants as of September 30, 2011 was 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     1,406,000       7.24       0.65  
$ 1.00 - $1.99     1,933,317       3.89       1.89  
$ 2.00 - $2.99     2,830,000       3.58       2.70  
$ 3.00 - $5.00     650,000       2.29       4.38  
Totals
    6,819,317       4.30       2.21  
                           
WARRANTS:
                       
$ 0.31 - $1.99     1,574,181       4.76       0.85  
$ 3.00 - $5.00     12,500       0.03       3.70  
                           
Totals
    1,586,681       4.72       0.87  
 
All options and warrants granted were vested and exercisable as of September 30, 2011.
 
 
Page | 16

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

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

 
During the quarter ended September 30, 2010, the Company granted 242,000 options to seven employees with an exercise price of $0.65 per share and an expiration date of 4 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $43,441 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate  1.81%    
Expected life  4 months    
Expected volatility    90%    

 
During the quarter ended December 31, 2010, the Company granted 15,000 options to one employee with an exercise price of $0.65 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $11,717 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate  1.65%    
Expected life  1 month    
Expected volatility   99%    
 
Page | 17

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

During the quarter ended December 31, 2010, the Company granted 4,000 options to one employee with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $1,040 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
 
Risk-free interest rate  1.65%    
Expected life  1 month    
Expected volatility   99%    

During the quarter ended March 31, 2011, the Company granted 250,000 options to three employees with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $102,154 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
 
Risk-free interest rate  2.16%    
Expected life  1 month    
Expected volatility   99%    

During the quarter ended June 30, 2011, the Company granted 100,000 options to three employees with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $47,338 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
 
Risk-free interest rate  2.4%    
Expected life  1 month    
Expected volatility   99%    
 
During the quarter ended June 30, 2011, the Company granted 100,000 options to three employees with an exercise price of $1.25 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $17,915 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   99%    

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%    
 
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 fair market value of these warrants is calculated $446,480 by using Black Scholes value method. Using this value, the proceeds of Convertible note were assigned between warrants and convertible note per ASC 470-20. The company recorded $401,648 capitalized financing cost which will be amortized over the life of the note.
 
 
Page | 18

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

(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.
 
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 may be based on performance criteria and/or continued service with our Company. A participant who is granted a "stock appreciation right" under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the Committee (but in no event less than the fair market value of the stock on the date of grant). Finally, the Committee may make "restricted stock" awards under the 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 September 30, 2011, 19,500 shares have been issued under this plan to non- officers employees.
 
 
Page | 19

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


NOTE 16 – SEGMENT AND GEOGRAPHIC AREAS
 
The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific.  Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services.  Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location.  We account for intracompany sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation.  The following table presents a summary of operating information and certain balance sheet information for the three months ended September 30:
 
   
2011
   
2010
 
 Revenues from unaffiliated customers:
           
 North America
  $ 909,069     $ 1,242,982  
 Europe
    916,618       2,089,979  
 Asia - Pacific
    4,403,020       5,070,110  
 Consolidated
  $ 6,228,708     $ 8,403,071  
                 
 Operating income (loss):
               
 Corporate headquarters
  $ (905,144 )   $ (1,056,548 )
 North America
    28,714       321,093  
 Europe
    (128,395 )     1,079,667  
 Asia - Pacific
    178,382       1,681,317  
 Consolidated
  $ (826,442 )   $ 2,025,530  
                 
Net income (loss) after taxes and before minority interest:
         
 Corporate headquarters
  $ (1,208,576 )   $ (1,481,129 )
 North America
    28,526       324,250  
 Europe
    (58,419 )     1,016,852  
 Asia - Pacific
    (82,980 )     2,681,517  
 Consolidated
  $ (1,321,450 )   $ 2,541,489  
                 
 Identifiable assets:
               
 Corporate headquarters
  $ 14,310,339     $ 17,043,137  
 North America
    1,856,621       2,278,499  
 Europe
    4,184,885       4,783,665  
 Asia - Pacific
    60,877,049       52,068,480  
 Consolidated
  $ 81,228,895     $ 76,173,781  
                 
 Depreciation and amortization:
               
