CLPS Incorporation — Form 20-F Summary
Reporting period: Fiscal year ended June 30, 2023, compared with fiscal years ended June 30, 2022 and 2021. The supplied filing is an annual Form 20-F, not a 2022 Q4 filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars; most operations and transactions are denominated in RMB.
Business context
CLPS is a Cayman Islands holding company providing IT consulting, customized IT solutions, staffing, training and related services, primarily to banking, wealth management, e-commerce and automotive clients. The company operates principally through subsidiaries in Mainland China, with additional operations in Hong Kong, Singapore, the United States and other jurisdictions. It maintained 20 delivery and research centers and had 3,509 employees at June 30, 2023, down from 3,824 a year earlier.
Key financial metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $150.4 million | $152.0 million | Down 1.1% |
| IT consulting revenue | $144.3 million | $144.1 million | Up 0.1% |
| Customized solution revenue | $4.6 million | $6.7 million | Down 32.4% |
| Gross profit | $34.5 million | $41.0 million | Down 15.9% |
| Gross margin | 22.9% | 27.0% | Down 4.1 percentage points |
| Income from operations | $0.08 million | $7.4 million | Material decline |
| Net income | $0.17 million | $4.6 million | Down 96.4% |
| Net income attributable to CLPS shareholders | $0.19 million | $4.5 million | Down 95.7% |
| GAAP diluted EPS | $0.01 | $0.21 | Down $0.20 |
| Non-GAAP net income | $5.0 million | $11.8 million | Down 57.3% |
| Operating cash flow | $9.7 million | $3.2 million | Up $6.5 million |
Revenue was heavily concentrated in IT consulting, which represented 96.0% of FY2023 revenue. Banking revenue was approximately $61.5 million, wealth management $37.4 million, e-commerce $25.5 million and automotive $14.2 million. Citibank and its affiliates represented 21.4% of total revenue and 32.3% of accounts receivable. The top five customers represented 49.1% of revenue.
Liquidity, debt and balance sheet
| Metric | June 30, 2023 | June 30, 2022 |
|---|---|---|
| Cash and cash equivalents | $22.2 million | $18.4 million |
| Restricted cash | $0.09 million | None reported |
| Accounts receivable, net | $48.5 million | $53.8 million |
| Current assets | $72.9 million | $76.8 million |
| Total assets | $95.3 million | $101.9 million |
| Bank loans | $10.6 million | $14.5 million |
| Total liabilities | $29.8 million | $34.1 million |
| Total shareholders’ equity | $65.5 million | $67.8 million |
All reported bank-loan principal was due within one year. The company reported $10.0 million of RMB financing facilities with no unused RMB capacity and an HKD58.0 million facility that remained unused. Contractual obligations totaled $11.4 million, including $10.6 million of bank loans and $0.84 million of operating lease commitments. Management stated that cash, operating cash flow and available credit should be sufficient for at least the next 12 months.
Cash flow and capital allocation
- Operating cash flow improved to $9.7 million from $3.2 million, helped by lower accounts receivable and prepayments.
- Investing cash use was $0.3 million, versus $16.3 million in FY2022, when the company spent approximately $20.8 million on office buildings, equipment and furniture.
- Financing cash use was $4.3 million, reflecting $23.4 million of new bank borrowings, $26.3 million of repayments and $1.4 million of dividends, including $1.18 million paid to shareholders.
- Capital expenditures were $0.5 million in FY2023, compared with $20.8 million in FY2022.
Material changes versus the prior comparable period
- Revenue declined modestly, but profitability deteriorated sharply because cost of revenue increased 4.4% while revenue decreased 1.1%. Cost of revenue rose to 77.1% of revenue from 73.0%.
- Gross margin fell to 22.9% from 27.0%, primarily reflecting higher IT professional compensation and labor costs.
- Goodwill impairment of $2.38 million was recorded in FY2023; no goodwill impairment was recorded in FY2022 or FY2021. Goodwill was reduced to zero.
