Innodata Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Innodata provides data services and technology using human expertise and machine learning. Its reporting segments are Digital Data Solutions (DDS), Synodex, and Agility PR Solutions. This unaudited report covers the three months ended March 31, 2019, with comparisons to Q1 2018.
Financial performance and liquidity
- Revenue: $13.694 million, down 3% from $14.120 million. DDS revenue was $10.177 million (down 3%); Synodex was $1.024 million (up from $0.981 million); Agility was $2.493 million (down 4%).
- Costs and margins: Direct operating costs were $9.560 million, or 70% of revenue, unchanged as a percentage from Q1 2018. Selling and administrative expenses rose 18% to $4.602 million, or 34% of revenue versus 28%.
- Profitability: Net loss attributable to Innodata was $452,000, compared with $268,000 in Q1 2018; diluted loss per share was $0.02 versus $0.01. Adjusted EBITDA was $470,000 versus $1.334 million. Agility’s segment adjusted EBITDA was a loss of $257,000 versus income of $96,000; DDS declined to $565,000 from $1.231 million, while Synodex improved to $162,000 from $7,000.
- Cash flow: Operating cash flow was $2.101 million, investing cash outflow was $485,000, and financing cash outflow was $387,000. Cash increased by $1.292 million to $12.161 million. Operating cash flow benefited primarily from a $2.543 million reduction in accounts receivable.
- Liquidity and obligations: Working capital was $11.128 million, down from $12.981 million at year-end 2018. Long-term obligations totaled $4.130 million, including current obligations of $1.033 million. The company also reported $8.715 million of operating lease liabilities after adopting the new lease accounting standard on January 1, 2019. No debt facilities or lines of credit were available.
- Balance sheet: Total assets were $52.680 million, versus $46.051 million at December 31, 2018. The increase principally reflects recognition of operating lease right-of-use assets.
Material changes and management commentary
DDS revenue fell primarily because of lower volume from one client, partly offset by increases from other clients. Management attributed the higher DDS selling and administrative costs mainly to professional fees, incentives, and new hires. Synodex’s lower direct costs reflected production efficiencies. Agility remained loss-making, with its loss worsening year over year.
Management said existing cash and internally generated funds should meet financial needs for the next 12 months, while noting that losses, capital spending, adverse legal decisions, or acquisitions could reduce liquidity. Expected capital expenditures over the next 12 months were approximately $1 million to $2 million; no material capital expenditure commitments existed at quarter-end. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Two DDS clients generated approximately 26% of Q1 revenue, compared with 32% a year earlier. Foreign clients generated 52% of revenue. Management highlighted project-based work, client concentration, possible reductions or cancellations, and the challenge of replacing completed work.
- In India, the tax authority disputes the classification of historical services for July 2012 through November 2016. If the authority prevails, tax could apply to approximately $67 million of revenue at rates of 12.36% to 15%; the company recorded no liability, based on counsel’s assessment. Separately, approximately $1 million of service-tax credits are recorded as a receivable amid a dispute over prior refunds.
- A Philippine court judgment against a former subsidiary, purportedly also involving Innodata, was approximately $6.2 million plus interest. A U.S. preliminary injunction remains in force while the matter is administratively closed. The company said substantial recovery could materially affect it. Other legal proceedings had estimated reasonably possible exposure of approximately $275,000 beyond recorded amounts.
- Unrecognized tax benefits were approximately $2.6 million at March 31, 2019. U.S. and Canadian deferred tax assets remain subject to valuation allowances; foreign earnings are intended to remain invested abroad.
- Management cited wage inflation in Asian operations, foreign-exchange exposure, project start-up and replacement timing, and seasonal fluctuations. Synodex revenue is typically lowest in Q3 and highest in Q4. Cash held by foreign subsidiaries was $5.7 million.
- Adoption of lease accounting added $8.715 million in operating lease liabilities and a $7.784 million right-of-use asset at quarter-end. The company reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether DDS client volumes recover and customer concentration declines.
- Whether Agility can improve profitability and whether rising selling and administrative expenses generate operating returns.
- Cash conversion and working-capital trends, given that Q1 operating cash flow depended substantially on collections.
- Potential outcomes and timing of the Indian tax disputes and Philippine judgment, including whether recorded reserves or receivables change.
- Liquidity after planned capital spending, scheduled obligations, lease payments, and any losses; the company has no credit facilities.