Business context and reporting period
Innodata Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. It provides digital data, content, media intelligence and related services through Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS). The filing includes unaudited fourth-quarter results as well as full-year results.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $63.1 million | $58.5 million |
| Direct operating costs | $47.2 million | $43.9 million |
| Gross profit / margin | $15.9 million / 25.1% | $14.6 million / 24.9% |
| Selling and administrative expenses | $19.5 million | $16.8 million |
| Operating loss | $4.7 million | $2.2 million |
| Net loss attributable to Innodata | $5.5 million; $0.22 per share | $2.8 million; $0.11 per share |
| Adjusted EBITDA | $0.7 million | $1.9 million |
| Cash from operating activities | Used $2.7 million | Provided $2.7 million |
| Cash and cash equivalents at year-end | $14.2 million | $24.9 million |
| Working capital at year-end | $14.4 million | $24.8 million |
Revenue increased 8%, but the operating loss widened as costs and selling and administrative expenses rose. The 2016 net loss included a $1.0 million charge from the revised MediaMiser contingent purchase-price arrangement. The company reported $5.0 million of total obligations classified as long-term obligations, including current maturities; this includes pension and acquisition-related obligations, not just borrowing. Capital lease obligations were $0.2 million. The company said it had no bank facilities or lines of credit.
Fourth-quarter 2016 revenue was $15.7 million, compared with $15.5 million in fourth-quarter 2015. Gross profit was $4.0 million versus $4.2 million, and net loss attributable to Innodata was $1.0 million versus $0.6 million.
Material changes versus the prior comparable period
- DDS revenue decreased 2% to $50.7 million, reflecting reduced e-book work and lower volume and pricing concessions at key clients.
- IADS revenue rose 105% to $4.3 million, primarily from additional Synodex work; its net loss improved to $1.7 million from $3.7 million.
- MIS revenue rose 72% to $8.1 million, mainly reflecting Agility revenue after its July 2016 acquisition. MIS reported a $1.2 million net loss, approximately unchanged.
- Agility was acquired for $4.2 million in cash. The acquisition expanded MIS’s media database, outreach and monitoring offerings.
- Cash fell by $10.7 million during 2016, reflecting operating cash use, the acquisition and capital expenditures. Investing activities used $7.0 million, including $4.2 million for Agility and $2.7 million of capital expenditures.
Outlook, risks and unusual items
Management gave no specific revenue or earnings forecast. It expects existing cash and internally generated funds to meet financial needs for the next 12 months, while noting the absence of credit facilities. Planned near-term spending includes IADS investment of $0.1–$0.4 million per quarter and 2017 capital expenditures of approximately $2–$3 million. Management expects to continue investing in IADS, which has incurred losses since inception.
- Customer concentration remains significant: two DDS clients accounted for approximately 31% of 2016 revenue. Two clients also represented 52% of year-end accounts receivable ($5.2 million); the filing elsewhere describes this as three clients, so the exact concentration should be checked in the underlying disclosure.
- For one client, the company deferred $750,000 of revenue for cash-basis recognition and recorded a $150,000 receivables allowance.
- An Indian service-tax authority disputes the classification of services provided by the company’s Indian subsidiary. If the authority prevails, service tax of approximately 14.5% could apply to that subsidiary’s 2016 revenue of $16.8 million. Refund appeals may also delay collections.
- A Philippine labor decision purports to require reinstatement and approximately $8.0 million in back pay and benefits. The company believes recovery against it is unlikely, but says an adverse outcome could be material.
- The company disclosed potentially improper payments by foreign employees in connection with local employment-tax inspections. Its internal investigation is complete, the DOJ and SEC closed their inquiries, and approximately $1.6 million of legal and related costs were incurred. The company established a Compliance Committee and updated policies and training.
- Foreign exchange, wage inflation, project-based work, pricing pressure and reliance on third-party content and technology may affect margins and results. Approximately $11.7 million of cash was held by foreign subsidiaries; repatriation could trigger U.S. tax.
- Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Reconcile the client concentration disclosure for accounts receivable and assess exposure to the major DDS clients, including the deferred-revenue client.
- Track cash consumption, working-capital decline, foreign cash accessibility and the company’s ability to fund planned investment without credit facilities.
- Review outcomes and potential cash effects of the Indian service-tax and other tax matters, including refund appeals and the stated exposure.
- Assess whether DDS can stabilize margins and whether IADS and MIS can improve profitability as investment and acquisition integration continue.
- Confirm the status and payment terms of the $1.5 million MediaMiser supplemental consideration and the potential financial exposure from the Philippine labor case.