Innodata Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Innodata provides digital services and solutions through Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS).
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $15.0 million | $15.7 million; down about 4% |
| Direct operating costs | $11.7 million; 79% of revenue | $11.5 million; 73% of revenue |
| Selling and administrative expense | $4.6 million; 31% of revenue | $3.8 million; 24% of revenue |
| Net income (loss) attributable to Innodata | $(1.7) million; $(0.07) per share | $3,000; $0.00 per share |
| Adjusted EBITDA | $(0.2) million | $1.4 million |
| Operating cash flow | $1.1 million | $0.7 million |
| Cash and cash equivalents | $14.2 million at March 31 | $14.2 million at December 31, 2016; $25.4 million at March 31, 2016 |
| Working capital | $12.6 million | $14.4 million at December 31, 2016 |
Cash used in investing activities was $1.0 million, principally for technology and equipment; financing activities used $31,000. Long-term obligations totaled $5.9 million, including $1.9 million current. The filing reports no bank facilities or lines of credit. The company recorded a $0.4 million income-tax provision.
Material changes and segment results
- DDS revenue fell 16% to $11.4 million, primarily due to $1.8 million less volume from a key e-book client and lower volume from other clients. DDS reported a $1.2 million segment loss, compared with $1.2 million income a year earlier.
- IADS revenue rose 10% to $1.0 million, but the segment reported a $0.4 million loss. Management said it expects to continue investing $0.1–$0.4 million per quarter.
- MIS revenue increased 117% to $2.6 million, principally reflecting the July 2016 Agility acquisition. MIS reported a $0.1 million loss, improved from a $0.5 million loss.
- Higher selling and administrative expenses and direct costs as a percentage of revenue contributed to the decline in results. Capital expenditures rose to $1.0 million from $0.2 million.
Outlook, risks, contingencies, and unusual items
- Management believes cash and internally generated funds should meet financial needs for the next 12 months, while warning that continued cash reductions from losses, capital spending, or acquisitions could adversely affect the company. Expected capital expenditures over the next 12 months are $2–$3 million.
- The U.S. entity deferred $6.2 million of payments to Asian subsidiaries in Q1. Management projects a further cash shortfall of about $7.0 million for payments due through 2018; deferrals create deemed taxable dividends offset against U.S. net operating loss carryforwards.
- Revenue of $370,000 from one client was deferred in Q1 and will be recognized only to the extent cash is received. A further $750,000 from that client had been deferred in the second half of 2016.
- Client concentration remains material: two DDS clients generated about 30% of Q1 revenue. The company also cited project-based work, client cancellations or reduced volumes, wage inflation, foreign exchange exposure, and continuing IADS losses as risks.
- Foreign currency forward contracts had a $14.9 million notional amount and a $7,000 unrealized loss at quarter-end. Management cautioned that currency movements could affect results.
- Tax matters include disputed Indian assessments and an Indian service-tax inquiry. If the service-tax authority prevails, the filing says the tax could be approximately 14.5% of relevant revenue; the Indian subsidiary reported $4.2 million of revenue for the period. The company also reported $1.2 million of unrecognized tax benefits.
- A Philippine employment-related judgment seeks approximately $8.0 million in back wages and benefits. Management, based on counsel, believes recovery against the company is unlikely, but states a substantial recovery could materially affect the company. Other legal matters could result in approximately $0.1 million of losses beyond recorded amounts.
- The company issued 253,622 shares for a supplemental MediaMiser acquisition payment; 30% of the first installment was paid in cash in April 2017.
Important facts for investors to verify
- Whether DDS client volumes stabilize or further reductions continue, including collection of the deferred client revenue.
- Whether the projected U.S. cash shortfall and intercompany payment deferrals develop as management expects, and their tax and liquidity effects.
- Whether the stated 12-month liquidity outlook remains supportable given planned capital spending, obligations, and lack of credit facilities.
- Developments in the Indian tax disputes and service-tax inquiry, and the Philippine employment litigation exposure.
- Whether MIS growth and IADS investment produce sustained improvement in segment profitability.