 Corporate headquarters
  $ 17,705     $ 153,724  
 North America
    75,434       132,077  
 Europe
    121,448       179,440  
 Asia - Pacific
    766,191       432,141  
 Consolidated
  $ 980,778     $ 897,383  
                 
 Capital expenditures:
               
 Corporate headquarters
  $ -     $ -  
 North America
    1,444       3,405  
 Europe
    -       -  
 Asia - Pacific
    1,426,440       679,271  
 Consolidated
  $ 1,427,884     $ 682,676  

 
Page | 20

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


Net revenues by our various products and services provided for the three-month period ended September 30, were as follows:
 
   
2011
   
2010
 
    $ 1,075,850     $ 3,477,793  
      2,037,206       1,669,919  
      3,115,652       3,255,360  
 Total
  $ 6,228,708     $ 8,403,071  

NOTE 17 – 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
September 30, 2011
 
             
NetSol PK
    39.48 %   $ 11,097,960  
NetSol-Innovation
    49.90 %     1,122,423  
Total
          $ 12,220,383  
                 
 
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 (“NETSOL PK”)
 
For the three months ended September 30, 2011 and 2010, NetSol Technologies Ltd. (“NetSol PK”) had net loss of ($99,918) and net income of $2,031,123. The related non-controlling interest was ($39,448) and $853,884, respectively.
 
 (B) NETSOL INNOVATION (PRIVATE) LIMITED (“NETSOL INNOVATION”)
 
For the three months ended September 30, 2011 and 2010, NetSol Innovation (Private) Limited (“NetSol Innovation”) had net income of $354,119 and $241,731. The related non-controlling interest was $176,705 and $120,624, respectively.
 
NOTE 18 – INCOME TAXES
 
Our effective tax rates were approximately 1.89% and 0.34% for the three months ended September 30, 2011 and 2010, 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.
 
 
Page | 21

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


NOTE 19 - SUBSEQUENT EVENTS
 
On October 13, 2011, the Company issued 187,500 shares to its directors against compensation for which the expenses have already been recorded in shares to be issued as at September 30, 2011.
 
On October 13, 2011, the Company issued 40,000 shares to its independent directors against compensation for which the expenses have already been recorded in shares to be issued as at September 30, 2011.
 
On October 13, 2011, the Company issued 200,000 shares to its employee against exercise of options.
 
On October 20, 2011, NetSol Technologies Europe, Ltd. (“NTE”) entered into a joint venture agreement with Investec Asset Finance, PLC (“Investec’) to form Virtual Lease Services Holdings Limited, a company formed under the laws of England and Wales (“VLS Holdings”) for the purpose of acquiring Virtual Lease Services, Limited, a company formed under the laws of England and Wales (“VLS”).  In the stock purchase agreement by and between the parties, VLS Holdings acquired 100% of the issued and outstanding shares of common stock of VLS in exchange for cash in the amount of £1,293,238.78.   Under the terms of the VLS Holdings shareholders’ agreement, NTE shall hold 51% of equity of VLS Holdings and Investec shall own 49% of VLS Holdings.
 
On October 24, 2011, the company filed a S3- $40 MN universal shelf registration statement with SEC.
 
 
Page | 22

 
NETSOL TECHNOLOGIES, INC.
 

Item 2.   Management's Discussion and Analysis Or Plan Of Operation
 
The following discussion is intended to assist in an understanding of the Company's financial position and results of operations for the quarter ending September 30, 2011.
 
Forward-Looking Information
 
This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management.  When used in this report, the words  "anticipate",  "believe",  "estimate", "expect",  "intend",  "plan", and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements.  These statements reflect management's current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.  The Company's realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company's technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel,  or the adoption of  technology  standards which are different  from  technologies  around  which the  Company's  business ultimately is built. The Company does not intend to update these forward-looking statements.
 
