CLPS Incorporation — Form 20-F Summary
Reporting period: Fiscal year ended June 30, 2019, with comparisons to fiscal 2018 and 2017. The request references “2018 Q4,” but the filing is an annual Form 20-F and does not present a separate quarterly Q4 financial statement.
Business context
CLPS is a Cayman Islands holding company whose subsidiaries provide IT consulting, software development, customized IT solutions and related services, primarily to banking, insurance and other financial-sector clients in China and internationally. The company operated ten delivery and research and development centers and had 2,085 employees at June 30, 2019, compared with 1,655 one year earlier.
IT consulting remained the core business, accounting for 95.1% of fiscal 2019 revenue. Citibank and its affiliates represented 25.7% of revenue and 30.0% of accounts receivable in fiscal 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $64.9 million | $48.9 million | +32.7% |
| Gross profit | $23.8 million | $17.7 million | +34.5% |
| Gross margin | 36.6% | 36.1% | +0.5 percentage points |
| Operating income (loss) | $(3.8) million | $1.7 million | Declined |
| Net income (loss) | $(3.4) million | $2.7 million | Declined |
| Net loss attributable to CLPS shareholders | $(3.3) million | $2.4 million | Declined |
| GAAP diluted EPS | $(0.24) | $0.21 | Declined |
| Non-GAAP net income | $3.6 million | $2.7 million | +32.0% |
| Operating cash flow | $0.4 million | $(4.8) million | Improved |
The GAAP loss primarily reflected $7.0 million of non-cash share-based compensation, substantially related to restricted share units and other awards granted under the company’s equity incentive plans. Excluding this expense, non-GAAP net income attributable to shareholders was $3.7 million, compared with $2.4 million in fiscal 2018.
Revenue growth was driven primarily by existing customers and higher demand for IT consulting. Consulting revenue increased 30.9% to $61.8 million, while customized IT solution revenue increased 86.1% to $3.0 million. Cost of revenues increased 31.7% to $41.2 million, but declined slightly as a percentage of revenue to 63.4% from 63.9%.
General and administrative expense increased 196.1% to $17.4 million, including $7.0 million of share-based compensation. R&D expense was $8.0 million, or 12.3% of revenue, versus 16.0% in fiscal 2018.
Balance sheet, debt and cash flow
| Metric at June 30 | 2019 | 2018 |
|---|---|---|
| Cash and cash equivalents | $6.6 million | $9.7 million |
| Short-term investments | $1.8 million | None reported |
| Accounts receivable, net | $19.3 million | $16.3 million |
| Total current assets | $29.7 million | $29.1 million |
| Total assets | $32.7 million | $30.9 million |
| Short-term bank loans | $2.2 million | $2.6 million |
| Total liabilities | $11.3 million | $12.8 million |
| Total shareholders’ equity | $21.4 million | $18.2 million |
Operating cash flow turned positive at $0.4 million, but investing activities used $3.9 million, primarily for short-term investments, long-term investments, acquisitions and capital expenditures. Financing activities provided $0.5 million. Cash therefore declined by $3.1 million during the year.
Accounts receivable turnover increased to 99 days from 84 days, reflecting longer customer payment approval processes. Management stated that available cash, operating cash flow and credit facilities should be sufficient for anticipated needs for at least the next 12 months. Cash held in mainland China was approximately $1.9 million and is subject to PRC currency-conversion and repatriation restrictions.
Contractual obligations at June 30, 2019 included $1.85 million of operating lease payments and $2.18 million of short-term loans, totaling $4.03 million. No material legal proceedings were reported.
Material changes and unusual items
- Revenue increased 32.7%, while the company moved from GAAP profitability to a GAAP net loss because of significant equity-based compensation and higher corporate expenses.
- The company granted 671,469 restricted share units in July 2018 and recognized $7.0 million of share-based compensation in fiscal 2019. Approximately $2.0 million of unrecognized compensation cost remained for RSUs and stock options at year-end.
