NetSol Technologies, Inc. Form 10-Q Summary
Reporting period: The filing is for the quarter and nine months ended March 31, 2015, comparing with the periods ended March 31, 2014. The request metadata identifies “2014 Q3,” but the filing itself clearly reports fiscal 2015 third-quarter results. The interim financial statements are unaudited.
Business Context
NetSol provides enterprise software, licensing, maintenance, system integration, consulting, and information-technology services primarily to the global automobile financing and leasing, banking, healthcare, and financial-services industries. Its principal products include NFS, NFS Ascent, LeasePak, and LeaseSoft. Operations span North America, Europe, and Asia-Pacific, with Asia-Pacific generating approximately 77% of consolidated quarterly revenue.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Nine Months Ended March 31, 2015 | Nine Months Ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $13.1 million | $9.4 million | $35.7 million | $26.8 million |
| Gross profit | $4.7 million | $2.4 million | $12.9 million | $9.0 million |
| Gross margin | 36.05% | 26.13% | 36.26% | 33.62% |
| Operating loss | $(1.6) million | $(2.7) million | $(4.9) million | $(5.4) million |
| Net loss attributable to NetSol | $(1.6) million | $(1.3) million | $(4.8) million | $(4.0) million |
| Loss per share | $(0.17) | $(0.14) | $(0.51) | $(0.45) |
Quarterly revenue increased 39.6%, while nine-month revenue increased 32.9%. Services revenue was the primary growth driver, increasing to $9.0 million from $4.7 million in the quarter and to $21.7 million from $14.2 million for the nine-month period. License revenue declined in the quarter, while maintenance revenue increased.
Quarterly operating loss narrowed by approximately $1.0 million, and operating margin improved to negative 12.48% from negative 28.64%. Despite higher revenue and improved operating performance, net loss attributable to NetSol increased because the prior-year quarter included $1.5 million of income from discontinued operations related to the Vroozi sale. The nine-month net loss also increased for the same reason and because of foreign-exchange losses in 2015.
Cash Flow, Liquidity, and Debt
- Cash and cash equivalents were $10.9 million at March 31, 2015, compared with $11.5 million at June 30, 2014. Approximately $7.3 million was held by foreign subsidiaries.
- Current assets were $28.5 million and current liabilities were $14.1 million, implying reported current coverage of approximately 2.0 times.
- Operating cash flow for the nine months was $2.6 million, down from $15.3 million in the prior-year period. The decline primarily reflected working-capital changes, including higher accounts receivable and revenues in excess of billings.
- Accounts receivable plus revenues in excess of billings increased to $15.0 million from $10.0 million at June 30, 2014. Reported average days sales outstanding improved to 96 days from 243 days.
- Investing cash outflow was $2.9 million, including $2.5 million of property and equipment purchases, compared with $10.9 million in the prior-year period.
- Financing activities provided $0.2 million. The company raised $1.9 million through common-stock issuances and paid $3.5 million on bank loans and capital leases.
- Total loans and capitalized lease obligations were $3.6 million, consisting of $3.0 million current maturities and $0.6 million long-term maturities, compared with $7.3 million at June 30, 2014.
- Management stated that the company and its subsidiaries were in compliance with applicable borrowing covenants and had no defaults.
Material Changes and Unusual Items
- The company signed a contract valued at more than $16 million over five years with a major Asian multi-finance group to implement NFS Ascent.
- Revenue growth was concentrated in Asia-Pacific, where quarterly revenue increased to $10.0 million from $6.0 million; Europe declined to $1.7 million from $2.2 million, while North America increased modestly.
- Depreciation and amortization increased substantially as the company began amortizing capitalized NFS Ascent product-license costs.
- Selling and marketing and general and administrative expenses increased as the company expanded personnel, opened a German subsidiary and office, and marketed NFS Ascent.
- During the nine months, the company issued restricted stock for services and compensation and sold 629,442 restricted shares for $1.9 million. Additional Regulation S issuances in January and March 2015 were used for working capital.
- Non-controlling interest declined to $13.5 million from $16.1 million, partly because the company purchased additional NetSol PK shares.
- Accumulated foreign-currency translation losses increased to $15.7 million from $15.0 million. The nine-month period included a $0.6 million foreign-exchange loss.
- There was no goodwill impairment reported for the period.
Outlook, Risks, and Contingencies
Management described its outlook for continuing operations as optimistic and expects services revenue to grow as NFS Ascent implementation projects progress. Its three-to-five-year strategy focuses on expanding global delivery capabilities, strengthening the Americas and European businesses, increasing APAC penetration, hiring technical talent, and marketing NFS Ascent. Management expects $1.5 million to $2.5 million of capital expenditures over the next 12 months for business development and infrastructure, funded primarily from operations.
Key risks include execution and acceptance of NFS Ascent, dependence on major projects and customers, foreign-exchange movements, geopolitical and political instability affecting Pakistan and other operating regions, delayed customer receivables, technology obsolescence, dependence on qualified personnel, and the need to fund continued growth. Management noted that foreign cash may be permanently reinvested abroad and that repatriation could create additional U.S. tax obligations.
A purported shareholder class action concerning historical statements about NFS Ascent and business prospects remained pending. The court dismissed the prior consolidated complaint, but plaintiffs filed an amended complaint on March 31, 2015. The company intended to seek dismissal and stated that it could not determine whether an unfavorable outcome was probable or remote or estimate any potential material effect.
Management reported effective disclosure controls, no material weakness in internal control over financial reporting, and no separate risk factors in Item 1A. The filing provides no formal revenue or earnings guidance.
Investor Verification Items
- Verify the sustainability and cash-conversion quality of the sharp revenue increase, particularly the concentration in Asia-Pacific and the growth in related-party services revenue.
- Review accounts receivable, revenues in excess of billings, unearned revenue, and contract-billing terms to assess working-capital and collection risk.
- Assess whether NFS Ascent implementation milestones and the reported five-year contract translate into recurring license, maintenance, and services revenue.
- Reconcile the improved gross margin with increased amortization, hiring, selling and marketing costs, and continued operating losses.
- Monitor foreign-exchange exposure, Pakistan and regional geopolitical conditions, and the availability of cash held by foreign subsidiaries.
- Track the pending securities litigation and any developments that could create material legal expense or liability.
- Review dilution from restricted stock issuances, options, and warrants; approximately 890,586 potentially dilutive shares were excluded from diluted loss per share because they were anti-dilutive.