Business Context and Reporting Period
CLPS Inc., a foreign private issuer based in Shanghai, China, filed this Form 6-K on June 27, 2018. The filing presents unaudited condensed consolidated financial results for the three and nine months ended March 31, 2018, compared to the same periods in 2017. The company provides IT consulting services and customized IT solution services, primarily to financial institutions.
Key Financial Metrics
Income Statement Highlights (Three Months Ended March 31, 2018)
- Revenues: $12.9 million (63.8% increase year-over-year).
- Gross Profit: $4.0 million (Gross margin of 30.8%, down from 36.9% in the prior year).
- Operating Income: $0.16 million (1.3% of revenue).
- Net Income: $0.60 million (142.8% increase year-over-year).
- Net Income Attributable to Shareholders: $0.38 million.
- Earnings Per Share (Basic & Diluted): $0.03.
Balance Sheet Highlights (As of March 31, 2018)
- Total Assets: $20.7 million.
- Cash and Cash Equivalents: $2.9 million.
- Accounts Receivable: $14.8 million.
- Total Current Liabilities: $13.0 million (includes $2.7 million in short-term bank loans).
- Total Shareholders' Equity: $7.7 million.
- Working Capital: Approximately $6.2 million.
Material Changes Versus Prior Period
Revenue Growth: Revenue surged 63.8% in the quarter and 58.1% for the nine-month period, driven primarily by a 68.8% increase in IT consulting services revenue. Demand from international and local Chinese financial institutions was a key driver.
Expense Increases: Cost of revenues rose 79.8% due to increased headcount (from 1,243 to 1,618 employees) and expanded facilities. Research and development expenses increased 83.6% to $2.3 million, reflecting new projects in cloud computing and mobile applications.
Profitability Drivers: Despite a decline in gross margin percentage due to lower margins on new projects, net income increased significantly. This was largely attributable to a $0.29 million increase in government subsidies and a tax benefit of $0.17 million derived from net operating loss carryforwards.
Foreign Currency: The strengthening of the RMB against the USD (6.2726 RMB/USD in March 2018 vs. 6.8832 RMB/USD in March 2017) resulted in a foreign currency translation gain of $0.24 million for the quarter.
Guidance, Outlook, and Liquidity
Liquidity and Capital Resources: As of March 31, 2018, the company held $2.9 million in cash. Management believes this, combined with working capital, is sufficient for operations for the next 12 months.
Recent IPO Activity: On May 29, 2018, CLPS completed its IPO, selling 2 million shares at $5.25 per share for gross proceeds of $10.5 million. On June 8, 2018, the underwriters exercised the over-allotment option for an additional 300,000 shares, raising an additional $1.58 million. Total gross proceeds from the IPO and over-allotment were approximately $12.08 million.
Outlook: The company plans to expand its financial IT solution services in China, leveraging big data, cloud engineering, and artificial intelligence. Management expects selling and marketing expenses to increase in absolute terms but remain relatively steady as a percentage of revenue.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers. Specific risks include the uncertainty of government subsidies (recorded only upon receipt) and the impact of RMB/USD exchange rate fluctuations on reported financial results.
Investor Verification Checklist
- Verify the sustainability of the 63.8% revenue growth rate and the concentration of revenue from international banks (47.2% of IT consulting revenue).
- Assess the impact of the declining gross margin (30.8% vs. 36.9% prior year) on future profitability as new projects scale.
- Confirm the timing and reliability of government subsidies, which contributed significantly to net income in the current period.
- Review the utilization of the $12.08 million in IPO proceeds and the company's ability to manage increased operating leverage from higher headcount.
- Monitor the company's exposure to foreign currency translation risks given the significant RMB/USD rate changes.