CLPS Incorporation Form 20-F Summary
Reporting period: Fiscal year ended June 30, 2022, with comparative fiscal years ended June 30, 2021 and June 30, 2020. The supplied filing is an annual Form 20-F for fiscal 2022, not a 2021 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars; most operations and functional currency exposure are in Renminbi.
Business context
CLPS is a Cayman Islands holding company providing IT consulting, customized IT solutions and related services, primarily to banking, financial services, wealth management, e-commerce and automotive customers. Operations are concentrated in Mainland China, with additional delivery and research centers globally. The company reported 3,824 employees and 19 delivery or R&D centers at June 30, 2022.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $152.0 million | $126.1 million | +20.6% |
| Gross profit | $41.0 million | $40.2 million | +2.0% |
| Gross margin | 27.0% | 31.9% | -4.9 percentage points |
| Operating income | $7.4 million | $8.4 million | -11.6% |
| Net income | $4.6 million | $7.0 million | -34.6% |
| Net income attributable to CLPS shareholders | $4.5 million | $6.8 million | -34.6% |
| GAAP diluted EPS | $0.21 | $0.39 | Declined |
| Non-GAAP net income | $11.8 million | $12.1 million | -3.1% |
| Non-GAAP diluted EPS | $0.55 | $0.68 | Declined |
IT consulting generated $144.1 million, or 94.8% of revenue, up 17.8%. Customized IT solution revenue rose 115.2% to $6.7 million, while other revenue increased 81.2% to $1.2 million. Banking remained the largest industry area at approximately $67.7 million of revenue, followed by core banking at approximately $61.1 million, wealth management at $32.1 million, e-commerce at $29.4 million and automotive at $10.4 million. These industry categories overlap in the filing and should not be summed.
Share-based compensation was $7.2 million in FY2022 versus $5.1 million in FY2021 and was the principal reconciliation item between GAAP and non-GAAP results. General and administrative expense increased 37.3% to $23.0 million, while R&D expense declined 40.2% to $8.0 million as staff were reallocated to client delivery.
Cash flow, liquidity and debt
| Metric | June 30, 2022 | June 30, 2021 |
|---|---|---|
| Cash and cash equivalents | $18.4 million | $24.7 million |
| Current assets | $76.8 million | $76.1 million |
| Accounts receivable, net | $53.8 million | $44.1 million |
| Total assets | $101.9 million | $82.7 million |
| Total liabilities | $34.1 million | $25.0 million |
| Current liabilities | $30.4 million | $23.0 million |
| Bank loans | $14.5 million | $7.5 million |
| Total shareholders’ equity | $67.8 million | $57.7 million |
Operating cash flow was $3.2 million, compared with negative $2.6 million in FY2021. Investing cash flow was negative $16.3 million, primarily reflecting $20.8 million of property and equipment purchases, including office buildings and related equipment. Financing cash flow was $7.5 million, including approximately $22.0 million of new bank borrowings and $14.5 million of repayments. Accounts receivable turnover increased to 116 days from 100 days, and the company identified collections as a liquidity risk.
All bank-loan principal outstanding at June 30, 2022 was due within one year. Contractual obligations included $14.5 million of bank loans due within one year and $2.1 million of operating lease payments. Management stated that available cash, operating cash flow and credit facilities should be sufficient for at least the next 12 months. No off-balance-sheet arrangements or material legal contingencies were reported.
Material changes and unusual items
- Revenue grew strongly, but cost of revenue increased 29.3%, reducing gross margin from 31.9% to 27.0%. Management attributed the pressure to staffing changes, increased delivery costs and COVID-19-related lockdown and prevention costs, including impacts in Shanghai.
- Net income declined despite revenue growth, primarily due to lower gross margin, higher general and administrative expense, higher income taxes and increased share-based compensation.
- The effective income tax rate increased to 39.8% from 15.1%. CLPS Shanghai was subject to the standard 25% PRC tax rate for fiscal 2022 because its high-and-new-technology-enterprise renewal had not been awarded as of the reporting date; management stated it expected to renew the status at a 15% rate.
