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, 2019

[ ]	For the transition period from __________ to __________

Commission file number: 0-22773

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

NEVADA		95-4627685
(State or other Jurisdiction of		(I.R.S. Employer NO.)
Incorporation or Organization)

23975 Park Sorrento, Suite 250, Calabasas, CA 91302

(Address of principal executive offices) (Zip Code)

(818) 222-9195 / (818) 222-9197

(Issuer’s telephone/facsimile numbers, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $.01 par value per share		NTWK		NASDAQ

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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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 11,753,063 shares of its $.01 par value Common Stock and no Preferred Stock outstanding as of February 7, 2020.

NETSOL TECHNOLOGIES, INC.

	Page No.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2019 and 2018	4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2019 and 2018	5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2019 and 2018	6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018	8
Notes to the Condensed Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosures about Market Risk	48
Item 4. Controls and Procedures	48

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	49
Item 1A Risk Factors	49
Item 2. Unregistered Sales of Equity and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	49
Item 4. Mine Safety Disclosures	49
Item 5. Other Information	49
Item 6. Exhibits	49

Page 2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	As of			As of
	December 31, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	22,083,584		$	17,366,364
Accounts receivable, net of allowance of $351,431 and $192,786		8,401,835			12,332,714
Accounts receivable, net of allowance of $0 and $166,075 - related party		1,231,181			3,266,600
Revenues in excess of billings, net of allowance of $205,006 and $194,684		15,850,011			14,719,047
Revenues in excess of billings - related party		101,669			110,827
Convertible note receivable - related party		4,185,000			3,650,000
Other current assets		3,392,190			3,146,264
Total current assets		55,245,470			54,591,816
Revenues in excess of billings, net - long term		1,291,025			1,281,492
Property and equipment, net		12,668,689			12,096,855
Right of use of assets - operating leases		3,050,885			-
Long term investment		2,411,807			2,653,769
Other assets		24,301			23,569
Intangible assets, net		6,792,846			7,332,950
Goodwill		9,516,568			9,516,568
Total assets	$	91,001,591		$	87,497,019

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	7,927,523		$	7,476,560
Current portion of loans and obligations under finance leases		9,436,332			6,905,597
Current portion of operating lease obligations		1,182,850			-
Unearned revenues		3,135,721			5,977,736
Common stock to be issued		88,324			88,324
Total current liabilities		21,770,750			20,448,217
Loans and obligations under finance leases; less current maturities		417,824			564,572
Operating lease obligations; less current maturities		1,966,770			-
Total liabilities		24,155,344			21,012,789
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value; 500,000 shares authorized;		-			-
Common stock, $.01 par value; 14,500,000 shares authorized; 12,000,566 shares issued and 11,753,063 outstanding as of December 31, 2019 and 11,911,742 shares issued and 11,664,239 outstanding as of June 30, 2019		120,006			119,117
Additional paid-in-capital		128,197,589			127,737,999
Treasury stock (At cost, 247,503 shares and 247,503 shares as of December 31, 2019 and June 30, 2019, respectively)		(1,455,969	)		(1,455,969	)
Accumulated deficit		(36,448,870	)		(35,206,898	)
Other comprehensive loss		(30,456,632	)		(33,125,006	)
Total NetSol stockholders’ equity		59,956,124			58,069,243
Non-controlling interest		6,890,123			8,414,987
Total stockholders’ equity		66,846,247			66,484,230
Total liabilities and stockholders’ equity	$	91,001,591		$	87,497,019

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 3

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	For the Three Months						For the Six Months
	Ended December 31,						Ended December 31,
	2019			2018			2019			2018
Net Revenues:
License fees	$	383,963		$	4,817,569		$	3,063,108		$	10,773,682
Maintenance fees		4,965,877			3,661,723			9,357,324			7,401,399
Services		10,282,755			8,348,843			16,701,646			14,819,468
Services - related party		57,424			174,492			140,357			404,623
Total net revenues		15,690,019			17,002,627			29,262,435			33,399,172