- Share-based compensation declined to $2.48 million from $7.18 million, but remained a significant adjustment in the company’s non-GAAP presentation.
- R&D expense increased to $8.3 million from $8.0 million, while selling and marketing expense decreased to $3.3 million from $4.1 million.
- Foreign-currency translation loss increased to $3.5 million from $1.8 million, contributing to a comprehensive loss of $3.4 million.
- Accounts receivable decreased by approximately $5.3 million, although receivable concentration remained high.
- The company adopted the current expected credit loss standard and lease accounting guidance on July 1, 2022. The reported effects were not material to earnings or cash flows, except for a $26,664 opening retained-earnings adjustment related to credit losses.
Guidance, outlook and management commentary
The filing does not provide quantitative revenue or earnings guidance. Management’s stated strategy is to grow with existing and new clients, invest in R&D and financial-technology solutions, expand training and talent programs, improve resource utilization, pursue selective alliances and acquisitions, and expand internationally. New or enhanced offerings include digital-currency applications, the CAKU 2.0 credit-card system, a loan-management platform and AI/RPA-enabled talent-acquisition tools.
Management reported positive operating cash flow and sufficient liquidity for the next 12 months, but also emphasized dependence on customer demand, employee utilization, pricing, wage levels, receivable collections and the ability to retain skilled personnel. The company had no material legal proceedings and reported no off-balance-sheet arrangements or material subsequent events.
Principal risks and unusual items
- Customer concentration: Citibank and its affiliates accounted for 21.4% of revenue and 32.3% of receivables; major agreements generally do not provide long-term purchase commitments.
- Margin pressure: Higher wages, underutilization, fixed-price project cost overruns and competitive pricing could further reduce margins.
- Receivable risk: Net accounts receivable was $48.5 million, with substantial exposure to a single customer and no generally required collateral.
- China and regulatory exposure: Operations are concentrated in Mainland China and subject to evolving PRC rules involving cybersecurity, data, foreign exchange, taxation, offshore listings and capital transfers.
- Fund-transfer restrictions: PRC subsidiaries must retain statutory reserves and can pay dividends only from distributable retained earnings; RMB conversion and remittance may require regulatory procedures.
- Audit and listing risk: The auditor is Ernst & Young Hua Ming LLP in Mainland China. PCAOB access improved in 2022, but future loss of access could create HFCAA-related trading or delisting risk.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were effective, but the auditor was not engaged to provide an internal-control opinion because the company is a non-accelerated filer.
- Foreign-exchange exposure: The RMB depreciated 8.3% against the U.S. dollar in FY2023, contributing to translation losses and potentially affecting reported U.S.-dollar results.
- Shareholder dilution: At June 30, 2023, 5.2 million stock options were outstanding, and 2.67 million warrants remained outstanding from the 2021 private placement.
- Tax contingencies: Unrecognized tax benefits totaled approximately $2.44 million, and PRC tax years remain subject to examination under the periods described in the filing.
Important facts for investors to verify
- Confirm that the applicable period is FY2023 rather than 2022 Q4.
- Reconcile the sharp decline in gross margin and GAAP earnings with labor costs, utilization, pricing and the $2.38 million goodwill impairment.
- Review customer concentration, receivable aging and collection performance, particularly Citibank exposure.
- Verify the amount, maturity and collateral requirements of the $10.6 million of bank loans and the availability of unused credit facilities.
- Assess how much reported cash is held in Mainland China and the practical ability to transfer it offshore or pay dividends.
- Track PCAOB inspection status, HFCAA exposure, Nasdaq compliance and any required CSRC or cybersecurity filings.
- Evaluate potential dilution from outstanding options, warrants and the 2023 equity incentive plan, which authorizes up to 20 million shares.
- Distinguish GAAP results from management’s non-GAAP results, which exclude share-based compensation and goodwill impairment and are not necessarily comparable with other companies’ measures.