NetSol Technologies, Inc. (NasdaqCM: NTWK) (NasdaqDubai: 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; and Bangkok, Thailand and Lahore, Pakistan for Asia Pacific.  The Company continues to maintain services, product 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 lowest cost blended rates from its design centers and campuses located around the world, but also with the guarantee of localized program and project management while minimizing any implementation risk associated with a single service center.  Our BestShoring® approach, which we consider a unique and cost effective global development model, is leading the way, providing value added solutions for Global Business Services™ through a win-win partnership, rather than the traditional outsourced vendor framework.  Our focus on “Solutions” serves to ensure the most favorable pricing while delivering in-depth domain experience.  NetSol currently has locations in Bangkok, Beijing, Lahore, the London metropolitan area, the San Francisco Bay Area, and Adelaide to best serve its clients and partners worldwide.  This provides NetSol customers with the optimum balance of subject matter expertise, in-depth domain experience, and cost effective labor, all merged into a scalable solution.  In this way, “BestShoring® delivers BestSolution™”.

Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol’s expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles.  The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT Consulting & Services; NetSol Defense Division; Business Intelligence, Information Security, Independent System Review, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.

 
Page | 23

 
NETSOL TECHNOLOGIES, INC.
 
In addition to services, our product offerings are fashioned to provide a Best Product for Best Solution model.  Our offerings include our flagship global solution, NetSol Financial Suite (NFS™). NFS™, a robust suite of five software applications, is an end-to-end solution for the lease 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 will be 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 On Demand 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 buy-side 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.

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 offices on an as-needed basis.
The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the quarter ended September 30, 2011.  It should be read together with our consolidated financial statements and related notes included herein.
 
Page | 24

 
NETSOL TECHNOLOGIES, INC.
 
 
 A few of NetSol’s major successes achieved during the quarter ended September 30, 2011 were:
 
•  
Further expansion in the China market by adding new customers.
 
•  
Formalized the Joint Venture Agreement with  Brasilinvest Group to launch a joint venture in Brazil.Formed an e-commerce division, Vroozi Inc., to provide a dedicated sales and delivery channel for the company’s existing smartOCI™ product line, as well as developing the next generation of e-commerce and search engine technologies. Vroozi Inc. formed this past quarter, is a wholly owned subsidiary of NetSol Technologies, Inc.Signed an agreement with a major U.S. aerospace defense contractor to implement NetSol’s smartOCI™ search engine software in its SAP e-Procurement environment.
 
•  
Signed an agreement with a major U.S. chipmaker to implement smartOCI™ search engine in its SAP e-Procurement environment.
 
•  
Won a major contract in the area of ‘Information Security’ with a leading telecom company in Pakistan.NetSol Innovation, a majority owned subsidiary, recently expanded its services to Australia, Europe and North America.  In turn, the demand of NetSol PK resources has increased to support the growing development and programming of our JV partner.
 
•  
Signed a new contract to supply LeaseSoft to a leading independent UK leasing and asset finance company. A major European Bank went live with the LeaseSoft portal application.  The deployment included full integration with a Europe-wide credit search agency to provide enhanced data accuracy and better informed credit decisions.
 
•  
A major European auto finance captive and one of the Company’s longest running client went live with NFS in India. This was delivered and implemented by NetSol Thai team in Bangkok.
 
•  
Restructured global operational units by streamlining the regional delivery capabilities and sales organization Consolidated from three global regions to two regions with Region 1 the Americas and Europe and Region 2 Asia Pacific and the Middle East.
 
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) raise funds for continued operations and growth; (c) make a major entry in the US and Latin American markets and, (d) continue to streamline sales and marketing efforts in the Asia Pacific region, Europe, China and the Middle East, Japan and Australia. However, management's outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.
 
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.
 
●        Result in enhanced organic growth by next generation of NFS solutions, SAAS model, e-commerce entry and leveraging new markets based on joint ventures.
 
●        Pursue the most strategic and synergistic acquisitions and new alliances based on our latest products and services.
 
●        Enhance delivery and service capabilities in China, Thailand, USA and UK.
 
The plan contemplates the following enhanced activities and initiatives will accomplish these goals:

o  
The remarkable success and demand of NFS™ in China has led to long term planning to expand in the Chinese market. The overall steady economic growth in China and historic transformation of the auto sector (China outsold cars against the United States in number of units in 2009) combined with growing consumer spending, warrants hiring additional local Chinese staff and infrastructure improvement. Management is poised to create a ‘proximity development center’ or PDC and clients support team to better serve our growing customers base. 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.

