NETSOL TECHNOLOGIES INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were effective. Management’s Report on Internal Control over Financial Reporting Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP). Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2020. This assessment was based on the criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, the Company has determined that as of June 30, 2020, the Company’s internal control over financial reporting are effective. Changes in Internal Control over Financial Reporting There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal year 2020, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)). ITEM 9B. OTHER INFORMATION NONE 32 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers and persons owning more than 10% of the outstanding Common Stock, file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and beneficial owners of more than 10% of the Company’s Common Stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on copies of such forms furnished as provided above, or written representations that no such forms were required, the Company believes that during the fiscal year ended June 30, 2020, all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of more than 10% of its Common Stock were complied with. CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS Board of Directors At the 2019 Annual Shareholders Meeting held in June 2020, a five-member board stood for election. The members were elected and, according to the bylaws of the company shall retain their position as directors until the next meeting. The board of directors is made up of Mr. Najeeb U. Ghauri (Chairman of the Board), Mr. Mark Caton, Ms. Malea Farsai, Mr. Kausar Kazmi and Mr. Henry Tolentino. Committees The Audit Committee is made up of Mr. Kazmi, as Chairman, with Mr. Caton and Mr. Tolentino as members. The Compensation Committee consists of Mr. Caton, as Chairman, with Mr. Kazmi and Mr. Tolentino as its members. The Nominating and Corporate Governance Committee consists of Mr. Tolentino, as Chairman, with Mr. Caton and Mr. Kazmi as its members. The table below provides the membership for each of the committees during Fiscal Year 2020. Nominating and Corporate Audit Compensation Governance Director Committee Committee Committee Najeeb Ghauri Naeem Ghauri * Malea Farsai Shahid J. Burki (I)* X (C) X X Mark Caton (I) X X (C) X Kausar Kazmi (I) (A) X X X Henry Tolentino (I) X X X (C) * Mr. Ghauri and Mr. Burki did not stand for reelection in June 2020. (I) Denotes an Independent Director. (C) Denotes the Chairperson of the Committee. (A) Mr. Kazmi became the Audit Committee Chairman in July 2020. 33 DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The Board of Directors elects the executive officers of the Company annually. Each year the stockholders elect the Board of Directors. The executive officers serve varying terms until their death, resignation or removal by the Board of Directors. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. The directors and executive officers of the Company are as follows: Name Year First Elected as an Officer or Director Age Position Held with the Registrant Family Relationship Najeeb Ghauri 1997 66 Chief Executive Officer, Chairman and Director None Roger Almond 2013 55 Chief Financial Officer None Patti L. W. McGlasson 2004 55 Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel None Mark Caton 2002 71 Director None Malea Farsai 2018 51 Director; Corporate Counsel None Henry Tolentino 2018 71 Director None Syed Kausar Kazmi 2019 67 Director None Business Experience of Officers and Directors: NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer from January 1998 to September 2002 and from October 2006 to present. Mr. Ghauri is a co-founder of NetSol Technologies, Inc. He was responsible for NetSol listing on NASDAQ in 1999, the NetSol subsidiary listing on KSE (Karachi Stock Exchange) in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008. Mr. Ghauri served as the Company’s Chief Executive Officer from 1999 to 2001 and as the Chief Financial Officer from 2001 to 2005. As CEO, Mr. Ghauri is responsible for managing the day-to-day operations of the Company, as well as the Company’s overall growth and expansion plan. In 2017, Mr. Najeeb Ghauri as the CEO, implemented a Company-wide initiative cutting costs which saved the Company in excess of $7,000,000. Mr. Ghauri was also instrumental in the substantial increase in revenue for fiscal year end 2015. In addition, Mr. Ghauri traveled overseas multiple times to execute the largest contract for the Company, worth over $100 million, in December 2015. Prior to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company (ARCO) (now acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent nearly five years with Unilever as brand and sales managers. Mr. Ghauri attended Eastern Illinois University where he received a Bachelor of Science degree in Management/Economics in 1978. He also received an M.B.A. in Marketing Management from Claremont Graduate School in California in 1981. Mr. Ghauri was elected Vice Chairman of US Pakistan Business Council in 2006, a Washington D.C. based council of US Chamber of Commerce. He is also very active in several philanthropic activities in emerging markets and is a founding director of Pakistan Human Development Fund, a non-profit organization, a partnership with UNDP to promote literacy, health services and poverty alleviation in Pakistan. Mr. Ghauri has participated in NASDAQ opening and/or closing bell ceremonies in 2006, 2008,2009 and 2020. Skills and Qualifications : Mr. Ghauri has an extensive executive, operational and strategic leadership experience in a global setting. Substantial experience in establishing management performance objective and establishing goals. 34 ROGER ALMOND was appointed Chief Financial Officer on September 9, 2013. Since 2007, Roger Almond held the position of Senior Manager at Pickard & Green Certified Public Accountants where he and his team were responsible for assisting national and international companies with their financial reporting requirements to the SEC. Roger Almond’s duties also included overseeing multiple entity consolidations, converting financial data to US GAAP, preparing financials statements, footnotes and MD&A. Prior to his current position, Roger Almond held the position of Assurance Manager at Grant Thornton LLP, in Los Angeles, California from 2003-2006. From November 1999 to August 2003, he was the Chief Financial Officer of Keysor Century Corporation located in Saugus, California. Roger Almond received his BS in Accounting from Brigham Young University in 1991 and he is a Certified Public Accountant licensed in California. He has also completed executive management courses at UCLA in 2001. PATTI L. W. MCGLASSON joined NetSol as General Counsel in January 2004 and was elected to the position of Secretary in March 2004. She was appointed Senior Vice President, Corporate and Legal Affairs in 2013. In the role of General Counsel, Ms. McGlasson is responsible for leading NetSol’s legal department company-wide. She is also responsible for the implementation of the Company’s internal corporate governance and policy plans, ethics and business conduct. She oversees all board meetings in her executive position as corporate secretary. Ms. McGlasson has nearly 28 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. Immediately prior to joining NetSol, Patti practiced at Vogt & Resnick, law corporation. She was admitted to practice in California in 1991. She received her Bachelor of Arts in Political Science in 1987 from the University of California, San Diego and, her Juris Doctor and Masters in Law in Transnational Business from the University of the Pacific, McGeorge School of Law, in 1991 and 1993, respectively. As part of her Masters in Law in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke in Rotterdam, the Netherlands in 1991. MARK CATON joined the Board of Directors in 2007. Mr. Caton is currently President of Ciena Financial, Inc. a diversified financial services company, a position he has held since 2006. Prior to joining Ciena, Mr. Caton was President of NetSol Technologies USA, responsible for US sales, from June 2002 to December 2003. Mr. Caton was employed by ePlus from 1994 to 2002 as Senior Vice President-Business Development. He was a member of the UCLA Alumni Association Board of Directors and served on the Board of Directors of NetSol from 2002-2003. Mr. Caton is a Chairman of the Compensation Committee and a member of the Audit and Nominating and Corporate Governance Committees. Mr. Caton received his BA from UCLA in psychology in 1971. Skills and Qualifications : Mr. Caton has over 25 years of experience in marketing and management. MALEA FARSAI joined the Board of Directors for the first time in 2018 and is currently the Company’s Corporate Counsel. Before joining NetSol in March 2000, Ms. Farsai was an associate at the law firm of Horowitz and Beam where she represented both domestic and international private and public clients from technology to apparel in various transactions. She has also worked on the formation of business startups and IPOs. Ms. Farsai was on the team that took the Company public and is the one who listed NetSol on NASDAQ in 1999 and has maintained its listing since then to current. After nearly two decades with NetSol, Ms. Farsai continues to work part-time as the Company’s Corporate Counsel overseeing the Company’s insurance needs as well as day to day corporate legal needs. She has also obtained many of NetSol’s various trademarks for the Company. During her tenure as a Board member this past year, Ms. Farsai has been actively updating and overseeing the Company’s Corporate and Social Responsibilities (CSR) globally. Prior to joining NetSol, she practiced law with the law firm of Horowitz and Beam in Irvine, California from 1996-2000. Ms. Farsai received her B.A. degree from University of California, Irvine and her J.D. in 1996, and has been a member of the California State Bar since 1996. She sits on the board of various charitable organizations in Los Angeles. Skills and Qualifications: Ms. Farsai has served the Company and its legal department since its inception and has a breadth of knowledge and understanding about NetSol’s business through her role as Corporate Counsel. She also has an understanding of Public Company corporate governance as well as the management and retention of a diverse group of employees. 35 HENRY TOLENTINO joined the Board of Directors in 2018. Mr. Tolentino brings more than 30 years of experience in the auto finance industry working with global manufacturers such as Toyota and General Motors. Prior to joining NetSol’s advisory board, Mr. Tolentino has held several executive positions at Toyota Leasing (Thailand) Co., Ltd., including most recently as president from 2006 to 2014 and then served as an advisor from 2015 to 2016. Prior to Toyota Leasing, Mr. Tolentino spent more than 10 years with Toyota Motor Credit Corporation, USA. He began his career in the auto finance industry with General Motors Acceptance Corporation. Mr. Tolentino joined the advisory board of NetSol in September 2017 where he provided strategic advice to the senior management of the Company. Mr. Tolentino is the Chairman of the Nomination and Corporate Governance Committee and member of the Audit and Compensation Committees. Skills and Qualifications : Mr. Tolentino has significant knowledge in international automobile manufacturing, business strategy and managing growth in the automotive industry. SYED KAUSAR KAZMI joined the Board of Directors in 2019. Mr. Kazmi brings over 40 years of expertise in the banking industry and is currently the Head of Commercial Banking and Business Development at Habib Bank Zurich PLC, located in London where he has served in this capacity since 2016. Prior to this position, Mr. Kazmi served as the Head of Business Development for UK and Europe at Habib Bank AG Zurich in London from 2012-2016, before which Mr. Kazmi was the CEO of the UK operations of Habib Bank AG Zurich from 2009-2012. In 2018, Mr. Kazmi was awarded by Power 100, Parliamentary Review in association with The British Publishing Company a “Lifetime Achievement Award” for his significant and lasting impact on the banking sector. In addition, Mr. Kazmi has been awarded by the Asian Media Group the “GG2 Power List” celebrating Britain’s 101 most influential Asians from 2016-2018. Mr. Kazmi received his BSc in Chemical Engineering with II Class Honors from Habib Institute of Technology in 1974. He sits on the board of many charitable organizations, with a focus on helping raise funds. Mr. Kazmi will succeed Mr. Burki as the Chairman of the Audit Committee and is a member of the Nominating and Corporate Governance and Compensation Committees. Skills and Qualifications : Mr. Kazmi has strong financial services and management expertise. He directs the operations of a financial services business, expending its focus on business development. 36 CORPORATE GOVERNANCE Code of Business Conduct & Ethics The Company adopted its Code of Business Conduct & Ethics, as amended and restated on September 9, 2013, applicable to every officer, director and employee of the Company, including, but not limited to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct & Ethics has been posted on our website and may be viewed at http://ir.netsoltech.com/governance-docs. Audit Committee The Company has an Audit Committee whose members are the independent directors of the Company, specifically, Mr. Kazmi, Mr. Caton, and Mr. Tolentino. Mr. Kazmi is the current Chairman of the Audit Committee. Audit Committee Financial Expert The Company has identified its audit chairperson, Mr. Kausar Kazmi as its Audit Committee financial expert. Mr. Kazmi is an independent board member as the term is defined in the Nasdaq Listing Rules. Mr. Kazmi’s over 40 years of experience in the banking industry including his current tenure as Head of Commercial Banking and Business Development for UK and Europe for Habib Bank AG Zurich as well as his service as a board member on various charities as the board member responsible for fundraising, provides him with an understanding of generally accepted accounting principles and financial reporting. Additionally, this experience provides an ability to assess the general application of accounting principles in connection with the accounting for estimates, accruals and reserves; experience analyzing financial statements that were comparable in the breadth and complexity of issues that can be reasonably expected to be raised by the Company’s financial statements; an understanding of internal control over financial reporting; and an understanding of audit committee functions. ITEM 11-EXECUTIVE COMPENSATION Introduction Our Compensation Committee is responsible for establishing and overseeing compensation programs that comply with NetSol’s executive compensation philosophy. As described in this Compensation Discussion and Analysis (“CD&A”), the Compensation Committee follows a disciplined process for setting executive compensation. This process involves analyzing factors such as company performance, individual performance, strategic goals and competitive market data to arrive at each element of compensation. The Compensation Committee approves compensation decisions for all executive officers. An independent compensation consultant helps the Compensation Committee by providing advice, information, and an objective opinion. This CD&A will focus on the compensation awarded to NetSol’s “named executive officers”—the Chief Executive Officer, Chief Financial Officer, and General Counsel, Corporate Secretary. You can find more complete information about all elements of compensation for the named executive officers in the following discussion and in the Summary Compensation table that appears on page 45. Fiscal 2020 Executive Compensation Highlights and Governance This section identifies the most significant decisions and changes made regarding NetSol’s executive compensation in fiscal year 2020. Shareholder Approval of Compensation At the last annual general meeting held on June 26, 2020, shareholders expressed support for our executive compensation programs, with 80.40% of votes cast at the meeting voting to ratify the compensation of our named executive officers. Although the advisory shareholder vote on executive compensation is non-binding, the Compensation Committee has considered, and will continue to consider, the outcome of the vote and the sentiments of our shareholders when making future compensation decisions for the named executive officers. Based on the results from our last annual general meeting, the Compensation Committee believes shareholders support the Company’s executive compensation philosophy and the compensation paid to the named executive officers. 