10-Q 1 f10q_02112013.htm FORM 10-Q f10q_02112013.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 December 31, 2012
 
( ) For the transition period from __________ to __________
 
Commission file number: 0-22773
 
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
 
NEVADA    95-4627685
(State or other Jurisdiction of     (I.R.S. Employer NO.)
Incorporation or Organization)
   
  24025 Park Sorrento, Suite 410, Calabasas, CA 91302  
  (Address of principal executive offices) (Zip Code)  
 
 
(818) 222-9195 / (818) 222-9197
 
  (Issuer's telephone/facsimile numbers, including area code)  
     
 
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   X                      No___
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large Accelerated Filer __  Accelerated Filer ___
   
Non-Accelerated Filer  __ Small Reporting Company  _X__
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ___                                No _X
 
The issuer had 8,192,447 shares of its $.01 par value Common Stock and no shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of February 8, 2013.
 
 
Page 1

 

 
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
  3
  4
  5
  7
Item 2.  Management's Discussion and Analysis or Plan of Operation 26
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 41
Item 4.  Controls and Procedures 41
 
PART II. OTHER INFORMATION
 
42
42
42
42
42
 
 
Page 2

 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 

 
ASSETS
 
As of December 31,
2012
 
As of June 30,
2012
 
Current assets:
         
Cash and cash equivalents
  $ 9,579,693   $ 7,599,607  
Restricted cash
    2,398,659     141,231  
Accounts receivable, net
    15,621,790     13,757,637  
Revenues in excess of billings
    11,443,669     12,131,329  
Other current assets
    2,118,234     2,648,302  
Total current assets
    41,162,045     36,278,106  
Investment under equity method
    547,306     -  
Property and equipment, net
    18,434,767     16,912,795  
               
Intangible assets, net
    28,756,690     28,502,983  
Goodwill
    9,653,330     9,653,330  
Total intangibles
    38,410,020     38,156,313  
Total assets
  $ 98,554,138   $ 91,347,214  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
             
Accounts payable and accrued expenses
  $ 4,034,587   $ 3,869,355  
Current portion of loans and obligations under capitalized leases
    3,473,417     1,896,238  
Other payables - acquisitions
    103,226     103,226  
Unearned revenues
    4,510,426     2,704,661  
Convertible notes payable, current portion
    2,656,245     2,809,093  
Loans payable, bank
    2,051,282     2,116,402  
Common stock to be issued
    88,325     105,575  
Total current liabilities
    16,917,508     13,604,550  
Obligations under capitalized leases, less current maturities
    276,821     260,107  
Convertible notes payable less current maturities
    -     936,364  
Long term loans; less current maturities
    1,294,976     1,551,541  
Total liabilities
    18,489,305     16,352,562  
Commitments and contingencies
             
Stockholders' equity:
             
     Common stock, $.01 par value; 15,000,000 shares authorized; 8,021,489 & 7,513,745 issued and outstanding as of December 31, 2012 and June 30, 2012
    80,215     75,137  
Additional paid-in-capital
    109,220,684     106,101,165  
Treasury stock
    (415,425 )   (415,425 )
Accumulated deficit
    (28,532,291 )   (31,684,399 )
Stock subscription receivable
    (2,342,238 )   (2,119,488 )
Other comprehensive loss
    (13,893,118 )   (12,361,759 )
Total NetSol shareholders' equity
    64,117,827     59,595,231  
Non-controlling interest
    15,947,006     15,399,421  
Total stockholders' equity
    80,064,833     74,994,652  
Total liabilities and stockholders' equity
  $ 98,554,138   $ 91,347,214  
 
See accompanying notes to these unaudited consolidated financial statements.
 
 
Page 3

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
   
For the Three Months
Ended December 31,
   
For the Six Months
Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net Revenues:
                       
License fees
    3,505,847       2,047,855       6,747,348       3,123,705  
Maintenance fees
    2,664,813       2,121,282       4,710,519       4,158,488  
Services
    5,637,009       4,436,915       11,421,702       7,552,567  
 Total net revenues
    11,807,669       8,606,052       22,879,569       14,834,760  
Cost of revenues:
                               
 Salaries and consultants
    2,948,533       2,287,803       6,334,201       4,671,214  
 Travel
    386,194       254,169       711,488       539,841  
 Repairs and maintenance
    123,722       96,723       251,719       170,917  
 Insurance
    41,007       31,348       78,726       67,216  
 Depreciation and amortization
    1,024,007       812,510       1,982,158       1,601,615  
 Other
    558,777       421,416       1,480,635       937,825  
Total cost of revenues
    5,082,240       3,903,969       10,838,927       7,988,628  
Gross profit
    6,725,429       4,702,083       12,040,642       6,846,132  
Operating expenses:
                               
Selling and marketing
    931,210       735,132       1,694,173       1,435,413  
Depreciation and amortization
    333,435       289,030       675,436       480,704  
Bad debt expense
    54,889       -       54,889       192,250  
Salaries and wages
    1,192,787       1,152,023       2,346,660       1,958,587  
Professional services, including non-cash compensation
    156,668       236,911       363,170       423,660  
General and administrative
    1,136,792       1,072,483       2,484,720       1,965,455  
Total operating expenses
    3,805,781       3,485,579       7,619,048       6,456,069  
Income from operations
    2,919,648       1,216,504       4,421,594       390,063  
Other income and (expenses)
         
(Loss) gain on sale of assets
    (275 )     (1,633 )     14,021       (3,274 )
Interest expense
    (179,932 )     (158,957 )     (472,321 )     (419,164 )
Interest income
    31,617       7,264       55,784       40,069  
Gain on foreign currency exchange transactions
    504,738       160,125       899,894       39,219  
Share of net income (loss) from equity investment
    484,487       -       484,487       (100,000 )
Beneficial conversion feature
    (74,384 )     (61,441 )     (442,128 )     (74,247 )
Other income (expense)
    36       (8,987 )     4       (16,706 )
Total other income (expenses)
    766,287       (63,629 )     539,741       (534,103 )
Net income (loss) before  income taxes
    3,685,935       1,152,875       4,961,335       (144,040 )
Income taxes
    2,548       (7,005 )     (11,448 )     (31,539 )
Net income (loss) after tax
    3,688,483       1,145,870       4,949,887       (175,579 )
Non-controlling interest
    (1,465,500 )     (826,303 )     (1,797,779 )     (963,561 )
Net income (loss) attributable to NetSol
    2,222,983       319,567       3,152,108       (1,139,140 )
                                 
Other comprehensive income (loss):
 
Translation adjustment
    (1,394,216 )     (1,039,343 )     (2,163,011 )     (2,013,541 )
Comprehensive income (loss)
    828,767       (719,776 )     989,097       (3,152,681 )
 Comprehensive loss  attributable to non controlling interest
    (399,096 )     (437,533 )     (631,652 )     (854,892 )
Comprehensive income (loss) attributable to NetSol
    1,227,863       (282,243 )     1,620,749       (2,297,789 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.28     $ 0.06     $ 0.41     $ (0.20 )
Diluted
  $ 0.28     $ 0.06     $ 0.40     $ (0.20 )
Weighted average number of shares outstanding
 
Basic
    7,957,521       5,665,562       7,774,719       5,626,944  
Diluted
    7,968,598       5,726,155       7,785,796       5,626,944  
                                 
Amounts attributable to NetSol common shareholders
 
Net income / (loss)
  $ 2,222,983     $ 319,567     $ 3,152,108     $ (1,139,140 )
 
See accompanying notes to these unaudited consolidated financial statements.
 