Cost of revenues:
Salaries and consultants		4,625,872			4,497,054			9,080,836			9,517,616
Travel		1,572,923			1,706,182			2,915,558			2,858,179
Depreciation and amortization		734,352			880,048			1,454,017			1,817,652
Other		954,912			1,060,772			1,899,436			2,109,096
Total cost of revenues		7,888,059			8,144,056			15,349,847			16,302,543

Gross profit		7,801,960			8,858,571			13,912,588			17,096,629

Operating expenses:
Selling and marketing		1,858,096			2,048,303			3,601,964			3,749,629
Depreciation and amortization		215,479			193,779			417,866			406,011
General and administrative		4,568,790			4,002,059			8,487,403			8,408,779
Research and development cost		454,605			424,652			1,127,575			742,807
Total operating expenses		7,096,970			6,668,793			13,634,808			13,307,226

Income from operations		704,990			2,189,778			277,780			3,789,403

Other income and (expenses)
Gain (loss) on sale of assets		528			(3,504	)		239			48,790
Interest expense		(88,006	)		(63,804	)		(151,669	)		(163,238	)
Interest income		435,682			230,421			834,911			479,385
Gain (loss) on foreign currency exchange transactions		61,061			2,536,755			(1,699,129	)		2,547,667
Share of net loss from equity investment		(164,796	)		(298,293	)		(354,020	)		(597,984	)
Other income		207,987			4,503			226,313			9,882
Total other income (expenses)		452,456			2,406,078			(1,143,355	)		2,324,502

Net income (loss) before income taxes		1,157,446			4,595,856			(865,575	)		6,113,905
Income tax provision		(610,510	)		(264,872	)		(848,748	)		(501,786	)
Net income (loss)		546,936			4,330,984			(1,714,323	)		5,612,119
Non-controlling interest		39,039			(1,475,355	)		472,351			(1,793,901	)
Net income (loss) attributable to NetSol	$	585,975		$	2,855,629		$	(1,241,972	)	$	3,818,218

Net income (loss) per share:
Net income (loss) per common share
Basic	$	0.05		$	0.25		$	(0.11	)	$	0.33
Diluted	$	0.05		$	0.25		$	(0.11	)	$	0.33

Weighted average number of shares outstanding
Basic		11,724,606			11,586,507			11,694,423			11,542,877
Diluted		11,724,606			11,592,193			11,694,423			11,548,563

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 4

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the Three Months						For the Six Months
	Ended December 31,						Ended December 31,
	2019			2018			2019			2018
Net income (loss)	$	585,975		$	2,855,629		$	(1,241,972	)	$	3,818,218
Other comprehensive income (loss):
Translation adjustment		2,009,060			(5,784,490	)		3,496,761			(6,248,566	)
Translation adjustment attributable to non-controlling interest		(244,031	)		1,986,953			(828,387	)		2,187,826
Net translation adjustment		1,765,029			(3,797,537	)		2,668,374			(4,060,740	)
Comprehensive income (loss) attributable to NetSol	$	2,351,004		$	(941,908	)	$	1,426,402		$	(242,522	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 5

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

A statement of the changes in equity for the three months ended December 31, 2019 is provided below:

					Additional								Other			Non			Total
	Common Stock				Paid-in		Treasury			Accumulated			Comprehensive			Controlling			Stockholders’
	Shares		Amount		Capital		Shares			Deficit			Loss			Interest			Equity
Balance at September 30, 2019		11,972,109	$	119,721	$	128,052,079	$	(1,455,969	)	$	(37,034,845	)	$	(32,221,661	)	$	8,605,749		$	66,065,074
Common stock issued for:
Services		28,457		285		145,510		-			-			-			-			145,795
Dividend to non-controlling interest		-		-		-		-			-			-			(1,920,618	)		(1,920,618	)
Foreign currency translation adjustment		-		-		-		-			-			1,765,029			244,031			2,009,060
Net income		-		-		-		-			585,975			-			(39,039	)		546,936
Balance at December 31, 2019		12,000,566	$	120,006	$	128,197,589	$	(1,455,969	)	$	(36,448,870	)	$	(30,456,632	)	$	6,890,123		$	66,846,247

