CLPS Incorporation — Form 20-F Summary
Reporting period: Fiscal years ended June 30, 2018, 2017 and 2016, prepared under U.S. GAAP. The requested “2017 Q4” period is not separately reported; this filing is an annual report for fiscal 2018. CLPS is a Cayman Islands holding company providing IT consulting and customized technology solutions primarily to banking, insurance and financial-sector customers in China and internationally.
Key Financial Metrics
| US$ | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $48.94 million | $31.36 million | +56.0% |
| Gross profit | $17.66 million | $12.69 million | +39.2% |
| Gross margin | 36.1% | 40.5% | -4.4 percentage points |
| Operating income | $1.73 million | $1.61 million | +7.5% |
| Operating margin | 3.5% | 5.1% | Decreased |
| Net income | $2.71 million | $2.22 million | +22.2% |
| Net income attributable to CLPS shareholders | $2.43 million | $2.05 million | +18.9% |
| Basic and diluted EPS | $0.21 | $0.18 | Increased |
| Operating cash flow | $(4.77) million | $0.62 million | Turned negative |
Revenue was concentrated in IT consulting, which generated $47.16 million, or 96.4% of FY2018 revenue, compared with 92.9% in FY2017. Customized IT solution revenue declined 11.5% to $1.63 million. Citibank and its affiliates represented 30.8% of FY2018 revenue, down from 38.6% in FY2017.
Cash and cash equivalents were $9.74 million at June 30, 2018, compared with $4.81 million at June 30, 2017. Current assets were $29.05 million and current liabilities were $12.79 million, implying reported current coverage of approximately 2.3 times. Accounts receivable increased to $16.27 million from $6.64 million, and collection turnover increased to 84 days from 65 days.
Short-term bank loans totaled $2.55 million at June 30, 2018, compared with none reported at June 30, 2017. The loans carried interest rates of approximately 5.655% and were repaid in July and August 2018. Contractual obligations included $0.95 million of operating lease commitments and $2.55 million of short-term loans.
Total assets increased to $30.94 million from $13.52 million. Total shareholders’ equity increased to $18.16 million from $5.31 million, primarily reflecting IPO proceeds and earnings. The company completed an IPO and over-allotment in May and June 2018, generating approximately $11.02 million of net proceeds.
Material Changes Versus Prior Period
- Revenue growth accelerated substantially, driven primarily by new IT consulting engagements and increased demand from banks and financial institutions.
- Cost of revenue grew faster than revenue, rising 67.5%, causing gross margin to fall from 40.5% to 36.1%.
- Research and development expense increased 85.2% to $7.84 million, reflecting cloud-computing and mobile-internet projects.
- Selling and marketing expense increased 84.5% to $2.23 million as the company expanded its sales and marketing teams.
- Operating cash flow turned negative because accounts receivable increased by approximately $9.75 million. Management attributed slower collections to longer customer approval processes.
- Employee headcount increased from 1,242 to 1,655, supporting expansion but increasing compensation and utilization risk.
- CLPS acquired the remaining 30% of CLPS Beijing for $0.6 million, becoming its wholly owned owner as of June 30, 2018; payment was made July 5, 2018.
- The company incorporated CLPS US, invested in Huanyu and Lihong, and completed the IPO during FY2018.
Outlook, Risks and Unusual Items
Management expects continued expansion of consulting, financial-sector solutions, research and development, employee training, international operations, strategic alliances and acquisitions. No quantified revenue, earnings or margin guidance is provided.
- Liquidity and working capital: Management stated that cash, operating cash flow and IPO proceeds should support anticipated needs for at least the next 12 months, but FY2018 operating cash flow was negative and receivables grew materially.
- Customer concentration: Citibank and affiliates accounted for 30.8% of revenue and 35.9% of accounts receivable. The company generally lacks long-term purchase commitments from customers.
- Margin pressure: New projects generated lower margins, while wage inflation, competition and resource-utilization levels could further affect profitability.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at June 30, 2018. A material weakness related to monitoring, capturing and reporting subsequent events, including revolving credit facilities, remained under remediation.
- China and currency exposure: Most operations, revenue and expenses are in China and denominated in RMB. Foreign-exchange controls may restrict movement of funds and dividends from PRC subsidiaries.
- IPO and dilution: The company issued 2.3 million shares through the IPO and over-allotment and had 283,192 warrants outstanding at June 30, 2018. In July 2018, it granted 671,469 RSUs with an estimated total fair value of $8.2 million.
- Other subsequent events: FDT-CL was closed in July 2018; CLPS SG acquired 80% of Infogain Solutions in August 2018 for approximately $0.42 million.
- The filing reports no material legal proceedings and no defaults or dividend arrearages. The company does not expect to pay dividends in the foreseeable future.
Investor Verification Points
- Reconcile the strong 56.0% revenue growth with the decline in gross margin and the increase in operating expenses.
- Review accounts receivable aging, subsequent collections and the adequacy of the $151,347 allowance for doubtful accounts.
- Assess the sustainability of operating cash flow given the $4.77 million FY2018 use of cash and increased receivables.
- Monitor customer concentration, especially Citibank-related revenue and receivables, and the absence of material long-term customer commitments.
- Confirm repayment and refinancing of FY2018 short-term loans and evaluate guarantees supporting revolving credit facilities.
- Track remediation of the material weakness in internal control over financial reporting and whether additional weaknesses or restatements arise.
- Evaluate dilution from warrants, the 2017 equity incentive plan and the July 2018 RSU grant.
- Review the effect of PRC foreign-exchange controls, tax rules, regulatory approvals and restrictions on transferring cash from Chinese subsidiaries.