37 Taking into account the marked increase in support of this plan at the June 26, 2020 Annual Shareholders Meeting, the Compensation Committee believes the compensation program meaningfully explains the Compensation Committee’s compensation decisions and its determination to tie long term incentives of the Chief Executive Officer to performance criteria. The Compensation Committee continues to reach out to its shareholders regarding their positions on the Company’s compensation program. In connection with the proxy solicitations, the executive compensation was discussed with certain of our top shareholders and their general acceptance of the compensation structure is reflected in the proxy vote results. Accordingly, the Compensation Committee will continue to provide the CEO with a bonus criterion that is based on total revenues and income from operations on a graduated basis. Bonuses would be paid 60% in cash and 40% in stock valued at the share price on June 30 th of the fiscal year in which it was earned. Based on the 2016 Annual Meeting of Shareholders vote on the Frequency of Say on Pay voting, we will continue to provide our stockholders with an annual opportunity to cast an advisory vote on the compensation programs for our named executive officers and as always, the stockholders are welcome to contact Investor Relations with any questions. Governance and Evolving Compensation Practices The Compensation Committee and the Board are aware of evolving practices in executive compensation and corporate governance. In response, we have adopted and/or maintained certain policies and practices that are in keeping with “best practices” in many areas. For example: ● The Compensation Committee engages an independent compensation consultant to evaluate our chief executive officer’s executive compensation practices in comparison to a peer group. ● We do not provide excessive executive perquisites to our named executive officers. ● Our incentive plans expressly prohibit repricing of options (directly or indirectly) without prior shareholder approval. ● Our policy on the prevention of insider trading prohibits various types of transactions involving Company stock or securities, including short sales, options trading, hedging, margin purchases and pledges. ● Our stock ownership guidelines require our executive officers to align their long-term interests with those of our stockholders. ● Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, in an open market transaction. ● Beginning with our fiscal year 2018 to current, we modified our compensation practices for our CEO to tie a significant portion to financial results both on a top line and bottom-line basis. General Compensation Overview For 2020, compensation designed for our executive officers consisted of: ● Base Salary ● Cash awards at the discretion of the Compensation Committee ● Long term equity in the form of time-based restricted stock; and ● Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees. In response to discussions we have had with certain shareholders and given the percentage voting in favor of our executive compensation, beginning with the 2019 fiscal year, Chief Executive Officer compensation shall consist of: ● Base Salary ● Short-term cash awards conditioned upon achieving objective performance targets ● Long-term equity in the form of time and objective performance targets; and ● Ability to participate generally in all group health and welfare benefit programs and tax-qualified retirement plans on the same basis as applicable to all of our employees. 38 The Compensation Committee administers the cash and non-cash compensation programs applicable to our executive officers. The Compensation Committee makes all decisions about executive officer compensation for the Chief Executive Officer and the remaining named executives after discussion with our Chief Executive Officer about his direct reports. The Compensation Committee has often refined the direct reports’ compensation recommendations made by the Chief Executive Officer. Our Chief Executive Officer’s compensation is determined solely by the Compensation Committee, which, consistent with NASDAQ requirements, is comprised exclusively of independent directors, and the Chief Executive Officer does not participate in Committee decisions surrounding his compensation. Independent Compensation Consultant The Compensation Committee retained Compensation Resources, Inc. as its independent compensation consultant. Compensation Resources provided chief executive officer and director compensation consulting services to the Compensation Committee, including a competitive market analysis of peers and the base salary, total cash compensation and total direct compensation. Interactions with Compensation Resources was limited to the Compensation Committee Chair and interaction with executives was generally limited to discussions as required to compile information at the Compensation Committee’s direction. During fiscal year 2020, Compensation Resources did not provide services to the Company. Based on these factors and its own evaluation of Compensation Resources independence pursuant to the requirements approved and adopted by the SEC, the Compensation Committee has determined that the work performed by Compensation Resources does not raise any conflicts of interest. Compensation Philosophy and Objectives Our executive compensation philosophy calls for competitive total compensation that will reward executives for achieving individual and corporate performance objectives and will attract, motivate and retain leaders who will drive the creation of shareholder value. It incorporates elements that create shareholder value by driving financial performance, retaining a high-performing and talented executive team, and aligning the interests of the executive team with the interests of shareholders. The Compensation Committee reviews the compensation and benefit programs for executive officers, including the named executive officers, and performs an annual assessment of the Company’s executive compensation policy. In determining total compensation, the Compensation Committee considers the objectives and attributes described below. Executive Compensation Principles Shareholder Alignment ● Our executive compensation programs are designed to create shareholder value. ● Long-term incentive awards, delivered in the form of equity, make up a portion of our executives’ total compensation and closely align the interests of executives with the long-term interests of our shareholders. Our policy prohibits the named executive officers from selling any newly issued shares for a period of three months, on an open market transaction. Performance based ● Long-term incentive awards are designed to reward our executive officers for creating long-term shareholder value. Long-term incentive awards are granted primarily in the form of stock options and/or shares. Appropriate Risk ● Our executive compensation programs are designed to encourage executive officers to take appropriate risks in managing their businesses to achieve optimal performance. Competitive with external talent markets ● Our executive compensation programs are designed to be competitive within the relevant markets. Simple and transparent ● Our executive compensation programs are designed to be readily understood by our executives, and transparent to our investors. Compensation Analysis Peer Group After consideration of business models, company revenue and market capitalization of other companies in the Company’s technology industry segment, and with the input from Compensation Resources, Inc., the compensation consultant used by the Company at the time the study was last conducted, the Compensation Committee established the following list of peer companies to provide a comparative framework for use in setting executive compensation: Amber Road, Inc. B Square Corp. Cass Information Systems Data Watch Corp. Digital Turbine, Inc. Everbridge, Inc. Mitek Systems, Inc. SPS Commerce Inc. USA Technologies, Inc. Zix Corp. 39 Executive Officer Base Salaries and Compensation Comparisons Compensation plans are developed by utilizing publicly available compensation data in the information technology and software services industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. The Compensation Committee has determined to utilize the services of a consultant for purposes of comparing our compensation program with similarly situated companies in like industries. The recommendations of these consultants will be utilized by the Compensation Committee in determining the appropriate compensation packages in addition to taking into account the unique global scale of the Company’s business. While these consultants may make general recommendations about the size and components of compensation, we anticipate our philosophy to continue on the basis of a pay-for-performance philosophy. In establishing the compensation of our named Chief Executive Officer, we based the amounts primarily on the market data and advice provided by Compensation Resources, Inc. with respect to the compensation paid to individuals who perform substantially similar functions within the peer group companies. In connection with the other named executive officers, we also relied on the recommendations of the Chief Executive Officer’s analysis relative to those individuals’ performance and compensation. We also examined the outstanding stock options and equity grants held by the executive officers for the purpose of considering the retention value of any additional equity awards. As a general guideline, for our named executive officers, we aim to set base salary, cash compensation and total compensation at approximately the mean market range. Our analysis determined that the base salary of our Chief Executive officer was slightly above the mean, cash compensation was generally within the mean, but the total direct compensation was below the mean. As such, it was determined to develop a long-term, performance-based element of the compensation that brought the total direct compensation within the mean. 2020 Executive Compensation Components Base Salary An executive’s base salary is a fixed element of the executive’s compensation intended to attract and retain executives. It is evaluated together with components of the executive’s other compensation to ensure that the executive’s total compensation is consistent with our overall compensation philosophy. Base salaries are adjusted annually by the Compensation Committee. The base salaries were established in arms-length negotiations between the executive and the Company, considering their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company. The Company expects each named executive officer to contribute to the Company’s overall success as a member of the executive team rather than focus solely on specific objectives within the officer’s area of responsibility. We provided a 3% increase in base salary for Ms. McGlasson in fiscal 2020. Due to the effects of COVID-19, the Company reduced her base salary by 13%. We provided a 4% increase in base salary for Mr. Almond in fiscal 2020. Due to the effects of COVID-19, the Company reduced his salary by 13%. In fiscal year 2020, Mr. Ghauri’s base salary did not increase. Due to the effects of COVID-19, Mr. Ghauri’s base salary was reduced by 4.7%. Mr. Ghauri’s perquisites were reduced by 8% for a total compensation reduction of 5.4%. The Compensation Committee determined that salary alone was an adequate basis for short term compensation, and that equity incentives would be used for the long-term elements of incentive programs for Ms. McGlasson and Mr. Almond. 40 Annual Bonus Our compensation program includes eligibility for bonuses as rewarded by the Compensation Committee. All executives are eligible for annual performance-based cash bonuses in accordance with Company policies. The Compensation Committee takes into consideration the executive’s performance during the previous year to determine eligibility for discretionary bonuses. Further, the compensation committee will review, if applicable, the performance criteria set forth in an executive’s previous year’s agreement and will determine if the executive has met such criteria in order to achieve the bonus. The Company’s bonus criteria at the executive management level, is typically based on a gross revenue and income from operations targets. Cash bonuses, if any for 2020 are reflected in the summary of compensation discussed below starting on page 48. For 2020, based on structured KPI’s by the compensation committee, Mr. Ghauri did not earn a bonus. See bonus structure as discussed below on page 46. The Compensation Committee determined that Gross Revenue and Income from Operations structure used in fiscal 2020 continues to be a proper measure for measuring Mr. Ghauri’s performance in that it encourages his participation in revenue generating activities and continues to incentivize him to monitor and maximize cost efficiency. Long-Term Equity Incentive Compensation We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Because base salary and equity awards are such basic elements of compensation within our industry, as well as the high technology and software industries in general, and are generally expected by employees, we believe that these components must be included in our compensation mix in order for us to compete effectively for talented executives. We award time based vested stock from our Equity Incentive Plans for several reasons. First, such awards facilitate retention of our executives. Restricted stock generally vests only if the executive remains employed by the Company. Second, time-based stock awards align executive compensation with the interests of our shareholders and thereby focuses executives on increasing value for the shareholders. Time vested stock generally only provides a superior return if the stock price appreciates, and results in materially less dilution to the shareholders than options while frequently providing equivalent value to the employee at less cost to the Company than options. In determining the number of shares to be granted to executives, we take into account the individual’s position, scope of responsibility, ability to affect profits and shareholder value, past and recent performance, and the estimated value of shares at the time of grant. Assuming individual performance at a level satisfactory to the Compensation Committee, the size of total equity compensation is generally targeted at the 50th percentile for the peer group. As indicated above, market data, including compensation percentiles, were among several factors the committee reviewed in determining compensation. Equity incentives provided to executives are determined by the Fair Market Value of our common stock on the grant date. Each executive’s stock award was based on an analysis of the Compensation Committee of an appropriate overall cash compensation for each individual taking into account their position and compensation at similarly situated companies. Each executive’s stock award was based on a desired overall compensation cash value less the base salary as approved by the Compensation Committee. In fiscal year 2020, Ms. McGlasson and Mr. Almond received a grant of 7,500 and 10,000 shares of common stock, respectively, vesting quarterly over a two-year period. Mr. Ghauri is eligible to receive grants of shares based on the performance criteria connected to gross revenues and net income from operations as discussed below. The total compensation including equity grants is designed to bring the Chief Executive Officer to the mean market average. 