NetSol Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, licenses, implements and supports enterprise software for automobile financing, leasing, banking, healthcare and financial-services customers. Its principal products include NFS, NFS Ascent, LeasePak and related services. This unaudited Form 10-Q covers the three and six months ended December 31, 2014, the second quarter of fiscal 2015, compared with the corresponding 2013 periods.
Financial Metrics
| Metric | Three Months Ended Dec. 31, 2014 | Three Months Ended Dec. 31, 2013 | Six Months Ended Dec. 31, 2014 | Six Months Ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $12.35 million | $8.55 million | $22.58 million | $17.48 million |
| Gross profit | $5.00 million | $2.92 million | $8.21 million | $6.58 million |
| Gross margin | 40.48% | 34.12% | 36.37% | 37.63% |
| Operating loss | $1.00 million | $1.46 million | $3.25 million | $2.75 million |
| Net loss attributable to NetSol | $1.37 million | $1.63 million | $3.21 million | $2.72 million |
| Loss per share | $0.14 | $0.18 | $0.34 | $0.30 |
| Operating cash flow | Not separately provided | Not separately provided | $4.02 million | $12.66 million |
- Quarterly revenue increased approximately 44.4%; six-month revenue increased approximately 29.2%.
- Quarterly services revenue, including related-party services, was $6.92 million, compared with $5.23 million. License revenue increased to $2.10 million from $0.46 million, while maintenance revenue increased to $3.33 million from $2.87 million.
- The quarter produced a 40.48% gross margin, but the six-month margin declined to 36.37% because salaries, consultants and depreciation and amortization grew faster than revenue.
- Six-month operating expenses increased 22.9% to $11.46 million, driven primarily by selling and marketing, general and administrative expenses, and amortization.
- Foreign-exchange results shifted from a $1.21 million gain in the prior-year six-month period to a $0.34 million loss in the current period.
- Cash and cash equivalents were $13.49 million at December 31, 2014, compared with $11.46 million at June 30, 2014. Current assets were $29.07 million and current liabilities were $17.05 million.
- Accounts receivable, including related-party receivables, totaled $9.83 million; revenues in excess of billings were $3.10 million. Combined receivables and unbilled amounts increased to $12.93 million from $10.01 million at June 30, 2014.
- Total debt and capitalized lease obligations were $4.30 million, including $3.22 million current and $1.08 million long term, down from $7.32 million at June 30, 2014.
- Six-month investing cash outflows were $2.17 million, including $1.77 million of property and equipment purchases. Financing cash flow was positive $0.57 million, including $1.61 million from stock sales and $2.87 million of net debt and lease repayments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by license and implementation activity, including NFS and NFS Ascent projects, and increased services revenue.
- Quarterly gross margin improved materially, but the six-month gross margin decreased because of higher technical staffing costs and amortization of capitalized NFS Ascent development costs.
- The quarterly and six-month operating losses remained significant. The quarterly loss narrowed, while the six-month operating loss and net loss attributable to NetSol increased.
- Six-month operating cash flow fell by $8.64 million, principally because the prior-year period benefited from a substantial reduction in revenues in excess of billings; current-period working capital also reflected higher receivables.
- Capital expenditures declined substantially from $6.06 million to $1.77 million. The company also purchased 1.58 million NetSol PK shares for $0.58 million, reducing the non-controlling interest percentage from 36.62% to 34.85%.
- The company sold Vroozi in March 2014. Accordingly, the prior-year comparison includes discontinued-operation losses of $0.15 million for the quarter and $0.38 million for the six months, while the current periods include none.
Guidance, Outlook, Risks and Unusual Items
- Management remained optimistic about continuing operations and expected services revenue to grow as NFS Ascent projects are implemented. It expected maintenance revenue to remain relatively stable until additional NFS Ascent customers are licensed.
- Management identified a three- to five-year growth strategy focused on strengthening delivery capacity, expanding in the Americas and Europe, penetrating Asia-Pacific markets, hiring technical talent and marketing NFS Ascent.
- The company anticipated $2.5 million to $3.5 million of capital expenditures over the next 12 months for business development and infrastructure, expected to be funded from current operations.
- Management stated that all borrowing covenants were satisfied and that it expected to repay obligations at maturity from internal sources. Failure to comply could accelerate loan maturities.
- Approximately $8.86 million of the company’s $13.49 million of cash and marketable securities was held by foreign subsidiaries and intended to remain permanently reinvested outside the United States. Repatriation could result in additional U.S. taxes.
- Key risks include foreign-exchange volatility, geopolitical and political instability affecting Pakistan and other operating regions, customer payment delays, limited customer budgets, technology obsolescence, dependence on qualified personnel and the ability to commercialize NFS Ascent.
- A federal securities class-action lawsuit filed in July 2014 alleges misleading statements concerning the company’s next-generation product. The company believes the claims are meritless and filed a motion to dismiss; the filing states that the potential outcome and any material effect cannot yet be assessed.
- The company issued restricted shares and sold common stock to non-U.S. accredited investors under Regulation S. Six-month stock issuances and stock-based compensation contributed to dilution and non-cash expense.
Important Facts for Investors to Verify
- Whether NFS Ascent contracts, including the reported agreement valued at more than $16 million over five years, convert into recognized license, implementation and services revenue as projected.
- Whether revenue growth can translate into sustained operating profitability after higher staffing, selling, marketing and amortization costs.
- The collectability and timing of the $12.93 million combined accounts receivable and revenues-in-excess-of-billings balance.
- Whether operating cash flow remains adequate to fund the planned $2.5 million to $3.5 million of capital expenditures while servicing debt and leases.
- The effect of foreign-exchange movements and the concentration of assets, revenue and operations in Asia-Pacific.
- The status, insurance coverage and potential financial exposure from the securities class-action litigation.
- The terms and dilution implications of outstanding options and warrants, totaling 890,586 potential shares excluded from diluted loss-per-share calculations.
- Whether the company’s stated compliance with subsidiary debt covenants continues and whether foreign cash can be accessed without significant tax or regulatory cost.