Business Context and Reporting Period
NetSol Technologies, Inc. provides enterprise software, implementation, consulting, maintenance and support services primarily for the global leasing and finance industry. Its principal products are the NetSol Financial Suite and NFS Ascent. Operations are organized into North America, Europe and Asia-Pacific, with approximately 75% of fiscal 2015 revenue generated in Asia-Pacific.
This Form 10-K covers the fiscal year ended June 30, 2015, compared with the fiscal year ended June 30, 2014. The filing was signed September 15, 2015. The source metadata refers to “2014 Q4,” but the filing is an annual report for fiscal 2015 rather than a quarterly filing.
Financial Performance and Position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $51.05 million | $36.38 million | +40.3% |
| Gross profit | $18.03 million | $8.66 million | +108.1% |
| Gross margin | 35.31% | 23.81% | +11.50 percentage points |
| Operating loss | $(5.17) million | $(13.09) million | Improved by $7.92 million |
| Net loss attributable to NetSol | $(5.55) million | $(11.36) million | Improved by $5.81 million |
| Net loss per share | $(0.57) | $(1.25) | Improved |
| Cash flow from operations | $5.08 million | $18.63 million | Down $13.56 million |
| Cash and cash equivalents | $14.17 million | $11.46 million | +23.6% |
Revenue growth was driven primarily by services, which increased to $32.13 million from $20.42 million, and maintenance revenue, which increased to $12.59 million from $10.53 million. License revenue increased to $6.33 million from $5.43 million. Related-party services represented $7.30 million of revenue, or approximately 14.3% of total revenue.
Cost of revenues increased to $33.02 million from $27.72 million, but declined as a percentage of revenue to 64.69% from 76.19%. Operating expenses increased 6.6% to $23.19 million, while declining as a percentage of revenue to 45.43% from 59.79%. Selling and marketing expense increased 33.3% as NetSol expanded its global sales effort for NFS Ascent. General and administrative expense declined 1.8%.
NetSol remained unprofitable. The fiscal 2015 loss included $10.34 million of depreciation and amortization, including approximately $1.18 million related to the full amortization of three older products that the Company decided to stop marketing. There was no goodwill impairment in fiscal 2015, compared with $136,762 in fiscal 2014. Fiscal 2014 also included $1.16 million of income from discontinued operations related to the sale of Vroozi.
At June 30, 2015, current assets were $31.51 million and current liabilities were $14.83 million. Accounts receivable and revenue in excess of billings totaled $15.24 million, up from $10.01 million. Days sales outstanding improved to 91 days from 201 days, although the increase in contract-related unbilled revenue remains relevant to cash conversion.
Total debt and capital lease obligations were approximately $4.38 million, consisting primarily of $3.43 million of current loan maturities and $0.83 million of capital leases. Total liabilities were $15.32 million. The Company reported compliance with its debt covenants and no defaults.
Material Changes Versus the Prior Comparable Period
- Revenue increased 40.3%, led by a $11.70 million increase in services revenue and higher maintenance revenue from customers going live on NetSol products.
- Gross margin expanded substantially as revenue growth outpaced cost growth and salaries and consultant costs declined as a percentage of revenue.
- Operating and net losses narrowed significantly, but the Company did not reach profitability.
- Operating cash flow fell sharply despite higher revenue, primarily because of increased accounts receivable and revenue recognized in excess of billings.
- Cash increased by $2.71 million to $14.17 million, supported by operating cash flow, common-stock proceeds and restricted-cash releases.
- Capital expenditures fell to $3.56 million from $13.24 million, particularly in Asia-Pacific. No additional intangible development costs were capitalized in fiscal 2015, compared with $3.39 million in fiscal 2014.
- Asia-Pacific revenue increased to $38.15 million from $25.13 million and represented 74.74% of consolidated revenue. Europe revenue increased to $7.36 million, while North America revenue increased to $5.54 million.
- The Company issued shares to raise working capital and issued equity compensation to employees, officers and directors. Shares outstanding increased materially year over year.
Outlook, Commentary, Risks and Unusual Items
Management described an aggressive three- to five-year growth strategy focused on expanding NFS Ascent, increasing sales and delivery capabilities in North America and Europe, penetrating China and other Asia-Pacific markets, retaining technical personnel, and improving productivity and operating margins. Management did not provide specific fiscal 2016 revenue or earnings guidance.
Key commercial developments included an NFS Ascent agreement in Indonesia valued at more than $16 million over five years, new NFS and legacy-product implementations in China, a Tesla Financial Services agreement, additional LeasePak licenses, and a U.S. LeasePak upgrade project. Approximately $900,000 of license revenue was recognized in fiscal 2015 from the Indonesian contract.
Management identified favorable trends including improving U.S. automotive and banking markets, demand from multinational automotive finance companies, growth opportunities in China and Southeast Asia, and lower employee turnover. Risks include geopolitical and terrorism concerns, political and economic uncertainty in Pakistan and China, foreign-exchange volatility, customer liquidity constraints and delayed receivables, intense competition, customer concentration, and reliance on international operations.
Daimler Financial Services accounted for approximately 12.89% of fiscal 2015 revenue, while The Innovation Group accounted for approximately 11.84%. Cash held by foreign subsidiaries was approximately $8.97 million and is intended to remain permanently reinvested outside the United States. Repatriation could create additional U.S. tax obligations.
The Company expects to require approximately $2 million to $3 million of working capital over the next 12 months for business development and infrastructure. It stated that it would seek to reduce reliance on external capital, while acknowledging that additional financing may be needed and could be dilutive.
A purported securities class action concerning statements about NFS Ascent remained pending. The complaint had been narrowed, and the Company had filed an answer. Management considered the claims meritless, but stated that the outcome could not yet be assessed as probable or remote and that a potential material effect could not be determined.
The independent registered public accounting firm issued an unqualified audit opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2015.
Important Facts for Investors to Verify
- Whether NFS Ascent implementations, particularly the more than $16 million Indonesian agreement, convert into the expected license, services and maintenance revenue and cash collections.
- The quality and collectability of the $15.24 million combined accounts receivable and unbilled-revenue balance, including related-party receivables.
- Whether the Company can improve operating cash flow and achieve profitability after substantial amortization and continued investment in sales and personnel.
- Customer and geographic concentration, including the approximately 75% Asia-Pacific revenue exposure and major-customer contributions from Daimler and The Innovation Group.
- Foreign-exchange, political and economic risks affecting Pakistan, China and other Asia-Pacific markets, including the $17.17 million accumulated foreign-currency translation loss.
- Debt maturities, capital-lease obligations, covenant compliance and the need for approximately $2 million to $3 million of near-term working capital.
- The potential cost and outcome of the NFS Ascent securities litigation, which the filing states cannot currently be assessed.
- The dilutive effect of outstanding options, warrants and the 2015 equity incentive plan, including 708,133 outstanding options and 163,124 warrants at June 30, 2015.