 
Page 4

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
   
For the Six Months
Ended December 31,
 
   
2012
   
2011
 
 Cash flows from operating activities:
           
 Net income (loss)
  $ 4,949,887     $ (175,580 )
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
 Depreciation and amortization
    2,657,594       2,082,319  
 Provision for bad debts
    54,889       192,250  
 Share of net (income) loss from investment under equity method
    (484,487 )     100,000  
 (Gain) loss on sale of assets
    (14,021 )     3,274  
 Stock issued for interest on notes payable
    211,111       -  
 Stock issued for services
    29,670       155,500  
 Fair market value of warrants and stock options granted
    320,021       256,479  
 Beneficial conversion feature
    442,128       74,247  
 Changes in operating assets and liabilities:
               
 (Increase) decrease in accounts receivable
    (1,864,153 )     3,322,973  
 Decrease (increase) in other current assets
    1,217,728       (2,042,183 )
 Increase (decrease) in accounts payable and accrued expenses
    1,908,178       (11,801 )
 Net cash provided by operating activities
    9,428,545       3,957,478  
 Cash flows from investing activities:
               
 Purchases of property and equipment
    (3,537,918 )     (2,832,212 )
 Sales of property and equipment
    59,350       73,048  
 Purchase of treasury stock
    -       (19,417 )
 Investment under equity method
    -       (100,000 )
 Purchase of non-controlling interest in subsidiaires
    (621,563 )     -  
 Acquisition, net of cash acquired
    -       (253,192 )
 Increase in intangible assets
    (2,132,595 )     (3,713,090 )
 Net cash used in investing activities
    (6,232,726 )     (6,844,863 )
 Cash flows from financing activities:
               
 Proceeds from the exercise of stock options and warrants
    612,650       368,000  
 Payment to common shareholders against fractional shares
    (194 )     -  
 Proceeds from sale of subsidiary stock to non-controlling interest
    3,031       -  
 Proceeds from convertible notes payable
    -       4,000,000  
 Payments on convertible notes payable
    -       (2,758,330 )
 Restricted cash
    (2,257,428 )     2,996,382  
 Proceeds from bank loans
    2,049,698       3,866,758  
 Payments on capital lease obligations & loans - net
    (723,936 )     (5,123,981 )
 Net cash (used) provided by financing activities
    (316,179 )     3,348,829  
 Effect of exchange rate changes in cash
    (899,554 )     89,120  
 Net increase in cash and cash equivalents
    1,980,086       550,564  
 Cash and cash equivalents, beginning of year
    7,599,607       4,172,802  
 Cash and cash equivalents, end of year
  $ 9,579,693     $ 4,723,366  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
Page 5

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
 
   
For the Six Months
Ended December 31,
 
   
2012
   
2011
 
 SUPPLEMENTAL DISCLOSURES:
           
 Cash paid during the period for:
           
 Interest
  $ 248,118     $ 520,470  
 Taxes
  $ 24,252     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Stock issued against the payment of vendors
  $ -     $ 50,000  
Stock issued for the conversion of Notes Payable
  $ 1,150,000     $ -  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
Page 6

 
NETSOL TECHNOLOGIES, INC.
 
 
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, 2012.  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 Connect (Private), Ltd. (“Connect)
NetSol-Abraxas Australia Pty Ltd. (“Abraxas”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
Vroozi, Inc. (“Vroozi”)
NetSol Technologies (Beijing) Co. Ltd. (NetSol Beijing)
 
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
Virtual Lease Services Holdings Limited (“VLSH”)
Virtual Lease Services Limited (“VLS”)
Hanover Asset Finance (Ireland) Limited (“HAFL”)
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 – ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
New Accounting Pronouncements
 
In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02 (“ASU 2012-02”), Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The purpose of ASU 2012-02, which amends the guidance to Topic 350, Intangibles — Goodwill and Other, is to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the qualitative goodwill impairment test. The amendments in ASU 2012-02 permit an entity to first assess qualitatively whether it is more likely than not (more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.
 
In February 2013, the FASB issued ASU 2013-02, which established the effective date for the requirement to present components of reclassifications out of accumulated other comprehensive income on the face of the income statement. The standard is effective in the second quarter of fiscal 2013, and is not expected to have a material impact on the consolidated financial statements.
 
 
 
Page 7

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 3 – ACQUISITION
 
On October 4, 2011, NTE, a wholly owned subsidiary of the Company, entered into an agreement with Investec Asset Finance PLC (“Investec”) a UK corporation, in which the Company obtained a 51% controlling interest in a newly-formed entity, Virtual Lease Services Holdings Limited (“VLSH”), which in turn acquired a 100% interest in Virtual Lease Services Limited (“VLS”). The purchase price paid in this transaction was entirely in the form of cash in the amount of $1,008,859.
 
At the time of acquisition the fair value of assets and liabilities acquired were as follows:
 
Cash
  $ 755,667  
Accounts Receivable
    469,970  
Fixed Assets
    200,579  
Customer List
    248,320  
Technology
    242,702  
Liabilities
    (330,071 )
Noncontrolling interest
    (792,351 )
Net Assets Acquired
    794,815  
         
Proceeds
    1,008,859  
Goodwill
  $ 214,044  
 
The acquisition of VLS is in alignment with the Company’s strategic plans and contributes to the continued expansion into technology markets through membership and practice acquisitions.
 
 
Page 8

 
NETSOL TECHNOLOGIES, INC.
 
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, convertible note payable and stock awards.
 
The components of basic and diluted earnings per share were as follows:
 
 
 For the six months ended December 31, 2012
Net Income
 
Shares
 
Per Share
 
 Basic income per share:
$ 3,152,108     7,774,719   $ 0.41  
              Net income available to common shareholders
             
 Effect of dilutive securities
                 
Warrants
        11,077        
 Diluted income per share
$ 3,152,108     7,785,796   $ 0.40  
 
 For the six months ended December 31, 2011
Net Income
 
Shares
 
Per Share
 
 Basic loss per share:
$ (1,139,141 )   5,626,944   $ (0.20 )
              Net income available to common shareholders
             
 Effect of dilutive securities *
                 
Stock options
        -        
Warrants
        -        
 Diluted loss per share
$ (1,139,141 )   5,626,944   $ (0.20 )
 
* As there is a loss, these securities are anti-dilutive.  The basic and diluted loss per share  is the same for the six months ended December 31, 2011. Convertible notes, being anti dilutive, have not been considered in diluted number of shares.
 
NOTE 5 – OTHER COMPREHENSIVE INCOME & FOREIGN CURRENCY:
 
The accounts of NTE, VLSH and VLS use the British Pound; HAFL uses the Euro; NetSol PK, Connect, and NetSol Innovation use Pakistan Rupees; NTPK Thailand uses Thai Baht; Abraxas uses the Australian dollar; and NetSol Beijing uses Chinese Yuan as the functional currencies.  NetSol Technologies, Inc., and its subsidiaries, NTNA and Vroozi, use the U.S. dollar as the functional currency.  Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period.  Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $13,893,118 and $12,361,759 as of December 31, 2012 and June 30, 2012 respectively. During the six months ended December 31, 2012 and 2011, comprehensive gain (loss) in the consolidated statements of operations included translation loss of $1,531,359 and a translation gain of $610,810 respectively.
 
