Innodata Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Innodata provides AI-enabled data engineering services and platforms through Digital Data Solutions (DDS), Synodex, and Agility. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $20.0m | $17.0m | $41.2m | $33.0m |
| Operating loss | $3.3m | $0.3m | $5.7m | $0.01m |
| Net income (loss) attributable to Innodata | ($3.8m) | ($0.1m) | ($6.6m) | $0.3m |
| Loss per share | ($0.14) | ($0.00) | ($0.24) | $0.01 |
| Adjusted EBITDA, non-GAAP | ($1.3m) | $0.7m | ($2.3m) | $2.0m |
| Cash from operating activities | Not provided for quarter alone | ($3.9m) | $5.6m |
- Q2 revenue grew 17%; first-half revenue grew 25%. Direct operating costs were 65% of revenue in Q2 (61% prior year) and 64% for the first half (62% prior year). Selling and administrative expenses were 52% of Q2 revenue (41% prior year) and 50% of first-half revenue (38% prior year).
- At June 30, cash was $10.5m, down from $18.9m at year-end 2021; working capital was $5.7m, down from $12.7m. Six-month capital expenditures were $3.6m. Cash declined $8.4m overall, including $0.6m of adverse foreign-exchange effects.
- Total assets were $49.9m and stockholders’ equity was $21.0m. Long-term obligations totaled $6.7m, principally $6.5m of accrued pension liability; this is not presented as conventional funded borrowing. Operating lease liabilities were $4.9m. The company reported no bank facilities or lines of credit.
- Q2 segment revenue: DDS $14.2m, Synodex $1.9m, and Agility $3.9m. For the first half, segment revenue was $30.1m, $3.6m, and $7.5m, respectively. Segment losses and rising costs were most pronounced in Agility; the filing reports first-half segment net loss of $5.3m for Agility.
Material changes and management commentary
- Revenue increased in all three segments. Management attributed DDS growth mainly to higher volume from an existing customer, Synodex growth to two existing customers, and Agility growth to subscriptions to its AI-enabled platform and newswire product.
- Cost growth outpaced revenue growth. Management cited higher headcount and salaries, growth-related hiring and marketing, and software amortization. Q2 selling and administrative expense rose 47%; first-half expense rose 64%.
- First-half operating cash use reflected the net loss and a $1.6m decrease in accounts payable and accrued expenses. Management expects approximately $7.5m of capital expenditures over the next 12 months for technology, equipment, and infrastructure upgrades.
- Management stated existing cash and internally generated funds should meet financial needs for at least 12 months from the filing date. If revenue declines significantly or for a prolonged period, it may reduce capital spending, defer investment, and cut operating costs. No full-year revenue or earnings guidance is provided.
- The company added an average of 119 new customers per quarter in the first half of 2022, versus 93 in 2021 and 62 in 2020. Management cautioned that project starts, cancellations, and replacement timing can make quarterly results fluctuate; Synodex revenue is typically lowest in Q3 and highest in Q4.
Risks, contingencies, and unusual items
- Customer concentration: One DDS customer generated 17% of first-half 2022 revenue. Three customers together accounted for 44% of accounts receivable at June 30. Project-based work, customer cancellations or reductions, and reliance on a limited number of customers are identified risks.
- Tax matters: An Indian service-tax dispute concerns approximately $63m of subsidiary revenue from July 2012 through November 2016; potential tax rates are 12.36%–15%, plus possible interest and penalties. The company has recorded no liability, based on its assessment with tax counsel. It also has about $1.0m of Indian service-tax credits recorded as a receivable, with recovery subject to a separate contested matter.
- Litigation: A Philippine judgment against a former subsidiary, purportedly also against Innodata, involves approximately $6.8m plus accrued interest. A U.S. preliminary injunction remains in effect against enforcement in the United States. The company says adverse outcomes beyond recorded amounts of approximately $350,000 in aggregate are reasonably possible; the potential judgment exposure could be material.
- Other exposures: Unrecognized tax benefits were $1.7m and could materially affect the effective tax rate if recognized. Currency movements affected comprehensive loss, and the company uses foreign-exchange forward contracts; outstanding hedge notional was $19.9m at June 30.
- Management reported no material adverse operating impact from COVID-19 in the period, but stated future effects remain uncertain. Other cited risks include inflation and wage increases in Asian operating locations, competition, technology and cybersecurity risks, and geopolitical uncertainty. No material change to previously disclosed risk factors was reported.
- A $2.9m redemption of Synodex non-controlling interest was recorded as a reduction to additional paid-in capital. The prior-year period included $0.6m of PPP loan-forgiveness income; there was no comparable 2022 gain.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins and positive cash flow, given the substantial increase in operating and selling expenses.
- Customer retention, project volumes, and the effect of DDS customer concentration on future revenue and receivables.
- Whether the planned $7.5m of capital expenditures and the current cash position remain consistent with management’s stated 12-month liquidity outlook, particularly without credit facilities.
- Progress and potential outcomes of the Indian tax disputes and Philippine judgment, including any changes in recorded liabilities or recoverability of tax credits.
- Agility and Synodex’s path toward profitability, as both reported segment losses and Agility’s first-half loss increased year over year.