- CLPS acquired the remaining 70% of Huanyu and obtained full ownership in May 2019. It also acquired 80% of Singapore-based Infogain in August 2018 and made investments in CLPS Lihong and EMIT.
- The company recognized a $145,329 share of loss from equity-method investees, including CLPS Lihong and EMIT.
- FDT-CL was liquidated in March 2019, and the company sold its interests in JQ and JL in November 2018.
- Subsequent to year-end, CLPS acquired 80% of Ridik Pte. Ltd. in Singapore for approximately $2.3 million, including cash and CLPS common shares. The purchase price allocation remained under evaluation.
- Fiscal 2019 included a $0.4 million foreign-currency translation loss, compared with a $0.06 million gain in fiscal 2018.
Guidance, outlook and management commentary
The filing does not provide formal revenue or earnings guidance. Management’s stated strategy is to grow revenue from existing and new financial-sector clients, expand consulting and customized solutions, invest in cloud, blockchain, big data and other technologies, develop talent through the CLPS Academy, improve resource utilization, and pursue selective alliances and acquisitions.
Management expects continued investment in R&D, sales and marketing, personnel, training centers and operating infrastructure. The company believes it has sufficient liquidity for the next 12 months, but notes that additional capital could be required for acquisitions, changed business conditions or other developments.
The company identified a material weakness in internal control over financial reporting as of June 30, 2019. The weakness related to insufficient accounting and financial-reporting personnel with U.S. GAAP and SEC expertise and insufficient related controls. Management planned remediation through additional hiring, training, accounting-policy documentation and enhanced monitoring, with completion targeted by June 30, 2020. The prior-year weakness involving monitoring and disclosure of subsequent events was reported as remediated.
Principal risks and contingencies
- High customer concentration, including substantial dependence on Citibank and affiliates and a lack of material long-term customer commitments.
- Collection and liquidity risk from increasing accounts receivable and longer payment cycles.
- Competition, pricing pressure, wage inflation, employee attrition and difficulty recruiting qualified IT personnel.
- Execution and utilization risk from rapid expansion, fixed-price projects and acquisitions.
- Dependence on China, including PRC regulatory, tax, foreign-exchange, capital-flow and legal-system risks.
- Currency risk because the functional currency of most operating subsidiaries is RMB while reporting is in U.S. dollars; the company has not used hedging transactions.
- Cybersecurity, data confidentiality, intellectual-property infringement, service interruption and potential client claims; the company states that it lacks business-interruption and certain data-related insurance.
- Internal-control deficiencies and the possibility of inaccurate or delayed financial reporting, regulatory action or Nasdaq listing consequences.
- Auditor oversight limitations because the company’s China-based auditor was not subject to PCAOB inspection at the time of filing.
- Restrictions on dividends and fund transfers from PRC subsidiaries. The board had never declared a dividend and did not expect to declare one in the foreseeable future.
Important facts for investors to verify
- Reconcile the reported GAAP net loss with the $7.0 million share-based compensation adjustment and evaluate the sustainability of non-GAAP profitability.
- Review the aging, collectability and customer concentration of the $19.3 million accounts receivable balance.
- Assess the status and effectiveness of remediation of the material weakness in U.S. GAAP and SEC reporting controls.
- Verify the terms, maturity dates, guarantees and refinancing status of the $2.2 million short-term bank loans and subsequent borrowing activity.
- Evaluate the financial contribution and integration risks of Infogain, Huanyu, CLPS Lihong, EMIT and the post-year-end Ridik acquisition.
- Confirm the impact of adopting the new revenue-recognition standard for fixed-price solution contracts beginning July 1, 2019.
- Monitor Citibank-related revenue and receivables concentration, customer renewals and pricing trends.
- Review PRC restrictions on cash repatriation, dividends, taxes and offshore funding, including approximately $8.7 million of restricted net assets in PRC subsidiaries.
- Track dilution from outstanding warrants, restricted share units, stock options and the company’s 2019 equity incentive plan.