41 Mr. Ghauri’s bonus for fiscal year 2020 is based on the total revenues and income from operations on a graduated basis. The following table demonstrates the graduated percentage of bonus that Mr. Ghauri will be eligible to earn based on the percentage of the goal achieved. Bonuses will be paid 60% in cash and 40% in shares of common stock valued on June 30, 2020. Total net revenues and income from operations are based on those values reported for the year ending June 30, 2020 excluding any adjustments relating to changes in revenue recognition policy. Allocated Bonus % % of Bonus 25 % 50 % 100 % 125 % 150 % 175 % 200 % Net revenues 55 % Increase in revenues 5 % 10 % 15 % 20 % 25 % 30 % 35 % Bonus Earned 82,500 165,000 330,000 412,500 495,000 577,500 660,000 % of Bonus 25 % 50 % 100 % 125 % 150 % 175 % 200 % Income from Operations 45 % Income from Operations % 5.0 % 7.5 % 10.0 % 12.5 % 15.0 % 17.5 % 20.0 % Bonus Earned 67,500 135,000 270,000 337,500 405,000 472,500 540,000 Total Bonus 150,000 300,000 600,000 750,000 900,000 1,050,000 1,200,000 Mr. Ghauri’s bonus for the fiscal year 2021 will be based on the same criteria stated above. Perquisites and Other Personal Benefits We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the level of perquisites and other personal benefits provided to NetSol’s executive officers. We maintain benefits and perquisites that are offered to all employees, including health and dental insurance. Benefits and perquisites may vary in different country locations and are consistent with local practices and regulations. Termination Based Compensation Upon termination of employment, all executive officers with a written employment agreement are entitled to receive severance payments under their employment agreements. In determining whether to approve, and as part of the process of setting the terms of, such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges securing new employment following termination. Further, the Committee recognizes that many of the named executives and officers have participated in the Company since its founding and that this participation has not resulted in a return on their investments. Termination and Change in Control Payments considered both the risk and the dedication of these executives’ service to the Company. Our Chief Executive Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the fourth anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the fourth anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any. Our Chief Financial Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the first anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the first anniversary from the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any. 42 The Secretary of the Company has an employment agreement that provides, if she is terminated without cause or if the executive terminates the agreement with Good Reason, she is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the second anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for her and her family until the end of the employment term and through the end of the second anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any. These agreements were designed to assist in the retention of the services of our named executives and to determine in advance the rights and remedies of the parties in connection with any termination. The types and amounts of compensation and the triggering events set forth in these agreements were based on a review of the terms and conditions of normal and customary agreements in our competitive marketplace. Tax and Accounting Implications Deductibility of Executive Compensation As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Compensation Committee is aware of the limitations imposed by Section 162(m) and considers the issue of deductibility when and if circumstances warrant. The committee reviews proposed compensation plans in light of applicable tax deductions, and generally seeks to maximize the deductibility for tax purposes of all elements of compensation. However, the committee may approve compensation that does not qualify for deductibility, including stock option and time-based restricted stock awards, if and when the committee deems it to be in the best interests of the Company and our shareholders. Accounting for Stock-Based Compensation Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation . 43 Summary Compensation The following table shows the compensation for the fiscal year ended June 30, 2019, 2018, and 2017, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company. Name and Principle Position Fiscal Year Ended Salary ($) Bonus ($) Stock Awards ($) (1) Option Awards ($) All Other Compensation ($) Total ($) Najeeb Ghauri 2020 $ 689,000 $ - $ - $ - $ 156,586 (4) $ 845,586 CEO & Chairman 2019 $ 675,000 $ 432,488 $ - $ 21,598 (3) $ 200,000 (4) $ 1,329,086 2018 $ 600,000 $ 300,000 (2) $ - $ - $ 200,000 (4) $ 1,100,000 Roger K Almond 2020 $ 217,111 $ 20,000 $ 56,900 $ - $ 10,639 (5) $ 304,650 Chief Financial Officer 2019 $ 221,520 $ 20,000 $ 55,500 $ - $ 10,191 (5) $ 307,211 2018 $ 213,000 $ 10,000 $ - $ - $ 9,952 (5) $ 232,952 Patti L. W. McGlasson 2020 $ 219,481 $ - $ 42,675 $ - $ 10,019 (6) $ 272,175 Secretary, General Counsel 2019 $ 226,113 $ - $ 55,500 $ - $ 10,378 (6) $ 291,991 2018 $ 217,420 $ - $ - $ - $ 9,935 (6) $ 227,355 (1) The stock was awarded as compensation to the officers. See also Grants of Plan Based Awards. These amounts do not reflect compensation actually received by the named executive officer. These amounts represent the aggregate grant date fair value of the stock awards granted during the relevant time period, computed in accordance with FASB ASC 718, excluding the effect of any estimated forfeitures based on vesting conditions. A summary of the assumptions we applied in calculating these estimates is set forth in the Notes to Consolidated Financial Statements included in Note 18. The awards for which the aggregate grant date fair value is shown in this column include awards described under the Grants of Plan-Based Awards Table and in the Outstanding Equity Awards at Fiscal Year-End Table. (2) Bonus was awarded by the Compensation Committee in late September 2018 for the results of his cost saving initiatives in fiscal 2018. The expense was accounted for in fiscal year 2019. (3) The life of 20,000 outstanding options, granted in February 2009, was extended for one year for the year ended June 30, 2019. (4) Per Mr. Najeeb Ghauri’s compensation agreement, he received $156,586, $200,000 and $200,000 in allowances, perquisites and benefits such as car allowance, insurance premiums, and home office allowance for the fiscal years ended June 30, 2020, 2019 and 2018, respectively. (5) Consists of $10,639, $10,191 and $9,952 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2020, 2019 and 2018, respectively. (6) Consists of $10,019, $9,935 and $9,795 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2020, 2019 and 2018, respectively. Grants of Plan-Based Awards In September 2016, Mr. Najeeb Ghauri was granted 82,644 shares of the Company’s common stock which 50% vested immediately and the remaining 50% will vest annually from June 2017 to June 2021. The shares were approved by the Compensation Committee as an incentive for the named officer. In July 2018, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly over the period of three years. The shares were approved by the Compensation Committee as an incentive for the named officer. In August 2019, Mr. Roger Almond was granted 10,000 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer. 44 In July 2018, Ms. Patti McGlasson was granted 7,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer. In August 2019, Ms. Patti McGlasson was granted 7,500 shares of the Company’s common stock, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer. Discussion of Summary Compensation Table The terms of our executive officers’ compensation are derived from our employment agreements with them and the annual performance review by our Compensation Committee. The terms of Mr. Najeeb Ghauri’s employment agreement with the Company were the result of negotiations between the Company and the executive and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Almond’s employment agreement with the Company were the result of negotiations between our Chief Executive Officer and the employees and were approved by our Compensation Committee. Employment Agreement with Najeeb Ghauri Effective January 1, 2007, the Company entered into an Employment Agreement with our Chief Executive Officer, Najeeb Ghauri (the “CEO Agreement”). The CEO Agreement was amended effective January 1, 2008, January 1, 2010, July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Pursuant to the CEO Agreement, as amended, between Mr. Ghauri and the Company (the “CEO Agreement”), the Company agreed to employ Mr. Ghauri as its Chief Executive Officer for a five-year term. The term of employment automatically renews for 12 additional months unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. For the fiscal year 2020, Mr. Ghauri is entitled to an annualized compensation of $900,000 consisting of salary, allowances, perquisites and benefits, and is eligible for annual bonuses based on the bonus structure adopted by the Compensation Committee as described in Item 11 under Executive Compensation beginning on page 38. As previously discussed, the $900,000 was temporarily reduced to $851,000 in response to the COVID-19 pandemic. Mr. Ghauri is entitled to six weeks of paid vacation per calendar year. The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CEO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 48 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 48 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 30 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CEO Agreement by Mr. Ghauri. The above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2007. The above summary of the First Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2008. The above summary of the Second Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31, 2009. The above summary of the Third Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary of the Fourth Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014. 45 Employment Agreement with Roger K. Almond Effective March 1, 2015, the Company entered into an Employment Agreement with our Chief Financial Officer, Mr. Roger K. Almond. Pursuant to the Employment Agreement, between Mr. Almond and the Company (the “CFO Agreement”), the Company agreed to employ Mr. Almond as its Chief Financial Officer from the date of the CFO Agreement through February 28, 2017. According to the terms of the CFO Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. For the fiscal year 2020, Mr. Almond is entitled to an annualized base salary of $230,381 per annum, a $2,000 per month car allowance, 10,000 shares of common stock to be granted equally on a quarterly basis over 2 years issued after each quarter of service through June 30, 2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $230,381 base salary was temporarily reduced to $186,515 in response to the COVID-19 pandemic. In addition, Mr. Almond is entitled to participate in the Company’s equity incentive plans and is entitled to four weeks of paid vacation per calendar year. The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CFO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 12 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 12 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CFO Agreement by Mr. Almond. The above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on March 4, 2015. Employment Agreement with Patti L. W. McGlasson Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary, General Counsel and Sr. Vice President, Legal and Corporate Affairs, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement and its related amendments, between Ms. McGlasson and the Company (the “General Counsel Agreement”), the Company agreed to employ Ms. McGlasson as its Secretary and General Counsel from the date of the General Counsel Agreement through June 30, 2017. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. The General Counsel Agreement was amended on July 25, 2013 and again on June 30, 2014 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”). Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the GC Agreement, Ms. McGlasson is entitled to an annualized base salary of $232,896 per annum, 7,500 shares of common stock to be granted equally on a quarterly basis over 2 years issued after each quarter of service through June 30, 2021 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. As previously discussed, the $232,896 was temporarily reduced to $188,552 in response to the COVID-19 pandemic. In addition, Ms. McGlasson is entitled to participate in the Company’s equity incentive plans and, is entitled to six weeks of paid vacation per calendar year. 46 The General Counsel Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the General Counsel Agreement, if she terminates her employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, she shall be entitled to all remaining salary from the termination date until 24 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 24 months. She shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If she is terminated by the Company for Cause (as described below), or at the end of the employment term, she shall not be entitled to further compensation. Under the General Counsel Agreement, Good Reason includes the assignment of duties inconsistent with her title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks her to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the General Counsel Agreement by the Company. Under the General Counsel Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform her duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the General Counsel Agreement by Ms. McGlasson. The above summary of the General Counsel Agreement is qualified in its entirety by reference to the full text of the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2006 on September 27, 2006. The above summary is also qualified in its entirety by reference to the full text of the Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q for the quarter ended March 31, 2010. The above summary is also qualified in its entirety by reference to the full text of the Second Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary is also qualified in its entirety by reference to the full text of the Third Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014. Outstanding Equity Awards at Fiscal Year-End The following table shows grants of stock options and grants of unvested stock awards outstanding on June 30, 2020, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table. OPTION AWARDS STOCK AWARDS NAME NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE OPTION EXERCISE PRICE ($) OPTION EXPIRATION DATE NUMBER OF SHARES OF COMMON STOCK THAT HAVE NOT VESTED MARKET VALUE OF SHARES THAT HAVE NOT VESTED ($) EQUITY INCENTIVE PLAN AWARDS: NUMBER OF UNEARNED SHARES THAT HAVE NOT VESTED EQUITY INCENTIVE PLAN AWARDS: MARKET OR PAYOUT VALUE OF SHARES THAT HAVE NOT VESTED ($) Najeeb Ghauri - - - 8,265 50,000 - - Roger K Almond - - - 8,336 46,964 - - Patti L. W. McGlasson - - - 3,752 21,349 - - Pension Benefits We do not have any qualified or non-qualified defined benefit plans. Potential Payments upon Termination or Change of Control Generally, regardless of the manner in which a named executive officer’s employment terminates, the executive officer is entitled to receive amounts earned during the term of employment. Such amounts include the portion of the executive’s base salary that has accrued prior to any termination and not yet been paid, and unused vacation pay. In addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment or a change of control, as set forth below. 47 Change-in-Control Payments Najeeb Ghauri, Chairman and Chief Executive Officer In the event that Mr. Ghauri is terminated as a result of a change in control, he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one percent of the Company’s consolidated gross revenues for the previous twelve (12) months; and at the election of the Executive, (c) a one-time cash payment equal to the cash value of all shares eligible for exercise upon the exercise of Executive’s Options then currently outstanding and exercisable as if they had been exercised in full (the “Change of Control Termination Payment”). In the event Executive elects to receive the cash value of the shares underlying Executive’s options, he shall so notify the Company of his intent. The following table summarizes the potential payments to Mr. Ghauri assuming his employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year. BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON Base Salary Continuance $ 2,756,000 $ 114,833 $ 2,756,000 Health Related Benefits 63,168 - 63,168 Bonus - - - Salary Multiple Pay-out 2,060,110 - - Bonus or Revenue One-time Pay-Out 563,723 - - Net Cash Value of Options - - - Total $ 5,443,001 $ 114,833 $ 2,819,168 Roger Almond, Chief Financial Officer In the event that Mr. Almond is terminated as a result of a change in control, he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”). 48 The following table summarizes the potential payments to Mr. Almond assuming his employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year. BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON Base Salary Continuance $ 217,111 $ 36,185 $ 217,111 Health related benefits 10,644 - 10,644 Bonus - - - Salary Multiple Pay-out 649,162 - - Bonus or Revenue One-time Pay-Out 281,862 - - Net Cash Value of Options - - - Total $ 1,158,778 $ 36,185 $ 227,755 Patti L. W. McGlasson, Senior V.P. of Legal and Corporate Affairs, Secretary and General Counsel In the event that Ms. McGlasson is terminated as a result of a change in control, she is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and her salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”). The following table summarizes the potential payments to Ms. McGlasson assuming her employment with us was terminated or a change of control occurred on June 30, 2020, the last day of our most recently completed fiscal year. BENEFITS AND PAYMENTS TERMINATION AFTER CHANGE OF CONTROL TERMINATION UPON DEATH OR DISABILITY TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON Base Salary Continuance $ 445,822 $ 37,152 $ 445,822 Health related benefits 20,040 - 20,040 Bonus - - - Salary Multiple Pay-out 666,504 - - Bonus or Revenue One-time Pay-Out 281,862 - - Net Cash Value of Options - - - Total $ 1,414,227 $ 37,152 $ 465,862 49 Director Compensation Director Compensation Table The following table sets forth a summary of the compensation earned by our Directors and/or paid to certain of our Directors pursuant to the Company’s compensation policies for the fiscal year ended June 30, 2020, other than Najeeb Ghauri, Naeem Ghauri and Malea Farsai who were paid as part of their employment agreements with the Company or its subsidiaries and not as directors. NAME FEES EARNED OR PAID IN CASH ($) SHARE AWARDS ($) (1) TOTAL ($) Shahid Javed Burki 59,197 55,845 115,042 Mark Caton 57,240 54,396 111,636 Henry Tolentino 55,287 40,952 96,239 Kausar Kazmi 51,376 38,057 89,433 223,100 189,250 412,350 (1) In fiscal 2020, the Directors’ fee structure was 60% cash and 40% common stock. During the fiscal year ended June 30, 2020, there were 15,171 shares issued to Mr. Shahid Javed Burki, 14,734 shares issued to Mr. Mark Caton, 12,317 shares issued to Mr. Henry Tolentino and 11,445 shares issued to Mr. Kausar Kazmi. Director Compensation Policy Messrs. Najeeb and Naeem Ghauri and Ms. Farsai are not paid any fees or other compensation for services as members of our Board of Directors. The Committee relied on a survey conducted by Compensation Resources, Inc. in setting the compensation for the non-employee members of our Board of Directors. As with named executives, the aim is to compensate the Board of Directors at the mean of peer companies. Any additional cash and/or equity compensation for the fiscal year beginning was designed to maintain this mean. The non-employee members of our Board of Directors received as compensation for services as directors as well as reimbursement for documented reasonable expenses incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company paid the following amounts to members of the Board of Directors for the activities shown during the fiscal year ended June 30, 2020. BOARD ACTIVITY CASH PAYMENTS Board Member Fee $ 205,506 Chairperson for Audit Committee $ 7,820 Chairperson for Compensation Committee $ 5,864 Chairperson for Nominating and Corporate Governance Committee $ 3,910 $ 223,100 Independent members of our Board of Directors are also eligible to receive stock option or stock award grants both upon joining the Board of Directors and on an annual basis in line with recommendations by the Compensation Committee, which grants are non-qualified stock options under our Employee Stock Option Plans. Further, from time to time, the non-employee members of the Board of Directors are eligible to receive stock grants that may be granted if and only if approved by the shareholders of the Company. 50 On September 12, 2016, the Compensation Committee granted independent board members 19,834 shares of common stock vesting at 50% immediately and rest at the completion of each year served commencing with the period ended September 30, 2017 and ending September 30, 2021. Compensation Committee Interlocks and Insider Participation The current members of the Compensation Committee are Mr. Caton (Chairman), Mr. Kazmi, and Mr. Tolentino. All current members of the Compensation Committee are “independent directors” as defined under the NASDAQ Listing Rules. None of these individuals were at any time during the fiscal year ended June 30, 2020, or at any other relevant time, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee. Employee Equity Plans OPTIONS: Number of Options Authorized Options Grants Issued Options Grants Cancelled / Expired Available for Issue Options Issued but Outstanding The 2003 stock option plan 200,000 200,000 - - - The 2005 stock option plan 500,000 500,000 (40,386 ) 40,386 - The 2011 stock option plan 500,000 500,000 - - - The 2013 stock option plan 1,250,000 1,151,804 - 98,196 - The 2015 stock option plan 1,250,000 947,546 (3,968 ) 306,422 - 3,700,000 3,299,350 (44,354 ) 445,004 - 51 ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock, its only class of outstanding voting securities as of September 18, 2020, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding common Stock with the address of each such person, (ii) each of the Company’s present directors and officers, and (iii) all officers and directors as a group: Number of Shares Name of Beneficial Owner (1) Beneficially Owned (2) Percentage (4) Najeeb Ghauri (3) 748,901 6.39 % Naeem Ghauri (3) 406,689 3.47 % Shahid Javed Burki (3) 159,611 1.36 % Mark Caton (3) 99,597 * Henry Tolentino (3) 27,313 * Patti McGlasson (3) 78,235 * Roger Almond (3) 33,747 * Kausar Kazmi (3) 11,445 * Malea Farsai (3) 39,811 * Moab Capital Partners LLC (5) 877,213 7.48 % All officers and directors as a group (nine persons) 1,605,349 13.69 % * Less than one percent (1) Except as otherwise indicated, the Company believes that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. (2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock relating to share grants that will vest or options currently exercisable or exercisable within 60 days of September 18, 2020, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. (3) Address c/o NetSol Technologies, Inc. at 23975 Park Sorrento, Suite 250, Calabasas, CA 91302. (4) Shares issued and outstanding as of September 18, 2020 were 11,727,594. (5) 5% or greater shareholder based on Schedule 13G filing on February 14, 2020. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company, was appointed CEO of WRLD3D by the Board of WRLD3D which does not include Najeeb Ghauri. The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of June 30, 2018, the Company had disbursed $750,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018. 52 The Company entered into an agreement with WRLD3D, whereby NetSol Thai was issued a Convertible Promissory Note (the “Thai Convertible Note”) which was fully executed on February 9, 2018. The maximum principal amount of the Convertible Note is $2,500,000, and as of June 30, 2019, NetSol Thai had disbursed $2,500,000. The Thai Convertible Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon NetSol Thai’s request on or after March 31, 2019. The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “April 1, 2019 Note”) which was fully executed on April 1, 2019. The maximum principal amount of the April 1, 2019 Note is $600,000, and as of June 30, 2020, the Company had disbursed $600,000. The April 1, 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after March 31, 2020. 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 the Company’s request on or after March 31, 2020. Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC which purchased a 4.9% investment in WRLD3D for $1,111,111. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees BF Borgers audited the Company’s financial statements for the fiscal year ended June 30, 2020 and KSP audited the Company’s financial statements for the fiscal year ended June 30, 2019. The aggregate fees billed by principal accountants for the annual audit and review of financial statements included in the Company’s Form 10-K, services related to providing an opinion in connection with our public offering of shares of common stock and/or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended June 30, 2020 was $250,000 and for the year ended June 30, 2019 was $280,000. Tax Fees Tax fees for fiscal year 2020 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2019. Tax fees for fiscal year 2019 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2018. All Other Fees No other fees were paid to principal accountant during the fiscal year 2020 and 2019. Pre-Approval Procedures The Audit Committee and the Board of Directors are responsible for the engagement of the independent auditors and for approving, in advance, all auditing services and permitted non-audit services to be provided by the independent auditors. The Audit Committee maintains a policy for the engagement of the independent auditors that is intended to maintain the independent auditor’s independence from NetSol. In adopting the policy, the Audit Committee considered the various services that the independent auditors have historically performed or may be needed to perform in the future. The policy, which is to be reviewed and re-adopted at least annually by the Audit Committee: (i) Approves the performance by the independent auditors of certain types of service (principally audit-related and tax), subject to restrictions in some cases, based on the Committee’s determination that this would not be likely to impair the independent auditors’ independence from NetSol; (ii) Requires that management obtain the specific prior approval of the Audit Committee for each engagement of the independent auditors to perform other types of permitted services; and (iii) Prohibits the performance by the independent auditors of certain types of services due to the likelihood that their independence would be impaired. Any approval required under the policy must be given by the Audit Committee, by the Chairman of the Committee in office at the time, or by any other Committee member to whom the Committee has delegated that authority. The Audit Committee does not delegate its responsibilities to approve services performed by the independent auditors to any member of management. The standard applied by the Audit Committee in determining whether to grant approval of an engagement of the independent auditors is whether the services to be performed, the compensation to be paid therefore and other related factors are consistent with the independent auditors’ independence under guidelines of the Securities and Exchange Commission and applicable professional standards. Relevant considerations include, but are not limited to, whether the work product is likely to be subject to, or implicated in, audit procedures during the audit of NetSol’s financial statements; whether the independent auditors would be functioning in the role of management or in an advocacy role; whether performance of the service by the independent auditors would enhance NetSol’s ability to manage or control risk or improve audit quality; whether performance of the service by the independent auditors would increase efficiency because of their familiarity with NetSol’s business, personnel, culture, systems, risk profile and other factors; and whether the amount of fees involved, or the proportion of the total fees payable to the independent auditors in the period that is for tax and other non-audit services, would tend to reduce the independent auditors’ ability to exercise independent judgment in performing the audit. 