Innodata Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Innodata is a global data engineering company with Digital Data Solutions (DDS), Synodex and Agility segments. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
- Revenue: $16.0 million, up 10% from $14.5 million. DDS revenue rose 13% to $11.8 million, Agility rose 14% to $3.2 million, and Synodex fell 23% to $1.0 million.
- Profit: Net income attributable to Innodata was $398,000, compared with a $291,000 loss a year earlier. Diluted EPS was $0.01 versus a $0.01 loss. Pretax income was $336,000; the company recorded a $73,000 income-tax benefit, compared with a $405,000 provision in Q1 2020.
- Costs and margins: Direct operating costs were $10.1 million, or 63% of revenue versus 67% a year earlier; selling and administrative expenses were $5.5 million, or 34% of revenue versus 32%. Revenue less direct operating costs was $5.9 million (about 37% of revenue), compared with $4.8 million (about 33%) in Q1 2020.
- Cash flow: Operating cash flow was $757,000 versus $750,000. Capital expenditures were $503,000; cash used in financing was $423,000, including $764,000 of withholding taxes on net-settled stock compensation and $268,000 of debt payments. Cash decreased $277,000 to $17.3 million.
- Liquidity and obligations: Working capital was $13.5 million and current assets were $31.3 million against current liabilities of $17.7 million. Total liabilities were $29.5 million. Long-term obligations were $7.8 million before current-portion classification, including $6.0 million of pension obligations; bank loans were $580,000. Operating lease liabilities totaled $7.1 million.
- Other metrics: Accounts receivable was $10.0 million; DSO improved to 56 days from 62 days at year-end 2020. One DDS client contributed 12% of quarterly revenue. Non-U.S. clients generated 49% of revenue.
Changes and management commentary
- Revenue growth was led by DDS, primarily from a new customer, and Agility, reflecting subscription and newswire products. Synodex’s decline reflected lower volume from two existing clients.
- Management attributed the improvement in net income primarily to DDS. Agility remained loss-making, with its net loss increasing to $426,000 from $274,000, as higher operating costs outweighed revenue growth.
- COVID-19 had no material adverse impact on Q1 2021 results, according to management; its future effects remained uncertain. Management said existing cash and internally generated funds should meet needs for the next 12 months. The company reported no bank facilities or lines of credit.
- Management anticipated $2.0–$2.5 million of capital expenditures over the next 12 months, funded from operations. The company applied in January 2021 for forgiveness of 100% of its $580,000 Paycheck Protection Program loan; forgiveness was not reported as approved.
- Management disclosed a correction to Q1 2020 lease-accounting errors: expenses decreased by $74,000, liabilities decreased by $51,000, assets increased by $23,000, and operating and financing cash-flow amounts each increased by $47,000. The filing states a restatement was not required.
Risks, contingencies and unusual items
- In India, the company is contesting a service-tax classification dispute involving approximately $64.0 million of subsidiary revenue from July 2012 through November 2016. Potential tax, interest and penalties are not clearly quantified in the filing; no liability was recorded based on counsel’s assessment. Separately, approximately $1.0 million of service-tax credits is recorded as a receivable while another dispute is contested.
- A Philippine court judgment involving former employees has a potential payment amount of approximately $6.8 million, plus accrued interest. A U.S. preliminary injunction remains in effect; the company warns that an adverse recovery could materially affect it.
- Management estimated that adverse outcomes in other legal matters of approximately $350,000 beyond recorded amounts were reasonably possible. Unrecognized tax benefits were $1.8 million; recognition could materially affect the effective tax rate.
- Key business risks include project cancellations or volume shortfalls, reliance on a limited number of DDS clients, wage inflation in Asian operating locations, foreign-exchange exposure, competition and technology change, and cybersecurity or data-privacy events. Management cited seasonality in Synodex and quarterly fluctuations as additional forecasting challenges.
Most important facts for investors to verify
- Whether the PPP loan was forgiven and whether cash generation supports the stated 12-month liquidity outlook and planned capital expenditures.
- Progress and potential financial exposure in the Indian service-tax disputes and Philippine judgment, including any change to recorded liabilities or the $1.0 million tax-credit receivable.
- Whether DDS’s new-customer-driven growth is repeatable, and whether Synodex can recover volume while Agility reduces its losses.
- Client concentration, foreign-currency and wage-cost trends, and the effect of stock-based compensation and option exercises on share dilution.