Innodata Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are with FY 2016. Innodata provides digital data services and solutions through Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). The financial statements received an unqualified audit opinion.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $60.9 million | $63.1 million |
| Direct operating costs | $45.8 million | $47.2 million |
| Gross profit, calculated as revenue less direct operating costs | $15.1 million; 24.8% margin | $15.9 million; 25.1% margin |
| Selling and administrative expenses | $20.2 million | $19.5 million |
| Operating loss | $5.1 million; 8.4% of revenue | $4.7 million; 7.4% of revenue |
| Net loss attributable to Innodata | $5.1 million; $0.20 per share | $5.5 million; $0.22 per share |
| Adjusted EBITDA, non-GAAP | Loss of $0.7 million | Income of $0.7 million |
| Cash and cash equivalents, year-end | $11.4 million | $14.2 million |
| Working capital, year-end | $9.7 million | $14.4 million |
| Cash flow from operations | $0.7 million provided | $2.7 million used |
| Cash used in investing activities | $3.4 million | $7.0 million |
- Segment revenue: DDS $46.7 million, down about 8%; IADS $4.8 million, up about 12%; MIS $9.4 million, up about 16%.
- Cash declined by $2.8 million during 2017. Of year-end cash, $5.7 million was held by foreign subsidiaries, which management intended to leave invested overseas.
- Long-term obligations totaled $6.6 million, including $2.1 million current and $4.5 million noncurrent. The balance includes capital leases, pension obligations, acquisition-related amounts, software-license obligations, and lease-related liabilities. The company reported no bank facilities or lines of credit.
- Three clients represented 51% of accounts receivable ($5.2 million); DSO rose to 61 days from 55.
- Foreign-exchange forward contracts had a $15.9 million notional amount and a reported year-end fair-value asset of approximately $0.3 million.
Material changes and unusual items
- Total revenue fell 3%. DDS weakness, including $3.3 million of reduced volume from a key e-book client, was partly offset by IADS growth and MIS revenue from the Agility acquisition.
- Operating loss widened despite lower revenue and direct costs: selling and administrative expenses rose 4%, and direct costs declined less than revenue. DDS recorded a $1.4 million accrual primarily related to legal proceedings, partly offset by a $0.2 million recovery of receivables. In 2016, DDS incurred $1.5 million of internal-investigation costs.
- 2017 net loss improved modestly, but adjusted EBITDA deteriorated by $1.4 million. MIS adjusted EBITDA loss increased to $1.3 million from $0.3 million; DDS adjusted EBITDA declined to $1.2 million from $2.8 million. IADS adjusted EBITDA loss narrowed to $0.6 million from $1.8 million.
- The 2017 Tax Act led to fourth-quarter tax-accounting adjustments, including a $6.4 million deemed-repatriation amount offset by net operating loss carryforwards and remeasurement of deferred tax assets. Management had not finalized its assessment of GILTI accounting. The reported tax provision was $0.3 million, versus $1.1 million in 2016.
- Capital expenditures were $3.4 million in 2017. Management anticipated 2018 capital expenditures of approximately $1.0–$2.0 million, with a portion potentially financed.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said existing cash and internally generated funds were expected to meet financial needs for the next 12 months, while cautioning that continued cash reductions could materially harm the company.
- Client concentration is material: two DDS clients generated approximately 30% of 2017 revenue. Client work is often project-based or terminable on short notice, and the company faces risks from volume reductions, cancellations, nonrenewals, and pricing pressure.
- A Philippine labor judgment, recalculated at approximately $6.2 million plus accrued interest, remains disputed. In January 2018, a U.S. court preliminarily enjoined former employees from pursuing or seeking enforcement of the judgment against Innodata in the United States while the action remains pending. The company warned that an adverse recovery could materially affect it.
- An Indian service-tax authority disputes the classification of services provided by the Indian subsidiary. If the authority prevails, those revenues could face service tax of approximately 14.5%; the subsidiary reported 2017 revenue of $15.6 million. The company is contesting the matter. Other Indian and Philippine tax disputes are also disclosed.
- Key risks include dependence on major clients and third-party content providers, competition and wage inflation, foreign-exchange exposure, data security and privacy, international operations, and difficulty making new services or acquisitions profitable. The company reported no goodwill impairment in its 2017 annual test.
- The stock traded as low as $0.88 in 2017; the filing notes potential Nasdaq delisting risk if the bid price remains below $1.00 for 30 consecutive business days and deficiencies are not cured within applicable periods.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not provide an attestation on internal controls.
Important facts for investors to verify
- Current status, potential liability, accrued interest, and reserve treatment of the Philippine labor judgment and other legal proceedings.
- Outcome and potential financial impact of the Indian service-tax dispute, including the scope of any assessment or refunds delayed by appeals.
- Revenue, project volumes, pricing, and receivable collection trends for the two largest DDS clients; also monitor DSO and customer concentration.
- Cash availability and restrictions on overseas funds, capital requirements, and progress toward generating positive adjusted EBITDA and operating results.
- Final accounting and tax effects of the 2017 Tax Act, including GILTI and any withholding taxes if foreign earnings are remitted.