NOTE 6 – ACCOUNTS  RECEIVABLE
 
Accounts receivable include an amount of US$ 150,050 due from related party.
 
 
Page 9

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 7 - OTHER CURRENT ASSETS
 
Other current assets consisted of the following:
 
   
As of December 31
2012
   
As of June 30
2012
 
             
 Prepaid Expenses
  $ 444,394     $ 596,180  
 Advance Income Tax
    787,884       763,147  
 Employee Advances
    34,408       24,026  
 Security Deposits
    186,944       178,428  
 Tender Money Receivable
    98,823       111,437  
 Other Receivables
    316,554       511,466  
 Other Assets
    178,057       463,618  
 Due From Related Party
    71,170       -  
     Total
  $ 2,118,234     $ 2,648,302  
 
Due from related party as of December 31, 2012 is receivable from Atheeb NetSol Saudi Company Limited.

 
Page 10

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 8 - PROPERTY AND EQUIPMENT
 
Property and equipment, net, consisted of the following:
 
   
As of December 31
2012
   
As of June 30
2012
 
             
Office furniture and equipment
  $ 1,983,763     $ 1,917,221  
Computer equipment
    17,172,477       14,986,148  
Assets under capital leases
    2,123,338       1,877,145  
Building
    2,067,537       2,133,174  
Land
    1,981,111       2,044,003  
Capital work in progress
    4,713,550       4,163,730  
Autos
    594,576       648,305  
Improvements
    229,795       230,759  
Subtotal
    30,866,147       28,000,485  
Accumulated depreciation
    (12,431,380 )     (11,087,690 )
    $ 18,434,767     $ 16,912,795  
 
For the six months ended December 31, 2012 and 2011, depreciation expense totaled $1,529,656 and $1,374,116 respectively.  Of these amounts, $939,912 and $953,898 respectively, are reflected in cost of goods sold.
 
The Company’s capital work in progress consists of ongoing enhancements to its facilities and infrastructure as necessary to meet the Company’s expected long term growth needs. The Company recorded capitalized interest of $ 162,738 and $331,145 as of December 31, 2012 and June 30, 2012, respectively.
 
Assets acquired under capital leases were $2,123,338 and $1,877,145 as of December 31, 2012 and June 30, 2012, respectively. Accumulated amortization related to these leases was $1,046,482 and $900,790 for the periods ended December 31, 2012 and June 30, 2012, respectively.
 
NOTE 9 - INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
   
As of December 31,
2012
   
As of June 30,
2012
 
 Product licenses
  $ 43,414,431     $ 42,072,045  
 Customer lists
    6,052,377       6,052,377  
 Technology
    242,702       242,702  
      49,709,510       48,367,124  
 Accumulated amortization
    (20,952,820 )     (19,864,141 )
 Intangible assets, net
  $ 28,756,690     $ 28,502,983  
 
(A) Product Licenses
 
Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses include unamortized software development and enhancement costs of $20,097,933. Product licenses are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 8 years. Amortization expense for the six months ended December 31, 2012 and 2011 was $1,042,246 and $647,717, respectively.
 
(B) Customer Lists
 
On October 4, 2011, the Company entered into an agreement to acquire a UK based company “Virtual Leasing Services Limited” through one of its subsidiaries. As a result of this acquisition, the Company recorded $248,320 of an existing customer list.
 
Customer lists are being amortized based on a straight-line basis, which approximates the anticipated rate of attrition, which is currently a weighted average of approximately 5 years. Amortization expense for the six months ended December 31, 2012 and 2011 was $60,782 and $59,847, respectively.
 
 
Page 11

 
NETSOL TECHNOLOGIES, INC.
 
(C) Technology
 
On October 4, 2011, the Company entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded $242,702 of existing technology. Technology assets are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 5 years. Amortization expense for the six months ended December 31, 2012 and 2011 was $24,910 and $12,353.
 
(D) Future Amortization
 
Estimated amortization expense of intangible assets over the next five years is as follows:
 
 Year ended;
     
 December 31, 2013
    2,023,101  
 December 31, 2014
    1,738,353  
 December 31, 2015
    1,248,899  
 December 31, 2016
    867,902  
 December 31, 2017
    778,224  
 Thereafter
    22,100,212  
 
NOTE 10 – GOODWILL
 
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in businesses combinations. Goodwill was comprised of the following amounts:
 
   
As of December 31,
2012
   
As of June 30,
2012
 
 Asia Pacific
  $ 1,303,372     $ 1,303,372  
 Europe
    3,685,858       3,685,858  
 USA
    4,664,100       4,664,100  
                 
     Total
  $ 9,653,330     $ 9,653,330  
 
On October 4, 2011, the Company entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded goodwill of $214,044.
 
The Company has determined that there was no impairment of the goodwill for either period presented.
 
 
Page 12

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 11 – INVESTMENT UNDER EQUITY METHOD
 
On April 10, 2009, the Company entered into an agreement to form a joint venture with the Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint venture entity Atheeb NetSol Saudi Company Ltd. is a company organized under the laws of the Kingdom of Saudi Arabia. The venture was formed with an initial capital contribution of $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.
 
Investment during the period
    100,000  
Net loss for the year ended June 30, 2012
    (503,303 )
NetSol's share (50.1%)
    (252,155 )
Unabsorbed losses brought forward
    (51,731 )
Total loss
    (303,886 )
Loss adjusted against investment
    (100,000 )
Loss adjusted against advance to investee
    (200,000 )
Net book value at June 30, 2012
  $ -  
         
Investment during the period
    -  
Net income for the period ended December 31, 2012
    1,099,726  
NetSol's share (50.1%)
    550,963  
Unabsorbed losses brought forward
    (3,657 )
Total income
    547,306  
Income adjusted against investment
    547,306  
Net book value at December 31, 2012
  $ 547,306  
 
 
Page 13

 
NETSOL TECHNOLOGIES, INC.

 
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consisted of the following:
 
   
As of December 31
   
As of June 30
 
   
2012
   
2012
 
             
 Accounts Payable
  $ 1,169,826     $ 1,278,452  
 Accrued Liabilities
    1,955,110       1,778,414  
 Accrued Payroll
    89,056       17,097  
 Accrued Payroll Taxes
    310,031       158,626  
 Interest Payable
    156,129       326,746  
 Deferred Revenues
    303       32,463  
 Taxes Payable
    354,132       277,557  
     Total
  $ 4,034,587     $ 3,869,355  
 
NOTE 13 - DEBTS
 
(A) LOANS AND LEASES PAYABLE
 
Notes payable consisted of the following:
 
   
As of December 31
   
Current
   
Long-Term
 
Name
 
2012
   
Maturities
   
Maturities
 
                   
Habib Bank Line of Credit
  $ 2,308,659     $ 2,308,659     $ -  
HSBC Loan
    1,267,743       357,382       910,361  
Term Finance Facility
    897,436       512,821       384,615  
Subsidiary Capital Leases
    571,376       294,555       276,821  
    $ 5,045,214     $ 3,473,417     $ 1,571,797  
 
   
As of June 30
   
Current
   
Long-Term
 
Name
    2012    
Maturities
   
Maturities
 
                         
D&O Insurance
  $ 89,996     $ 89,996     $ -  
Habib Bank Line of Credit
    51,231       51,231       -  
Bank Overdraft Facility
    308,013       308,013       -  
HSBC Loan
    1,367,644       345,203       1,022,441  
Term Finance Facility
    1,058,201       264,550       793,651  
Subsidiary Capital Leases
    832,801       572,694       260,107  
    $ 3,707,886     $ 1,631,687     $ 2,076,199  
 
The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well as Errors and Omissions (“E&O”) liability insurance, for which the total balances are renewed on an annual basis and as such are recorded in current maturities. The interest rate on the insurance financing was 0.42% and 0.42% as of December 31 and June 30, 2012, respectively. Interest paid during the period ended December 31, 2012 and 2011 was nominal.
 