 
Page | 25

 
NETSOL TECHNOLOGIES, INC.
 
o  
NetSol’s Beijing office more than doubled its office space on March 1, 2011; new local Chinese staff has been added and additional hiring continues.  The process of forming a new wholly owned subsidiary by the Company, as a Wholly Owned Foreign Enterprise under Chinese laws, is in progress and is expected to be completed in the current calendar year. NetSol is positioning China to become a dominant market for lending enterprise solutions for captive multinationals and local Chinese companies, including equipment finance, big ticket leasing markets and the banking industry. In the lease and finance domain NetSol can claim the de facto leadership position in the rapidly growing Chinese market.

o  
Thailand has emerged as a new market for banking and auto finance. NetSol has formalized its presence in Bangkok by establishing a wholly owned subsidiary, NetSol Thai. The office space in Bangkok has been enhanced with new hires of local and international staff to address and support a very rapidly growing market. The pipeline of new customers is growing from the markets in Japan, South Korea, Australia, India and other regional markets. These markets will be serviced and supported from the Thailand office with strong sales and client support team. The Bangkok facility is intended to become the prime location for delivery and implementation for global customers and partners particularly in Asia Pacific.

o  
To date, few US-based fortune 500 captive auto finance companies have shown serious interest in NFS™.   We expect, however, to achieve stronger results through strengthening NetSol’s North American operation by augmenting the service levels of the local technical team with effective integration of the NetSol PK center of excellence, resulting in a seamless integration of core project delivery and global support teams. Recently we have noticed elongated decision making by C level executives for NFS solutions and this is primarily due to challenging economic times in developed markets and economies. However  NetSol is experiencing a growing interest in our next generation NFS solution which is positioned to go to market by late 2012 to expand our revenue base.

 
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 new IP, AKA, smartOCI™ has been demonstrated and presented to major fortune 500 companies in the US as an on-demand, catalogue content management system. The demand of e-procurement search engine seems robust and attractive. Several new license sales activities are in the pipeline 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.

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.

o  
The market of the Kingdom of Saudi Arabia is robust, rich and well capitalized, offering vast opportunities for NetSol through our joint venture. Recently, there have been a few new local IT contracts awarded but our vision is based on long term and high value projects in the defense, public, infrastructure and multinational auto captive markets. In order to be equal partners with a major conglomerate, Atheeb Group, a $2 billion group in revenue, we need to have the serious financial wherewithal and resources to bid on major projects exceeding $100 million each in value. Currently, the joint venture has 10 employees based in Riyadh with direct delivery and implementation support from NetSol PK. The long term plan is to expand staffing levels and provide financial capability to bid in major projects with Atheeb. We are noticing an impressive traction for NFS in the Kingdom markets and ANSCL teams are aggressively positioning NetSol overall offering in this robust and rich economy.

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.

o  
In order to maximize the market and product potential of our SAP and Ecommerce line, highlighted by our smartOCI™ product, we are spinning this line off into its own operational entity.  We believe this will better enhance product and market development by providing a dedicated management and fulfillment staff.


 
Page | 26

 
NETSOL TECHNOLOGIES, INC.

 
●           Growth – New Alliances, Mergers & Acquisition
 
o  Pursue new opportunities in emerging markets of Latin America - such as Brazil and Argentina - through local partners. These focused and niche markets for leasing and finance verticals represent new opportunities to introduce NFS™ and related service offerings.

o The markets in the US and UK offer a host of complementary companies with impressive client bases to expand the distribution channels for NFS™ and its new generation product line.  There are   established small sized Companies, with relatively low valuations, which can become part of NetSol on an affordable basis. It is important to seek out these companies in order to grow our customer base, revenue and net margins by leveraging our delivery and implementation model.

Funding and Investor Relations:
 
The fundamental challenge constantly facing the management is to achieve sustainable and impressive growth with a much stronger balance sheet. In light of global opportunities for organic growth and through alliances and M&A, there are certain opportunity costs for an inability to tap into these markets and areas. The biggest hurdle to win large value contracts and projects in every market is the weak cash position. Therefore, management has the responsibility to broaden its horizon by prudently exploring all available vehicles to adequately capitalize the Company. Smart new capital may be needed to make NetSol a much healthier company with an impressive balance sheet and sufficient size to   participate in and win major projects in key markets. To summarize,   the following areas would need injections of new capital either from internal operations or external injections, dependent, in part, on market conditions.
 
