NetSol Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, markets and supports enterprise software for automobile financing and leasing, banking, healthcare and financial-services customers worldwide. Its principal products include NFS, NFS Ascent, LeasePak and related implementation, consulting and maintenance services.
This unaudited Form 10-Q covers the three months ended September 30, 2015, the first quarter of fiscal 2016, with comparisons to the three months ended September 30, 2014. The company operates through North America, Europe and Asia-Pacific segments and is classified as a small reporting company.
Financial Highlights
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $13.31 million | $10.23 million | Up 30.1% |
| Gross profit | $5.41 million | $3.21 million | Up 68.4% |
| Gross margin | 40.67% | 31.41% | Up 9.26 percentage points |
| Operating loss | $0.06 million | $2.24 million | Improved by $2.19 million |
| Net loss attributable to NetSol | $0.41 million | $1.84 million | Improved by $1.43 million |
| Loss per diluted share | $0.04 | $0.20 | Improved |
| Net cash used in operations | $3.18 million | $0.48 million | Use increased by $2.70 million |
Revenue growth was led by services, which increased to $8.94 million from $5.79 million, including related-party services of $2.19 million. Maintenance revenue increased to $3.17 million from $2.85 million. License revenue declined to $1.19 million from $1.58 million.
Cost of revenues declined to 59.33% of revenue from 68.59%, primarily reflecting operating leverage and lower depreciation and amortization. Operating expenses were broadly flat at $5.47 million versus $5.46 million, although selling and marketing expense increased approximately 50% to support NFS Ascent efforts.
Cash, Liquidity and Debt
- Cash and cash equivalents were $10.08 million at September 30, 2015, down from $14.17 million at June 30, 2015. Approximately $6.08 million was held by foreign subsidiaries and management indicated that these funds were intended to remain permanently reinvested outside the United States.
- Current assets were $30.90 million and current liabilities were $13.66 million, implying a current ratio of approximately 2.3 times.
- Accounts receivable and related-party receivables totaled $11.89 million; revenues in excess of billings were $6.56 million. Combined receivables and unbilled amounts increased to $18.46 million from $15.24 million at June 30, 2015.
- Management reported average days sales outstanding of 116 days in both comparable periods, based on combined accounts receivable and revenues in excess of billings.
- Total loans and capital lease obligations were $4.57 million, including $4.24 million current and $0.33 million long term, compared with $4.38 million at June 30, 2015.
- The company used $3.18 million in operating cash flow, used $0.45 million in investing activities and generated $0.33 million from financing activities. Capital expenditures were $0.63 million.
- Management stated that the company was in compliance with borrowing covenants and had no defaults as of the report date.
Material Changes Versus the Prior Comparable Period
- Revenue increased 30.1%, with Asia-Pacific representing 74.1% of consolidated revenue compared with 70.5% in the prior-year quarter. Asia-Pacific revenue increased to $9.86 million from $7.21 million.
- Gross margin expanded substantially to 40.67% from 31.41%, while the operating loss narrowed to $56,964 from $2.24 million.
- NetSol remained loss-making, with the attributable loss reduced to $411,028 from $1.84 million. The current quarter also included a $113,719 foreign-currency loss, compared with a $79,220 gain in the prior-year quarter.
- Operating cash flow deteriorated despite improved earnings, primarily because of increases in accounts receivable, related-party receivables and revenues in excess of billings, together with reductions in unearned revenue and accounts payable.
- Other comprehensive loss attributable to NetSol was $1.37 million, including a $1.25 million currency-translation loss. Accumulated translation losses increased to $18.13 million.
- NetSol issued 15,000 common shares valued at $77,750 for services. At September 30, 2015, 697,133 options and 163,124 warrants remained outstanding and exercisable.
Outlook, Commentary, Risks and Unusual Items
Management described the outlook for continuing operations as optimistic. Near-term priorities include growing revenue and profitability, supporting NFS Ascent implementations, improving North American and European performance, and streamlining sales and marketing. Management expects services revenue to grow faster than license revenue as NFS Ascent projects are implemented, while maintenance revenue is expected to remain relatively stable until additional NFS Ascent customers are licensed.
Reported commercial developments included two agreements with leading Chinese auto captive finance companies for NFS, an NFS Ascent refinancing system launch at an Indonesian customer, establishment of a model office for a prospective NFS Ascent customer and multiple LeasePak upgrades.
Management estimated capital requirements of approximately $1.5 million to $2.5 million over the next 12 months for business development and infrastructure enhancements, expected to be funded from operations. The filing cautions that funding may not be sufficient or available on acceptable terms and that equity financing could be dilutive.
- Revenue recognition involves percentage-of-completion accounting for certain customized licenses and implementation contracts, creating estimation and timing risk.
- Foreign-exchange exposure is significant because many subsidiaries use the British pound, euro, Pakistan rupee, Thai baht, Australian dollar and Chinese yuan as functional currencies.
- Management cited geopolitical and economic risks affecting Pakistan, the Middle East, global auto sales, customer budgets and collections.
- The company faces a pending federal securities class action concerning prior statements about NFS Ascent and a shareholder derivative action filed October 27, 2015. Management considers the allegations meritless but stated that the outcomes cannot presently be assessed as probable or remote, and potential material impact cannot be determined.
- No goodwill impairment was recorded during the quarter. The company reported effective disclosure controls and no material weakness in internal control over financial reporting.
- The filing text does not provide formal quantitative revenue or earnings guidance.
Investor Verification Checklist
- Verify whether the sharp revenue growth and gross-margin improvement are sustainable or primarily reflect project timing and increased services activity.
- Monitor collection of the $18.46 million combined accounts receivable and unbilled-revenue balance and the resulting operating cash-flow performance.
- Assess the concentration of revenue, assets and growth expectations in Asia-Pacific and the related currency and geopolitical exposure.
- Review NFS Ascent customer wins, implementation milestones and the timing of license and percentage-of-completion revenue recognition.
- Confirm compliance with subsidiary debt covenants and the ability to fund approximately $1.5 million to $2.5 million of planned capital expenditures from operations.
- Track the federal securities litigation and shareholder derivative action, for which the filing states that a potential loss cannot currently be estimated.