Innodata Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Unaudited consolidated financial statements. Innodata provides data engineering and AI/ML services and platforms through Digital Data Solutions (DDS), Synodex, and Agility.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $17.45 | $14.55 | $50.47 | $42.95 |
| Direct operating costs | $10.70 | $9.78 | $31.21 | $29.21 |
| Selling and administrative expenses | $7.26 | $4.58 | $19.77 | $13.66 |
| Income (loss) before tax | $(0.52) | $0.14 | $0.05 | $(0.04) |
| Net income (loss) attributable to Innodata | $(0.80) | $0.21 | $(0.51) | $(0.57) |
| EPS, basic and diluted | $(0.03) | $0.01 | $(0.02) | $(0.02) |
| Cash from operating activities | — | $5.64 | $5.65 | |
| Capital expenditures | — | $2.92 | $1.12 |
- Direct costs were 61% of revenue in Q3 and 62% in 9M, versus 67% and 68% a year earlier. Revenue less direct costs was approximately 39% of revenue in Q3 and 38% in 9M; these are calculated ratios, not a separately reported GAAP margin.
- At September 30, cash was $20.94 million, current assets $33.81 million, current liabilities $20.30 million, and working capital $13.52 million. Total assets were $58.83 million and total liabilities $31.56 million.
- Long-term obligations were $6.83 million in total, including $6.12 million of accrued pension liability; $1.13 million was current. Operating lease liabilities were $6.56 million. The company reported no bank loans outstanding and no credit facilities or lines of credit.
- Cash increased by $3.37 million over the first nine months to $20.94 million. Operating cash flow was nearly unchanged year over year; financing cash flow included $2.21 million from option exercises and $0.76 million of withholding-tax payments.
Changes and segment performance
- Q3 revenue rose 20% year over year, driven by new clients and higher volumes in DDS and Agility; Synodex declined. DDS revenue grew 25% to $13.24 million, Agility grew 14% to $3.23 million, and Synodex fell 17% to $0.98 million.
- For 9M, revenue grew 18%. DDS rose 24% to $38.00 million and Agility rose 13% to $9.58 million; Synodex fell 22% to $2.89 million.
- Higher selling and administrative costs absorbed the revenue growth: Q3 expense increased $2.68 million, mainly from hiring, stock compensation, commissions, incentives, marketing, and professional fees. Agility’s Q3 selling and administrative expense was $2.9 million, or 91% of segment revenue. Synodex also recorded a Q3 segment loss, with direct costs exceeding segment revenue.
- The nine-month result included a $0.58 million gain from forgiveness of the company’s 2020 Paycheck Protection Program loan. The nine-month pretax result was slightly positive, but Innodata still reported a $0.51 million attributable net loss.
Outlook, risks, and unusual items
- Management said existing cash and internally generated funds were expected to meet needs for at least 12 months from the filing date. It anticipated approximately $3.5–$4.0 million of capital expenditures over the next 12 months, funded from operations. No specific revenue or earnings guidance was provided.
- Management reported no material adverse effect from COVID-19 on results through September 30, 2021, but said the pandemic’s future economic and business effects remained uncertain. Project-based work, client cancellations or volume reductions, competition, execution of growth plans, cybersecurity and data privacy, and foreign-exchange and wage pressures are among the stated risks.
- Quarterly results may fluctuate as projects start, end, or are replaced. Management noted that Synodex revenue is typically lowest in Q3 and highest in Q4; Asian facility holidays can also raise Q4 overtime costs.
- Cash included $13.5 million held by foreign subsidiaries. The company said it intended to indefinitely reinvest those funds abroad, citing potential withholding taxes on remittance.
- An Indian tax classification dispute concerns services provided from July 2012 through November 2016. The subsidiary’s revenue during that period was approximately $64 million; potential tax, interest, and penalties are not quantified in the filing, and no liability was recorded based on counsel’s assessment. A separate dispute concerns approximately $1.0 million of service-tax credits recorded as a receivable.
- A Philippine judgment involving former employees could involve approximately $6.8 million plus interest. A U.S. preliminary injunction remains in force during the pending action. The company also stated that adverse outcomes in other matters beyond recorded amounts could be approximately $0.35 million in aggregate and are reasonably possible.
- Unrecognized tax benefits were $1.72 million at September 30; recognition could materially affect the effective tax rate. No goodwill or long-lived-asset impairment was identified in the period’s analysis.
- Management concluded disclosure controls were effective as of September 30, 2021 and reported no material change in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- Whether DDS and Agility growth can continue while higher hiring, sales, and marketing costs are incurred, and whether Synodex revenue recovers from its decline.
- Client concentration and project durability: one DDS client represented about 10% of Q3 revenue and 11% of 9M revenue; three clients accounted for 34% of receivables at quarter-end.
- The eventual outcomes and potential financial exposure from the Indian tax disputes and Philippine judgment, including whether recorded receivables or liabilities require adjustment.
- Cash availability and funding plans, particularly the foreign-held cash, planned capital spending, and the absence of bank facilities or credit lines.
- Whether working-capital cash sources and operating cash flow remain sustainable as the company scales, and the effect of stock compensation and option exercises on share dilution.