Innodata Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Innodata provides AI-enabled data engineering services and software platforms through Digital Data Solutions (DDS), Synodex, and Agility. The interim financial statements are unaudited.
Financial performance
- Q3 revenue: $18.4 million, up 6% from $17.5 million a year earlier. DDS revenue declined 4% to $12.9 million; Synodex grew 80% to $1.8 million; Agility grew 19% to $3.8 million.
- Q3 profitability: Operating loss was $3.1 million versus $0.5 million; net loss attributable to Innodata was $3.3 million versus $0.8 million. Diluted loss per share was $0.12 versus $0.03. Adjusted EBITDA, a non-GAAP measure, was a loss of $1.2 million versus income of $0.7 million.
- Q3 costs and margins: Direct operating costs were $12.4 million, or 67% of revenue, compared with 61% a year earlier. Selling and administrative expenses were $9.1 million, or 49% of revenue, versus $7.3 million, or 42%. The filing does not present a consolidated gross margin measure.
- Nine-month results: Revenue rose 18% to $59.6 million. Operating loss was $8.8 million versus $0.5 million; net loss attributable to Innodata was $10.0 million versus $0.5 million. Adjusted EBITDA was a loss of $3.5 million versus income of $2.7 million.
- Cash flow: Nine-month operating cash use was $1.7 million, compared with $5.6 million provided in 2021. Investing cash use was $5.3 million, principally for equipment, infrastructure, and software development; financing cash use was $0.2 million. Foreign exchange reduced cash by $1.0 million.
- Liquidity and obligations: Cash was $10.7 million at September 30, down from $18.9 million at year-end 2021. Working capital was $3.0 million, down from $12.7 million. Current assets were $23.9 million and current liabilities $20.9 million. Long-term obligations were $6.5 million, including accrued pension obligations; operating lease liabilities totaled $4.7 million. The company reported no bank facilities or lines of credit.
Material changes and management commentary
- Revenue growth for the first nine months came from all three segments, led by Synodex’s 86% increase and DDS’s 13% increase. Management attributed DDS growth primarily to higher volume from an existing customer; Synodex growth to two existing customers; and Agility growth to platform and newswire subscriptions.
- Expenses grew faster than revenue. For the nine-month period, direct operating costs increased 24%, while selling and administrative expenses increased 49%, reflecting higher headcount, wages, stock compensation, marketing, and growth investments. Agility recorded a $5.2 million nine-month Adjusted EBITDA loss; DDS generated $3.4 million and Synodex lost $1.7 million.
- Management said existing cash and internally generated funds were expected to meet financial needs for at least 12 months after filing. It anticipated approximately $6.4 million of capital expenditures over the next 12 months, some of which might be financed. No material capital expenditure commitments were reported at quarter-end.
- The company added an average of 113 new customers per quarter during the first nine months of 2022. Management noted project-start timing and possible project reductions or cancellations can cause quarterly volatility; Synodex revenue is typically lowest in Q3 and highest in Q4. No specific financial guidance was provided.
Risks, contingencies, and unusual items
- Tax dispute in India: An unresolved assessment concerns the classification of services provided from July 2012 through November 2016, when the subsidiary earned approximately $53 million in revenue. Potential tax, interest, and penalties are not quantified in the filing; no liability was recorded. A separate dispute concerns approximately $160,000 of previously granted refunds, and about $0.9 million of service-tax credits remained recorded as a receivable.
- Philippines litigation: A 2008 judgment against a former Philippine subsidiary, purportedly also against Innodata, represents approximately $6.8 million plus interest. A U.S. preliminary injunction remains in force against enforcement in the United States. The company also disclosed that adverse outcomes in other proceedings estimated beyond recorded amounts could reach approximately $350,000 in aggregate and are reasonably possible.
- Other exposures: One DDS customer generated 13% of nine-month revenue. Two customers accounted for 24% of receivables at September 30. The company cited foreign exchange and wage-cost exposure, customer/project concentration, competition, cybersecurity, and uncertainty around macroeconomic conditions. Management reported no material adverse COVID-19 impact on the reported periods.
- Unusual items: The company redeemed a Synodex non-controlling interest in March, recording a $2.9 million charge to additional paid-in capital. It reported no goodwill or intangible-asset impairment in its 2022 test. The 2021 comparison included a $0.6 million PPP loan-forgiveness gain.
Key facts for investors to verify
- Whether revenue growth can translate into improved margins and operating cash flow, given expense growth and the Q3 operating loss.
- Cash runway, planned $6.4 million capital expenditures, and funding options in the absence of credit facilities.
- Progress and potential financial exposure from the Indian tax proceedings and Philippine judgment.
- Customer concentration, receivable collection, and the sustainability of DDS and Agility performance.
- Potential dilution from outstanding options and 700,000 performance-based restricted stock units; the filing also reports 1,143,000 options granted after quarter-end on October 7, 2022.