Business context and reporting period
Innodata Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2023. The company provides AI data preparation and AI model deployment services, alongside software-enabled platforms. Its reporting segments are Digital Data Solutions (DDS), Synodex, and Agility.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2022 period.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $19.7 | $20.0 | $38.5 | $41.2 |
| Gross profit / margin | $6.9 / 35% | $7.0 / 35% | $12.9 / 34% | $14.8 / 36% |
| Selling and administrative expense | $7.6 | $10.3 | $15.4 | $20.5 |
| Net loss attributable to Innodata | $(0.8) / $(0.03) per share | $(3.8) / $(0.14) per share | $(2.9) / $(0.11) per share | $(6.6) / $(0.24) per share |
| Adjusted EBITDA (non-GAAP) | $1.6 | $(1.3) | $2.4 | $(2.3) |
| Operating cash flow | Not provided separately | Not provided separately | $4.2 | $(3.9) |
Liquidity and obligations: At June 30, cash and cash equivalents were $13.7 million, short-term investments $0.01 million, and working capital $4.5 million, up from $2.9 million at December 31, 2022. Current liabilities were $21.4 million. Long-term obligations totaled $7.5 million, including $6.4 million of accrued pension liability and $1.1 million for software licenses; operating lease liabilities were $4.4 million. The company had not drawn on its new revolving credit facility.
Cash flow and investment: First-half investing cash use was $2.5 million, including $3.0 million of capital expenditures, partly offset by $0.5 million of investment proceeds. Financing provided $2.0 million, principally from stock option exercises. Cash increased by $3.9 million during the half-year.
Material changes versus prior comparable periods
- Q2 revenue declined about 1%; first-half revenue fell about 7%. DDS revenue decreased 7% in Q2 and 14% year to date, largely due to lower customer volumes. Synodex revenue grew 11% and Agility grew 13% in Q2; first-half growth was 11% and 15%, respectively.
- Q2 net loss narrowed by about $3.0 million, primarily as lower selling and administrative costs improved results. First-half net loss narrowed by about $3.7 million.
- First-half gross margin fell to 34% from 36%, mainly reflecting lower DDS revenue. DDS gross margin was 33% versus 39% year to date; Synodex improved to 13% from a 12% gross loss, while Agility remained at 45%.
- Selling and administrative expense declined 26% in Q2 and 25% year to date, reflecting cost optimization and reduced headcount, marketing, recruitment, and professional costs. First-half direct operating costs decreased 3%, but rose as a share of revenue to 66% from 64%.
- Operating cash flow improved from a $3.9 million use to $4.2 million provided. Management attributed 2023 cash generation to noncash expenses and working-capital movements, including tax-related cash flows and withholding tax on stock option exercises.
Outlook, management commentary, risks and unusual items
- Management said cash, cash equivalents, and internally generated funds should meet financial needs for at least 12 months from the filing date. It gave no specific revenue or earnings guidance.
- Management anticipates approximately $6.5 million of capital expenditures over the next 12 months for software development and technology, equipment, and infrastructure upgrades; some may be financed. It reported no material capital expenditure commitments at June 30.
- A Wells Fargo secured revolving facility entered in April 2023 provides up to the lesser of the borrowing base or $10 million and matures April 4, 2026. The June 30 borrowing base was approximately $2.9 million. Borrowings generally bear daily simple SOFR plus 2.25%. A consolidated fixed-charge coverage ratio of at least 1.10 to 1.00 is required by December 31, 2023.
- Key business risks include project cancellations or reduced customer volumes, DDS customer concentration, intense competition and the risk that AI/large-language-model investments fail to produce expected revenue or margins. International operations expose the company to foreign exchange, wage inflation, changing tax and data-privacy rules, and limits on repatriating earnings. Management also cited seasonality and project start-up or replacement timing as sources of quarterly variability.
- Contingencies: A Philippine employment judgment could involve approximately $5.9 million plus accrued interest; enforcement against Innodata Inc. in the U.S. is subject to a preliminary injunction, and the company is contesting the matter. Management stated that additional losses of approximately $450,000 beyond recorded amounts were reasonably possible across legal matters. An Indian service-tax dispute concerns approximately $57 million of historical subsidiary revenue and could entail tax of 12.36%–15%, plus interest and penalties; no liability was recorded. The company also reported approximately $0.8 million of service-tax credits as a receivable, with recovery timing uncertain.
- Other notable items include $0.6 million of first-half severance related to a cost-structure realignment, $2.0 million of first-half stock-based compensation, and $1.2 million of vendor-financed software licenses acquired. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Whether DDS customer volumes stabilize or continue to decline, and the scale and revenue contribution of new customer engagements.
- Whether cost reductions can sustain profitability without impairing delivery capacity, and how much of reported improvement depends on non-GAAP adjustments.
- Progress toward the credit facility’s 1.10 fixed-charge coverage covenant by December 31, 2023, and actual availability under its borrowing-base limits.
- Actual capital expenditure needs versus the approximately $6.5 million plan, and the resulting effect on cash and liquidity.
- Developments in the Philippine litigation and Indian tax proceedings, including potential exposure, interest, penalties, and collectability of the tax-credit receivable.
- Customer and geographic concentration, foreign exchange and wage-cost effects, and returns on AI and platform investments.