Business Context and Reporting Period
Innodata Inc. (Innodata Corporation) is a provider of Internet and on-line publishing services, specializing in data capture and conversion for legal, scientific, educational, and medical publishers. This Form 10-QSB covers the quarterly period ended September 30, 1998. As of October 31, 1998, there were 1,473,819 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Revenues | $5,309,806 | $14,109,397 |
| Net Income | $469,224 | $1,518,606 |
| EPS (Basic) | $0.32 | $1.03 |
| EPS (Diluted) | $0.31 | $1.01 |
| Operating Cash Flow (9mo) | $2,148,732 | |
| Cash and Equivalents (Sep 30, 1998) | $3,478,906 | |
| Total Debt (Current + Long-term) | $110,000 (approx) | |
| Working Capital | $4,032,605 |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $469,224 for the quarter and $1,518,606 for the nine-month period, a significant improvement from a net loss of $1,278,079 and $4,142,314, respectively, in the comparable 1997 periods.
- Revenue Growth: Revenues from continuing operations increased to $5.31 million for the quarter (vs. $4.42 million in 1997) and $14.11 million for the nine months (vs. $13.42 million in 1997). Total reported 1997 revenues were higher due to discontinued businesses.
- Expense Reduction: Direct operating expenses decreased 14% for the quarter and 23% for the nine months compared to 1997. This was driven by the elimination of journal/book pagination services and a significant reduction in the value of Philippine pesos.
- Foreign Currency Impact: In 1997, the company recognized a $1,000,000 unrealized loss on foreign currency contracts. In 1998, a settlement agreement resulted in a $487,000 reduction of the estimated liability, recognized as income.
- Restructuring: The 1997 period included $1.5 million in restructuring and impairment costs, which were absent in the 1998 period.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company estimates capital expenditures of approximately $1,000,000 over the next 12 months for facilities in India, the Philippines, and Sri Lanka, as well as U.S. equipment.
- Liquidity: The company maintains a $1 million line of credit collateralized by company assets. Management believes this is sufficient for cash requirements.
- Year 2000 Compliance: The company plans to spend approximately $500,000 to replace non-compliant systems. It expects to achieve compliance and complete testing by June 30, 1999. While management does not anticipate a material financial impact, failure of critical systems or vendors to comply could adversely affect operations.
- Customer Concentration: One customer (twelve affiliated companies) accounted for 18% of revenues in the third quarter of 1998. A second customer accounted for 13%.
- Forward-Looking Statements: Results are subject to risks including market changes, competition, and the ability to execute growth strategies.
Investor Verification Checklist
- Verify the sustainability of revenue growth from new customers versus the impact of discontinued businesses.
- Confirm the status of the foreign currency contract settlement and any remaining exposure to Philippine peso fluctuations.
- Assess the progress and costs associated with Year 2000 compliance, specifically the $500,000 system replacement plan.
- Monitor the concentration risk associated with the top two customers representing 31% of quarterly revenue.
- Review the utilization of the $1 million line of credit and the company's ability to fund the projected $1 million in capital expenditures.