Innodata Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated financial statements. Innodata provides data engineering, AI/ML data services and software platforms through Digital Data Solutions (DDS), Synodex and Agility.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $17.0 million | $13.9 million | $33.0 million | $28.4 million |
| Operating loss | $0.34 million | $0.31 million | $0.01 million | $0.18 million |
| Net income (loss) attributable to Innodata | $(0.10) million | $(0.48) million | $0.30 million | $(0.78) million |
| Diluted earnings (loss) per share | $0.00 | $(0.02) | $0.01 | $(0.03) |
| Cash provided by operating activities | Not separately stated | Not separately stated | $5.59 million | $3.28 million |
- Q2 revenue grew approximately 22% (about 23% using reported amounts); first-half revenue increased 16%. DDS led growth, with higher volumes from existing clients. Agility also grew, while Synodex revenue declined.
- Direct operating costs were 61% of revenue in Q2 versus 70% a year earlier, and 62% for the first half versus 68%. Selling and administrative costs rose to 41% of Q2 revenue from 32%, and to 38% for the first half from 32%, reflecting hiring, compensation, commissions, marketing and recruiting expenses.
- The company remained loss-making from operations in Q2 and approximately breakeven for the first half. Reported first-half net income included a $580,000 gain from forgiveness of its Paycheck Protection Program loan; the SBA approved 100% forgiveness in May 2021.
- Segment results were mixed: DDS improved and was profitable; Synodex moved to a loss as revenue fell; Agility’s losses increased with higher operating costs.
Financial position and liquidity
- At June 30, 2021, cash and cash equivalents were $22.1 million, up from $17.6 million at year-end; working capital was $14.5 million, versus $13.5 million.
- First-half operating cash flow was $5.6 million, supported in part by working-capital changes, including increased accounts payable and accrued expenses. Investing cash use was $1.5 million, primarily for equipment and technology; financing cash provided was $0.4 million, including $1.8 million from option exercises and offset by $0.8 million of stock-withholding taxes and $0.6 million of obligation payments.
- Total long-term obligations were $7.0 million, including $6.2 million of accrued pension liability; the current portion was $1.2 million. Operating lease liabilities totaled $6.8 million. The $580,000 PPP loan was forgiven, and the filing reports no bank facilities or lines of credit.
- Management said existing cash and internally generated funds were expected to meet financial needs for the next 12 months. Cash included $11.2 million held by foreign subsidiaries that the company intended to permanently reinvest overseas.
Outlook, risks and unusual items
- Management anticipated approximately $3.0–$3.5 million in capital expenditures over the next 12 months, funded from operating cash generation. No revenue or earnings guidance was provided.
- The company said COVID-19 had not materially adversely affected results in the reported periods, but its future impact remained uncertain. It cited project-based work and client cancellations or volume reductions, client concentration, competition, technology and cybersecurity risks, foreign exchange and wage inflation, and potential acquisition-related impairment risks.
- Two DDS clients each represented approximately 11% of Q2 revenue; one represented 12% of first-half revenue. Three clients accounted for 36% of receivables at June 30. Non-U.S. clients generated 47% of Q2 revenue and 48% of first-half revenue.
- Contingencies include a disputed Indian service-tax assessment relating to approximately $64 million of historical subsidiary revenue; the company recorded no liability. A separate dispute concerns approximately $1.0 million of service-tax credits recorded as a receivable. The filing also describes a Philippine judgment with a stated potential payment of about $6.8 million plus interest; a U.S. preliminary injunction remained in force. Management said adverse outcomes beyond recorded amounts of approximately $350,000 in aggregate were reasonably possible for legal proceedings and claims.
- The 2020 comparative financial statements were revised for immaterial lease-accounting errors: expenses decreased by $74,000 for Q2 and $147,000 for the first half, and first-half loss per share decreased by $0.01. The company concluded a restatement was not required.
Investor verification points
- Assess whether DDS growth and improved direct-cost ratios can persist as selling and administrative spending rises, and whether Synodex and Agility can improve profitability.
- Separate recurring operating performance from the one-time $580,000 PPP forgiveness gain and examine the sources and sustainability of operating cash flow.
- Monitor major-client volumes and receivable concentration, as well as the disputed Indian tax matters and Philippine litigation exposure.
- Review expected capital expenditures, pension and lease obligations, and the availability of liquidity given the absence of credit facilities and the overseas cash position.