Business Context and Reporting Period
CLPS Incorporation is a Cayman Islands holding company providing IT consulting, customized solutions and related services, primarily to banking, financial services, wealth management, e-commerce and automotive clients. Operations are concentrated in China, with additional global delivery and R&D centers.
The filing is an annual Form 20-F for the fiscal year ended June 30, 2020, prepared under U.S. GAAP. The requested “2019 Q4” period is not separately reported; the filing provides annual fiscal-year information and comparable fiscal 2019 data.
Financial Highlights
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $89.4 million | $64.9 million | +37.7% |
| Gross profit | $31.1 million | $23.8 million | +31.0% |
| Gross margin | 34.8% | 36.6% | Down 1.8 percentage points |
| Operating income | $1.3 million | $(3.8) million | Returned to profitability |
| Net income | $3.1 million | $(3.4) million | Improved by $6.5 million |
| Net income attributable to shareholders | $2.9 million | $(3.3) million | Returned to profitability |
| GAAP diluted EPS | $0.20 | $(0.24) | Improved |
| Non-GAAP net income attributable to shareholders | $6.9 million | $3.7 million | +85% approximately |
| Operating cash flow | $5.9 million | $0.4 million | Improved by $5.5 million |
IT consulting revenue increased 41.1% to $87.1 million and represented 97.5% of total revenue. Customized IT solution revenue decreased 39.3% to $1.8 million. Revenue outside mainland China increased to $10.6 million, or 11.8% of total revenue, from $4.5 million, or 7.0%, in FY2019.
Banking revenue was approximately $44.5 million, wealth management revenue $19.2 million, e-commerce revenue $11.1 million, credit card revenue $9.5 million and automotive revenue $3.6 million. Citibank and its affiliates represented 21.5% of FY2020 revenue and approximately 30.1% of accounts receivable at year-end.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $12.7 million, compared with $6.6 million at June 30, 2019.
- Current assets were $40.5 million and current liabilities were $16.4 million, implying reported working capital of approximately $24.2 million.
- Accounts receivable increased to $25.8 million from $19.3 million; reported collection turnover was 91 days versus 99 days in FY2019.
- Total debt was approximately $2.2 million, consisting primarily of short-term bank loans. Scheduled debt payments were $2.16 million within one year and $22,554 thereafter.
- Total assets were $45.4 million and total shareholders’ equity was $28.6 million at June 30, 2020.
- Management stated that cash, operating cash flow and available credit should be sufficient for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by increased demand from existing financial-sector customers and a larger client base, which increased from 174 to 227 customers.
- Gross margin declined because cost of revenues grew faster than revenue, reflecting higher headcount, expanded facilities and increased depreciation and amortization.
- Operating expenses increased overall, although general and administrative expense declined 6.0% because FY2019 included substantially higher share-based compensation expense.
- FY2020 included $4.0 million of share-based compensation expense. Non-GAAP measures exclude this non-cash expense and are not substitutes for GAAP results.
- The company acquired an 80% interest in Ridik Pte. for approximately $2.5 million, acquired Ridik Consulting, and recognized additional goodwill. Goodwill increased to $2.1 million from $0.4 million.
- CLPS sold part of its interest in CLPS Lihong, received $1.0 million and recognized a disposal gain of approximately $0.4 million.
- Effective July 1, 2019, the company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $138,644. The company reported that ASC 606 increased FY2020 revenue by approximately $0.4 million and net income by approximately $60,000 versus ASC 605.
- Employees increased from 2,085 to 2,746, while reported employee attrition rose from 16.0% to 16.6%.
Outlook, Risks and Unusual Items
Management intends to expand existing and new customer relationships, continue R&D and talent-development investments, improve operating efficiency, pursue strategic alliances and acquisitions, and expand internationally. The filing does not provide formal numerical revenue, earnings or margin guidance.
- COVID-19 could reduce customer IT spending and disrupt operations; the duration and financial impact were described as uncertain.
- The business is exposed to customer concentration, particularly Citibank, and generally lacks long-term minimum-purchase commitments.
- Receivables and cash are concentrated in China, where bank deposits are not insured by the FDIC and RMB conversion and remittance are subject to PRC controls.
- Competition, wage inflation, employee retention, utilization rates and fixed-price project execution could pressure margins.
- PRC regulatory, tax, foreign-exchange and legal-system uncertainties may restrict funding, dividends, acquisitions or repatriation of cash. Approximately $9.9 million of PRC subsidiary net assets were restricted from distribution at year-end.
- The company stated that its previously identified internal-control material weakness had been remediated as of June 30, 2020. However, the auditor did not audit internal control over financial reporting and expressed no opinion on its effectiveness.
- The auditor is based in China and was not subject to full PCAOB inspection, creating potential U.S. listing and regulatory risks.
- No material litigation was reported. Contractual commitments included approximately $957,245 of operating lease payments and $2.2 million of bank-loan obligations.
Investor Verification Checklist
- Verify the annual-period mismatch: this filing covers FY2020, not a separately reported 2019 fourth quarter.
- Reconcile GAAP net income of $3.1 million with non-GAAP net income of $7.1 million, including the $4.0 million share-based compensation adjustment.
- Assess whether revenue growth can continue without further gross-margin deterioration and whether operating cash flow remains positive after normalization of accrued salaries and benefits.
- Review the aging, collectability and concentration of the $25.8 million accounts receivable balance.
- Evaluate the integration and performance of the Ridik acquisition and the carrying value of $2.1 million of goodwill.
- Monitor customer concentration, PRC cash restrictions, dividend capacity, currency exposure and potential changes to U.S. listing or PCAOB-access requirements.
- Review dilution from the 2020 equity incentive plan, which authorized up to 11,011,663 shares, and outstanding options, RSUs and warrants.