53 PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated March 18, 1997, incorporated by reference as Exhibit 3.1 to NETSOL’s Registration Statement No. 333-28861 filed on Form SB-2 filed June 10, 1997. * 3.2 Amendment to Articles of Incorporation dated May 21, 1999, incorporated by reference as Exhibit 3.2 to NETSOL’s Annual Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed September 28, 1999. * 3.3 Amendment to the Articles of Incorporation of NETSOL International, Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to NETSOL’s Annual Report on Form 10-KSB/A filed on February 2, 2001. * 3.4 Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated August 20, 2003 filed as Exhibit A to NETSOL’s Definitive Proxy Statement filed June 27, 2003. * 3.5 Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated March 14, 2005 filed as Exhibit 3.0 to NETSOL’s quarterly report filed on Form 10-QSB for the period ended March 31, 2005. * 3.6 Amendment to the Articles of Incorporation dated October 18, 2006 filed as Exhibit 3.5 to NETSOL’s Annual Report for the fiscal year ended June 30, 2007 on Form 10-KSB. * 3.7 Amendment to Articles of Incorporation dated May 12, 2008. * 3.8 Amendment to the Articles of Incorporation dated August 6, 2012, filed as Appendix A to NETSOL’s Definitive Proxy Statement filed June 14, 2012. * 3.9 Amended and Restated Bylaws of NetSol Technologies, Inc. dated February 9, 2018*. 4.1 Form of Common Stock Certificate. * 10.1 Stock Purchase Agreement dated May 6, 2006 by and between the Company, McCue Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated by reference as Exhibit 2.1 to NETSOL’s Current Report filed on form 8-K on May 8, 2006. * 10.3 Employment Agreement by and between NetSol Technologies, Inc. and Patti L. W. McGlasson dated May 1, 2006 incorporated by reference as Exhibit 10.20 to NETSOL’s Annual Report on form 10-KSB dated September 18, 2006. * 10.4 Employment Agreement by and between the Company and Najeeb Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007. * 10.5 Employment Agreement by and between the Company and Naeem Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007. * 10.6 Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007. * 10.7 Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. * 10.8 Company 2005 Stock Option Plan incorporated by reference as Exhibit 1.1 to NETSOL’s Definitive Proxy Statement filed on March 3, 2006. * 10.9 Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2010. * 10.10 Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2010. * 10.11 Amendment to Employment Agreement by and between Company and Patti L. W. McGlasson dated effective April 1, 2010. * 10.12 Company’s 2011 Equity Incentive and Nonstatutory Plan incorporated by reference as Appendix A to NETSOL’s Proxy Statement filed on April 11, 2011. * 10.13 Company’s 2013 Equity Incentive Plan incorporated by reference as Appendix A to NETSOL’s Definitive Proxy Statement filed on May 29, 2013. * 10.14 Amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective July 25, 2013. * 10.15 Amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L.W. McGlasson dated effective July 25, 2013. * 10.16 Restated Charter of the Compensation Committee dated effective September 10, 2013. * 10.17 Restated Charter of the Nominating and Corporate Governance Committee dated effective September 10, 2013. * 10.18 Restated Charter of the Audit Committee dated effective September 10, 2013. * 10.19 Restated Code of Business Conduct & Ethics dated effective September 10, 2013. * 10.20 Company’s 2015 Equity Incentive Plan incorporated by reference as Appendix A to NETSOL’s Definitive Proxy Statement filed on April 15, 2015. * 21.1 A list of all subsidiaries of the Company (1) 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO) (1) 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO) (1) 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO) (1) 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002 (CFO) (1) *Previously Filed (1) Filed Herewith 54 SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. NetSol Technologies, Inc. Date: September 28, 2020 BY: /S/ NAJEEB GHAURI Najeeb Ghauri Chief Executive Officer Date: September 28, 2020 BY: /S/ ROGER K. ALMOND Roger K. Almond Chief Financial Officer Principal Financial Officer 55 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: September 28, 2020 BY: /S/ NAJEEB U. GHAURI Najeeb U. Ghauri Chief Executive Officer Director, Chairman Date: September 28, 2020 BY: /S/ ROGER K. ALMOND Roger K. Almond Chief Financial Officer Principal Accounting Officer Date: September 28, 2020 BY: /S/ MARK CATON Mark Caton Director Date: September 28, 2020 BY: /S/ MALEA FARSAI Malea Farsai Director Date: September 28, 2020 BY: /S/ HENRY TOLENTINO Henry Tolentino Director Date: September 28, 2020 BY: /S/ KAUSAR KAZMI Kausar Kazmi Director 56 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Description Page Report of Independent Registered Public Accounting Firm F-2 Financial Statements Consolidated Balance Sheets as of June 30, 2020 and 2019 F-4 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended June 30, 2020 and 2019 F-5 Consolidated Statement of Equity for the Years Ended June 30, 2020 and 2019 F-7 Consolidated Statements of Cash Flows for the Years Ended June 30, 2020 and 2019 F-9 Notes to Consolidated Financial Statements F-11 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors NetSol Technologies, Inc. and subsidiaries Calabasas, California Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2019, and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity and cash flow for the period then ended. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial positions of NetSol Technologies, Inc. and subsidiaries as of June 30, 2019 and the results of their operations and their cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ KSP Group, Inc. CERTIFIED PUBLIC ACCOUNTANTS We have served as the Company’s auditor since 2017. Los Angeles, CA September 23, 2019 F- 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors NetSol Technologies, Inc. and subsidiaries Calabasas, California Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020, and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity and cash flow for the period then ended. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial positions of NetSol Technologies, Inc. and subsidiaries as of June 30, 2020 and the results of their operations and their cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ BF Borgers CPA PC. CERTIFIED PUBLIC ACCOUNTANTS We have served as the Company’s auditor since 2020. Lakewood, CO September 28, 2020 F- 3 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of As of June 30, 2020 June 30, 2019 ASSETS Current assets: Cash and cash equivalents $ 20,166,830 $ 17,366,364 Accounts receivable, net of allowance of $435,611 and $192,786 10,131,752 12,332,714 Accounts receivable, net of allowance of $90,594 and $166,075 - related party 1,282,505 3,266,600 Revenues in excess of billings, net of allowance of $188,914 and $194,684 17,198,281 14,719,047 Revenues in excess of billings - related party 8,163 110,827 Other current assets 3,108,180 3,146,264 Total current assets 51,895,711 50,941,816 Revenues in excess of billings, net - long term 1,300,289 1,281,492 Convertible note receivable - related party 4,250,000 3,650,000 Property and equipment, net 11,329,631 12,096,855 Right of use of assets - operating leases 2,360,129 - Long term investment 2,387,692 2,653,769 Other assets 41,992 23,569 Intangible assets, net 5,391,077 7,332,950 Goodwill 9,516,568 9,516,568 Total assets $ 88,473,089 $ 87,497,019 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 5,680,837 $ 7,476,560 Current portion of loans and obligations under finance leases 9,139,561 6,905,597 Current portion of operating lease obligations 1,111,912 - Unearned revenues 4,095,472 5,977,736 Common stock to be issued 88,324 88,324 Total current liabilities 20,116,106 20,448,217 Loans and obligations under finance leases; less current maturities 1,539,975 564,572 Operating lease obligations; less current maturities 1,339,965 - Total liabilities 22,996,046 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; 12,122,149 shares issued and 11,874,646 outstanding as of June 30, 2020 and 11,911,742 shares issued and 11,664,239 outstanding as of June 30, 2019 121,222 119,117 Additional paid-in-capital 128,677,754 127,737,999 Treasury stock (at cost, 247,503 shares as of June 30, 2020 and 2019) (1,455,969 ) (1,455,969 ) Accumulated deficit (34,269,817 ) (35,206,898 ) Other comprehensive loss (34,085,047 ) (33,125,006 ) Total NetSol stockholders’ equity 58,988,143 58,069,243 Non-controlling interest 6,488,900 8,414,987 Total stockholders’ equity 65,477,043 66,484,230 Total liabilities and stockholders’ equity $ 88,473,089 $ 87,497,019 The accompanying notes are an integral part of these consolidated financial statements. F- 4 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended June 30, 2020 2019 Net Revenues: License fees $ 4,564,560 $ 16,768,749 Maintenance fees 18,951,248 15,521,413 Services 32,555,690 34,892,290 Services - related party 300,821 636,731 Total net revenues 56,372,319 67,819,183 Cost of revenues: Salaries and consultants 18,821,738 19,253,364 Travel 4,181,742 6,527,868 Depreciation and amortization 2,897,371 3,525,857 Other 3,508,098 3,625,478 Total cost of revenues 29,408,949 32,932,567 Gross profit 26,963,370 34,886,616 Operating expenses: Selling and marketing 6,450,663 7,831,758 Depreciation and amortization 834,583 897,800 General and administrative 17,138,832 17,357,918 Research and development cost 1,468,954 1,971,228 Total operating expenses 25,893,032 28,058,704 Income (loss) from operations 1,070,338 6,827,912 Other income and (expenses) Gain on sale of assets 23,103 81,455 Interest expense (346,856 ) (311,798 ) Interest income 1,569,536 955,061 Gain on foreign currency exchange transactions 398,610 6,345,859 Share of net loss from equity investment (605,864 ) (841,845 ) Other income 224,224 18,680 Total other income (expenses) 1,262,753 6,247,412 Net income before income taxes 2,333,091 13,075,324 Income tax provision (1,141,068 ) (1,057,784 ) Net income 1,192,023 12,017,540 Non-controlling interest (254,942 ) (3,434,141 ) Net income attributable to NetSol $ 937,081 $ 8,583,399 Net income per share: Net income per common share Basic $ 0.08 $ 0.74 Diluted $ 0.08 $ 0.74 Weighted average number of shares outstanding Basic 11,734,648 11,599,290 Diluted 11,784,414 11,621,990 The accompanying notes are an integral part of these consolidated financial statements. F- 5 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) For the Years Ended June 30, 2020 2019 Net income $ 937,081 $ 8,583,399 Other comprehensive income (loss): Translation adjustment (1,229,927 ) (13,463,469 ) Translation adjustment attributable to non-controlling interest 269,886 4,724,534 Net translation adjustment (960,041 ) (8,738,935 ) Comprehensive income (loss) attributable to NetSol $ (22,960 ) $ (155,536 ) The accompanying notes are an integral part of these consolidated financial statements. F- 6 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Years Ended June 30, 2020 and 2019 Stock Other Additional Sub- Compre- Non Total Common Stock Paid-in Treasury Accumulated scriptions Shares to hensive Controlling Stockholders’ Shares Amount Capital Shares Deficit Receivable be Issued 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 common stock options 13,076 131 84,869 - - - - - - 85,000 Exercise of subsidiary common stock options - - (6,629 ) - - - - - 9,279 2,650 Common stock issued for: Services 190,197 1,901 1,138,109 - - - - - - 1,140,010 Purchase of treasury shares - - - (250,945 ) - - - - - (250,945 ) Equity component shown as current liability at June 30, 2018 - - - - - - 88,324 - - 88,324 June 30, 2019 - - - - - - (88,324 ) - - (88,324 ) Fair value of options extended - - 43,612 - - - - - - 43,612 Acquisition of non-controlling interest in subsidiary - - (1,109 ) - - - - - (925,991 ) (927,100 ) Dividend to non-controlling interest - - - - - - - - (566,465 ) (566,465 ) Adjustment in subscription receivable - - - - - 221,000 - - - 221,000 Foreign currency translation adjustment - - - - - - - (8,738,935 ) (4,724,534 ) (13,463,469 ) Net income for the year - - - - 8,583,399 - - - 3,434,141 12,017,540 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 The accompanying notes are an integral part of these consolidated financial statements. F- 7 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Years Ended June 30, 2020 and 2019 Other Additional Compre- Non Total Common Stock Paid-in Treasury Accumulated hensive 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 Subsidiary common stock issued for: -Services - - - - - - 158 158 Common stock issued for: Services 210,407 2,105 988,345 - - - - 990,450 Equity component shown as current liability at June 30, 2019 - - - - - - - 88,324 June 30, 2020 - - - - - - - (88,324 ) Acquisition of non-controlling interest in subsidiary - - (20,493 ) - - - (30,401 ) (50,894 ) Dividend to non-controlling interest - - - - - - (1,920,618 ) (1,920,618 ) Foreign currency translation adjustment - - - - - (960,041 ) (269,886 ) (1,229,927 ) Net income for the year - - - - 937,081 - 254,942 1,192,023 Balance at June 30, 2020 12,122,149 $ 121,222 $ 128,677,754 $ (1,455,969 ) $ (34,269,817 ) $ (34,085,047 ) $ 6,488,900 $ 65,477,043 The accompanying notes are an integral part of these consolidated financial statements F- 8 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended June 30, 2020 2019 Cash flows from operating activities: Net income $ 1,192,023 $ 12,017,540 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,731,954 4,423,657 Provision for bad debts 184,944 474,516 Share of net loss from investment under equity method 605,864 841,845 Gain on sale of assets (23,103 ) (80,470 ) Stock based compensation 808,616 1,131,013 Fair market value of stock options - 43,612 Changes in operating assets and liabilities: Accounts receivable 2,035,843 (1,836,962 ) Accounts receivable - related party 1,957,864 (977,445 ) Revenues in excess of billing (3,252,704 ) (10,764,428 ) Revenues in excess of billing - related party 105,441 (122,810 ) Other current assets (132,175 ) (861,128 ) Accounts payable and accrued expenses (1,399,828 ) (47,819 ) Unearned revenue (1,842,313 ) 692,089 Net cash provided by operating activities 3,972,426 4,933,210 Cash flows from investing activities: Purchases of property and equipment (1,377,145 ) (2,726,558 ) Sales of property and equipment 106,180 1,170,878 Convertible note receivable - related party (600,000 ) (1,526,500 ) Investment in associates (94,500 ) (250,000 ) Purchase of subsidiary shares (89,425 ) (317,500 ) Net cash used in investing activities (2,054,890 ) (3,649,680 ) Cash flows from financing activities: Proceeds from the exercise of stock options and warrants - 85,000 Proceeds from exercise of subsidiary options 11,621 2,650 Purchase of treasury stock - (250,945 ) Dividend paid by subsidiary to non-controlling interest (1,920,618 ) (566,465 ) Proceeds from bank loans 4,221,203 1,227,158 Payments on finance lease obligations and loans - net (611,913 ) (480,231 ) Net cash provided by financing activities 1,700,293 17,167 Effect of exchange rate changes (817,363 ) (6,023,186 ) Net decrease in cash and cash equivalents 2,800,466 (4,722,489 ) Cash and cash equivalents at beginning of the period 17,366,364 22,088,853 Cash and cash equivalents at end of period $ 20,166,830 $ 17,366,364 The accompanying notes are an integral part of these consolidated financial statements. F- 9 NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) For the Years Ended June 30, 2020 2019 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 355,927 $ 293,969 Taxes $ 1,027,950 $ 848,497 NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets acquired under finance lease $ - $ 268,276 Amount accrued for the purchase of VLS $ - $ 609,600 Assets recognized under operating lease $ 3,474,583 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 10 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS NetSol Technologies, Inc., was incorporated under the laws of the State of Nevada on March 18, 1997. (NetSol Technologies, Inc. and subsidiaries collectively referred to as the “Company”) 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company as follows: Wholly owned Subsidiaries NetSol Technologies Americas, Inc. (“NTA”) 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”) OTOZ, Inc. (“OTOZ”) OTOZ (Thailand) Limited (“OTOZ Thai”) The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation. F- 11 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current period. Below is the table of reclassified amounts: For the Year ended June 30, 2019 Originally reported Reclassified REVENUES License fees $ 16,768,749 $ 16,768,749 Maintenance fees 15,010,171 15,521,413 Services 34,185,992 34,892,290 Maintenance fees - related party 511,242 - Services - related party 1,343,029 636,731 Total net revenues $ 67,819,183 $ 67,819,183 Cost of revenues: Other $ 4,066,443 $ 3,625,478 Operating expenses: General and administrative $ 16,916,953 $ 17,357,918 Basis of Presentation The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. 