·  
Expansion in China, Thailand and other emerging markets, including Latin America.
 
·  
Expanding the North American operation to roll out NetSol new generation solutions and enter Cloud Computing Solutions.
 
·  
Diversify in Ecommerce space such as smartOCI™ search engine.
 
·  
Support of bigger IT related public and defense sectors projects in the Kingdom of Saudi Arabia with our joint venture partner.
 
·  
Capital Expenditures for our next generation products, technology and infrastructure.
 
·  
Improve credit ratings for our new big customers and win the confidence of new and existing investors.
 
·  
Hiring and training of programmers, engineers, sales and marketing.
 
Capital may be injected through:  continued exercises of options by the officers in cash; new debt and stock offerings with accredited investors who typically hold for long term investment as well as through a public offering based on market conditions and dynamics.  The board and management would be cognizant and prudent to make the best decision in the long term interest of shareholders.
 

Page | 27

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

Improving the Bottom Line:
 
Management believes that these measures will improve the bottom line on an ongoing basis:
 
·  
Improve pricing, sales volume and fee structures.
·  
Continue consolidation and reevaluating operating margins as ongoing activities.
·  
Streamline further cost of goods sold to improve gross margins to historical levels over 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.
·  
Cost efficient management of every operation and continue further consolidation to improve bottom line.
·  
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.
 
MATERIAL TRENDS AFFECTING NETSOL
 
Management has identified the following material trends affecting NetSol.
 
Positive trends:

·  
The global recession and consolidations have opened doors for low cost solution providers such as NetSol. The BestShoring® model of NetSol is a catalyst in today’s environment.

·  
Global economic pressures and the recession have shifted users of IT processes and technology to utilize both offshore and onshore solutions providers, to control costs and improve ROIs.

·  
Serious interest in NetSol’s next generation solution has been expressed by a few global companies.  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.

·  
GMAC – China, the implementation of first R2 for Wholesale Finance (WFS) is on track setting a strong foundation for growth. Two other key modules (CMS / CAP) are in the development stage and are expected to be marketed in fiscal 2012.
 
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NETSOL TECHNOLOGIES, INC.


·  
China has become the world’s second largest economy, continuing to grow by over 9%   a year while growth in other industrial nations has declined or grown only marginally.

·  
China’s automobile and banking sectors have been unaffected by the global meltdown and   their recent automobile sales statistics have outperformed all other economies.

·  
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.

·  
E-Commerce, new technologies, innovations and online activities are gaining momentum in many verticals.   New areas for diversification are opening for NetSol.

·  
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.

·  
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.

·  
Noticeable new interest emanating from the Latin America markets for NFS™.

·  
NetSol has never lost a product customer despite the recent severe recession. The dependency of our blue chip clients on NetSol solutions has further elevated new enhancements and services orders in the US.

·  
Improved outlook and earnings of bellwether technology companies in USA, reflecting the turnaround of this sector after recession.

·  
Global opportunities for NetSol to diversify its delivery capabilities to Bangkok, Thailand and such other new emerging economies that offer geopolitical stability and low cost IT resources, thereby reducing dependency upon the Lahore technology campus.

·  
Our global multi-national clients have continued to pursue deeper relationships in newer regions and countries. This reflects our customers’ dependencies and satisfaction with our NetSol Financial Suite of products.

·  
The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 5 more years remaining on this tax incentive.

Negative trends:

·  
Geopolitical unrest due to extremism in the regions of Pakistan and Afghanistan.

·  
Significant strains in US-Pakistan relations.

·  
Recent turbulent political developments in the Arab world might delay activities and plans.

·  
Natural disasters in Japan, Thailand and Pakistan have damaged these economies.

·  
The emergence of many smaller players offering IT solutions in China has resulted in greater price competition.
 
·  
The fear of renewed recession in light of U.S debt down-grade and the continued sluggish European market, could lead to our business in North America and Europe suffering.
 
·  
Dramatic and deep global recession has created a serious decline in business spending causing significant budget cuts for many of the Company’s target verticals.
 
 
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NETSOL TECHNOLOGIES, INC.


·  
Tightened liquidity and credit restrictions in consumer spending has either delayed or reduced spending on business solutions and systems, squeezing IT budgets and extending decision making cycles.
 