In April 2008, the Company entered into an agreement with Habib American Bank to secure a line of credit to be collateralized by Certificates of Deposit held at the bank. The interest rate on this line of credit is variable and was 1.99% as of December 31 and June 30, 2012, respectively.
 
Interest expense during the six months ended December 31, 2012 and 2011 was $11,422 and $32,131, respectively.
 
In June 2012, the Company’s subsidiary, NTNA entered into an agreement with Habib American Bank to secure a line of credit up to $500,000 to be collateralized by Certificates of Deposit of same value held at the bank. The interest rate on this line of credit is variable and was 1.99% as of December 31, 2012 and June 30, 2012 respectively. Interest expense during the six months ended December 31, 2012 was $2,120.
 
 
Page 14

 
NETSOL TECHNOLOGIES, INC.

The amount mentioned above, represents combine outstanding balance payable to Habib American Bank.
 
In February 2012, the Company entered into agreement with HSBC for the issuance of stand by letter of credit worth $90,000 in favor of landlord against the new office space. The Company has deposited $90,000 in a saving account with HSBC as collateral against this letter of credit.
 
In January 2011, the Company’s subsidiary, NTE entered into an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £200,000, or approximately $323,360. The agreement was later revised in July 2012 whereby the limit was increased to £300,000 or $485,040 approximately until September 30, 2012 whereby it again reverts to £200,000 or $323,360 untill December 2012. The annual interest rate is 4.25% over the bank’s sterling base rate, which was 0.5% as of December 31 and June 30, 2012, respectively. Total outstanding balance as of December 31, 2012 was £nil or $nil.
 
In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,616,800 for a period of 5 years with monthly payments of £18,420, or $29,781 approximately. The interest rate was 4% which is 3.5% above bank sterling base rate. As of June 30, 3012, the subsidiary had used this facility up to £875,741, or $1,367,644, of which £654,698, or $1,022,441, was shown as long term and remaining £221,043, or $345,203, as current maturity.  As of December 31, 2012, The subsidiary has used this facility up to £784,106, or $1,267,743, of which £563,063, or $910,361, was shown as long term and remaining £221,043, or $357,382, as current maturity.  Interest expense, for the period ended December 31, 2012 and December 31, 2011, was £29,353, or $46,756 and £8,250 or $12,787, respectively.
 
The Company’s subsidiary, NetSol PK, entered into two different term finance facilities from Askari Bank to finance the construction of a new building. The aggregate amount of these facilities is Rs. 162,500,000 or approximately $1,666,667 approximately (secured by the first charge of Rs. 580 million or approximately $5.95 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 of June 30, 2012, the subsidiary had used Rs. 100,000,000 or approximately $1,058,201 of which $793,651 was shown as long term liabilities and the remainder of $264,550 as current maturity. As of the period ended December 31, 2012, the company had used a total of Rs. 87,500,000 or approximately $897,436 of which $384,615 is shown as long term liabilities and the remainder of $512,821 as current maturity. Interest expense, for the six month period ended December 31, 2012 and December 31, 2011, was $70,696 and $70,710, respectively.
 
The Company leases various fixed assets under capital lease arrangements expiring in various years through 2016. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the six months ended December 31, 2012 and 2011.
 
Following is the aggregate minimum future lease payments under capital leases as of December 31 and June 30, 2012:
 
   
As of December 31
2012
   
As of June 30
2012
 
Minimum Lease Payments
           
Due FYE 12/31/12
  $ -     $ 629,251  
Due FYE 12/31/13
    350,850       215,953  
Due FYE 12/31/14
    215,751       71,218  
Due FYE 12/31/15
    87,320       -  
Total Minimum Lease Payments
    653,921       916,422  
Interest Expense relating to future periods
    (82,545 )     (83,621 )
Present Value of minimum lease payments
    571,376       832,801  
Less:  Current portion
    (294,555 )     (572,694 )
Non-Current portion
  $ 276,821     $ 260,107  

 
Page 15

 
NETSOL TECHNOLOGIES, INC.

 
Following is a summary of fixed assets held under capital leases as of December 31 and June 30, 2012:
 
   
As of December 31
2012
   
As of June 30
2012
 
Computer Equipment and Software
  $ 740,353     $ 702,637  
Furniture and Fixtures
    403,408       403,439  
Vehicles
    677,361       468,853  
Building Equipment
    302,216       302,216  
                 
Total
    2,123,338       1,877,145  
Less:  Accumulated Depreciation
    (1,046,482 )     (900,790 )
Net
  $ 1,076,856     $ 976,355  
 
Interest expense for the six months ended December 31, 2012 and 2011 was $74,456 and $36,906, respectively.
 
(B) LOANS PAYABLE - BANK
 
The Company’s subsidiary, NetSol PK, has a loan with a bank, secured by the company’s assets. This loan consists of the following as of December 31 and June 30, 2012:
 
For the period ended December 31, 2012:
TYPE OF
LOAN
MATURITY
DATE
 
INTEREST
RATE
   
BALANCE
USD
 
               
Export Refinance
Every 6 months
    9.50 %   $ 2,051,282  
                   
Total
            $ 2,051,282  
 
For the year ended June 30, 2012:
 
TYPE OF
LOAN
MATURITY
DATE
 
INTEREST
RATE
   
BALANCE
USD
 
                   
Export Refinance
Every 6 months
    11.00 %   $ 2,116,402  
                   
Total
            $ 2,116,402  
 
Interest expense for the six months ended December 31, 2012, and 2011 was $ 94,046 and $121,177, respectively.
 
NOTE 14 – OTHER PAYABLE AND COMMON STOCK TO BE ISSUED
 
On June 30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California corporation (subsequently renamed 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 December 31, 2012 and June 30, 2012, the remaining cash due of $103,226 is shown as “Other Payable” and the remaining stock to be issued of 4,670 shares at an average price of $18.90 is shown in “Common stock to be issued” in the accompanying consolidated financial statements.
 
 
Page 16

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 15 – CONVERTIBLE NOTES PAYABLE
 
The net outstanding balance of convertible notes as of December 31 and June 30, 2012 is as follows:
 
Issue Date
 
Balance net of BCF @
12/31/12
   
Current
Portion
   
Long Term
 
 Maturity
Date
                     
Sep-12
    2,656,245       2,656,245       -  
Sep-13
                           
Total
    2,656,245       2,656,245       -    
 
Issue Date
 
Balance net of BCF @
6/30/12
   
Current
Portion
   
Long Term
 
 Maturity
Date
                           
Sep-11
    3,745,457       2,809,093       936,364.25  
Sep-13
                           
Total
    3,745,457       2,809,093       936,364.25    
 
For the periods ended December 31, 2012 and 2011, the interest accrued on convertible notes was $282,600 and $198,762, respectively.
 