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, except balances maintained in China are insured for RMB500,000 ($70,721) in each bank. The Company maintains two bank accounts in China. As of June 30, 2020 and 2019, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $18,210,378 and $16,124,339, respectively. The Company has not experienced any losses in such accounts. F- 12 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Notes Receivable Notes Receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income. Revenues in Excess of Billings Revenues in excess of billings represent the total of the project to be billed to the customer for revenues recognized per US GAAP. As the customers are billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.” Investments The Company uses the equity investment without readily determinable fair value method to account for investments in businesses that are not publicly traded and for which the Company does not control or have the ability to exercise significant influence over operating and financial policies. In accordance with this method, these investments are recorded at lower of cost or fair value, as appropriate, and are classified as long-term. Investments held by the Company in businesses that are not publicly traded and for which the Company has the ability to exercise significant influence over operating and financial management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded at cost and are adjusted for the Company’s proportionate share of earnings, losses and distributions. These investments are classified as long-term. The Company assesses and records impairment losses when events and circumstances indicate the investments might be impaired. Gains and losses are recognized when realized and recorded in other income (expense) in the accompanying Consolidated Statements of Operations. F- 13 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Property and Equipment Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using various methods over the estimated useful lives of the assets, ranging from three to twenty years. Following is the summary of estimated useful lives of the assets: Category Estimated Useful Life Computer equipment & software 3 to 5 Years Office furniture and equipment 5 to 10 Years Building 20 Years Autos 5 Years Assets under capital leases 3 to 10 Years Improvements 5 to 10 Years The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included with “Computer equipment and software.” Impairment of Long-Lived Assets The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. 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. The Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, the Company recognizes 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 present value of expected future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present 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. F- 14 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Research and Development Costs Research and development expenses are comprised of salaries, benefits and overhead expenses of employees involved in software product enhancement and development, cost of outside contractors engaged to perform quality assurance, software product enhancement and development (if any). Development costs are expensed as incurred. Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business 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 exceeds its carrying value, step two does not need to be performed. 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. 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 Financial Instruments The Company applies the provisions of 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, restricted cash, 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 notes receivable and 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. F- 15 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Our financial assets that are measured at fair value on a recurring basis as of June 30, 2020 are as follows: Level 1 Level 2 Level 3 Total Assets Revenues in excess of billings - long term $ - $ - $ 1,300,289 $ 1,300,289 Total $ - $ - $ 1,300,289 $ 1,300,289 Our financial assets that are measured at fair value on a recurring basis as of June 30, 2019, are 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 for the years ended June 30, 2020 and 2019 is as follows: Revenues in excess of billings - long term Fair value discount Total Balance at June 30, 2018 $ 1,445,245 $ (238,576 ) $ 1,206,669 Effect of ASC 606 adoption (1,445,245 ) 238,576 (1,206,669 ) Additions 1,380,631 (99,139 ) 1,281,492 Balance at June 30, 2019 $ 1,380,631 $ (99,139 ) $ 1,281,492 Amortization during the period - 55,344 55,344 Effect of Translation Adjustment (39,056 ) 2,509 (36,547 ) Balance at June 30, 2020 $ 1,341,575 $ (41,286 ) $ 1,300,289 The Company used the discounted cash flow method with an interest rate of 4.35% during the years ended June 30, 2020 and 2019. 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. Unearned Revenue Unearned revenue represents billings in excess of revenue earned on contracts and are recognized on a pro-rata basis over the life of the contract. Unearned revenue was $4,095,472 and $5,977,736 as of June 30, 2020 and 2019, respectively. Cost of Revenues Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance. F- 16 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Advertising Costs The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2020 and 2019 were $285,964 and $282,354, respectively. Share-Based Compensation The Company records stock compensation in accordance with ASC 718, Compensation – Stock Compensation . ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes forfeitures as they occur. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations. Foreign Currency Translation The Company transacts business in various foreign currencies. The accounts of NetSol UK, NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, Omni and NetSol Innovation use Pakistan Rupees; NTPK Thailand, NetSol Thai and OTOZ Thai use Thai Baht; NetSol Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTA and OTOZ, use the U.S. dollar as the functional currency. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are recorded to other comprehensive income. F- 17 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Statement of Cash Flows The Company’s cash flows from operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Segment Reporting The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the geographic locations of its subsidiaries. (See Note 21 “Segment Information and Geographic Areas”) 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 Consolidated Balance Sheets. The adoption of ASU 2016-02 did not materially impact the results of operations or cash flows. 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 adoption of this standard 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. F- 18 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (“ASU 2016-13”) . This accounting standard update changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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. 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. F- 19 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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. 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. F- 20 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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. The Company’s disaggregated revenue by category is as follows: For the Years Ended June 30, 2020 2019 Core: License $ 4,564,560 $ 16,768,749 Maintenance 18,951,248 15,521,413 Services 25,713,554 28,683,468 Services - related party 300,821 636,731 Total core revenue, net 49,530,183 61,610,361 Non-Core: Services 6,842,136 6,208,822 Total non-core revenue, net 6,842,136 6,208,822 Total net revenue $ 56,372,319 $ 67,819,183 Significant Judgments More judgments and estimates are required under Topic 606 than were required under Topic 605. 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. F- 21 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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. 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. F- 22 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The Company’s revenues in excess of billings and deferred revenue are as follows: As of June 30, 2020 As of June 30, 2019 Revenues in excess of billings $ 18,506,733 $ 16,111,366 Deferred Revenue $ 4,095,472 $ 5,977,736 During the year ended June 30, 2020, the Company recognized revenue of $5,977,736, which 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. 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 $62,919,547 as of June 30, 2020, of which the Company estimates to recognize approximately $13,818,077 in revenue over the next 12 months and the remainder over an estimated 6 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 the Company applied in the adoption and application of Topic 606: Application ● 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). Modified Retrospective Transition Adjustments ● For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition. F- 23 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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 fulfillment duties and collections efforts. 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 year ended June 30, 2020 Net Income Shares Per Share Basic income per share: Net income available to common shareholders $ 937,081 11,734,648 $ 0.08 Effect of dilutive securities Share grants - 49,766 - Diluted income per share $ 937,081 11,784,414 $ 0.08 For the year ended June 30, 2019 Net Income Shares Per Share Basic income per share: Net income available to common shareholders $ 8,583,399 11,599,290 $ 0.74 Effect of dilutive securities Stock options - 4,418 - Share grants - 18,282 - Diluted income per share $ 8,583,399 11,621,990 $ 0.74 NOTE 5 – MAJOR CUSTOMERS During the year ended June 30, 2020, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $14,869,030 and $8,904,809, respectively representing 26.4% and 15.8%, respectively of revenues. During the year ended June 30, 2019, revenues from DFS and BMW were $23,912,605 and $12,522,867 representing 35.3% and 18.5%, respectively of revenues. The revenue from these customers are shown in the Asia – Pacific segment. Accounts receivable from DFS and BMW at June 30, 2020, were $4,821,468 and $474,271, respectively. Accounts receivable at June 30, 2019, were $7,917,814 and $159,322, respectively. Revenues in excess of billings at June 30, 2020 were $5,709,226 and $6,977,375, respectively. Revenues in excess of billings at June 30, 2019, were $4,371,081 and $5,472,043, respectively. Included in this amount was $1,300,289 and $1,281,492 shown as long term at June 30, 2020 and 2019, respectively. F- 24 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 6 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY Convertible Note Receivable - May 25, 2017 The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of June 30, 2020, the Company had disbursed $750,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2019. 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 Convertible Note is convertible upon the occurrence of the following events: 1. Upon a qualified financing which is an equity financing of at least $2,000,000. 2. Optionally, upon an equity financing less than $2,000,000. 