A statement of the changes in equity for the three months ended September 30, 2019 is provided below:

					Additional									Other			Non			Total
	Common Stock				Paid-in			Treasury			Accumulated			Comprehensive			Controlling			Stockholders’
	Shares		Amount		Capital			Shares			Deficit			Loss			Interest			Equity
Balance at June 30, 2019		11,911,742	$	119,117	$	127,737,999		$	(1,455,969	)	$	(35,206,898	)	$	(33,125,006	)	$	8,414,987		$	66,484,230
Exercise of subsidiary common stock options		-		-		(28,097	)		-			-			-			39,718			11,621
Common stock issued for:
Services		60,367		604		342,177			-			-			-			-			342,781
Foreign currency translation adjustment		-		-		-			-			-			903,345			584,356			1,487,701
Net loss		-		-		-			-			(1,827,947	)		-			(433,312	)		(2,261,259	)
Balance at September 30, 2019		11,972,109	$	119,721	$	128,052,079		$	(1,455,969	)	$	(37,034,845	)	$	(32,221,661	)	$	8,605,749		$	66,065,074

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 6

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

A statement of the changes in equity for the three months ended December 31, 2018 is provided below:

													Stock
					Additional								Sub-			Other			Non			Total
	Common Stock				Paid-in		Treasury			Accumulated			scriptions			Comprehensive			Controlling			Stockholders’
	Shares		Amount		Capital		Shares			Deficit			Receivable			Loss			Interest			Equity
Balance at September 30, 2018		11,782,360	$	117,824	$	126,918,319	$	(1,205,024	)	$	(42,827,708	)	$	(221,000	)	$	(24,649,274	)	$	11,315,509			69,448,646
Exercise of common stock options		10,000		100		64,900		-			-			-			-			-			65,000
Common stock issued for:
Services		67,950		679		415,519		-			-			-			-			-			416,198
Dividend to non-controlling interest		-		-		-		-			-			-			-			(566,465	)		(566,465	)
Foreign currency translation adjustment		-		-		-		-			-			-			(3,797,537	)		(1,986,953	)		(5,784,490	)
Net income		-		-		-		-			2,855,629			-			-			1,475,355			4,330,984
Balance at December 31, 2018		11,860,310	$	118,603	$	127,398,738	$	(1,205,024	)	$	(39,972,079	)	$	(221,000	)	$	(28,446,811	)	$	10,237,446		$	67,909,873

A statement of the changes in equity for the three months ended September 30, 2018 is provided below:

														Stock
					Additional									Sub-			Other			Non			Total
	Common Stock				Paid-in			Treasury			Accumulated			scriptions			Comprehensive			Controlling			Stockholders’
	Shares		Amount		Capital			Shares			Deficit			Receivable			Loss			Interest			Equity
Balance at June 30, 2018		11,708,469	$	117,085	$	126,479,147		$	(1,205,024	)	$	(37,994,502	)	$	(221,000	)	$	(24,386,071	)	$	14,146,417			76,936,052
Adjustment in retained earnings on adoption of ASC 606		-		-		-			-			(5,795,795	)		-			-			(2,957,860	)		(8,753,655	)
Exercise of subsidiary common stock options		-		-		(6,629	)		-			-			-			-			9,279			2,650
Common stock issued for:
Services		73,891		739		445,801			-			-			-			-			-			446,540
Foreign currency translation adjustment		-		-		-			-			-			-			(263,203	)		(200,873	)		(464,076	)
Net income		-		-		-			-			962,589			-			-			318,546			1,281,135
Balance at September 30, 2018		11,782,360	$	117,824	$	126,918,319		$	(1,205,024	)	$	(42,827,708	)	$	(221,000	)	$	(24,649,274	)	$	11,315,509		$	69,448,646