(A) 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 $8.95 per share. The warrants entitle the investors to acquire a total of 140,845 shares of common stock, have a 5 year term, and have an initial exercise price of $8.95 per share. The Notes and Warrant terms contain standard anti-dilution protection.  The Company raised new capital through a follow on offering under its registered shelf offering on form S-3 in March 2012 and as a result, the conversion price of note and exercise price of warrants has been adjusted downward from $8.95 to $7.73. Resultantly, the number of warrants has also been increased to 163,021.  The proceeds of the Note were assigned between warrants and convertible note per ASC 470-20. The Company recorded $401,648 capitalized financing cost and discount of $19,665 on shares to be issued upon conversion of note into equity.
 
On September 13, 2012, the parties replaced the note with a new note for the same principal amount, an elimination of a shareholders’ receivable condition, a decrease in the interest rate and a decrease in the conversion price from $7.73 to $4.93.
 
From July 1, 2012 to the date of exchange, the company accrued interest amounting to $144,000 at default rate due to non-compliance of one of the note provisions.
 
The Company has expensed out balance amount of financing cost and discount $254,543 on the old note at the date of replacement and recorded a further discount of $381,339 which will be amortized over remaining life of note. However due to partial conversion of notes worth $1,150,000 till December 31, 2012, out of this discount, a total amount of $187,584 has been expensed out in these consolidated financial statements. Due to the reduction in conversion price the number of warrants has also been adjusted to the 168,943.
 
 
Page 17

 
NETSOL TECHNOLOGIES, INC.

 
NOTE 16 - STOCKHOLDERS’ EQUITY
 
(A) TREASURY STOCK
 
On November 11, 2011, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 250,000 of its shares of common stock over the following 6 months. The shares are to be repurchased from time to time in open market transactions or privately negotiated transactions in the Company’s discretion. The Company repurchased 4,430 shares of common stock from open market against cash consideration of $19,417 until December 31, 2012. The repurchase plan expired by its own verses in May, 2012. The balance as of December 31 and June 30, 2012 was $415,425.
 
(B) SHARES ISSUED FOR SERVICES TO RELATED PARTIES
 
During the six months ended December 31, 2012 and 2011, the Company issued a total of 5,000 and 21,000 shares of restricted common stock for services rendered by the officers of the Company. These shares were valued at the fair market value of $25,200 and $135,075 respectively.
 
The Company recorded an expense of $13,700 and $109,500 against the services rendered by officers during the six months ended December 31, 2012 and 2011.
 
During the six months ended December 31, 2011, the Company issued a total of 12,000 shares of restricted common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $154,400.
 
The Company recorded an expense of and $40,000 for services rendered by the independent members of the Board of Directors as part of their board compensation during the six months ended December 31, 2011.
 
During the period ended December 31, 2012, the Company issued a total of 2,500 shares of its common stock to employees as required according to the terms of their employment agreements valued at $12,600.
 
The Company recorded an expense of $6,850 and $6,000 as part of compensation to employees as required according to the terms of their employment agreements during the six months ended December 31, 2012 and 2011.
 
(C) SHARE-BASED PAYMENT TRANSACTIONS
 
During the period ended December 31, 2012, and June 30, 2012, the Company issued a total of 2,400 and 17,300 shares of its common stock for provision of services to unrelated consultants valued at $9,120 and $91,520, respectively.
 
(D) SHARE ISSUED AGAINST CASH PAYMENTS
 
During the year ended June 30, 2012, the Company issued 1,667,500 new shares through secondary offering under S3 registration against net proceeds of $5,743,300. The shares were issued at the offering price of $4.0 per share. Aegis Capital Corp. acted as sole book-running manager and underwriters for the offering. The Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price.
 
(E) REVERSE STOCK SPLIT
 
 On August 6, 2012 the shareholders of the Company authorized the board of directors to conduct a reverse split of the common stock of the Company in a range from 5 to 15 shares into one. Pursuant to the authority granted, the board approved the ratio of 10:1 for the reverse split which was effectuated on August 13, 2012. All figures have been presented on the basis of reverse split where ever applicable for all the periods presented in these financial statements.
 
 
Page 18

 
NETSOL TECHNOLOGIES, INC.
 
NOTE 17 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
 
Common stock purchase options and warrants consisted of the following:
 
OPTIONS:
       
Exercise
 
Aggregated
 
   
# of shares
   
Price
 
Intrinsic Value
 
                 
Outstanding and exercisable, June 30, 2011
    691,932     $30.00 to $50.00   $ 1,637,459  
Granted
    351,259     $3.00 to $7.50        
Exercised
    (231,259 )   $3.00 to $12.50        
Expired / Cancelled
    (8,499 )   $7.50 to $16.50        
Outstanding and exercisable, June 30, 2012
    803,433     $30.00 to $50.00   $ -  
Granted
    184,922     $3.50 to $5.00        
Exercised
    (184,922 )   $3.50 to $5.00        
Expired / Cancelled
    (171,002 )   $25.00 to $29.10        
Outstanding and exercisable, December 31, 2012
    632,431     $6.50 to $50.00   $ -  
                         
WARRANTS:
                       
Outstanding and exercisable, June 30, 2011
    17,823     $3.10 to $37.00   $ 219,119  
Granted
    246,396     $5.00 to $7.73        
Exercised
                       
Expired
    (2,500 )   $18.50 to $37.00        
Outstanding and exercisable, June 30, 2012
    261,719     $3.10 to $7.73   $ (30,105 )
Granted / adjusted
    5,922                  
Exercised
    (15,323 )       $3.10        
Expired
                       
Outstanding and exercisable, December 31, 2012
    252,318     $5.00  to $7.46   $ 82,541  
 
The average life remaining on the options and warrants as of December 31, 2012 is as follows:
 
OPTIONS:
               
                     
$0.10
 -
$9.90   270,000       5.20       6.98  
$10.00
 -
$19.90   187,431       2.91       18.94  
$20.00
 -
$29.90   129,000       2.82       24.57  
$30.00
 -
$50.00   46,000       1.31       41.41  
                           
Totals
  632,431       3.75       16.62  
                           
WARRANTS:
                     
$3.10
 -
$7.73   252,318       4.05       6.65  
                           
                           
Totals
  252,318       4.05       6.65  
 
All options and warrants granted are vested and are exercisable as of December 31, 2012.
 
(A) INCENTIVE AND NON-STATUTORY STOCK OPTION PLANS
 
The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the Board specifically determines otherwise, as provided.
 
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
 
 
Page 19

 
NETSOL TECHNOLOGIES, INC.
 
 
OPTIONS
 
During the quarter ended September 30, 2012, the Company granted 28,572 options to two employees with an exercise price of $3.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $20,036 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate 0.07%
Expected life 1 month
Expected volatility 27.27%
 
During the quarter ended September 30, 2012, the Company granted 16,350 options to one employee with an exercise price of $4.00 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $4,209 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate 0.08%
Expected life 1 month
Expected volatility 28.43%
 
During the quarter ended September 30, 2012, the Company granted 50,000 options to two employees with an exercise price of $4.75 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $55,040 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 0.1%
Expected life 1 month
Expected volatility 26.58%
 
During the quarter ended December 31, 2012, the Company granted 70,000 options to six employees with an exercise price of $4.75 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $73,478 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate 0.11%
Expected life 3 months
Expected volatility 32.23%
 
During the quarter ended December 31, 2012, the Company granted 20,000 options to one employee with an exercise price of $5.00 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $16,860 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
 
Risk-free interest rate 0.11%
Expected life 3 months
Expected volatility 32.23%
 
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 140,845 warrants of common stock at an initial exercise price of $8.95 per share with a life of five years. The Notes and Warrants terms contain anti-dilution protection.  The fair market value of these warrants was calculated as $446,480 by using Black Scholes value method. Using this value, the proceeds of Convertible note were allocated between warrants and convertible based on their relative fair values. The Company recorded $401,648 capitalized financing cost which will be amortized over the life of the note. As a result of new capital raised under the shelf registration on form S-3 the conversion price of note and exercise price of warrants has been adjusted downward from $8.95 to $7.73 and number of warrants have been increased to 163,021. Moreover, the Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price.
 