3. Optionally after the maturity date. 4. Upon a change of control. The Convertible Note is convertible into Series BB Preferred shares at the lesser of (i) the price paid per share for the equity security by the investors in the qualified financing and (ii) $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 Convertible Note. Convertible Note Receivable – February 9, 2018 The Company’s subsidiary NetSol Thai entered into an agreement with WRLD3D, whereby NetSol Thai was issued a Convertible Promissory Note (the “Thai Convertible Note”) which was fully executed on February 9, 2018. The maximum principal amount of the Thai Convertible Note is $2,500,000, and as of June 30, 2020, NetSol Thai had disbursed $2,500,000. The Thai Convertible 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 Thai Convertible 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. If the Company converts the Thai Convertible 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) 70%. If the Company converts the Thai Convertible 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 Thai Convertible Note. Convertible Note Receivable – April 1, 2019 The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “April 1, 2019 Note”) which was fully executed on April 1, 2019. The maximum principal amount is $600,000, and as of June 30, 2020, the Company had disbursed $600,000. The April 1, 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. F- 25 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The April 1, 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. If the Company converts the April 1, 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 April 1, 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 April 1, 2019 Note. Convertible Note Receivable – August 19, 2019 The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “August 19, 2019 Note”) which was fully executed on August 19, 2019. The maximum principal amount is $400,000, and as of June 30, 2020, the Company had disbursed $400,000. The August 19, 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 19, 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. If the Company converts the August 19, 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 19, 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 19, 2019 Note. The following table summarizes the convertible notes receivable from WRLD3D. Convertible Agreement Interest Maturity Note Date Rate Date Amount May 25, 2017 5% On Demand $ 750,000 February 9, 2018 10% On Demand 2,500,000 April 1, 2019 10% On Demand 600,000 August 19, 2019 10% On Demand 400,000 $ 4,250,000 The Company has accrued interest of $701,062 and $328,748 at June 30, 2020 and 2019, respectively, which is included in “Other current assets”. F- 26 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 7 - OTHER CURRENT ASSETS Other current assets consisted of the following: As of As of June 30, 2020 June 30, 2019 Prepaid Expenses $ 1,035,415 $ 991,528 Advance Income Tax 355,482 800,798 Employee Advances 44,415 33,778 Security Deposits 270,403 147,668 Other Receivables 1,239,221 733,826 Other Assets 163,244 438,666 Total $ 3,108,180 $ 3,146,264 NOTE 8 – REVENUES IN EXCESS OF BILLINGS – LONG TERM Revenues in excess of billings, net consisted of the following: As of As of June 30, 2020 June 30, 2019 Revenues in excess of billings - long term $ 1,341,575 $ 1,380,631 Present value discount (41,286 ) (99,139 ) Net Balance $ 1,300,289 $ 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 years ended June 30, 2020 and 2019, the Company accreted $55,344 and $Nil, respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with an interest rate of 4.35% during the years ended June 30, 2020 and 2019. F- 27 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 9 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: As of As of June 30, 2020 June 30, 2019 Office Furniture and Equipment $ 3,143,833 $ 3,125,382 Computer Equipment 19,256,543 18,905,603 Assets Under Capital Leases 1,443,423 1,720,490 Building 5,848,813 6,021,939 Land 1,512,905 1,559,111 Capital Work In Progress 27,648 - Autos 1,348,405 1,024,754 Improvements 36,929 111,165 Subtotal 32,618,499 32,468,444 Accumulated Depreciation (21,288,868 ) (20,371,589 ) Property and Equipment, Net $ 11,329,631 $ 12,096,855 For the years ended June 30, 2020 and 2019, depreciation expense totaled $1,903,640 and $2,285,225, respectively. Of these amounts, $1,069,057 and $1,387,425, respectively, are reflected in cost of revenues. Following is a summary of fixed assets held under capital leases as of June 30, 2020 and 2019: As of As of June 30, 2020 June 30, 2019 Computers and Other Equipment $ 328,621 $ 324,466 Furniture and Fixtures 51,119 65,084 Vehicles 1,063,683 1,330,940 Total 1,443,423 1,720,490 Less: Accumulated Depreciation - Net (667,096 ) (538,564 ) $ 776,327 $ 1,181,926 NOTE 10 - 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. F- 28 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 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. 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 re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the 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 June 30, 2020 Assets Operating lease assets, net $ 2,360,129 Liabilities Current Operating $ 1,111,912 Non-current Operating 1,339,965 Total Lease Liabilities $ 2,451,877 The components of lease cost were as follows: For the Year Ended June 30, 2020 Amortization of finance lease assets $ 253,071 Interest on finance lease obligation 81,907 Operating lease cost 1,258,102 Short term lease cost 282,806 Sub lease income (33,426 ) Total lease cost $ 1,842,460 F- 29 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Lease term and discount rate were as follows: As of June 30, 2020 Weighted average remaining lease term - Operating leases 2.45 Years Weighted average discount rate - Operating leases 5.6 % Supplemental disclosures of cash flow information related to leases were as follows: For the Year Ended June 30, 2020 Cash flows related to lease liabilities Operating cash flows related to operating leases $ 1,263,089 Maturities of operating lease liabilities were as follows as of June 30, 2020: Amount Within year 1 $ 1,215,699 Within year 2 855,582 Within year 3 474,181 Within year 4 75,500 Within year 5 786 Thereafter 3,142 Total Lease Payments 2,624,890 Less: Imputed interest (173,013 ) Present Value of lease liabilities 2,451,877 Less: Current portion (1,111,912 ) Non-Current portion $ 1,339,965 As of June 30, 2020, 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 $ 1,575,573 Within year 2 917,556 Within year 3 530,632 Within year 4 105,665 Within year 5 35,154 Total $ 3,164,580 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 year ended June 30, 2020, the Company received $33,426 of lease income. F- 30 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 11 – LONG-TERM INVESTMENT Drivemate The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“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. During the year ended June 30, 2020, the Company paid $94,500 leaving a balance of $155,500 to be paid. As of June 30, 2020, the Company owns 5.05% of Drivemate. 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 year ended June 30, 2020 and 2019, the Company performed $1,054,372 and $245,280 of services, respectively. Under the equity method of accounting, the Company recorded its share of net loss of $16,714 and $3,235 for the years ended June 30, 2020 and 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. As of June 30, 2020, the investment earned by NetSol PK was $2,777,778. As of June 30, 2020, NTI and NTPK own 1,636,876 and 4,092,189, respectively, of Series BB Preferred Stock. In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of WRLD3D which included the following key terms and features: ● The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”. ● The warrants expired on March 2, 2020. ● “Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016. ● “Qualified Financing” is defined as financing with total proceeds of at least $2 million. ● The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred. ● The exercise price of the warrants is equal to the greater of a) 70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or b) 25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant). The Company determined that it met the significant influence criteria since the CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company accounts for the investment using equity method of accounting. During the years ended June 30, 2020 and 2019, NetSol PK provided services valued at $300,821 and $636,731, respectively, which is recorded as services-related party. Accounts receivable at June 30, 2020 and 2019 were $1,373,099 and $1,020,589, respectively. Revenue in excess of billing at June 30, 2020 and 2019 were $8,163 and $110,827, respectively. Under the equity method of accounting, the Company recorded its share of net loss of $589,150 and $838,610 for the years ended June 30, 2020 and 2019, respectively. F- 31 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The following table reflects the above investments at June 30, 2020. Drivemate WRLD3D Total Gross investment $ 344,500 $ 3,888,889 $ 4,233,389 Cumulative net loss on investment (19,940 ) (1,401,142 ) (1,421,082 ) Cumulative other comprehensive income (loss) - (424,615 ) (424,615 ) Net investment $ 324,560 $ 2,063,132 $ 2,387,692 NOTE 12 - INTANGIBLE ASSETS Intangible assets consisted of the following: As of As of June 30, 2020 June 30, 2019 Product Licenses - Cost $ 47,244,997 $ 47,244,997 Effect of Translation Adjustment (16,045,322 ) (15,343,727 ) Accumulated Amortization (25,808,598 ) (24,568,320 ) Net Balance $ 5,391,077 $ 7,332,950 (A) Product Licenses Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $5,391,077 will be amortized over the next 3.25 years. Amortization expense for the years ended June 30, 2020 and 2019 was $1,828,314 and $2,138,432, respectively. (B) Future Amortization Estimated amortization expense of intangible assets over the next five years is as follows: Year ended: June 30, 2021 $ 1,730,911 June 30, 2022 1,730,911 June 30, 2023 1,730,911 June 30, 2024 198,344 $ 5,391,077 F- 32 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 13 – GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period business combinations. Goodwill was comprised of the following amounts: As of June 30, As of June 30, 2020 2019 NetSol PK (Asia - Pacific) $ 1,166,610 $ 1,166,610 NTE (Europe) 3,471,814 3,471,814 VLS (Europe) 214,044 214,044 NTA (North America) 4,664,100 4,664,100 Total $ 9,516,568 $ 9,516,568 NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: As of As of June 30, 2020 June 30, 2019 Accounts Payable $ 1,351,158 $ 1,156,498 Accrued Liabilities 3,349,624 5,055,358 Accrued Payroll & Taxes 537,888 793,503 Taxes Payable 303,996 326,386 Other Payable 138,171 144,815 Total $ 5,680,837 $ 7,476,560 F- 33 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NOTE 15 – DEBTS Notes payable and capital leases consisted of the following: As of June 30, 2020 Current Long-Term Name Total Maturities Maturities D&O Insurance (1 ) $ 81,728 $ 81,728 $ - Paycheck Protection Program Loans (2 ) 469,721 182,669 287,052 Bank Overdraft Facility (3 ) - - - Term Finance Facility (4 ) 1,380,878 354,337 1,026,541 Loan Payable Bank - Export Refinance (5 ) 2,975,482 2,975,482 - Loan Payable Bank - Running Finance (6 ) - - - Loan Payable Bank - Export Refinance II (7 ) 2,261,365 2,261,365 - Loan Payable Bank - Running Finance II (8 ) - - - Loan Payable Bank - Export Refinance III (9 ) 2,975,483 2,975,483 - Term Finance Facility (10 ) 65,473 16,423 49,050 10,210,130 8,847,487 1,362,643 Subsidiary Finance Leases (11 ) 469,406 292,074 177,332 $ 10,679,536 $ 9,139,561 $ 1,539,975 As of June 30, 2019 Current Long-Term Name Total Maturities Maturities D&O Insurance (1 ) $ 67,671 $ 67,671 $ - Paycheck Protection Program Loans (2 ) - - - Bank Overdraft Facility (3 ) - - - Term Finance Facility (4 ) - - - Loan Payable Bank - Export Refinance (5 ) 3,066,355 3,066,355 - Loan Payable Bank - Running Finance (6 ) 325,034 325,034 - Loan Payable Bank - Export Refinance II (7 ) 2,330,431 2,330,431 - Loan Payable Bank - Running Finance II (8 ) 735,925 735,925 - Loan Payable Bank - Export Refinance III (9 ) - - - Term Finance Facility (10 ) 82,969 15,838 67,131 6,608,385 6,541,254 67,131 Subsidiary Finance Leases (11 ) 861,784 364,343 497,441 $ 7,470,169 $ 6,905,597 $ 564,572 (1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings range from 5.0% to 7.0% as of June 30, 2020 and 6.0% and 7.0% as of June 30, 2019. (2) The Company and its subsidiary, NTA, received Paycheck Protection Program loans of $469,721 introduced by the U.S. Government during the COVID-19 Pandemic. This loan is forgivable if the Company meets the criteria set by the U.S. Government. The loans carry an interest rate of 1% and have a maturity date of two years from the date of the disbursement of the loan. As of June 30, 2020, the Company has not applied for the loan forgiveness. F- 34 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 (3) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $370,370. The annual interest rate was 5.1% as of June 30, 2020. Total outstanding balance as of June 30, 2020 and 2019 was £nil. This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of June 30, 2020, NTE was in compliance with this covenant. (4) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during Pandemic COVID-19. This is a term loan payable in three years. The availed facility amount is Rs. 232,042,664 or $1,380,878, at June 30, 2020, of which $354,337 is show as current and the remaining $1,026,541 is shown as long term. The interest rate for the loan was 3% at June 30, 2020. (5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 500,000,000 or $2,975,482 and Rs. 500,000,000 or $3,066,355 at June 30, 2020 and 2019, respectively. The interest rate for the loan was 3% at June 30, 2020 and 2019. (6) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $446,322 and Rs. 75,000,000 or $459,953, at June 30, 2020 and 2019, respectively. NetSol PK used Rs. 53,000,000 or $325,034, at June 30, 2019. The interest rate for the loan was 7.2% and 13.0% at June 30, 2020 and 2019, respectively. These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of June 30, 2020, NetSol PK was in compliance with this covenant. (7) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 380,000,000 or $2,261,366 and Rs. 380,000,000 or $2,330,431, at June 30, 2020 and 2019, respectively. The interest rate for the loan was 3% at June 30, 2020 and 2019. (8) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 120,000,000 or $714,116 and Rs. 120,000,000 or $735,925, at June 30, 2020 and 2019, respectively. The interest rate for the loan was 7.7% and 14.3% at June 30, 2020 and 2019, respectively. During the loan tenure, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of June 30, 2020, NetSol PK was in compliance with these covenants. (9) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. Total facility amount is Rs. 900,000,000 or $5,355,868 and NetSol PK used Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at June 30, 2020. (10) In March 2020, the Company’s subsidiary, VLS, entered into a loan agreement with Investec Bank PLC. The loan amount was £69,549, or $85,863, for a period of 5 years with monthly payments of £1,349, or $1,665. As of June 30, 2020, the subsidiary has used this facility up to $65,473, of which $49,050 was shown as long-term and $16,311 as current. The interest rate was 6.14% at June 30, 2020. (11) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2024. 