NetSol Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, markets, and exports software and provides systems integration, consulting, managed services, and IT products for the automobile finance and leasing, banking, healthcare, and financial-services industries. Key offerings include NetSol Financial Suite and Vroozi’s smartOCI e-procurement solutions. The filing covers the unaudited three months ended September 30, 2012, the first quarter of fiscal 2013, compared with the three months ended September 30, 2011.
Financial Results and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $11.07 million | $6.23 million | 77.8% increase |
| Gross profit | $5.32 million | $2.14 million | 147.9% increase |
| Gross margin | 48.0% | 34.4% | Improved |
| Operating income (loss) | $1.50 million | $(0.83) million | Turned profitable |
| Net income (loss) attributable to NetSol | $0.93 million | $(1.46) million | Turned profitable |
| Basic and diluted EPS | $0.12 | $(0.26) | Improved |
| Net cash provided by operations | $2.90 million | $0.88 million | Increased |
| EBITDA, non-GAAP | $2.51 million | $(0.23) million | Turned positive |
Revenue growth was led by license fees of $3.24 million, up from $1.08 million, and services revenue of $5.78 million, up from $3.12 million. Maintenance revenue was broadly unchanged at $2.05 million. Asia-Pacific generated $7.85 million, or approximately 71% of consolidated revenue, compared with $4.40 million in the prior-year quarter.
At September 30, 2012, cash and cash equivalents were $8.02 million, and restricted cash was $1.71 million. Accounts receivable increased to $18.08 million from $13.76 million at June 30, 2012; management reported approximately 150 days sales outstanding. Total current assets were $40.70 million against current liabilities of $16.93 million.
Total liabilities were $18.74 million, including $5.24 million of loans and capitalized lease obligations, $2.09 million of bank loans, and $2.68 million of current convertible notes payable. Stockholders’ equity totaled $77.82 million, including $15.50 million of non-controlling interests. Total assets were $96.56 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 77.8%, primarily from new NetSol Financial Suite license deals and implementation, consulting, and customization work.
- Gross margin expanded to 48.0% from 34.4%, reflecting a greater contribution from licenses and services and improved cost absorption.
- Operating expenses increased 28.4% to $3.81 million, but declined as a percentage of revenue to 34.4% from 47.7%.
- The company moved from a $1.46 million NetSol-attributable loss to $0.93 million of income. Results included a $395,156 foreign-currency gain versus a $120,906 loss in the prior-year quarter.
- Operating cash flow increased to $2.90 million, although accounts receivable consumed $4.32 million of cash during the quarter.
- Investing cash outflows were $2.49 million, including $1.46 million of property and equipment purchases and $1.09 million of additions to intangible assets.
- On September 13, 2012, the company replaced its convertible note with a new note, reduced the conversion price to $4.93, and recorded additional financing-related discounts. Investors converted $1.05 million of principal into 212,982 shares during the quarter.
- The company completed a one-for-ten reverse stock split on August 13, 2012. Share and per-share data in the filing are presented on a post-split basis.
Guidance, Outlook, Risks, and Unusual Items
Management stated that its three- to five-year strategy targets annual revenue growth of 15% to 25%, gross margins of 55% to 60% in 2013 and an average of 65% over the following three years. Management expects continued investment in China, Thailand, North America, Vroozi, next-generation products, cloud offerings, sales and marketing, and delivery capacity. The filing does not provide formal quarterly or annual revenue or earnings guidance.
Management expects to require approximately $5.0 million to $7.0 million of working capital over the next 12 months for business development and infrastructure. It intends to rely primarily on internally generated cash, while remaining open to strategic relationships or additional capital raises. The company acknowledged potential dilution and pricing pressure from equity financing.
- Management disclosed a material weakness in internal control over financial reporting related to insufficient U.S. GAAP technical accounting expertise. Disclosure controls and procedures were concluded to be ineffective as of September 30, 2012. Planned remediation includes recruiting a U.S.-based CPA or other U.S. GAAP personnel and using consultants for compliance support.
- The company operates in Pakistan and other regions exposed to geopolitical unrest, extremism, and changes in U.S.-Pakistan relations.
- European recessionary conditions, possible renewed U.S. recession, tight customer budgets, delayed collections, foreign-exchange volatility, and increased price competition in China could affect results.
- Borrowings contain financial covenants, including requirements relating to receivables, tangible net worth, debt-service coverage, leverage, and current ratios. Management represented that the company and subsidiaries were in compliance at the filing date.
- Convertible debt and warrants create potential dilution. The note’s conversion price was reduced to $4.93, and the related warrant exercise price was adjusted to $7.46.
- Accumulated foreign-currency translation losses were $12.90 million at September 30, 2012. Goodwill was $9.65 million, and management reported no goodwill impairment for the periods presented.
- No material litigation was reported. Subsequent to quarter-end, a noteholder converted $100,000 of principal into 20,284 shares and employees exercised options for 30,000 shares.
Most Important Facts for Investors to Verify
- Whether the sharp revenue growth, particularly license and Asia-Pacific revenue, is recurring or driven by timing of large contracts.
- Collections and aging of the $18.08 million accounts receivable balance, including the reported 150-day sales outstanding.
- The company’s ability to sustain the 48.0% gross margin and progress toward management’s stated margin targets.
- Remediation of the disclosed material weakness in U.S. GAAP accounting expertise and the effectiveness of any new controls.
- Upcoming maturities, covenant requirements, and refinancing or repayment capacity for debt and convertible notes.
- Potential dilution from convertible notes, warrants, options, employee compensation, and future capital raises following the reverse stock split.
- The reliability of non-GAAP EBITDA of $2.51 million and its reconciliation to operating income, net income, and operating cash flow.
- Exposure to foreign exchange, Pakistan and regional geopolitical conditions, European weakness, and customer concentration or contract timing.