NETSOL TECHNOLOGIES INC quarterly report, Q1 FY2015

NetSol Technologies, Inc. — Form 10-Q Summary

Reporting period: Three months ended September 30, 2014, the first quarter of fiscal 2015. The interim financial statements are unaudited. NetSol provides enterprise software, licensing, maintenance, system integration, consulting, and IT services primarily to the global leasing and finance industries, with operations in North America, Europe, and Asia-Pacific.

Financial performance and position

Metric	Q1 FY2015	Q1 FY2014	Change
Total revenue	$10.23 million	$8.92 million	Up 14.6%
Gross profit	$3.21 million	$3.66 million	Down 12.2%
Gross margin	31.4%	41.0%	Down 9.6 percentage points
Operating loss	$2.24 million	$1.29 million	Loss increased $952,581
Net loss	$2.23 million	$431,256	Loss increased
Net loss attributable to NetSol	$1.84 million	$1.10 million	Loss increased $740,911
Net loss per share	$0.20	$0.12	Loss increased
Operating cash flow	$(481,025)	$2.92 million	Turned negative

• Revenue growth was led by services, including related-party services, and maintenance fees. License revenue declined to $1.58 million from $2.25 million because major NFS Ascent contracts were primarily recognized through services and percentage-of-completion accounting.
• Services revenue increased to $5.79 million from $4.29 million; related-party services were $1.40 million versus $967,543.
• Cost of revenues increased to $7.01 million from $5.26 million, driven by higher technical salaries and consultants and increased depreciation and amortization, including amortization of capitalized NFS Ascent product licenses.
• Operating expenses increased 10.3% to $5.46 million, primarily due to higher depreciation and amortization and general and administrative costs.
• Cash and cash equivalents were $10.38 million at September 30, 2014, compared with $11.46 million at June 30, 2014. Current assets were $28.74 million and current liabilities were $16.33 million.
• Accounts receivable, including related-party receivables, rose to $13.69 million from $7.64 million at June 30, 2014. Accounts receivable plus revenues in excess of billings increased to $15.86 million from $10.01 million.
• Net cash used in investing activities was $940,287, including $1.03 million of property and equipment purchases. Net cash provided by financing activities was $806,721, including $850,000 raised from a common-stock sale.
• Total debt and capital lease obligations declined to $4.60 million from $7.32 million at June 30, 2014; current maturities were $3.21 million and long-term obligations were $1.39 million.
• The current ratio was approximately 1.76, based on reported current assets and current liabilities.

Material changes versus the prior comparable period

• Revenue increased 14.6%, but gross margin contracted materially because cost of revenues grew faster than revenue.
• The operating loss widened and the loss attributable to NetSol increased to $1.84 million, partly because the prior-year period benefited from a $1.11 million foreign-currency gain compared with $79,220 in the current period.
• Operating cash flow declined from $2.92 million provided to $481,025 used, principally reflecting increased accounts receivable and related-party receivables.
• North America revenue increased to $1.17 million from $1.08 million; Europe increased to $1.85 million from $1.21 million; Asia-Pacific revenue, including related-party revenue, increased to $7.21 million from $6.63 million.
• The company sold Vroozi in March 2014. The prior-year quarter included a $201,249 loss from discontinued operations; the current quarter did not.
• Other comprehensive loss attributable to NetSol was $3.79 million, including foreign-currency translation effects. Accumulated translation losses were $16.93 million at September 30, 2014.

Outlook, commentary, risks, and unusual items

• Management remained optimistic about continuing operations and reported a five-year, more than $16 million NFS Ascent implementation agreement, additional NFS agreements in China, expanded work with CNH Industrial Capital in Australia, a new Stuttgart office, and development of a European business-process outsourcing offering.
• Management expects services revenue to grow as NFS Ascent projects are implemented and expects maintenance revenue to remain relatively flat until additional NFS Ascent customers go live.
• The company plans to spend approximately $2.5 million to $3.5 million over the next 12 months on business development and infrastructure enhancements, expected to be funded from current operations.
• Management identified opportunities in improving U.S. and European economies, global interest in NFS Ascent, and growth in Asia-Pacific markets. Risks include geopolitical instability, Pakistan-related political and economic conditions, potential receivable delays, foreign-exchange volatility, technology obsolescence, dependence on qualified personnel, and customer budget constraints.
• The company reported compliance with borrowing covenants and no defaults. Certain facilities require minimum tangible net worth, debt-service coverage, debt-to-equity, and current-ratio thresholds.
• A federal securities class-action lawsuit filed July 25, 2014 alleges misleading statements concerning the company’s next-generation product. NetSol considers the claims meritless, intends to defend the action, and states that the potential outcome cannot currently be assessed.
• The company received $452,675 on September 30, 2014 under a note receivable related to the Vroozi sale. A further $452,675 contingent note was excluded from the gain calculation because its realization was uncertain.
• Management concluded that disclosure controls were effective and that no material weakness existed in internal control over financial reporting.

Important facts for investors to verify

• Whether NFS Ascent contracts convert into recognized license and services revenue on the expected schedule and whether implementation activity improves margins.
• The collectability and aging of the sharp increase in accounts receivable and related-party receivables.
• Whether operating cash flow returns to positive levels while the company funds planned $2.5 million to $3.5 million of capital and business-development spending.
• The sustainability of cash resources given continuing losses, debt maturities, foreign-subsidiary cash balances, and limited U.S. liquidity.
• The status, insurance coverage, potential damages, and defense costs associated with the securities class-action litigation.
• The effect of foreign-currency movements on reported earnings, comprehensive loss, assets, and subsidiary liquidity.
• The company’s ability to maintain all subsidiary borrowing covenants and refinance or repay obligations as they mature.