Business Context and Reporting Period
NetSol Technologies, Inc. designs, develops, markets and supports enterprise software for the automotive finance and leasing, banking, healthcare and financial-services industries. Its principal products include NFS, NFS Ascent, LeasePak, LeaseSoft and LoanSoft, supplemented by implementation, consulting, integration and IT services.
This unaudited Form 10-Q covers the three and six months ended December 31, 2015, representing the second quarter and first half of fiscal 2016. The company reports North America, Europe and Asia-Pacific segments and had 10,458,250 common shares outstanding as of February 8, 2016.
Financial Performance and Position
| Metric | Three months ended December 31, 2015 | Three months ended December 31, 2014 | Six months ended December 31, 2015 | Six months ended December 31, 2014 |
|---|---|---|---|---|
| Net revenues | $16.2 million | $12.4 million | $29.5 million | $22.6 million |
| Gross profit / margin | $8.0 million / 49.58% | $5.0 million / 40.48% | $13.4 million / 45.56% | $8.2 million / 36.37% |
| Income (loss) from operations | $2.1 million / 12.88% | $(1.0) million / (8.13%) | $2.0 million / 6.87% | $(3.2) million / (14.38%) |
| Net income (loss) attributable to NetSol | $875,065 | $(1.4) million | $464,037 | $(3.2) million |
| Basic EPS | $0.08 | $(0.14) | $0.05 | $(0.34) |
- Services revenue, including related-party services, increased to $12.2 million in the quarter and $21.2 million for the six-month period. License-fee revenue declined to $709,691 in the quarter and $1.9 million year to date, while maintenance revenue was comparatively stable.
- Asia-Pacific generated 80.42% of quarterly revenue and 77.56% of six-month revenue. Asia-Pacific revenue increased substantially, while North American revenue declined.
- Six-month operating cash flow was $2.0 million, compared with $4.0 million in the prior-year period. Investing cash flow used $1.2 million, primarily for property and equipment, and financing activities provided $35,628.
- Cash and cash equivalents were $14.0 million at December 31, 2015, compared with $14.2 million at June 30, 2015. Approximately $11.5 million was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.
- Current assets were $33.6 million and current liabilities were $13.3 million. Accounts receivable, including related-party receivables, totaled $11.8 million; accounts receivable plus revenues in excess of billings totaled $16.8 million. Days sales outstanding increased to 100 days from 93 days.
- Total debt and capital lease obligations were $4.0 million, including $3.8 million current and $273,109 long term. Management stated that all borrowing covenants were satisfied and no defaults existed.
- Total assets were $87.2 million and total stockholders’ equity was $73.6 million at December 31, 2015. Goodwill was $9.5 million, with no goodwill impairment recorded.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 31.1%, and six-month revenue increased 30.6%, driven principally by implementation, customization and enhancement services for new and existing customers.
- Quarterly gross margin expanded from 40.48% to 49.58%, and six-month gross margin expanded from 36.37% to 45.56%, as revenue grew faster than cost of revenues and depreciation and amortization declined.
- The company returned to operating profitability and net profitability in both the quarter and six-month period, compared with operating and net losses in the prior-year periods.
- Selling and marketing expense increased as the company hired personnel and expanded marketing for NFS Ascent. General and administrative expense declined, primarily because of lower legal and professional costs.
- Foreign-exchange losses declined to $134,527 in the quarter and $248,246 for six months, compared with $421,082 and $341,862, respectively, in the prior-year periods. Nevertheless, accumulated translation losses increased to $18.5 million from $17.2 million at June 30, 2015.
- The company purchased 669,000 NetSol PK shares for $347,623, reducing the non-controlling ownership percentage from 34.90% to 34.15%.
Guidance, Outlook, Risks and Unusual Items
- Management described the outlook as optimistic and expects services revenue to grow as NFS Ascent implementations progress. Maintenance revenue is expected to remain relatively stable until additional NFS Ascent customers go live.
- Reported first-half contract wins included an NFS Ascent upgrade contract valued at more than $100 million, an approximately $8 million U.K. NFS Ascent contract, a LeaseSoft contract expected to exceed $2.5 million, and an approximately $1.1 million Australian NFS contract. The filing does not provide a clear schedule for recognizing these contract values as revenue.
- Management expects $1.5 million to $2.5 million of capital expenditures during the next 12 months for business development and infrastructure, funded primarily from current operations.
- Key risks include foreign-exchange volatility, political and economic instability in Pakistan and other operating countries, potential delays or non-collection of receivables, customer budget constraints, dependence on key personnel and technologies, and execution risk related to NFS Ascent.
- Related-party revenue was material: $2.7 million in the quarter and $5.0 million for six months. Related-party accounts receivable totaled approximately $5.7 million at December 31, 2015.
- A federal securities class action remains focused on disclosures concerning the release of NFS Ascent during October 24-November 8, 2013. On January 20, 2016, the parties agreed in principle to settle, subject to court approval; the company expects insurers to cover the settlement cost. Two shareholder derivative actions were also pending, with the company named as a nominal defendant in each.
- The company stated that disclosure controls were effective, no material weakness existed in internal control over financial reporting, and no changes materially affected those controls during the period.
Investor Verification Checklist
- Verify the timing, remaining performance obligations and cash-collection terms for the reported NFS Ascent and other contract wins, particularly the contract valued at more than $100 million.
- Assess the sustainability of the revenue mix shift toward services and the effect of lower license revenue on future margins.
- Monitor accounts receivable, related-party receivables, unbilled revenue and days sales outstanding for collection risk.
- Confirm the location and liquidity of foreign cash, potential U.S. tax consequences of repatriation, and foreign-exchange exposure.
- Track settlement approval and insurance coverage for the securities litigation and any potential residual financial exposure.
- Reconcile reported debt maturities and subsidiary financial covenants, particularly the NetSol PK and U.K. subsidiary facilities.