INNODATA INC quarterly report, Q1 FY2022

Business context and reporting period

Innodata Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company provides AI-enabled data engineering services and software platforms through Digital Data Solutions (DDS), Synodex, and Agility.

Financial performance and liquidity

Direct operating costs were $13.4 million, or 63% of revenue, unchanged as a share of revenue year over year. Selling and administrative expenses rose 85% to $10.2 million, equal to 48% of revenue versus 34% a year earlier. The company recorded a $2.4 million pretax loss and a $0.5 million income tax provision, primarily reflecting foreign taxes.

At March 31, cash and cash equivalents were $15.4 million, down from $18.9 million at year-end; working capital was $9.6 million, down from $12.7 million. Total liabilities were $30.9 million. Long-term obligations were $7.4 million in total, including pension obligations, a settlement agreement, and Microsoft licenses; operating lease liabilities were $5.1 million. The filing reports no bank facilities or lines of credit.

Material changes versus the prior comparable period

• DDS revenue increased 35% to $15.9 million, mainly on higher volume from an existing customer; segment income before tax was $1.3 million versus $0.7 million.
• Synodex revenue rose 70% to $1.7 million, but the segment moved to a $1.0 million pretax loss from $0.1 million of income, with higher labor and technology costs.
• Agility revenue grew 13% to $3.6 million, while its pretax loss widened to $2.7 million from $0.4 million, reflecting higher operating and growth-related expenses.
• Selling and administrative costs increased substantially as the company invested in hiring, marketing, commissions, and growth initiatives. Stock-based compensation rose to $0.5 million from $0.3 million.
• The company redeemed the remaining 7.5% non-controlling interest in Innodata Synodex, LLC on March 31, 2022, making it wholly owned. The $2.9 million carrying value was reclassified within equity.

Outlook, commentary, risks, and unusual items

Management said cash and internally generated funds should meet financial needs for at least 12 months from the filing date, while noting there are no credit facilities. Capital expenditures over the next 12 months were anticipated to be approximately $11.0 million, with a portion potentially financed. No specific revenue or earnings guidance is provided. The company added 121 customers during the quarter and described this as an indicator of business momentum.

Management reported no material adverse effect from COVID-19 on Q1 results, but said future economic impacts remain uncertain. Disclosed risks include project cancellations or delays, reliance on a limited number of DDS customers, competition, technology and cybersecurity risks, foreign exchange and wage-cost exposure, and the ability to fund growth investments. One DDS customer represented approximately 21% of Q1 revenue and 31% of receivables at quarter-end.

Contingencies include a Philippine labor judgment with a potential payment of approximately $6.8 million plus accrued interest; a U.S. preliminary injunction remains in effect, and no final outcome is stated. The company also contests Indian service-tax assessments relating to historical services; it recorded no liability for the principal case and carries approximately $1.0 million of service-tax credits as a receivable. Management states that adverse tax or litigation outcomes could materially affect results. The filing says additional adverse outcomes of approximately $350,000 beyond recorded legal accruals are reasonably possible across other proceedings.

Other notable items: a $0.1 million loss on lease termination was included in operating cash flow adjustments. Management stated disclosure controls were effective as of March 31, 2022 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether DDS customer concentration and receivable exposure persist, and whether the large-customer revenue growth is sustainable.
• How quickly Synodex and Agility investments translate into improved segment profitability, given their Q1 losses.
• Whether projected capital spending of approximately $11.0 million can be funded while operating cash flow is negative and no credit lines are available.
• Developments in the Philippine judgment and Indian service-tax disputes, including potential interest, penalties, or impairment of the recorded tax-credit receivable.
• Cash availability and use: $10.3 million of quarter-end cash was held by foreign subsidiaries that the company intends to indefinitely reinvest.