NetSol Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2012; filed May 7, 2012. The request metadata identifies “2011 Q3,” but the filing clearly covers fiscal 2012 third-quarter results. Financial statements are unaudited.
Business Context
NetSol develops and markets enterprise software and provides systems integration, consulting, implementation, maintenance and IT services for automobile finance and leasing, banking, healthcare and financial-services customers. Its principal offerings include NetSol Financial Suite and Vroozi’s smartOCI e-procurement products. Operations are reported across North America, Europe and Asia-Pacific, with Asia-Pacific generating 69.9% of nine-month revenue.
Key Financial Metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $10.6 million | $10.8 million | $25.4 million | $29.7 million |
| Gross profit | $5.7 million | $6.8 million | $12.5 million | $18.9 million |
| Gross margin | 54.6% | 62.6% | 49.3% | 63.8% |
| Operating income | $2.2 million | $4.8 million | $2.6 million | $10.7 million |
| Net income attributable to NetSol | $1.7 million | $3.3 million | $0.5 million | $6.8 million |
| Net income per diluted share | $0.03 | $0.06 | $0.01 | $0.14 |
| Net cash from operating activities | Not separately provided | Not separately provided | $5.3 million | $7.3 million |
For the nine months, license revenue fell 40.6% to $6.1 million, maintenance revenue rose 7.0% to $6.0 million, and services revenue declined 3.2% to $13.4 million. Management reported non-GAAP EBITDA of $4.4 million, or 17.5% of revenue, versus $10.5 million, or 35.3%, in the prior-year period.
Cash, Liquidity and Debt
- Cash and cash equivalents were $9.1 million at March 31, 2012, up from $4.2 million at June 30, 2011 and $3.4 million at March 31, 2011. Restricted cash was $90,000.
- Current assets were $35.8 million and current liabilities were $12.3 million. Accounts receivable were $14.7 million, revenues in excess of billings were $9.3 million, and reported days sales outstanding were 158 days.
- Total liabilities were $18.2 million, including $4.1 million of loans and capitalized leases, $2.2 million of bank loans and $3.7 million of long-term convertible notes. The company stated that it was current on debt covenants and expected to repay obligations from internal sources.
- Operating cash flow of $5.3 million was more than offset by $9.3 million of investing cash uses, including $3.7 million of capital expenditures, $5.3 million of capitalized intangible development costs and $253,000 for the UK acquisition.
- Financing activities provided $9.4 million, including $5.7 million from a common-stock offering, $4.0 million of convertible-note proceeds and $4.4 million of bank-loan proceeds, partially offset by debt and lease repayments.
Material Changes Versus Prior Comparable Period
- Nine-month revenue decreased 14.2%, primarily because prospective customers delayed signing new license deals amid geopolitical and market conditions.
- Nine-month gross margin declined 14.5 percentage points, mainly due to lower revenue, higher salaries and consultant costs, increased depreciation and amortization, and third-party hardware and software costs.
- Operating expenses increased 21.8%. The prior-year period benefited from an $858,969 gain related to settlement of a former office lease; no comparable gain was recorded in 2012.
- Net income attributable to NetSol declined 92.0% for the nine months. The decrease was partly offset by lower interest expense and a smaller non-controlling-interest charge.
- The company acquired a 51% controlling interest in Virtual Lease Services in the UK for approximately $1.0 million, recording $214,000 of goodwill and adding customer-list and technology intangibles.
- NetSol issued 16.675 million common shares in a March 2012 secondary offering for net proceeds of $5.7 million. Shares outstanding increased substantially, contributing to dilution risk.
- The company fully repaid the prior 2008 convertible note and issued a $4.0 million 2011 convertible note maturing in September 2013. Its conversion price was adjusted to $0.773, and related warrants increased to 1.63 million.
Outlook, Commentary and Risks
Management described the outlook as optimistic and targeted a return to annual top-line growth, anticipated double-digit growth from 2013 onward, improved margins, expansion in China, Thailand, Japan, Latin America and the United States, and continued development of next-generation NFS, SaaS and Vroozi products. Management also stated an objective of restoring gross margins to historical levels above 60% as sales increase.
- Near-term performance depends on closing delayed license transactions, increasing services utilization, improving pricing and productivity, and controlling operating costs.
- Management identified risks from geopolitical unrest and US-Pakistan relations, European recession and debt concerns, global IT-budget reductions, currency movements, competition in China, delayed receivable collections, technology obsolescence, dependence on skilled personnel and the need for additional capital.
- The company expected working-capital needs of approximately $5.0 million to $7.0 million over the next 12 months for business development and infrastructure. Management acknowledged that additional financing may not be available on acceptable terms and could be dilutive.
- NetSol had not regained compliance with Nasdaq’s minimum bid-price requirement and faced potential delisting if compliance was not restored within the applicable grace period.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective due to a material weakness involving insufficient U.S. GAAP technical expertise. Remediation plans included hiring or retaining U.S.-based CPA and SOX-compliance resources.
- The filing reported no material litigation and no defaults on senior securities. No impairment of goodwill was recorded.
Most Important Facts to Verify
- Whether delayed license deals converted into signed contracts and whether license revenue and gross margins recovered after March 31, 2012.
- The sustainability and collectability of the $14.7 million accounts receivable balance and 158-day DSO.
- Progress in remediating the material weakness in internal controls and the qualifications of financial-reporting personnel.
- Compliance with Nasdaq’s minimum bid-price requirement and any resulting delisting risk.
- Cash requirements, covenant compliance and repayment capacity for the convertible notes, bank loans and capitalized leases.
- The dilution impact of the March equity offering, convertible note, warrants, options and other stock-based compensation.
- Whether Asia-Pacific concentration, foreign-exchange exposure and geopolitical risks could continue to affect revenue and profitability.