NetSol Technologies, Inc. Form 10-Q Summary
Reporting period: Three months ended September 30, 2011, the first quarter of fiscal 2012. The interim financial statements are unaudited. NetSol develops and markets enterprise software and provides systems integration, consulting, implementation, maintenance, and IT services, with principal operations in North America, Europe, and Asia-Pacific.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Total revenue | $6.23 million | $8.40 million |
| Gross profit | $2.14 million | $5.22 million |
| Gross margin | 34.42% | 62.15% |
| Operating income (loss) | $(0.83) million | $2.03 million |
| Net income (loss) attributable to NetSol | $(1.46) million | $1.57 million |
| Basic and diluted earnings (loss) per share | $(0.03) | $0.04 |
| Net cash provided by operating activities | $0.88 million | $(0.11) million |
| Net cash used in investing activities | $(3.29) million | $(2.69) million |
| Net cash provided by financing activities | $1.41 million | $0.95 million |
- Revenue mix was license fees of $1.08 million, maintenance fees of $2.04 million, and services of $3.12 million.
- Cash and cash equivalents were $3.12 million at September 30, 2011, compared with $4.17 million at June 30, 2011 and $2.15 million at September 30, 2010. Restricted cash was $2.70 million.
- Accounts receivable were $13.86 million, and revenues in excess of billings were $7.04 million. Management reported days sales outstanding of 205 days, compared with 173 days in the comparable prior-year period.
- Total assets were $81.23 million and total liabilities were $17.49 million at September 30, 2011.
- Debt and lease obligations included $3.59 million of long-term convertible notes, $4.78 million of loans and capital leases, and $2.27 million of bank loans. The $4.0 million 2011 convertible note issuance funded repayment of the remaining 2008 convertible note balance.
- Capital expenditures were $1.43 million and additions to intangible assets were $1.77 million. Net EBITDA, a non-GAAP measure disclosed by management, was a loss of approximately $0.23 million, or 3.63% of revenue, versus $2.70 million, or 32.18% of revenue, in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined 25.88%, primarily because license revenue fell 69% to $1.08 million, which management attributed to delays in signing new contracts amid geopolitical and global economic uncertainty.
- Maintenance revenue increased 21.99%, while services revenue decreased 1.29%.
- Gross margin fell to 34.42% from 62.15% as revenue declined while cost of revenues increased to $4.08 million from $3.18 million. Salaries and consultant costs increased as the company expanded personnel in Pakistan, Thailand, and North America.
- Operating expenses decreased 7.08% in dollars but increased as a percentage of revenue to 47.69% from 38.04%. Selling and marketing expense increased, while general and administrative expense declined.
- The company moved from operating income and net income in the prior-year quarter to operating and net losses. The comparison was also affected by a $120,906 foreign-exchange loss in 2011 versus a $1.07 million gain in 2010.
- Operating cash flow improved to $0.88 million from negative $0.11 million, principally reflecting collections and changes in operating assets. However, investing cash outflows increased and cash declined by approximately $1.05 million during the quarter.
- The Asia-Pacific region generated 70.69% of consolidated revenue, up from 60.34%, while Europe declined to 14.72% from 24.87% and North America declined modestly to 14.59% from 14.79%.
Guidance, Outlook, Risks, and Unusual Items
- Management expects delayed license transactions to resume in the near term and maintains an optimistic long-term outlook, including anticipated double-digit annual growth from 2013 onward. No formal quarterly or annual revenue or earnings guidance was provided.
- Strategic priorities include expansion in China, Thailand, Latin America, North America, and Saudi Arabia; development of next-generation NetSol Financial Suite products; expansion of the smartOCI e-commerce business through Vroozi; and selective acquisitions and alliances.
- Management estimated working-capital needs of $5.0 million to $7.0 million for the next 12 months and acknowledged that additional debt or equity capital may be required. The company filed a $40 million universal shelf registration statement on October 24, 2011.
- On October 20, 2011, the company’s European subsidiary entered a joint venture to acquire Virtual Lease Services. NetSol is to hold 51% of the venture; the reported cash purchase price was £1.29 million.
- Management disclosed a material weakness in internal control over financial reporting related to insufficient technical U.S. GAAP expertise among accounting personnel. Planned remediation includes recruiting or retaining U.S.-based accounting and SOX expertise.
- NASDAQ notified the company on September 2, 2011 of noncompliance with the $1.00 minimum bid-price requirement. The company had a 180-day grace period to regain compliance, with possible delisting if it failed to do so.
- Risks include prolonged customer decision cycles, slower collections and potential bad-debt provisions, geopolitical and natural-disaster exposure in operating regions, foreign-currency volatility, competition and pricing pressure in China, European economic weakness, and dependence on external financing.
- The filing states that the company and subsidiaries were in compliance with borrowing covenants and had no defaults as of the report date. No material litigation was reported.
- Subsequent events included issuance of director and employee shares, employee option exercises, the Virtual Lease Services joint venture, and amendments increasing executive cash compensation by 5% and the CFO and Secretary compensation by 10%.
Most Important Facts for Investors to Verify
- Whether delayed license contracts convert into signed orders and restore revenue and gross margins.
- The collectability and aging of the $13.86 million accounts receivable balance, including the 205-day reported DSO.
- The company’s ability to fund the stated $5.0 million to $7.0 million working-capital requirement without excessive dilution or additional leverage.
- Terms, conversion effects, and potential dilution from the $4.0 million 2011 convertible notes and 1,408,451 related warrants.
- Progress toward remediation of the disclosed material weakness in U.S. GAAP and financial-reporting controls.
- NASDAQ minimum-bid-price compliance and the risk of delisting.
- Execution, funding requirements, and expected contribution from the Vroozi, China, Saudi Arabia, Brazil, Thailand, and Virtual Lease Services initiatives.
- Whether capitalized software, product licenses, goodwill, and other intangible assets remain recoverable given the quarter’s revenue decline and operating loss.