NETSOL TECHNOLOGIES INC annual report, FY2023

NETSOL Technologies, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2023, compared with fiscal year ended June 30, 2022. The requested “2022 Q4” metadata does not match the source filing, which is an annual Form 10-K for fiscal 2023.

Business Context

NETSOL provides enterprise software, implementation, consulting, subscription, support and IT services to the global finance and leasing industry. Its principal offerings include NFS Ascent, NFS Digital, Otoz digital auto retail and mobility solutions, and the AppexNow Flex and Hubex API products. Operations are organized into North America, Europe and Asia-Pacific, with Asia-Pacific accounting for 67.8% of fiscal 2023 revenue.

The company is transitioning from traditional perpetual licensing toward cloud-hosted, subscription-based products. It had approximately 1,770 employees at June 30, 2023, including 1,415 technical employees.

Financial Performance and Key Metrics

Metric	FY2023	FY2022	Change
Total revenue	$52.4 million	$57.2 million	Down $4.9 million, or 8.5%
License revenue	$2.3 million	$4.5 million	Down 50.0%
Subscription and support	$26.0 million	$28.3 million	Down 8.1%
Services revenue	$24.1 million	$24.4 million	Down 1.2%
Gross profit	$16.9 million	$23.7 million	Down $6.8 million
Gross margin	32.3%	41.5%	Down 9.2 percentage points
Operating loss	$8.8 million	$1.1 million	Loss increased $7.7 million
Net loss attributable to NETSOL	$5.2 million	$0.9 million	Loss increased $4.4 million
Basic and diluted loss per share	$0.46	$0.08	Loss increased $0.38 per share
Adjusted EBITDA, net	$(2.3) million	$1.8 million	Declined $4.1 million

Revenue declined primarily because of lower license fees, lower subscription and support revenue, and foreign-currency effects. Subscription and support revenue in fiscal 2022 included approximately $3.5 million of one-time catch-up revenue. Services revenue increased on a constant-currency basis, reflecting change requests, enhancements and reimbursable costs.

Cost of revenues increased to $35.5 million from $33.5 million, driven principally by higher salaries, consultant fees and travel. Selling, general and administrative expense increased to $24.1 million from $23.5 million, while research and development expense increased to $1.6 million from $1.3 million.

Other income was $5.6 million, including a $6.7 million foreign-currency gain, which partially offset the operating loss. The company also recorded approximately $1.0 million of impairment on its Drivemate investment, $1.7 million of additional doubtful-account provision, and $1.0 million of other comprehensive-loss reclassifications related to liquidations.

Cash Flow, Liquidity and Debt

• Cash and cash equivalents were $15.5 million at June 30, 2023, down from $24.0 million.
• Operating cash flow was $2.0 million, compared with $3.1 million in the prior year.
• Investing cash flow used $1.4 million, primarily for property and equipment purchases.
• Financing cash flow used $0.7 million, primarily for loan and finance-lease repayments.
• Current assets were $41.6 million versus current liabilities of $20.8 million.
• Accounts receivable increased to $11.7 million from $8.7 million, and days sales outstanding increased to 168 days from 140 days.
• Total loans and finance-lease obligations were approximately $6.0 million, including $5.8 million current and $0.2 million long term. Operating lease obligations totaled approximately $1.2 million.
• Approximately $13.5 million of cash was held by foreign subsidiaries and approximately $13.5 million of foreign deposits were uninsured.
• Management expects $2 million to $3 million of working capital for the next 12 months for business development and infrastructure enhancements.
• The company stated that it was in compliance with applicable borrowing covenants and had no defaults.

Material Changes Versus the Prior Comparable Period

• Revenue decreased 8.5%, while gross margin fell sharply from 41.5% to 32.3%.
• The company moved from a $1.1 million operating loss to an $8.8 million operating loss and from a $0.9 million net loss attributable to NETSOL to a $5.2 million loss.
• Asia-Pacific revenue decreased to $35.5 million from $42.5 million, while North America revenue increased to $6.1 million from $4.3 million and Europe revenue increased to $10.8 million from $10.4 million.
• Revenue concentration remained significant: Daimler Financial Services represented 28.6% of fiscal 2023 revenue, down from 31.6%; BMW represented approximately 7.9% according to the Business section.
• Accounts receivable allowances and the provision for doubtful accounts increased substantially, primarily because of non-payment by a Chinese customer and an overdue Asia-Pacific contract asset.
• Cash declined by $8.4 million, including a $8.3 million adverse effect from exchange-rate changes.
• NetSol launched Flex and Hubex, expanded AWS cloud services, signed a U.S. automotive mobility contract, and expanded Otoz to 55 dealers in 36 states. Management estimated approximately $1.1 million of annual recurring revenue from the newly onboarded Otoz dealers.
• The company reported approximately $7.0 million of revenue from customer change requests and expected nearly $2.0 million from a U.K. bank contract extension and $5.0 million over five years from a Kubota Australia agreement.

Outlook, Commentary, Risks and Unusual Items

Management expressed optimism about fiscal 2024 and beyond, particularly for cloud-based NFS Ascent subscriptions, legacy-system replacements in North America and Europe, expanded APAC penetration, mobility products and API-based offerings. No specific consolidated revenue, earnings or margin guidance was provided.

• Pakistan political and economic instability, inflation and rupee depreciation may affect operations, costs and reported results.
• U.S.-China tensions may impair Chinese operations, customer demand, access to funds and business development.
• Inflation, higher interest rates, recession risk, geopolitical conflict and reduced customer technology budgets may pressure demand and profitability.
• Foreign-currency movements materially affect reported results; the company does not hedge its principal Pakistan rupee exposure.
• Customer concentration is material, particularly with Daimler Financial Services and other automotive finance customers.
• Long collection cycles and rising days sales outstanding increase credit and liquidity risk. Contract assets included a $1.275 million provision for an overdue Asia-Pacific customer balance.
• Management identified employee retention and competition for technical personnel as continuing risks; fiscal 2023 employee turnover was approximately 19%.
• The company has a full valuation allowance against $8.5 million of deferred tax assets and reported net operating loss carryforwards, some of which may be limited under tax rules.
• Unusual fiscal 2023 items included a $6.7 million foreign-exchange gain, a $1.0 million Drivemate impairment, liquidation-related reclassifications, and a $1.7 million bad-debt provision.
• The independent auditor issued an unqualified opinion and reported no critical audit matters. Management stated that disclosure controls and internal control over financial reporting were effective.

Important Facts for Investors to Verify

1. Whether the shift to subscription and cloud revenue can offset declining license revenue and improve recurring growth.
2. The sustainability and cash-flow impact of the 32.3% gross margin and the company’s plan to reduce personnel, delivery and travel costs.
3. Collection status for the overdue Chinese and Asia-Pacific customer balances and the adequacy of the allowance for doubtful accounts.
4. Revenue concentration and renewal or expansion prospects for Daimler Financial Services, BMW and other major customers.
5. Availability and repatriation of foreign subsidiary cash, including uninsured deposits and local-currency restrictions.
6. The effect of Pakistan rupee depreciation, interest rates and borrowing-cost increases on future earnings and covenant compliance.
7. Conversion of Otoz, Flex, Hubex and AWS initiatives into contracted revenue and sustainable recurring revenue.
8. The timing and collectability of approximately $34.3 million of contracted but unsatisfied performance obligations, including approximately $18.7 million expected to be recognized over the next 12 months.
9. The company’s ability to fund expected $2 million to $3 million of working capital needs while operating at a loss and holding materially less cash than the prior year.