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 7

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months
	Ended December 31,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(1,714,323	)	$	5,612,119
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,871,883			2,223,663
Provision for bad debts		(20,699	)		-
Share of net loss from investment under equity method		354,020			597,984
Gain on sale of assets		(239	)		(48,790	)
Stock based compensation		328,585			869,743
Changes in operating assets and liabilities:
Accounts receivable		4,554,558			4,208,751
Accounts receivable - related party		2,229,695			(219,538	)
Revenues in excess of billing		(1,088,693	)		(7,633,216	)
Revenues in excess of billing - related party		14,823			(91,279	)
Other current assets		(208,065	)		(1,409,746	)
Accounts payable and accrued expenses		490,875			139,331
Unearned revenue		(3,019,493	)		(1,094,375	)
Net cash provided by operating activities		3,792,927			3,154,647

Cash flows from investing activities:
Purchases of property and equipment		(785,999	)		(1,441,237	)
Sales of property and equipment		32,524			519,645
Convertible note receivable - related party		(535,000	)		(1,033,000	)
Net cash used in investing activities		(1,288,475	)		(1,954,592	)

Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants		-			65,000
Proceeds from exercise of subsidiary options		11,621			2,650
Dividend paid by subsidiary to non-controlling interest		(1,920,618	)		(566,465	)
Proceeds from bank loans		2,074,341			382,240
Payments on finance lease obligations and loans - net		(102,499	)		(289,027	)
Net cash provided by (used in) financing activities		62,845			(405,602	)
Effect of exchange rate changes		2,149,923			(2,562,502	)
Net increase (decrease) in cash and cash equivalents		4,717,220			(1,768,049	)
Cash and cash equivalents at beginning of the period		17,366,364			22,088,853
Cash and cash equivalents at end of period	$	22,083,584		$	20,320,804

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 8

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	For the Six Months
	Ended December 31,
	2019		2018
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest	$	149,210	$	170,571
Taxes	$	805,709	$	435,659

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired under finance lease	$	-	$	66,256
Assets recognized under operating lease	$	3,571,947	$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 9

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and 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. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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 condensed consolidated 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, 2019. 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 condensed consolidated financial statements include the accounts of NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows:

Wholly owned Subsidiaries

NetSol Technologies Americas, Inc. (“NTA”)

OTOZ, Inc. (“OTOZ”)

NetSol Connect (Private), Ltd. (“Connect”)

NetSol Technologies Australia Pty Ltd. (“Australia”)

NetSol Technologies Europe Limited (“NTE”)

NTPK (Thailand) Co. Limited (“NTPK Thailand”)

NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)

Virtual Lease Services Limited (“VLS”)

Virtual Lease Services (Ireland) Limited (“VLSIL”)

Majority-owned Subsidiaries

NetSol Technologies, Ltd. (“NetSol PK”)

NetSol Innovation (Private) Limited (“NetSol Innovation”)

NetSol Technologies Thailand Limited (“NetSol Thai”)

Page 10

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

For comparative purposes, prior year’s condensed consolidated financial statements have been reclassified to conform to report classifications of the current period. Below is the table of reclassified amounts:

	For the Three Months Ended				For the Six Months Ended
	December 31, 2018				December 31, 2018
	Originally reported		Reclassified		Originally reported		Reclassified

REVENUES
License fees	$	4,817,569	$	4,817,569	$	10,773,682	$	10,773,682
Maintenance fees		3,534,693		3,661,723		7,173,020		7,401,399
Services		8,237,334		8,348,843		14,655,968		14,819,468
Maintenance fees - related party		127,030		-		228,379		-
Services - related party		286,001		174,492		568,123		404,623
Total net revenues	$	17,002,627	$	17,002,627	$	33,399,172	$	33,399,172

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. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates.

Concentration of Credit Risk

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of December 31, 2019, and June 30, 2019, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $20,260,523 and $16,124,339, respectively. The Company has not experienced any losses in such accounts.

The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Page 11

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Fair Value of Financial Instruments

The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

The three levels of valuation hierarchy are defined as follows:

Level 1:	Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.

Level 2:	Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.

