Innodata Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports full-year results, not standalone fourth-quarter financial statements. Innodata provides AI data-engineering services and software platforms through Digital Data Solutions (DDS), Synodex, and Agility.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $69.8 million | $58.2 million |
| Direct operating costs | $43.5 million | $38.4 million |
| Selling and administrative expenses | $27.9 million | $18.7 million |
| Operating income (loss) | $(1.7) million | $1.2 million |
| Net income (loss), consolidated | $(1.8) million | $0.6 million |
| Net income (loss) attributable to Innodata | $(1.7) million | $0.6 million |
| Basic and diluted EPS | $(0.06) | $0.03 basic; $0.02 diluted |
| Cash from operating activities | $5.2 million | $5.7 million |
- Revenue increased approximately 20%. DDS revenue grew 25% to $52.6 million, mainly on higher volume from one client. Agility revenue rose 14% to $13.0 million, largely from media-database subscriptions. Synodex revenue declined 13% to $4.2 million.
- Direct operating costs fell to 62.4% of revenue from 66.0%, implying a higher contribution margin before selling and administrative expenses. However, selling and administrative expenses increased 49% and rose to 40.0% of revenue from 32.0%. The company attributed the increase principally to sales hiring, commissions, incentives, stock compensation, recruiting, and marketing.
- Operating margin was approximately negative 2.4%, versus positive 2.0% in 2020. The company recorded a $0.6 million gain on forgiveness of its 2020 PPP loan; this was a nonrecurring benefit in 2021.
- Cash and cash equivalents were $18.9 million at year-end, versus $17.6 million a year earlier. Working capital was $12.7 million, down from $13.5 million. Operating cash flow was positive despite the net loss, supported by noncash expenses and working-capital sources, including higher payables and accruals.
- Capital expenditures were $4.4 million, compared with $1.4 million in 2020. Management anticipated approximately $11.0 million of 2022 capital expenditures for technology, equipment, platform development, and infrastructure upgrades; it noted a portion might be financed.
- Total long-term obligations were $7.5 million, including $6.8 million of accrued pension obligations; $1.3 million was classified as current. The company had no bank facility or line of credit. Management said cash and expected operating cash flow should cover financial needs for at least 12 months from issuance of the statements.
- Days sales outstanding improved to 56 days from 62. Approximately 57% of year-end accounts receivable, or $6.3 million, was due from six clients.
Material changes and management outlook
- Growth investments increased materially: the company expanded its sales force by nearly 400%, ending 2021 with 115 sales personnel, and continued investment in its Goldengate AI/ML platform and product portfolio. Management expects these investments to support future growth and said it expected to fund them from internal resources, while separately noting possible financing for part of planned 2022 capital spending.
- Management reported that the company was nearly 100% cloud-based and remote, which it said improved scalability and reduced fixed operating costs. It made no specific revenue or earnings forecast in the filing.
- Quarterly performance is volatile: management disclosed that quarterly net income ranged from approximately $1.2 million in Q4 2020 to a loss of approximately $1.2 million in Q4 2021. Project timing, utilization, and the replacement or cancellation of client work can affect results.
- Customer concentration remains a risk. One DDS client generated 11% of 2021 revenue, down from 14% in 2020. Many customer agreements may be terminated on 30 to 90 days’ notice, and project volumes are often requirements-based.
- The company reported no material adverse effect from COVID-19 on FY2021 results, but said the pandemic’s future effects remain uncertain. It also identified foreign-exchange and wage inflation exposure, competition, cybersecurity and data-protection risks, and reliance on third-party content providers for Agility.
Controls, contingencies, and unusual items
- Disclosure controls: Management concluded disclosure controls and procedures were not effective as of December 31, 2021. It described remediation efforts, including a third-party consultant, better documentation, and a more efficient review process, expected to be completed in Q2 2022. Separately, management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
- Philippine labor judgment: A 2008 judgment against a former Philippine subsidiary and purportedly Innodata carries a stated potential principal amount of approximately $6.4 million, plus accrued interest. A U.S. preliminary injunction remains in effect against enforcement in the United States while the related action is pending. The company said a substantial recovery could materially affect it.
- Indian service-tax dispute: Authorities dispute the classification of services provided from July 2012 through November 2016. If the authorities prevail, the services could be subject to tax of 12.36% to 15% on approximately $63.0 million of historical subsidiary revenue, plus potential interest and penalties. No liability was recorded. A separate refund dispute concerns approximately $160,000, and approximately $1.0 million of service-tax credits remains recorded as a receivable.
- The auditor identified measurement of income-tax exposures as a critical audit matter. Unrecognized tax benefits were $1.8 million at year-end. The company also reported approximately $50.0 million of indefinitely reinvested foreign earnings, which could incur withholding taxes if repatriated or no longer treated as indefinitely reinvested.
- The company recorded no goodwill impairment in its 2021 annual assessment. The financial statements received an unqualified audit opinion; that opinion does not cover the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Whether the sales-force and platform investments translate into revenue growth and improved operating profitability, particularly in Agility and Synodex.
- Progress and completion of the disclosed disclosure-controls remediation, and whether any deficiencies affect future reporting.
- Developments in the Philippine labor judgment and Indian tax matters, including any change in exposure, recorded reserves, or enforcement status.
- Customer retention, project replacement, and receivable collection, given short termination periods, client concentration, and receivables concentration.
- Funding and execution of the approximately $11.0 million 2022 capital-spending plan, especially given the absence of bank credit facilities and lines of credit.
- The effect of wage inflation, foreign-exchange movements, and Agility’s dependence on third-party content on margins and cash flow.