Innodata Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Amounts below are in U.S. dollars. Innodata is a global data engineering company with Digital Data Solutions (DDS), Synodex and Agility segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $13.9m | $13.6m | $28.4m | $27.3m |
| Direct operating costs | $9.7m | $9.6m | $19.4m | $19.1m |
| Direct costs as % of revenue | 70% | 71% | 68% | 70% |
| Selling and administrative expenses | $4.6m | $4.6m | $9.3m | $9.2m |
| Loss before income taxes | $(0.4)m | $(0.6)m | $(0.3)m | $(1.0)m |
| Income tax provision | $0.2m | $0.1m | $0.6m | $0.1m |
| Net loss attributable to Innodata | $(0.6)m | $(0.7)m | $(0.9)m | $(1.1)m |
| Loss per share, basic and diluted | $(0.02) | $(0.03) | $(0.04) | $(0.04) |
| Operating cash flow | Not presented quarterly | $3.2m | $3.1m |
- Q2 segment revenue: DDS $9.9m (down 1%); Synodex $1.2m (up 33%); Agility $2.8m (up 4%). Six-month revenue increased across all segments: DDS $20.3m (+1%), Synodex $2.5m (+32%) and Agility $5.6m (+8%).
- Margins and earnings: Q2 direct-cost ratio improved by one percentage point, although DDS direct costs rose to 73% of segment revenue from 71%. Lower losses overall reflected improved Synodex and Agility results; DDS moved to a loss. The filing does not provide a standalone consolidated gross-profit or EBITDA measure.
- Cash, working capital and obligations at June 30: Cash and equivalents were $13.5m versus $10.9m at year-end 2019; working capital was $8.2m versus $8.8m. Current assets were $25.9m and current liabilities $17.7m. Long-term obligations totaled $7.0m, including $4.9m accrued pension liability, $0.6m settlement obligations, $0.8m Microsoft license obligations, and a $0.58m PPP loan. Operating lease liabilities were $7.0m. No bank facilities or lines of credit were available.
- Cash generation and investment: Six-month operating cash flow of $3.2m, investing outflow of $1.0m (capital expenditures), and financing inflow of $0.4m produced a $2.6m increase in cash. DSO was 59 days, compared with 66 days at year-end 2019.
Material changes, outlook and commentary
- Management reported no material adverse effect on Q2 results from COVID-19, but said demand from existing and prospective customers began to decline in late March. The extent and duration of the pandemic’s future effects could not be estimated. As of July 31, 99% of staff were deployed at near-full productivity, with approximately 95% working remotely.
- Management believed cash and internally generated funds would cover needs for the next 12 months while reduced demand persisted for a period. If revenue fell significantly or for a prolonged period, it could cut capital expenditures, defer investment and reduce costs; it said it likely had no other source of liquidity to support operations without significant detriment. No revenue or earnings guidance was provided.
- Planned capital expenditures for the next 12 months were approximately $2.0m–$2.3m, funded from operating cash generation. The company received $579,700 under the PPP in May; forgiveness is conditional on eligible use of proceeds and maintaining payroll levels. Any unforgiven amount is payable over two years at 1% interest, with payments deferred for six months.
- COVID-19-related continuity spending increased technology costs; lower occupancy and other operating costs partly offset the increase. Q2 2020 did not include the $0.4m one-time Indian social-security assessment recorded in Q2 2019. COVID-related macroeconomic changes triggered impairment reviews; no impairment of tangible or intangible long-lived assets was identified at June 30.
- Key exposures include client concentration and project-based or at-will DDS contracts, wage inflation in operating countries, foreign-exchange movements, and dependence on international operations. One DDS client represented 16% of Q2 revenue; three clients accounted for 40% of receivables at June 30. Non-U.S. clients generated 55% of Q2 revenue.
Contingencies and other notable items
- An Indian tax dispute challenges the classification of services for July 2012–November 2016. If the tax authority prevails, the historical revenue base was approximately $66m and service tax could be 12.36%–15%, plus interest and penalties. The company is appealing and recorded no liability based on counsel’s assessment. A separate dispute concerns approximately $160,000 of previously granted refunds; about $1.0m of service-tax credits are recorded as a receivable, with recovery timing uncertain.
- A Philippine judgment involving former employees carries a potential payment of approximately $6.4m plus interest; a U.S. preliminary injunction remains in force. Management said substantial recovery could materially adversely affect the company. Other legal matters were assessed as reasonably possible to result in up to approximately $0.3m in aggregate beyond recorded amounts.
- Unrecognized tax benefits were approximately $3.0m at June 30; recognition could materially affect the effective tax rate. The company maintained a valuation allowance against U.S. and Canadian deferred tax assets.
- Disclosure controls and procedures were concluded effective as of June 30, 2020; no material change in internal control over financial reporting was reported for the quarter.
Investor verification priorities
- Track COVID-19 effects on customer demand, project volumes and contract renewals, particularly in DDS, and whether management’s 12-month liquidity assessment remains supportable.
- Check PPP forgiveness status and the terms and repayment requirements for any unforgiven balance.
- Monitor the Indian service-tax appeals and the collectability of the approximately $1.0m tax-credit receivable, along with the Philippine judgment and other legal exposures.
- Assess client concentration, foreign receivables exposure, wage and currency pressures, and whether planned capital spending remains within the stated range.
- Review future segment profitability and cash flow, including the effects of the elevated tax provision and pension obligations.