Level 3:	Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

The Company’s assets that were measured at fair value on a recurring basis as of December 31, 2019, were as follows:

	Level 1		Level 2		Level 3		Total Assets
Revenues in excess of billing - long term	$	-	$	-	$	1,291,025	$	1,291,025
Total	$	-	$	-	$	1,291,025	$	1,291,025

The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2019, were as follows:

	Level 1		Level 2		Level 3		Total Assets
Revenues in excess of billing - long term	$	-	$	-	$	1,281,492	$	1,281,492
Total	$	-	$	-	$	1,281,492	$	1,281,492

The reconciliation from June 30, 2019 to December 31, 2019 is as follows:

	Revenues in excess of billing - long term			Fair value discount			Total
Balance at June 30, 2019	$	1,380,631		$	(99,139	)	$	1,281,492
Amortization during the period		-			27,681			27,681
Effect of Translation Adjustment		(19,808	)		1,660			(18,148	)
Balance at December 31, 2019	$	1,360,823		$	(69,798	)	$	1,291,025

Page 12

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model.

New Accounting Pronouncements

Recent Accounting Standards Adopted by the Company:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of July 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods presented in the year of adoption. Accordingly, the comparative periods and disclosures have not been restated.

The Company elected the package of practical expedients to not reassess:

	●	whether a contract is or contains a lease
	●	lease classification
	●	initial direct costs

Additionally, the Company adopted the policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

Adoption of the new standard resulted in the recording of a non-cash transitional adjustment to ROU assets and lease liabilities of approximately $3,011,814 and $3,091,236, respectively, as of July 1, 2019. The difference between the ROU assets and lease liabilities represented existing deferred rent expense and prepaid rent that were derecognized and adjusted ROU assets in the Condensed Consolidated Balance Sheets. The adoption of ASU 2016-02 did not materially impact the results of operations or cash flows.

Accounting Standards Recently Issued but Not Yet Adopted by the Company:

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after the adoption date.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

Page 13

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 3 – REVENUE RECOGNITION

The Company determines revenue recognition through the following steps:

●	Identification of the contract, or contracts, with a customer;
●	Identification of the performance obligations in the contract;
●	Determination of the transaction price;
●	Allocation of the transaction price to the performance obligations in the contract; and
●	Recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

The Company has two primary revenue streams: core revenue and non-core revenue.

Core Revenue

The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

Non-Core Revenue

The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.

Subscription

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

Page 14

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Software Licenses

Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.

Maintenance

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

Professional Services

Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

BPO and Internet Services

Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Page 15

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

The Company’s disaggregated revenue by category is as follows:

	For the Three Months				For the Six Months
	Ended December 31,				Ended December 31,
	2019		2018		2019		2018
Core:
License	$	383,963	$	4,817,569	$	3,063,108	$	10,773,682
Maintenance		4,965,877		3,661,723		9,357,324		7,401,399
Services		8,559,529		6,868,621		13,185,798		11,856,646
Services - related party		57,424		174,492		140,357		337,337
Total core revenue, net		13,966,793		15,522,405		25,746,587		30,369,064

Non-Core:
Services		1,723,226		1,480,222		3,515,848		2,962,822
Services - related party		-		-		-		67,286
Total non-core revenue, net		1,723,226		1,480,222		3,515,848		3,030,108

Total net revenue	$	15,690,019	$	17,002,627	$	29,262,435	$	33,399,172

Significant Judgments

Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.

The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from maintenance and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.

The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.

Page 16

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

The Company’s revenues in excess of billings and deferred revenue are as follows:

	As of		As of
	December 31, 2019		June 30, 2019

Revenues in excess of billings	$	17,242,705	$	16,111,366

Deferred Revenue	$	3,135,721	$	5,977,736

During the three and six months ended December 31, 2019, the Company recognized revenue of $2,051,136 and $5,051,198, respectively, that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

Page 17

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $65,347,649 as of December 31, 2019, of which the Company estimates to recognize approximately $13,454,230 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

Deferred Revenue

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.