·  
Tighter internal processes and budgets will cause delays in the receivables from a few clients.
 
·  
Anticipated worsening US deficit and a rise in inflation in coming years would put further stress on consumers and business spending.

·  
Volatility in oil prices, Euro zone in European markets and uncertainty overall in global economies could deter the growth and GDP in the US.

·  
Unrest and growing war in Afghanistan could increase the migration of both refugees and extremists to Pakistan, thus creating domestic and regional challenges.

·  
Management believes that the Pakistan rupee is overvalued and that once adjustments are made there might be both positive and negative impacts on the financial statements of the Company. Positive impact could be in terms of the price of our services while translating Pakistan revenues at a higher exchange rate in the consolidated revenue statement might result in negative impact on the financial statements in future.
 
 CRITICAL ACCOUNTING POLICIES
 
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill.
 
REVENUE RECOGNTION
 
The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of licenses with major customization, modification, and development is recognized on a percentage of completion method. Revenue from the implementation of software is recognized on a percentage of completion method.
 
Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year.
 
MULTIPLE ELEMENT ARRANGEMENTS
 
We enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development (multiple-element arrangements).
 
VSOE of fair value for each element is based on the price for which the element is sold separately. We determine the VSOE of fair value of each element based on historical evidence of our stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then, the entire arrangement fee is recognized ratably over the performance period.
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NETSOL TECHNOLOGIES, INC.

 
INTANGIBLE ASSETS
 
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
 
SOFTWARE DEVELOPMENT COSTS
 
Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
 
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.
 
STOCK-BASED COMPENSATION
 
Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.
 
RECENT ACCOUNTING PRONOUNCEMENTES
 
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
 
GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
 
CASH RESOURCES
 
The company had $3.12 million worldwide in cash as on September 30, 2011.
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NETSOL TECHNOLOGIES, INC.

AVAILABLE INFORMATION
 
Through the company’s web sites, its customers, both existing and potential, and investors can access a wide range of information about its product offerings, and support and technical matters. 
 
Our website is located at www.netsoltech.com, and our investor relations website is located at http://www.netsoltech.com/IR/.  The following filings are available through our investor relations website after we file with the SEC:  Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders.  These filings are also available for download free of charge on our investor relations website.  We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings.  Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549.  Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
 
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website.  Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website.  Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts.  Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http://www.netsoltech.com/company/corporate-governance.php.  The content of our websites are not intended to be incorporated by reference into this 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
 
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NETSOL TECHNOLOGIES, INC.
CHANGES IN FINANCIAL CONDITION
 
Quarter                      Ended September 30, 2011 as compared to the Quarter Ended September 30, 2010:
 
Net revenues for the quarter ended September 30, 2011 and 2010 are broken out among the subsidiaries as follows:
 
   
2011
         
2010
       
   
Revenue
   
%
   
Revenue
   
%
 
 Corporate headquarters
  $ -       0.00 %   $ -       0.00 %
                                 
 North America:
                               
 Netsol Tech NA
    909,069       14.59 %     1,242,982       14.79 %
 Vroozi
    -       0.00 %     -          
      909,069       14.59 %     1,242,982       14.79 %
 Europe:
                               
 Netsol UK
    -       0.00 %     -       0.00 %
 Netsol Tech Europe
    916,618       14.72 %     2,089,979       24.87 %
      916,618       14.72 %     2,089,979       24.87 %
 Asia-Pacific:
                               
 Netsol Tech (PK)
    3,184,046       51.12 %     4,064,454       48.37 %
 Netsol-Innovation
    902,195       14.48 %     666,805       7.94 %
 Netsol Connect
    149,795       2.40 %     132,275       1.57 %
 Netsol-Abraxas Australia
    68,782       1.10 %     2,844       0.03 %
 Netsol-Thailand
    98,202       1.58 %     203,732       2.42 %
                                 
      4,403,020       70.69 %     5,070,110       60.34 %
                                 
     Total
  $ 6,228,708       100.00 %   $ 8,403,071       100.00 %
 
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NETSOL TECHNOLOGIES, INC.

 
The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended September 30, 2011 and 2010 as a percentage of revenues.
 
   
For the Three Months
 
   
Ended September 30,
 
   
2011
         
2010