 
Page 20

 
NETSOL TECHNOLOGIES, INC.
 
On September 13, 2012, the parties replaced the note with a new note for the same principal amount, an elimination of a shareholders’ receivable condition, a decrease in the interest rate and a decrease in the conversion price from $7.73 to $4.93. Due to reduction in the note conversion price, the exercise price of warrants has been adjusted downward from $7.73 to $7.46 and the number of warrants has increased from 163,021 to 168,943.
 
(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 500,000 (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 50,000 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 maybe based on performance criteria and/or continued service with our Company. A participant who is granted a "stock appreciation right" under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the Committee (but in no event less than the fair market value of the stock on the date of grant). Finally, the Committee may make "restricted stock" awards under the 2011 Plan, which is subject to such terms and conditions as the Committee determines and as are set forth in the award agreement related to the restricted stock. As of December 31, 2012, 16,950 shares have been issued under this plan to non- officers employees
 
 
 
 
21

 
NETSOL TECHNOLOGIES, INC.

NOTE 18 – 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 intra-company sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation.  The following table presents a summary of operating information and certain balance sheet information for the six months ended December 31:
 
   
2012
   
2011
 
 Revenues from unaffiliated customers:
           
 North America
  $ 2,667,104     $ 1,749,313  
 Europe
    3,919,329       2,506,234  
 Asia - Pacific
    16,139,086       10,579,213  
 Revenue from related party
    154,050       -  
 Consolidated
  $ 22,879,569     $ 14,834,760  
                 
 Operating income (loss):
               
 Corporate headquarters
  $ (1,571,519 )   $ (1,664,711 )
 North America
    (473,482 )     21,932  
 Europe
    746,291       (112,664 )
 Asia - Pacific
    5,720,304       2,145,505  
 Consolidated
  $ 4,421,594     $ 390,063  
                 
Net income (loss) after taxes and before non-controlling interest:
         
 Corporate headquarters
  $ (1,841,321 )   $ (2,130,465 )
 North America
    (514,199 )     21,308  
 Europe
    655,192       (13,771 )
 Asia - Pacific
    6,650,215       1,947,348  
 Consolidated
  $ 4,949,887     $ (175,579 )
                 
 Identifiable assets:
               
 Corporate headquarters
  $ 14,642,936     $ 14,077,314  
 North America
    3,379,705       2,460,475  
 Europe
    6,201,762       6,884,161  
 Asia - Pacific
    74,329,735       62,556,489  
 Consolidated
  $ 98,554,138     $ 85,978,439  
                 
 Depreciation and amortization:
               
 Corporate headquarters
  $ 67,898     $ 35,353  
 North America
    323,016       150,023  
 Europe
    457,469       300,783  
 Asia - Pacific
    1,809,211       1,596,160  
 Consolidated
  $ 2,657,594     $ 2,082,319  
                 
 Capital expenditures:
               
 Corporate headquarters
  $ 2,157     $ -  
 North America
    41,520       9,348  
 Europe
    13,369       484,485  
 Asia - Pacific
    3,480,872       2,338,379  
 Consolidated
  $ 3,537,918     $ 2,832,212  
 
Net revenues by our various products and services provided for the period ended December 31, are as follows:
 
 
22

 
NETSOL TECHNOLOGIES, INC.

   
2012
   
2011
 
 Licensing Fees
  $ 6,747,348     $ 3,123,705  
 Maintenance Fees
    4,710,519       4,158,488  
 Services
    11,267,652       7,552,567  
 Services to related party
    154,050       -  
 Total
  $ 22,879,569     $ 14,834,760  
 
During the six months ended December 31, 2012, revenue services were provide to Atheeb NetSol Saudi Company Limited (related party).
 
NOTE 19 – 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
December 31,
2012
 
             
NetSol PK
    35.46 %   $ 13,957,436  
NetSol-Innovation
    49.90 %     1,333,760  
VLS
    49.00 %     655,810  
                 
Total
          $ 15,947,006  
 
SUBSIDIARY
 
Non Controlling
Interest %
   
Non-Controlling
Interest at
June 30,
2012
 
                 
NetSol PK
    39.48 %   $ 13,600,492  
NetSol-Innovation
    49.90 %     1,076,833  
VLS
    49.00 %     722,096  
                 
Total
          $ 15,399,421  
 
(A) NETSOL TECHNOLOGIES, LIMITED
 
NetSol PK is majority owned by the Company. During the period ended December 31, 2012, the Company purchased 3,142,400 shares of NetSol PK from the open market against the value of $621,563. After this purchase, the non-controlling interest in NetSol PK was reduced from 39.48% to 35.46%.  For the six months ended December 31, 2012 and 2011, NetSol PK had net income of $4,408,358 and $1,847,135. The related non-controlling interest was $1,587,227 and $729,249, respectively. For the same period the Comprehensive loss attributable to non-controlling interest was $611,742 and $803,074 respectively.
 
Employees of the company also exercised options to acquire 18,000 shares of the subsidiary valued at $3,031.
 
 
23

 
NETSOL TECHNOLOGIES, INC.

 
(B) NETSOL INNOVATION (PRIVATE) LIMITED
 
For the six months ended December 31, 2012 and 2011, NetSol Innovation had net income of $589,819 and $501,681. The related non-controlling interest was $294,320 and $250,339, respectively. For the same period the Comprehensive loss attributable to non-controlling interest was $37,395 and $49,983 respectively.
 
(C) VIRTUAL LEASE SERVICES
 
For the six months ended December 31, 2012 and 2011, VLS had a net loss of $170,955 and $34,052. The related  non-controlling interest was $83,768 and $16,685, respectively. For the same period the Comprehensive income attributable to non-controlling interest was $17,482 and comprehensive loss $1,783 respectively.
 
NOTE 20 – INCOME TAXES
 
Our effective tax rates were approximately 0.23% and 21.9% for the six months ended December 31, 2012 and 2011, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates.  Also, the Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future.
 
NOTE 21 - SUBSEQUENT EVENTS
 
121,704 shares were issued to the holders of convertible note against conversion of $600,000 of principal value.
 
Employees of the Company exercised options to acquire 58,000 shares of common stock valued at $265,000.
 
One of the officers of the Company exercised options to acquire 11,538 shares of common stock valued at $75,000.
 
 
24

 
NETSOL TECHNOLOGIES, INC.
 
Item 2.  Management's Discussion and Analysis of 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 December 31, 2012.
 
Forward-Looking Information
 
This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management.  When used in this report, the words  "anticipate",  "believe",  "estimate", "expect",  "intend",  "plan", and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements.  These statements reflect management's current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.  The Company's realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company's technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel,  or the adoption of  technology  standards which are different  from  technologies  around  which the  Company's  business ultimately is built. The Company does not intend to update these forward-looking statements.
 