- Property and equipment increased to $20.6 million from $0.6 million after major office-property acquisitions. The company purchased office properties in Hong Kong and Singapore for approximately $19.8 million in aggregate, in addition to other capital expenditures.
- Share count increased to 22.4 million issued and outstanding shares from 20.3 million, primarily reflecting equity awards and other share issuances. The company also had 2.7 million outstanding warrants issued in the March 2021 private placement.
- The company acquired a 53.33% interest in MSCT in August 2021 for approximately $0.2 million. The transaction was accounted for as an asset acquisition because MSCT had not commenced normal operations.
- Foreign-currency translation produced a $1.8 million loss in FY2022 versus a $2.7 million gain in FY2021, reducing comprehensive income attributable to CLPS shareholders to $2.7 million from $9.4 million.
Guidance, outlook, commentary and risks
The filing does not provide quantified revenue, earnings or margin guidance. Management describes a strategy focused on expanding existing and new client relationships, increasing customized solutions, investing in financial-technology products such as digital-currency applications and the CAKU credit-card system, developing employees through the CLPS Academy, improving resource utilization, and pursuing strategic alliances and acquisitions.
- Customer concentration is material: Citibank and its affiliates represented 20.6% of FY2022 revenue and 30.2% of accounts receivable at June 30, 2022. The top five customers represented 49.0% of revenue.
- Receivables, collection timing and concentration of cash in Mainland China are important liquidity considerations. Approximately $14.8 million of cash was held in PRC financial institutions where deposits are not insured by the FDIC or equivalent programs.
- The company relies heavily on personnel and faces wage inflation, employee attrition, utilization and recruitment risks. Voluntary attrition was 15.4% in FY2022.
- COVID-19, economic weakness, competition, pricing pressure, fixed-price project execution, cybersecurity, data protection, intellectual-property claims and business interruption could adversely affect results.
- PRC regulatory and foreign-exchange restrictions may limit transfers of cash, dividends and capital between Mainland China subsidiaries and the Cayman Islands parent. The subsidiaries have not declared or paid cash dividends to the holding company, and CLPS has not declared shareholder dividends.
- The company identified risks relating to PRC regulatory oversight of overseas-listed companies, cybersecurity and data regulations, CSRC filing or approval requirements, and the enforceability of U.S. judgments in China and the Cayman Islands.
- Ernst & Young Hua Ming LLP issued an unqualified audit opinion on the financial statements, but the filing states that the auditor had not been fully inspected by the PCAOB. The company warned that continued HFCAA-related inspection limitations could lead to Nasdaq trading restrictions or delisting. Management assessed internal control over financial reporting as effective, but the auditor did not provide an attestation opinion.
- No material legal proceedings were reported. The filing states that no subsequent event occurred after June 30, 2022 through the report date.
Investor verification checklist
- Verify that the period analyzed is fiscal 2022 ended June 30, 2022, rather than 2021 Q4.
- Reconcile GAAP net income of $4.6 million with non-GAAP net income of $11.8 million, particularly the $7.2 million share-based compensation adjustment.
- Assess whether the gross-margin decline and higher accounts-receivable days reflect temporary COVID-19 effects or a persistent deterioration in delivery economics and collections.
- Review the maturity, interest rates, guarantees and renewal or refinancing requirements for the $14.5 million of bank loans due within one year.
- Evaluate the recoverability and business productivity of the $20.6 million property and equipment balance and the company’s ongoing capital-expenditure needs.
- Confirm the status of CLPS Shanghai’s HNTE tax certification and the potential effect of a 15% versus 25% tax rate.
- Monitor customer concentration, particularly Citibank, and the aging and collectability of the $53.8 million receivables balance.
- Track PCAOB inspection status, HFCAA exposure and any Nasdaq or SEC trading-status developments.
- Review PRC restrictions on dividend remittances, restricted net assets, related-party balances and the company’s ability to fund the Cayman Islands parent.