Practical Expedients and Exemptions

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients applied by the Company:

●	The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
●	The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.
●	The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

Costs to Obtain a Contract

The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfilment duties and collections efforts.

Page 18

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 4 – EARNINGS 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 and stock awards.

The components of basic and diluted earnings per share were as follows:

	For the three months ended December 31, 2019						For the six months ended December 31, 2019
	Net Income		Shares		Per Share		Net Loss			Shares		Per Share
Basic income (loss) per share:
Net income (loss) available to common shareholders	$	585,975		11,724,606	$	0.05	$	(1,241,972	)		11,694,423	$	(0.11	)
Effect of dilutive securities
Stock options		-		-		-		-			-		-
Diluted income (loss) per share	$	585,975		11,724,606	$	0.05	$	(1,241,972	)		11,694,423	$	(0.11	)

	For the three months ended December 31, 2018						For the six months ended December 31, 2018
	Net Income		Shares		Per Share		Net Income		Shares		Per Share
Basic income per share:
Net income available to common shareholders	$	2,855,629		11,586,507	$	0.25	$	3,818,218		11,542,877	$	0.33
Effect of dilutive securities
Stock options		-		5,686		-		-		5,686		-
Diluted income per share	$	2,855,629		11,592,193	$	0.25	$	3,818,218		11,548,563	$	0.33

The following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

	For the Three Months				For the Six Months
	Ended December 31,				Ended December 31,
	2019		2018		2019		2018

Stock Options		40,386		126,083		40,386		126,083
Share Grants		119,921		-		119,921		-
		160,307		126,083		160,307		126,083

Page 19

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY

The accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, 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 $30,456,632 and $33,125,006 as of December 31, 2019 and June 30, 2019, respectively. During the three and six months ended December 31, 2019, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $1,765,029 and $2,668,374, respectively. During the three and six months ended December 31, 2018, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $3,797,537 and $4,060,740, respectively.

NOTE 6 – RELATED PARTY TRANSACTIONS

NetSol-Innovation

In November 2004, the Company entered into a joint venture with 1insurer, formerly Innovation Group, called NetSol-Innovation. NetSol-Innovation provided support services to 1insurer. During the three and six months ended December 31, 2019, NetSol Innovation provided $Nil services. During the three and six months ended December 31, 2018, NetSol Innovation provided services of $Nil and $67,286, respectively. Accounts receivable at December 31, 2019 and June 30, 2019 were $Nil and $2,130,041, respectively.

NOTE 7 – MAJOR CUSTOMERS

During the six months ended December 31, 2019 revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $8,691,233 and $4,793,304 representing 29.7% and 16.4% of revenues. During the six months ended December 31, 2018, revenues from DFS and BMW were $10,563,362 and $7,353,916 representing 31.6% and 22.0% of revenues. The revenue from these customers are shown in the Asia – Pacific segment.

Accounts receivable from the DFS and BMW at December 31, 2019, were $1,230,133 and $359,838, respectively. Accounts receivable at June 30, 2019, were $7,917,814 and $159,322, respectively. Revenues in excess of billings at December 31, 2019 were $6,605,189 and $5,465,422, respectively. Revenues in excess of billings at June 30, 2019, were $4,371,081 and $5,472,043, respectively. Included in this amount was $1,291,025 and $1,281,492 shown as long term at December 31, 2019 and June 30, 2019, respectively.

NOTE 8 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “August 2019 Note”) which was fully executed on August 19, 2019. The maximum principal amount of $400,000 was paid on September 9, 2019. The August 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2020. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

The August 2019 Note is convertible upon the occurrence of the following events:

	1.	Conversion upon a qualified financing which is an equity financing of at least $1,000,000.
	2.	Optional conversion upon an equity financing less than $1,000,000.
	3.	Optional conversion after the maturity date.
	4.	Change of control.

Page 20

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

If the Company converts the August 2019 Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securities by the investors multiplied by (B) a calculated conversion rate which is determined based on the amount of the principal and interest outstanding and the Company’s ownership percentage.

