NetSol Technologies, Inc. 2019 Form 10-K Summary
Business context and reporting period
NetSol Technologies, Inc. provides enterprise software, implementation, consulting, maintenance, business-process outsourcing and IT services primarily to the global leasing and asset-finance industry. Its principal products are the NetSol Financial Suite and NFS Ascent. Operations are organized into North America, Europe and Asia-Pacific, with approximately 1,360 employees as of June 30, 2019.
The filing is a Form 10-K for the fiscal year ended June 30, 2019, compared with fiscal 2018. The request metadata references “2018 Q4,” but this document reports annual fiscal-year results rather than a standalone quarterly period.
Asia-Pacific generated 80.7% of consolidated revenue. Daimler Financial Services and BMW accounted for 35.3% and 18.5% of fiscal 2019 revenue, respectively.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $67.8 million | $60.9 million | +11.3% |
| Gross profit | $34.4 million | $29.2 million | +17.9% |
| Gross margin | 50.8% | 47.9% | +290 bps |
| Operating income | $6.8 million | $3.1 million | +123.5% |
| Operating margin | 10.1% | 5.0% | +510 bps |
| Net income attributable to NetSol | $8.6 million | $4.3 million | +99.3% |
| Basic and diluted EPS | $0.74 | $0.38 | +94.7% |
| Adjusted EBITDA, net | $12.9 million | $10.3 million | +24.7% |
| Operating cash flow | $4.9 million | $15.7 million | -68.6% |
Revenue growth was led by license fees, which increased to $16.8 million from $6.6 million, primarily from major NFS Ascent contracts. Maintenance revenue increased to $15.0 million from $14.4 million, while services revenue increased modestly to $34.2 million from $33.6 million. Related-party services revenue declined to $1.3 million from $5.7 million.
Cash and cash equivalents declined to $17.4 million from $22.1 million. Current assets were $54.6 million and current liabilities were $20.4 million. Accounts receivable and revenues in excess of billings totaled approximately $31.7 million, and average days sales outstanding improved to 171 days from 192 days.
Total debt and capital-lease obligations were approximately $7.5 million, including $6.9 million current and $0.6 million long term. The company reported compliance with applicable financial covenants and no defaults. It expects to require approximately $2 million to $3 million of working capital over the next 12 months for business development and infrastructure enhancements.
Material changes versus the prior comparable period
- Revenue increased 11.3%, with license revenue rising approximately 154% as large NFS Ascent contracts were recognized.
- Gross margin expanded to 50.8%, partly reflecting lower U.S.-dollar-denominated salaries and amortization expense following the Pakistan rupee’s devaluation.
- Travel expense increased to $6.5 million from $1.8 million because of implementation activity for major China and multi-country contracts.
- Research and development expense increased 130.8% to $2.0 million, driven by innovation initiatives involving blockchain, artificial intelligence and the Internet of Things.
- Foreign-currency transaction gains increased to $6.3 million from $5.0 million and materially contributed to other income and net earnings.
- Operating cash flow fell substantially because of increased revenues in excess of billings and working-capital investment.
- NetSol adopted ASC 606 using the modified retrospective method. The adoption reduced opening accumulated deficit by $5.8 million for NetSol and reduced non-controlling interest by $3.0 million; the filing also presents fiscal 2019 results under prior GAAP for comparison.
- On June 30, 2019, the company acquired Investec’s remaining 49% interest in Virtual Lease Services for approximately $927,100, including a contingent payment, making VLS wholly owned.
- The company repurchased 41,650 shares for $250,945 during fiscal 2019 under a program authorizing up to $2.5 million of repurchases during the initial six-month period.
Guidance, outlook, risks and unusual items
Management expressed optimism regarding opportunities in fiscal 2020 and beyond, particularly for NFS Ascent in China, Asia-Pacific, Europe and North America. Priorities include increasing penetration of multinational auto-finance customers, expanding maintenance and services revenue, strengthening North American and European operations, improving delivery efficiency and pursuing partnerships or strategic acquisitions. The filing does not provide formal numerical revenue or earnings guidance.
- Customer concentration is significant: two customers represented 53.8% of fiscal 2019 revenue.
- Geographic concentration is significant: Asia-Pacific represented 80.7% of revenue and the company has substantial operations in Pakistan.
- Foreign-exchange exposure is material. The company recorded a $6.3 million currency gain, but future currency movements could materially affect revenue, expenses, reported earnings and equity.
- Political, economic and security risks include tensions involving Pakistan, India, Afghanistan and Kashmir, geopolitical unrest, Brexit uncertainty and potential China-U.S. trade effects.
- Contract execution involves lengthy implementations, management estimates of project costs and completion, and substantial revenues in excess of billings. Contracted but unsatisfied performance obligations were approximately $69.7 million at June 30, 2019, of which approximately $10.3 million was expected to be recognized over the next 12 months.
- The company held approximately $16.1 million of cash at foreign subsidiaries that was uninsured or subject to foreign banking and repatriation considerations.
- Related-party exposure includes approximately $3.65 million of convertible notes receivable from WRLD3D at June 30, 2019, plus subsequent additional funding. The CEO’s son was WRLD3D’s CEO, and company executives had an indirect financial interest in WRLD3D.
- NetSol had accumulated translation losses of $33.1 million in other comprehensive loss at June 30, 2019.
- The company has substantial executive severance and change-in-control obligations; the filing estimates potential change-in-control payments of approximately $5.8 million for the CEO, $1.2 million for the CFO and $1.5 million for the general counsel, based on a June 30, 2019 scenario.
- The company reported no material legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls and internal control over financial reporting.
Investor verification points
- Verify the sustainability of license revenue growth and the timing, scope and profitability of the major NFS Ascent contracts.
- Assess customer concentration, especially the exposure to Daimler and BMW, and the effect of any implementation delays or contract changes.
- Reconcile reported earnings with operating cash flow and monitor revenues in excess of billings, receivables and collection periods.
- Separate recurring operating performance from the $6.3 million foreign-currency gain and evaluate sensitivity to further Pakistan rupee movements.
- Review the accounting and comparability effects of ASC 606 adoption, including the $5.8 million opening accumulated-deficit adjustment.
- Evaluate the collectability, terms and related-party governance of the WRLD3D convertible notes and investments.
- Confirm debt maturities, covenant compliance, foreign cash availability and the funding of anticipated $2 million to $3 million working-capital needs.
- Review the effect of the VLS acquisition, contingent consideration and related-party relationships on future consolidated results.