NETSOL Technologies, Inc. — Fiscal 2021 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021, compared with fiscal 2020 ended June 30, 2020. The request metadata references “2020 Q4,” but the supplied filing is an annual report for fiscal 2021, not a quarterly filing.
Business Context
NETSOL provides enterprise software, implementation, consulting, subscription, support and related IT services to the global finance and leasing industry. Its primary products include NFS Ascent, LeasePak, NFS Digital and the Otoz digital auto-retail platform. The company is shifting from traditional perpetual licensing toward cloud-hosted, subscription-based offerings.
Operations are organized across North America, Europe and Asia-Pacific. Asia-Pacific generated approximately 72.7% of fiscal 2021 revenue. Daimler Financial Services and BMW Financial represented approximately 21.0% and 13.0% of revenue, respectively, creating significant customer concentration.
Financial Performance
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total revenue | $54.9 million | $56.4 million | Down 2.6% |
| License revenue | $6.25 million | $3.26 million | Up $2.99 million |
| Subscription and support | $22.17 million | $20.25 million | Up $1.92 million |
| Services revenue | $26.45 million | $32.56 million | Down $6.11 million |
| Gross profit | $26.35 million | $26.96 million | Down $0.61 million |
| Gross margin | 48.0% | 47.8% | Up 0.2 percentage points |
| Operating income | $2.72 million | $1.07 million | Up $1.65 million |
| Operating margin | 5.0% | 1.9% | Up 3.1 percentage points |
| Net income attributable to NETSOL | $1.78 million | $0.94 million | Up $0.84 million |
| Basic and diluted EPS | $0.15 | $0.08 | Increased |
| Adjusted EBITDA, net | $5.37 million | $4.32 million | Up $1.05 million |
Cash Flow, Liquidity and Debt
- Cash and cash equivalents increased to $33.71 million from $20.17 million.
- Operating cash flow increased to $15.73 million from $3.97 million.
- Investing cash flow was negative $2.52 million, including $2.55 million of property and equipment purchases and $155,500 invested in associates.
- Financing cash flow was negative $1.17 million, including $2.36 million spent on share repurchases, partly offset by $1.90 million of bank-loan proceeds.
- Current assets were $55.58 million and current liabilities were $23.48 million, implying current liquidity of approximately 2.4 times current liabilities.
- Total loans and finance-lease obligations were approximately $12.07 million, including $11.37 million classified as current and $0.70 million long term. Operating lease obligations totaled approximately $1.42 million.
- The company stated that it was in compliance with its borrowing covenants and had no defaults. It anticipates requiring approximately $2 million to $3 million of working capital during the next 12 months for business development and infrastructure enhancements.
- Approximately $31.7 million of cash, cash equivalents and marketable securities was held by foreign subsidiaries, creating potential repatriation, currency and country-risk considerations.
Material Changes Versus Fiscal 2020
- Revenue declined modestly because the $6.11 million decrease in services revenue exceeded growth in license and recurring subscription and support revenue.
- Recurring subscription and support revenue increased as customers went live under DFS- and BMW-related contracts.
- License revenue increased primarily from GAC, TIL and BMW NFS Ascent implementations.
- Gross margin improved slightly despite higher technical salaries, primarily because COVID-19 sharply reduced travel costs.
- Operating expenses declined 8.7%, driven mainly by lower general and administrative and research and development spending.
- Foreign-exchange results deteriorated from a $398,610 gain to a $597,433 loss.
- The company adopted ASC 326, resulting in a $6.78 million cumulative-effect reduction to equity for expected credit losses, including a full allowance against $4.25 million of related-party convertible notes receivable and related accrued interest.
- The company repurchased 669,018 shares for $2.36 million at an average price of $3.53 per share. It subsequently repurchased an additional 22,510 shares for $100,106 after year-end.
Guidance, Outlook and Management Commentary
- Management expects continued opportunities from NFS Ascent, cloud deployments, SaaS pricing, digital transformation and Otoz.
- Growth plans focus on expanding in North America and Europe, deepening Asia-Pacific penetration, replacing legacy systems and diversifying into banking, commercial lending and related verticals.
- A China customer upgrade contract was expected to generate approximately $9.0 million over its contract term; a U.S. LeasePak implementation was expected to generate approximately $1.0 million.
- Contracted but unsatisfied performance obligations totaled approximately $48.3 million at June 30, 2021. The company estimated that approximately $15.6 million would be recognized over the following 12 months and the remainder over approximately six years.
- COVID-19 reduced travel and certain operating costs but delayed customer decision-making, live implementations, conferences and face-to-face sales activity. Future effects remained uncertain.
- Management identified foreign-exchange volatility, political and trade tensions involving the United States and China, customer concentration, competition for technical personnel and dependence on international operations as material risks.
- The company does not pay common-stock dividends and expects to continue retaining earnings for growth, subject to Board review.
Unusual Items, Contingencies and Governance
- The audit report was unqualified. The auditor identified revenue recognition and goodwill and intangible-asset impairment as critical audit matters requiring significant judgment.
- The company recorded a full allowance for related-party WRLD3D convertible notes and accrued interest; the related-party investment remained recorded under the equity method at approximately $1.39 million.
- Management reported no material legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls and internal control over financial reporting.
- Executive employment agreements provide potentially significant severance and change-in-control payments, including an estimated $5.28 million potential payment to the CEO upon a change-in-control termination as of June 30, 2021.
Most Important Facts for Investors to Verify
- Whether recurring subscription and support growth can offset declining implementation and services revenue.
- The timing, collectability and conversion to billed receivables of the $15.64 million in current and long-term revenues in excess of billings.
- Customer concentration and renewal or expansion trends for Daimler Financial Services and BMW Financial.
- The recoverability of goodwill, intangible assets and the remaining WRLD3D-related investment and receivables.
- Actual fiscal 2022 cash requirements, debt maturities, covenant compliance and the concentration of cash held by foreign subsidiaries.
- The continuing effects of COVID-19, foreign-currency movements, China-related geopolitical risks and the company’s ability to retain technical personnel.
- Whether the stated $48.3 million performance-obligation backlog is converted into revenue and cash as projected.