Business Context and Reporting Period
This Form 20-F is CLPS Incorporation’s annual report for the fiscal year ended June 30, 2021, prepared under U.S. GAAP. The request metadata references 2020 Q4, but the filing is not a quarterly report and presents full-year fiscal 2021 results, with comparisons to fiscal 2020 and 2019.
CLPS is a Cayman Islands holding company providing IT consulting, customized IT solutions, and related services, primarily to banking, financial services, e-commerce, and automotive clients. Operations are concentrated in Mainland China, with additional delivery and R&D centers internationally. The company had 3,352 employees and 19 delivery or R&D centers at June 30, 2021.
Financial Highlights
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Revenue | $126.1 million | $89.4 million | Up 41.0% |
| Gross profit | $40.2 million | $31.1 million | Up 29.1% |
| Gross margin | 31.9% | 34.8% | Down 2.9 percentage points |
| Operating income | $8.4 million | $3.2 million | Up 161.2% |
| Net income | $7.0 million | $3.1 million | Up 127.9% |
| Net income attributable to CLPS shareholders | $6.8 million | $2.9 million | Up 132.0% |
| GAAP diluted EPS | $0.39 | $0.20 | Increased |
| Non-GAAP net income | $12.1 million | $7.1 million | Up 71.5% |
| Operating cash flow | $(2.6) million | $5.9 million | Turned negative |
IT consulting generated $122.3 million, or 97.0% of revenue, compared with $87.1 million, or 97.5%, in fiscal 2020. Customized IT solutions generated $3.1 million, up 69.7%, while other services generated $0.7 million, up 51.5%.
Banking-related revenue was approximately $60.0 million, wealth management $25.2 million, e-commerce $19.2 million, credit card services $11.2 million, and automotive $8.5 million. Revenue outside Mainland China was $13.6 million, or 10.7% of total revenue.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $24.7 million at June 30, 2021, compared with $12.7 million in 2020.
- Short-term investments were $4.2 million, versus $0.6 million in 2020.
- Accounts receivable, net, increased to $44.1 million from $25.8 million; collection turnover increased to 100 days from 91 days.
- Total assets were $82.7 million and total shareholders’ equity was $57.7 million.
- Total bank loans were $7.5 million, substantially current, compared with $2.2 million in 2020.
- Current liabilities were $23.0 million, including $12.5 million of salaries and benefits payable.
- Management stated that cash, operating cash flow, and available credit lines should be sufficient for at least the next 12 months, although operating cash flow was negative in fiscal 2021.
Fiscal 2021 financing cash inflow was $19.3 million, including $14.7 million of net proceeds from a private placement and warrant issuance. Investing cash outflow was $5.6 million, driven primarily by short-term investments, property and equipment, acquisitions, and investments.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, primarily from higher demand and billing rates for consulting services from existing clients.
- Gross margin declined from 34.8% to 31.9%, as cost of revenues grew 47.3%, faster than revenue, reflecting higher headcount and expanded facilities.
- Operating and net income increased substantially, partly aided by revenue growth, government subsidies of $2.1 million, and operating leverage.
- Share-based compensation increased to $5.1 million from $4.0 million and represented a significant difference between GAAP and non-GAAP earnings.
- Accounts receivable increased 71.3%, materially outpacing revenue growth and contributing to negative operating cash flow.
- The company completed a $16.0 million private placement of 2,666,666 shares at $6.00 per share and issued warrants for an additional 2,666,666 shares. The warrants have a $6.00 exercise price and expire in September 2026.
- The company acquired CareerWin, acquired the remaining interests in Ridik and JAJI HR, invested in SSIT and other entities, and disposed of Infogain. Infogain generated a $9,022 gain on disposal.
- Management reported that a previously identified material weakness in internal control over financial reporting had been remediated as of June 30, 2021. The independent auditor did not audit internal control effectiveness.
Outlook, Commentary and Risks
No specific quantitative revenue, earnings, margin, or cash-flow guidance is provided. Management intends to grow through expansion with existing and new clients, continued R&D, talent training, operational efficiencies, strategic alliances and acquisitions, and international expansion.
- Customer concentration remains material: Citibank and affiliates represented 19.1% of fiscal 2021 revenue and 23.2% of accounts receivable at June 30, 2021. The top five customers represented 45.7% of revenue.
- The business is heavily dependent on personnel utilization, employee recruitment and retention, and wage levels in China. Voluntary employee attrition was 15% in fiscal 2021.
- Competition, pricing pressure, fixed-price project execution risk, long sales cycles, technology changes, and dependence on major customers could pressure future margins and revenue.
- COVID-19, economic conditions, U.S.-China relations, currency movements, PRC regulation, cybersecurity, data protection, and intellectual-property risks could materially affect results.
- Most cash and operations are in China. RMB conversion and repatriation are subject to PRC foreign-exchange controls, and PRC subsidiaries’ ability to distribute dividends is restricted by statutory reserves and other regulations.
- The company’s auditor is based in China and was not subject to complete PCAOB inspection. The filing highlights potential HFCAA-related trading restrictions or delisting risk if inspection limitations persist.
- The company does not maintain commercial general liability or business interruption insurance and does not expect to pay dividends in the foreseeable future.
Subsequent Events and Commitments
- The company paid the remaining $3.3 million balance for a Hong Kong office property in July 2021.
- It entered into agreements to acquire office properties in Singapore and Hong Kong and made additional equity investments in UniDev, Fuson, and MSCT.
- The company sold its remaining 7% interest in CLPS Lihong for approximately $0.7 million and no longer held an interest in that entity after July 2021.
- Contractual obligations at June 30, 2021 totaled $13.7 million, including $2.1 million of operating leases, $7.8 million of bank loans, $3.3 million of fixed-asset purchase obligations, and $0.5 million of investment commitments.
- The filing reports no material pending legal proceedings.
Important Facts for Investors to Verify
- Whether rapid revenue growth can translate into positive operating cash flow as receivables and collection days increase.
- The sustainability of the 31.9% gross margin and the effect of employee costs, utilization, pricing, and expansion.
- The composition, aging, collectability, and customer concentration of the $44.1 million accounts receivable balance.
- The effect of $5.1 million of share-based compensation and the potential dilution from outstanding equity awards and 2.7 million warrants.
- The company’s ability to refinance or repay predominantly current bank debt and fund announced property purchases and investments.
- Continuing compliance with Nasdaq listing requirements, PCAOB inspection requirements, and potential HFCAA-related restrictions.
- PRC restrictions on cash transfers, dividend payments, foreign-exchange conversion, tax matters, and regulatory approvals for overseas investments or acquisitions.
- Whether management’s stated internal-control remediation remains effective, noting that the auditor expressed no opinion on internal control over financial reporting.