If the Company converts the August 2019 Note either as an optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the August 2019 Note).

The following table summarizes the convertible notes receivable from WRLD3D.

				Convertible
Agreement	Interest		Maturity	Note		Amount
Date	Rate		Date	Amount		Disbursed
May 25, 2017		5%	On Demand	$	750,000	$	750,000
February 9, 2018		10%	On Demand		2,500,000		2,500,000
April 1, 2019		10%	March 31, 2020		600,000		535,000
August 19, 2019		10%	March 31, 2020		400,000		400,000
				$	4,250,000	$	4,185,000

The Company has accrued interest of $508,235 and $328,748 at December 31, 2019 and June 30, 2019, respectively, which is included in “Other current assets.

NOTE 9 - OTHER CURRENT ASSETS

Other current assets consisted of the following:

	As of		As of
	December 31, 2019		June 30, 2019

Prepaid Expenses	$	1,040,611	$	991,528
Advance Income Tax		747,863		800,798
Employee Advances		97,140		33,778
Security Deposits		152,805		147,668
Other Receivables		1,056,559		733,826
Other Assets		297,212		438,666
Total	$	3,392,190	$	3,146,264

Page 21

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 10 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

Revenues in excess of billings, net consisted of the following:

	As of			As of
	December 31, 2019			June 30, 2019

Revenues in excess of billing - long term	$	1,360,823		$	1,380,631
Present value discount		(69,798	)		(99,139	)
Net Balance	$	1,291,025		$	1,281,492

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2019, the Company accreted $13,821 and $27,681 which was recorded in interest income for that period. The Company used the discounted cash flow method with an interest rate of 4.35%.

NOTE 11 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	As of			As of
	December 31, 2019			June 30, 2019

Office Furniture and Equipment	$	3,326,658		$	3,125,382
Computer Equipment		20,242,827			18,905,603
Assets Under Capital Leases		1,671,055			1,720,490
Building		6,331,664			6,021,939
Land		1,641,773			1,559,111
Capital Work In Progress		13,859			-
Autos		1,403,884			1,024,754
Improvements		96,223			111,165
Subtotal		34,727,943			32,468,444
Accumulated Depreciation		(22,059,254	)		(20,371,589	)
Property and Equipment, Net	$	12,668,689		$	12,096,855

For the three and six months ended December 31, 2019, depreciation expense totaled $484,662 and $950,113, respectively. Of these amounts, $269,183 and $532,247, respectively, are reflected in cost of revenues. For the three months ended December 31, 2018, depreciation expense totaled $533,837 and $1,097,965, respectively. Of these amounts, $340,058 and $691,954, respectively, are reflected in cost of revenues.

Page 22

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Following is a summary of fixed assets held under finance leases as of December 31, 2019 and June 30, 2019:

	As of			As of
	December 31, 2019			June 30, 2019
Computers and Other Equipment	$	340,367		$	324,466
Furniture and Fixtures		65,084			65,084
Vehicles		1,265,604			1,330,940
Total		1,671,055			1,720,490
Less: Accumulated Depreciation - Net		(638,759	)		(538,564	)
	$	1,032,296		$	1,181,926

Finance lease term and discount rate were as follows:

	As of
	December 31, 2019

Weighted average remaining lease term - finance leases		1.9 Years

Weighted average discount rate - finance leases		13.0	%

NOTE 12 - LEASES

The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years.

The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company used the incremental borrowing rate on July 1, 2019 for all leases that commenced prior to that date. For finance leases, the Company used the incremental borrowing rate implicit in the lease.

The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.

The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.

Page 23

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a remeasurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants.

