Innodata Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Innodata is a global data engineering company providing AI-related services and platforms through Digital Data Solutions (DDS), Synodex and Agility.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $14.53 | $13.69; up 6% |
| Direct operating costs | $9.74; 67% of revenue (reported as 68%) | $9.56; 70% of revenue |
| Selling and administrative expenses | $4.72; 32% of revenue | $4.60; 34% of revenue |
| Income (loss) before taxes | $0.05 | $(0.48) |
| Income tax provision (benefit) | $0.41 | $(0.03) |
| Net loss attributable to Innodata | $(0.37); $(0.01) per share | $(0.45); $(0.02) per share |
| Operating cash flow | $0.70 | $2.10 |
| Cash and cash equivalents at quarter-end | $10.75 | $10.87 at Dec. 31, 2019 |
| Working capital at quarter-end | $8.12 | $8.79 at Dec. 31, 2019 |
Revenue increased across all three segments: DDS $10.41 million (up 2%), Synodex $1.28 million (up 30%) and Agility $2.84 million (up 12%). Management attributed growth to new-customer volume in DDS, higher revenue from an existing client in Synodex, and Agility platform subscriptions and newswire products. Agility’s segment loss before tax improved to $0.25 million from $0.65 million; DDS and Synodex reported segment income before tax of $0.06 million and $0.24 million, respectively, after intersegment eliminations.
Cash used in investing was $0.58 million, primarily for technology equipment; cash used in financing was $0.06 million for long-term obligation payments. Cash declined by $0.13 million during the quarter, including a $0.20 million adverse foreign-exchange effect. DSO was 60 days, compared with 66 days at December 31, 2019. Total long-term obligations were $5.44 million, including $4.67 million of accrued pension liability; operating lease liabilities were $7.25 million. The filing reports no bank facilities or lines of credit.
Material changes and notable items
- Compared with Q1 2019, revenue grew 6% and the loss attributable to Innodata narrowed by about $0.09 million. Operating cash flow fell from $2.10 million to $0.70 million, primarily because the prior-year period benefited from a $2.54 million reduction in receivables.
- The tax provision rose to $0.41 million from a $0.03 million benefit, primarily due to foreign taxes and foreign-exchange-related tax effects. The reported effective tax rate was 794.1%, which management said was disproportionate because of losses in certain entities and valuation allowances.
- Foreign currency translation and derivative fair-value changes contributed to other comprehensive loss of $0.88 million; total comprehensive loss attributable to Innodata was $1.24 million.
- After quarter-end, on May 4, 2020, the company received $579,700 under the Paycheck Protection Program. The loan and interest are forgivable subject to eligible use and payroll-maintenance conditions; any unforgiven balance is payable over two years at 1% interest, with payments deferred for six months.
Outlook, risks and contingencies
- COVID-19: The company said there was no material adverse effect on Q1 results, but demand from existing and prospective customers began to weaken in late March. It reported that approximately 93% of its workforce was working remotely with near-full productivity by late April. Management could not reliably estimate the pandemic’s future impact and warned that client reductions, delays or cancellations could materially affect results.
- Management believed cash and internally generated funds would cover financial needs for the next 12 months while sustaining reduced demand for a period. In a significant or prolonged revenue decline, it said it could reduce capital expenditures, defer investment and cut costs. Planned capital expenditures for the next 12 months were approximately $2.0–$2.3 million.
- COVID-19 prompted an impairment review; the company reported no impairment of goodwill or other long-lived assets as of March 31, 2020. Goodwill was $2.00 million.
- Customer concentration remains relevant: one DDS client generated 14% of revenue; non-U.S. customers generated 54%. Two clients accounted for 28% of receivables at quarter-end.
- Tax matters: An Indian service-tax dispute concerns the classification of services provided from July 2012 through November 2016, when the subsidiary generated approximately $66 million of revenue. The company contests the assessment and recorded no liability; an adverse result could be material. A separate dispute concerns approximately $160,000 of prior refunds; about $1.0 million of service-tax credits remained recorded as a receivable.
- Litigation: A Philippine judgment in favor of former employees involves a potential claim of approximately $6.4 million plus interest. A U.S. preliminary injunction bars enforcement against Innodata in the United States while the related action remains pending. Management also stated that reasonably possible adverse outcomes in other matters could total approximately $0.3 million beyond recorded amounts.
- Management cited project-based and at-will contracts, customer concentration, competition, wage inflation, foreign-exchange exposure and cybersecurity as risks. The company reported that disclosure controls were effective at March 31, 2020 and that it continued remediation of material weaknesses identified in its 2019 Form 10-K.
Important facts for investors to verify
- Whether COVID-19-related demand reductions continued after late March and how they affected subsequent revenue, margins and cash flow.
- The conditions and expected forgiveness status of the $579,700 PPP loan.
- Progress and potential financial exposure in the Indian tax disputes and Philippine judgment matter.
- Customer concentration, receivables collection and the company’s ability to fund planned capital spending without credit facilities.
- Progress in remediating the previously identified internal-control weaknesses and any updated impairment assessments.