NetSol Technologies, Inc. (NasdaqCM: NTWK) (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, for North America; the London Metropolitan area for Europe; and Bangkok, Thailand, Beijing, China and Lahore, Pakistan for Asia Pacific.  The Company continues to maintain services, solutions and/or sales specific offices in Australia, China, Thailand, and Pakistan and through alliances in the Kingdom of Saudi Arabia and Japan.
 
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 with competitive cost blended rates from its “center of excellence”  delivery center in Pakistan and other global centers located in the USA, UK, Thailand and China, Our model also provides localized programs in key markets 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 global locations provide 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™”.
 
 
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NETSOL TECHNOLOGIES, INC.
 
Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol’s expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles.  The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT consulting & services; business intelligence, information security, independent system review, outsourcing services and software process improvement consulting; maintenance and support of existing systems; and, project management.
 
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. When used together, they fully automate the entire leasing / financing cycle.
 
NFS™ 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 solutions 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.
 
NetSol North America, Inc. has recently launched its Infrastructure as a Service (IaaS) business line.  In its updated public cloud forecast in June 2012, Gartner estimated that IaaS was the fastest growing cloud segment.  NetSol’s IaaS offering will differentiate itself from the competition by providing much enhanced performance at a lower cost point.  At an elastic cloud price, management believes these customers will experience performance, reliability and speed usually associated with a highly scalable private cloud.
 
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.
 
NetSol’s IP, smartOCI®, now part of  Vroozi, Inc., a wholly owned subsidiary of NTI, 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®; a new search engine technology and buy-side content marketplace provider which enables corporate buyers and shoppers a simple and intuitive user interface to search multiple supplier catalogs simultaneously within the SAP procurement application.  The smartOCI® technology was officially released to the market in 2011 at the SAP SAPPHIRE Conference in Orlando, Florida, and has strengthened NetSol’s presence in the global SAP Services market.
 
NetSol global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively in terms of global delivery capabilities, cross selling to multinational captives’ finance companies, centralized marketing organization and a network of employees connected across the globe to support local and global customers and partners.
 
The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the quarter ended December 31, 2012.  It should be read together with our consolidated financial statements and related notes included herein.
 
 
26

 
NETSOL TECHNOLOGIES, INC.
 
A few of NetSol’s major successes achieved in the first half of fiscal year 2013 were:
 
·  
NTE renegotiated maintenance agreements with a number of major NTE clients which has resulted in increased maintenance revenues.
 
·  
NTE LeaseSoft implementation went live for a leading UK independent leasing company..
 
·  
NetSol Europe is developing a prototype Apps for three of our existing customers. Virtual Lease Services was awarded a significant new Chip & Pin contract which is anticipated to increase the vendor business for VLS during the second half.
 
·  
The Company participated in CLBA (China Leasing Business Association) annual event as a Gold Sponsor where more than 500 delegates and 200 companies had participated.
 
·  
Atheeb NetSol signed an InfoSec Cyber Security contract to be implemented at Royal Saudi Air Force – KSA. In addition, NetSol would also act as Atheeb NetSol’s technology implementation partner for implementation of SOC & GRC technology at the Royal Saudi Air Force.The Company secured sole partnership for Pakistan with Encase Guidance Software, a world leader in Digital Forensics, to carry out effective computer investigation of any kind, including intellectual property theft, incident response & compliance auditing.
 
·  
NetSol Technologies diversified into developing mobile applications for its clients. NTNA signed a letter of Intent with PACCAR Inc. for licensing and implementation of its NetSol Financial Suite TM at PACCAR Leasing Mexico. Mercedes-Benz Leasing China (MBLC) went live with NetSol Financial Suite (NFSTM) for the Hire Purchase and Operating Lease market. Since the automotive leasing market in China is still new, the presence of NetSol Financial Suite in this landscape is a significant development which promises to have a large impact on the Chinese market.
 
·  
Chongqing Auto Finance Co., Ltd. (CQAFC), West China's first non-captive China Banking Regulatory Commission-approved auto finance company to conduct leasing of various auto brands and models, went live with the entire NetSol Finance Suite (NFS™).
 
·  
NetSol Technologies won a multi-million dollar contract for the implementation of its flagship product NFS™ at a major automobile manufacturer in Thailand.
 
·  
NetSol Technologies created a new division, "NetSolCloudVM", that will offer infrastructure-as-a-service (IaaS), initially targeting the North American market.
 
·  
Vroozi signed an agreement with a Fortune 500 communication technology company to implement Vroozi's smartOCI search engine software in its enterprise resource planning (ERP) e-Procurement environment.
 
·  
Vroozi Inc., took on board Ms. Ivy Montgomery as VP Marketing who has the past experience of working with SAP and Oracle
 
·  
NetSol Technologies signed a contract to implement the Transport Department Automation System for the Government of Punjab, Pakistan.
 
·  
A European Bank portfolio migration went live with more than doubling the size of the lease portfolio managed on LeaseSoft.
 
·  
NTE commissioned to provide a Point of Sale solution to a Bank client to support their entry into Vehicle finance. This solution will support both Bank direct and captive manufacturer brands at point of sale through dealers.
 
·  
NTNA secured and delivered a Leasing and Finance Consulting project with a Mexico based subsidiary of one of the largest commercial truck manufacturing company in the world
 
·  
NTNA completed the Data Center setup for its IaaS (Infrastructure as a Service) offering.
 
The success of the Company, in the near term, will depend, in large part, on the Company's ability to: (a) continue to grow revenues and improve profits; (b) adequately capitalize for growth in various markets and verticals; (c) make progress in the North American markets and, (d) continue to streamline sales and marketing efforts in every market we operate. However, management's outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.
 
 
27

 
NETSOL TECHNOLOGIES, INC.
 
Marketing and Business Development Activities
 
Management has developed, and the board of directors has ratified, an aggressive 3-5 year growth strategy aimed at increasing competitiveness and financial strength.
 
This plan is designed to:
 
● 
Achieve 15-25% annual revenue growth for the next 5 years
 
● 
Achieve 55-60% gross margins in 2013, anticipate average 63 to 65% for next three years.
 
Result in enhanced organic growth
 
Building a strong new ecommerce vertical under Vroozi platform
 
Continue to enhance delivery and service capabilities in Thailand, China and Pakistan
 
Strengthen NetSol brand and market shares in APAC markets
 
● 
Continue to hire the best available talent to develop the next line of managers for our growing demand
 
The plan contemplates the following enhanced activities and initiatives will accomplish these goals:
 
o  
Continued expansion in the Chinese market which offers ever growing new opportunities in the auto, banking and lending sectors for NFS™.
 
o  
NetSol is positioning China to become a dominant market for lending enterprise solutions for captive multinationals and local Chinese companies, including equipment finance, big ticket leasing markets and the banking industry. In the lease and finance domain NetSol can claim the de facto leadership position in the rapidly growing Chinese market.
 
o  
Further augmentation of NTPK Thailand. 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 an alternate delivery and implementation center for global customers and partners in Asia Pacific.
 
o  
The new and fast growing manifestations of e-commerce, such as cloud computing, are being utilized by some of our offerings and will be further explored by us for other offerings. Our e-commerce division’s smartOCI® has been demonstrated and presented to major fortune 500 companies in the US as an on-demand, catalogue content management system. The demand of e-procurement search engine seems robust and attractive. Continued new license sales activities are in the pipeline for Vroozi, Inc. Presently smartOCI® is the main asset in this entity while we explore other channels of growth in e-commerce and search engine space. There has been a surge of interest amongst fortune 500 corporations for demos and workshops for smartOCI® in recent months. To date, ten new US based major corporations have been signed up for smartOCI®.
 
o  
Europe continues to experience a severe recession coupled with regional debt crises.  NetSol Europe’s operations have maintained modest growth in sales while the Company has further rationalized overall operating overheads. The gross margins with a few clients have been improved reflecting long term commitment for both parties.   In addition, the successful integration of VLS in conjunction with Investec Bank as a JV partner should bolster growth in services sectors complementing core solutions and augmenting overall market share in the UK.
 