Supplemental balance sheet information related to leases was as follows:

	As of
	December 31, 2019
Assets
Operating lease assets, net	$	3,050,885

Liabilities
Current Operating	$	1,182,850
Non-current Operating		1,966,770
Total Lease Liabilities	$	3,149,620

The components of lease cost were as follows:

	For the Six Months
	Ended December 31, 2019

Amortization of finance lease assets	$	135,000
Interest on finance lease obligation		52,331
Operating lease cost		598,069
Short term lease cost		152,972
Sub lease income		(16,713	)
Total lease cost	$	921,659

Lease term and discount rate were as follows:

	As of
	December 31, 2019

Weighted average remaining lease term - Operating leases		2.9 Years

Weighted average discount rate - Operating leases		5.6	%

Page 24

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

Supplemental disclosures of cash flow information related to leases were as follows:

	For the Six Months
	Ended December 31, 2019

Cash flows related to lease liabilities
Operating cash flows related to operating leases	$	566,589

Maturities of operating lease liabilities were as follows as of December 31, 2019:

	Amount
Within year 1	$	1,323,467
Within year 2		1,074,055
Within year 3		723,321
Within year 4		228,248
Within year 5		61,578
Thereafter		3,836
Total Lease Payments		3,414,505
Less: Imputed interest		(264,885	)
Present Value of lease liabilities		3,149,620
Less: Current portion		(1,182,850	)
Non-Current portion	$	1,966,770

As of June 30, 2019, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under non-cancelable operating leases for the following five fiscal years and thereafter were as follows:

Within year 1	$	744,549
Within year 2		514,243
Within year 3		269,375
Within year 4		197,872
Within year 5		36,044
Total	$	1,762,083

The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and terminate by July 2021. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2019, the Company received $8,514 and $16,713 of lease income.

Page 25

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 13 – LONG TERM INVESTMENT

Drivemate

The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement (“Drivemate Agreement”) whereby the Company will purchase an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company will purchase 5,469 preferred shares for $1,800,000 consisting of $500,000 cash and $1,300,000 in services. The Company paid $250,000 on May 2, 2019 and received 760 shares for a 5.27% holding in Drivemate. The remaining $250,000 will be paid in $62,500 increments beginning 15 months from the date of the Drivemate Agreement signing with the final payment due 24 months from the date of the Drivemate Agreement signing. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company is to own 30% of Drivemate at the final payment date; therefore, the Company accounts for the investment using the equity method of accounting.

During the three and six months ended December 31, 2019, the Company performed $303,101 and $507,716 of services, respectively.

Under the equity method of accounting, the Company recorded its share of net loss of $5,856 and $11,248 for the three and six months ended December 31, 2019, respectively.

WRLD3D-Related Party

On March 2, 2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which was earned by providing IT and enterprise software solutions.

During the three and six months ended December 31, 2019, NetSol PK provided services valued at $57,424 and $140,357, respectively, which is recorded as services-related party. During the three months and six months ended December 31, 2018, NetSol PK provided services valued at $174,492 and $337,337, respectively, which is recorded as services-related party. Accounts receivable at December 31, 2019 and June 30, 2019 were $1,231,181 and $1,020,589, respectively. Revenue in excess of billing at December 31, 2019 and June 30, 2019 were $101,669 and $110,827, respectively.

Under the equity method of accounting, the Company recorded its share of net loss of $158,940 and $342,772 for the three and six months ended December 31, 2019, respectively, and the Company recorded its share of net loss of $298,293 and $597,984 for the three and six months ended December 31, 2018, respectively.

The following table reflects the above investments at December 31, 2019.

	DriveMate			WRLD3D			Total
Initial investment		250,000			3,888,889			4,138,889
Cumulative net loss on investment		(14,936	)		(1,330,542	)		(1,345,478	)
Cumulative Other comprehensive income (loss)		-			(381,604	)		(381,604	)
Net Investment		235,064			2,176,743			2,411,807

Page 26

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

(Unaudited)

NOTE 14 - INTANGIBLE ASSETS

Intangible assets consisted of the following:

	As of			As of
	December 31, 2019			June 30, 2019

Product Licenses - Cost	$	47,244,997		$	47,244,997
Effect of Translation Adjustment		(14,099,205	)		(15,343,727	)
Accumulated Amortization		(26,352,946	)		(24,568,320	)
Net Balance	$	6,792,846		$	7,332,950