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 secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the years ended June 30, 2020 and 2019. F- 35 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Following is the aggregate minimum future lease payments under capital leases as of June 30, 2020: Amount Minimum Lease Payments Within year 1 $ 326,556 Within year 2 152,975 Within year 3 19,852 Within year 4 13,235 Total Minimum Lease Payments 512,618 Interest Expense relating to future periods (43,212 ) Present Value of minimum lease payments 469,406 Less: Current portion (292,074 ) Non-Current portion $ 177,332 Following is the aggregate future long term debt payments as of June 30, 2020: Amount Loan Payments Within year 1 $ 553,429 Within year 2 988,874 Within year 3 360,745 Within year 4 13,024 Total Loan Payments 1,916,072 Less: Current portion (553,429 ) Non-Current portion $ 1,362,643 NOTE 16 – INCOME TAXES The Company is incorporated in the State of Nevada and registered to do business in the State of California. The following is a breakdown of income before the provision for income taxes: Consolidated pre-tax income (loss) consists of the following: Years Ended June 30, 2020 2019 US operations $ 417,885 $ (1,941,611 ) Foreign operations 1,915,206 15,016,935 $ 2,333,091 $ 13,075,324 F- 36 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The components of the provision for income taxes are as follows: Years Ended June 30, 2020 2019 Current: Federal $ - $ - State and Local 2,275 - Foreign 1,138,793 1,057,784 Deferred: Federal - - State and Local - - Foreign - - Provision for income taxes $ 1,141,068 $ 1,057,784 A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows: Reconciliation of effective income tax rate Years Ended June 30, 2020 2019 Income tax (benefit) provision at statutory rate $ 489,949 21.0 % $ 2,745,818 21.0 % State income (benefit) taxes, net of federal tax benefit 162,850 7.0 % 912,658 7.0 % Foreign earnings taxed at different rates 602,918 25.8 % (3,143,954 ) -24.0 % Change in valuation allowance for deferred tax assets (120,739 ) -5 % 356,905 2.7 % Other 6,090 0.3 % 186,357 1.4 % Provision for income taxes $ 1,141,068 48.9 % $ 1,057,784 8.1 % Deferred income tax assets and liabilities as of June 30, 2020 and 2019 consist of tax effects of temporary differences related to the following: Components of deferred tax asset Years Ended June 30, 2020 2019 Net operating loss carry forwards $ 7,318,282 $ 6,994,268 Other 115,253 257,337 Net deferred tax assets 7,433,535 7,251,605 Valuation allowance for deferred tax assets (7,433,535 ) (7,251,605 ) Net deferred tax assets $ - $ - 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. The valuation allowance decreased by $181,930 for the year ended June 30, 2020. At June 30, 2020, federal and state net operating loss carry forwards in the United States of America were $30,196,241 and $7,347,063, respectively. Federal net operating loss carry forwards begin to expire in 2028, while state net operating loss carry forwards are expiring each year. Due to both historical and recent changes in the capitalization structure of the Company, the utilization of net operating losses may be limited pursuant to section 382 of the Internal Revenue Code. Net operating losses related to foreign entities were $1,330,673 at June 30, 2020. F- 37 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 As of June 30, 2020, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company is subject to U.S. federal income tax, as well as various state and foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending June 30, 2017 through 2019. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months. The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently invest and upon which no deferred US income taxes have been provided is $31,046,118 as of June 30, 2020. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed. The Company determined that it is not practicable to determine unrecognized deferred tax liability associated with the unremitted earnings attributable to the foreign subsidiaries. Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2025. The aggregate effect of the tax holiday for June 30, 2020 and 2019 is $47,477 and $2,771,078, respectively. The effect on basic and diluted earnings per share is $0.004, for June 30, 2020 and $0.19 and $0.18 for June 30, 2019. NOTE 17 - STOCKHOLDERS’ EQUITY During the years ended June 30, 2020 and 2019, the Company issued 55,044 and 41,482 shares of common stock, respectively, for services rendered by officers of the Company. These shares were valued at the fair market value of $312,090 and $252,655, respectively, and recorded as compensation expense in the accompanying consolidated financial statements. During the years ended June 30, 2020 and 2019, the Company issued 73,667 and 35,723 shares of common stock respectively, 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 $261,622 and $201,246, respectively, and recorded as compensation expense in the accompanying consolidated financial statements. During the years ended June 30, 2020 and 2019, the Company issued 81,696 and 112,992 shares of common stock, respectively, to employees pursuant to the terms of their employment agreements. These shares were valued at the fair market value of $416,738 and $686,109, respectively, and recorded as compensation expense in the accompanying consolidated financial statements. During the years ended June 30, 2019, the Company received $85,000 pursuant to a stock option agreement for the exercise of 13,076 shares of common stock at $6.50 per share. During the years ended June 30, 2019, the Company purchased 41,650 shares of its common stock from the open market at an average price of $6.03 per share pursuant to the Company’s stock buy-back plan. NOTE 18 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the Board of Directors 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. F- 38 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The Plans provide 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 Plans contemplate the issuance of common stock upon exercise of options or other awards granted to eligible persons under the Plans. Shares issued under the Plans 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 Plans, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the Plans. 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. Options granted under the Plans 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. 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 Board of Directors. The maximum term of any option granted under the 2015 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years. Under the Plans, 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 Board of Directors. The Board of Directors may also make “deferred share” awards, which entitle the participant to receive the Company’s stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with the 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 Board of Directors (but in no event less than the fair market value of the stock on the date of grant). Finally, the Board of Directors may make “restricted stock” awards under the Plans, which are subject to such terms and conditions as the Board of Directors determines and as are set forth in the award agreement related to the restricted stock. As of June 30, 2020, the remaining shares to be granted are 40,386 under 2005 Plan, 98,196 under the 2013 Plan and 306,422 under the 2015 Plan. F- 39 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Options and Warrants A summary of option and warrant activity for the years ended June 30, 2020 and 2019 is presented below: OPTIONS: # of shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregated Intrinsic Value Outstanding and exercisable, June 30, 2018 53,462 $ 6.50 0.61 $ - Granted - - Exercised (13,076 ) $ 6.50 Expired / Cancelled - - Outstanding and exercisable, June 30, 2019 40,386 $ 6.50 0.61 $ - Granted - - Exercised - - Expired / Cancelled (40,386 ) $ 6.50 Outstanding and exercisable, June 30, 2020 - - - $ - During the year ended June 30, 2019, the Company extended the life of 40,386 options with an exercise price of $6.50, for a period of one year. The Company recorded $43,612 in compensation expense for the extension of these options in the accompanying consolidated financial statements. The fair market value was calculated using the Black-Scholes option pricing model with the following assumptions: June 30, 2019 Risk-free interest rate 2.56 % Expected life 1 year Expected volatility 45 % Expected dividend 0 % F- 40 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Stock Grants The following table summarizes stock grants awarded as compensation: # of shares Weighted Average Grant Date Fair Value ($) Unvested, June 30, 2018 155,648 $ 6.07 Granted 122,277 $ 5.71 Vested (191,450 ) $ 5.99 Forfeited / Cancelled (4,960 ) $ 6.05 Unvested, June 30, 2019 81,515 $ 5.88 Granted 200,273 $ 4.61 Vested (210,408 ) $ 4.71 Forfeited / Cancelled (4,959 ) $ 6.05 Unvested, June 30, 2020 66,421 $ 5.75 For the years ended June 30, 2020 and 2019, the Company recorded compensation expense of $808,458 and $1,131,013, respectively. The compensation expense related to the unvested stock grants as of June 30, 2020 was $373,129 which will be recognized during the fiscal years 2021 through 2022. NOTE 19 – COMMITMENTS AND CONTINGENCIES On or about July 13, 2020, the Company was named as a defendant in a civil lawsuit based on an alleged breach of contract claim filed by Royal News Corp. d/b/a Royal Media Group (“RMG”). The lawsuit is captioned Royal News Corp. d/b/a Royal Media Group v. Netsol Techs., Inc. , U.S. District Court Case No. 1:20-cv-05381-PAE (S.D.N.Y.) (the “Lawsuit”). On or about August 24, 2020, the Company and RMG reached an agreement to fully resolve the case and are in the process of documenting the agreement, which includes a release of each other from all obligations, contractual or otherwise, claims, disputes or other matters, in exchange for (i) a payment by the Company to RMG in the amount of $100,000; and (ii) RMG dismissing the Lawsuit, with prejudice, pursuant to Rule 41(a) of the Federal Rules of Civil Procedure. On September 22, 2020, a notice of dismissal with prejudice was filed with the United States District Court Southern District of New York. NOTE 20 – RETIREMENT PLANS The Company and its subsidiaries have varying defined contribution plans based on country specific laws. Employer contributions vary by subsidiary from 0% up to 8% taking the form in some jurisdictions of employee matching contributions and in others direct employer contributions mandated by local law. During the years ended June 30, 2020 and 2019, the Company contributed $1,135,233 and $1,072,106, respectively, to these plans. NOTE 21 – SEGMENT INFORMATION AND GEOGRAPHIC AREAS The Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. The 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. The Company accounts for intra-company sales and expenses as if the sales or expenses were to third parties and eliminates them in the consolidation. F- 41 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The following table presents a summary of identifiable assets as of June 30, 2020 and 2019: As of As of June 30, 2020 June 30, 2019 Identifiable assets: Corporate headquarters $ 4,508,724 $ 2,947,727 North America 5,949,653 5,730,928 Europe 10,856,814 8,399,033 Asia - Pacific 67,157,898 70,419,331 Consolidated $ 88,473,089 $ 87,497,019 The following table presents a summary of investments under the equity method as of June 30, 2020 and 2019: As of As of June 30, 2020 June 30, 2019 Investment in associates under equity method: Corporate headquarters $ 473,692 $ 686,504 Asia - Pacific 1,914,000 1,967,265 Consolidated $ 2,387,692 $ 2,653,769 F- 42 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The following table presents a summary of operating information for the years ended June 30: For the Years Ended June 30, 2020 2019 Revenues from unaffiliated customers: North America $ 4,444,862 $ 3,947,407 Europe 11,914,071 9,148,165 Asia - Pacific 39,712,565 54,019,594 56,071,498 67,115,166 Revenue from affiliated customers Asia - Pacific 300,821 704,017 300,821 704,017 Consolidated $ 56,372,319 $ 67,819,183 Intercompany revenue Europe $ 585,250 $ 574,517 Asia - Pacific 7,045,640 7,511,236 Eliminated $ 7,630,890 $ 8,085,753 Net income (loss) after taxes and before non-controlling interest: Corporate headquarters $ (408,016 ) $ (2,296,409 ) North America (241,444 ) (756,510 ) Europe 1,766,434 1,473,274 Asia - Pacific 75,049 13,597,185 Consolidated $ 1,192,023 $ 12,017,540 Depreciation and amortization: North America $ 11,828 $ 26,275 Europe 353,862 329,671 Asia - Pacific 3,366,264 4,067,711 Consolidated $ 3,731,954 $ 4,423,657 Interest expense: Corporate headquarters $ 33,710 $ 14,074 Europe 9,905 6,876 Asia - Pacific 303,241 290,848 Consolidated $ 346,856 $ 311,798 Income tax expense: Corporate headquarters $ 1,075 $ 1,837 North America 1,200 - Europe 326,524 320,263 Asia - Pacific 812,269 735,684 Consolidated $ 1,141,068 $ 1,057,784 F- 43 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 The following table presents a summary of capital expenditures for the years ended June 30: For the Years Ended June 30, 2020 2019 Capital expenditures: North America $ 3,904 $ 1,384 Europe 763,308 502,823 Asia - Pacific 609,933 2,222,351 Consolidated $ 1,377,145 $ 2,726,558 Geographic Information Disclosed in the table below is the geographic information of total revenues by country for the years ended June 30, 2020 and 2019. June 30, 2020 June 30, 2019 Revenue Long-lived Assets Revenue Long-lived Assets China $ 20,065,572 $ 843,694 $ 31,622,024 $ 58,058 Thailand 3,807,648 900,514 3,304,119 771,992 USA 3,457,676 5,689,067 2,911,195 5,385,230 UK 12,275,903 5,528,801 9,852,180 4,549,676 Pakistan & India 2,008,907 19,103,687 2,006,934 22,125,464 Australia & New Zealand 3,149,715 261,615 5,684,487 14,783 Mexico 987,190 - 1,036,213 - Indonesia 5,611,454 - 3,909,304 - South Africa 496,480 - 2,135,027 - Other Countries 4,511,774 - 5,357,700 - Total $ 56,372,319 $ 32,327,378 $ 67,819,183 $ 32,905,203 F- 44 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 Disclosed in the table below is the reconciliation of revenue by each entity and country disclosed above for the years ended June 30, 2020 and 2019. Revenues 2020 Total China Thailand USA UK Pakistan & India Australia & New Zealand Mexico Indonesia South Africa Other Countries North America: $ 4,444,863 $ - $ - $ 3,457,673 $ - $ - $ - $ 987,190 $ - $ - $ - Europe: 11,914,070 - - - 11,914,070 - - - - - - Asia-Pacific: 40,013,386 20,065,572 3,807,648 - 361,833 2,008,910 3,149,715 - 5,611,454 496,480 4,511,774 Total $ 56,372,319 $ 20,065,572 $ 3,807,648 $ 3,457,673 $ 12,275,903 $ 2,008,910 $ 3,149,715 $ 987,190 $ 5,611,454 $ 496,480 $ 4,511,774 Revenues 2019 Total China Thailand USA UK Pakistan & India Australia & New Zealand Mexico Indonesia South Africa Other Countries North America: $ 3,947,408 $ - $ - $ 2,911,195 $ - $ - $ - $ 1,036,213 $ - $ - $ - Europe: 9,148,164 - - - 9,148,164 - - - - - - Asia-Pacific: 54,723,611 31,622,024 3,304,119 - 704,016 2,006,934 5,684,487 - 3,909,304 2,135,027 5,357,700 Total $ 67,819,183 $ 31,622,024 $ 3,304,119 $ 2,911,195 $ 9,852,180 $ 2,006,934 $ 5,684,487 $ 1,036,213 $ 3,909,304 $ 2,135,027 $ 5,357,700 NOTE 22 – 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 June 30, 2020 NetSol PK 33.88 % $ 6,361,747 NetSol-Innovation 33.88 % 128,514 NetSol Thai 0.006 % (39 ) OTOZ Thai 0.006 % 4 OTOZ 5.00 % (1,326 ) Total $ 6,488,900 SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at June 30, 2019 NetSol PK 33.80 % $ 6,993,491 NetSol-Innovation 49.90 % 1,421,528 NetSol Thai 0.006 % (32 ) Total $ 8,414,987 F- 45 NETSOL TECHNOLOGIES, INC. Notes to Consolidated Financial Statements June 30, 2020 and 2019 NetSol PK During the years ended June 30, 2020 and 2019, employees of NetSol PK exercised 114,000 and 20,000 options of common stock and NetSol PK received cash of $11,261 and $2,650, respectively. Due to the exercise of options, the non-controlling interest increased from 33.80% at June 30, 2019 to 33.88% at June 30, 2020. During the years ended June 30, 2020 and 2019, NetSol PK paid a cash dividend of $1,610,909 and $1,675,936, respectively. NetSol Innovation During the year ended June, 30, 2020, the Company’s subsidiary NetSol PK purchased NetSol Innovation, from 1insurer for $89,425. Due to this purchase, the non-controlling interest decreased from 49.90% at June 30, 2019 to 33.88% at June 30, 2020. During the year ended June 30, 2020, NetSol Innovation paid a cash dividend of $2,778,453. NOTE 23 – SUBSEQUENT EVENTS Effective July 30, the Company’s, Board of Directors authorized the repurchase of up to two million dollars’ worth of the Company’s issued and outstanding common shares. The repurchase plan is authorized commencing July 30, 2020, and ending December 24, 2020, subject to an additional six-month extension at the discretion of management. Although no shares were repurchased during fiscal year 2020, the Company purchased 147,052 shares at an average price of $3.16 per share subsequent to the fiscal year ended June 30, 2020. F- 46