 
28

 
NETSOL TECHNOLOGIES, INC.
 
o  
The Kingdom of Saudi Arabia is undergoing massive development in education, technology, infrastructure, healthcare, public and defense sectors. The economy is robust, rich and well capitalized, offering vast opportunities for NetSol through our joint venture ANSCL. 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. Within the Kingdom, we forsee bigger contracts and projects that will require both the financial wherewithal and strong balance sheet of Atheeb and the technical expertise of NetSol. The JV is positively shaping up as the pipeline is improving every quarter. Currently, the joint venture has 10 employees based in Riyadh with direct delivery and implementation support from NetSol PK. In the last few months NSCL signed four new contracts both in defense and private sector to provide IT services and consulting in the key areas that are valued to over $2.0MN. This is just a beginning as we anticipate very exciting developments as we close new contracts.
 
Growth – New Alliances, Mergers & Acquisition
 
The markets in the US and UK offer a host of synergistic and complementary companies with impressive client bases to expand the distribution channels for NFS™ and its new generation product line.  There are established small sized Companies, with relatively low valuations, which can become part of NetSol on an affordable basis. It is important to seek out these companies in order to grow our customer base, revenue and net margins by leveraging our delivery and implementation model.
 
Funding and Investor Relations:
 
The fundamental challenge constantly facing the management is to achieve sustainable growth with a healthy balance sheet, without too much dilution. In light of global opportunities for organic growth and through alliances and mergers and acquisitions, the Company raised cash through a public offering of shares of common stock in 2012.  We are using this cash infusion to support sales and marketing, Vroozi, infrastructure, and operations and capital investment in the Chinese subsidiary, NetSol Beijing.  Going forward any new capital raise would depend on new opportunities to accelerate growth organically and/or through M&A.
 
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 IR consultants and investment bankers.
 
·  
Utilizing US mainstream media to highlight NetSol’s image and ‘niche’ business offering.
 
·  
Founding management continued investment in the Company in the open market reaffirming their commitment to the potential and the future of the Company.
 
Improving the Bottom Line:
 
Management believes that these measures will improve the bottom line on an ongoing basis:
 
·  
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.
 
 
29

 
NETSOL TECHNOLOGIES, INC.
 
Management continues to be focused on scaling up 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.
 
MATERIAL TRENDS AFFECTING NETSOL
 
Management has identified the following material trends affecting NetSol.
 
Positive trends:
 
·  
The global economic uncertainty 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 groundwork for the new generation solution, is gaining momentum.
 
·  
First successful implementation of NextGen – NFS™ solution with a Thai bank is a very positive indicator for new deals.
 
·  
China has become the world’s second largest economy, continuing to grow by over 8% 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 continue to outperform all other economies. China’s passenger vehicle sales rose 49% in December 2012, while China’s total vehicle sales, including trucks and buses, is projected  to accelerate this year and surpass 20 million for the first time according to Bloomberg News, February 7, 2013.
 
·  
Growing interest in Japan for IT services and NFS applications within banking, equipment finance and general leasing industries.
 
·  
E-Commerce, new technologies, innovations and online activities are gaining momentum in many verticals.   New areas for diversification are opening for NetSol. The B2B e-commerce market has never been stronger with the US market alone tracking at close to $4 trillion in total spend in 2012 thereby offering a potentially huge opportunity to grow Vroozi offerings.
 
·  
Vroozi provides a strong entry in the e-commerce and cloud by way of developing and marketing a new IP with the Vroozi Shopping Platform and smartOCI and landing Fortune 500 US customers.
 
·  
Companies which survived the recent recession, such as NetSol, with price advantage and a global presence, will gain further momentum as economic indicators continue to 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, defense, cyberspace securities, IT, infrastructure and many other new sectors. This makes it one of the most promising markets for the Atheeb NetSol joint venture.
 
·  
The dependency of our blue chip clients on NetSol solutions has further deepened; creating new enhancements, new modules, and services orders in the US.
 
·  
Global opportunities requiring NetSol to diversify its delivery capabilities to Bangkok and such other new emerging economies that offer geopolitical stability and low cost IT resources, thereby reducing dependency upon the Lahore technology campus.
 
 
30

 
NETSOL TECHNOLOGIES, INC.
 
·  
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 4 more years remaining on this tax incentive.
 
Negative trends:
 
·  
Geopolitical unrest due to extremism in the regions of Pakistan and Afghanistan.
 
·  
Continued strains in US-Pakistan relations.
 
·  
The emergence of many smaller players offering IT solutions in China has resulted in greater price competition.
 
·  
The fear of renewed recession in the US and, a continued sluggish European market could adversely affect our business in North America and Europe.
 
·  
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. Restricted liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables from some 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.
 
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 may 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.
 
 
31

 
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 2 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.
 
 
32

 
NETSOL TECHNOLOGIES, INC.
 
CASH RESOURCES
 
The company had $9.58 ­­ million worldwide in cash as on December 31, 2012.
 
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 Quarterly Report on Form 10-Q 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/us/investors/corporate-governance .  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.
 
 
33

 
NETSOL TECHNOLOGIES, INC.
 
CHANGES IN FINANCIAL CONDITION
 
Quarter Ended December 31, 2012 as compared to the Quarter Ended December 31, 2011
 
Net revenues for the quarter ended December 31, 2012 and 2011 are broken out among the subsidiaries as follows:
 
   
2012
   
2011
 
   
Revenue
   
%
   
Revenue
   
%
 
 Corporate headquarters
  $ -       0.00 %   $ -       0.00 %
                                 
 North America:
                               
 NTNA
    778,674       6.59 %     840,244       9.76 %
 Vroozi
    175,240       1.48 %     -       0.00 %
      953,914       8.08 %     840,244       9.76 %
                                 
 Europe:
                               
 Netsol UK
    -       0.00 %     -       0.00 %
 NTE
    1,997,745       16.92 %     1,128,100       13.11 %
 VLS
    415,583       3.52 %     458,364       5.33 %
 HAFL
    -       0.00 %     3,152       0.04 %
      2,413,328       20.44 %     1,589,616       18.47 %
 Asia-Pacific:
                               
 NetSol PK
    5,692,858       48.21 %     5,005,922       58.17 %
 Netsol Innovation
    906,344       7.68 %     722,855       8.40 %
 Connect
    198,265       1.68 %     151,407       1.76 %
 Abraxas
    238,359       2.02 %     90,883       1.06 %
 NTPK Thailand
    1,330,194       11.27 %     205,126       2.38 %
 NetSol Beijing
    74,407       0.63 %     -       0.00 %
                                 
      8,440,427       71.48 %     6,176,193       71.77 %
                                 
     Total
  $ 11,807,669       100.00 %   $ 8,606,052       100.00 %
 
 
34

 
NETSOL TECHNOLOGIES, INC.
 
The following table sets forth the items in our unaudited consolidated statement of operations for the three months ended December 31, 2012 and 2011 as a percentage of revenues.
 
   
For the Three Months
 
   
Ended December 31,