Innodata Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Innodata provides data transformation and related technology services through Digital Data Solutions (DDS), Agility PR Solutions, and Synodex. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $14.27 | $15.30 | $28.39 | $30.25 |
| Net loss attributable to Innodata | $(0.47) | $(0.17) | $(0.73) | $(1.90) |
| Loss per share, diluted | $(0.02) | $(0.01) | $(0.03) | $(0.07) |
| Adjusted EBITDA, non-GAAP | $1.65 | $0.96 | $2.98 | $0.79 |
- Operating costs and margins: Direct operating costs were $9.93 million in Q2 and $19.82 million for the first half, or 69% and 70% of revenue, respectively, versus 74% and 76% in the comparable 2017 periods. Selling and administrative expense was $3.67 million in Q2 and $7.58 million for the first half, equal to 26% and 27% of revenue, versus 27% and 29%. The filing attributes cost reductions primarily to headcount actions begun in the second half of 2017.
- Cash flow: First-half operating cash flow was $2.98 million, investing cash outflow was $1.26 million, and financing cash outflow was $1.37 million. Cash increased $0.30 million to $11.71 million. Capital expenditures were $1.26 million; management anticipated $1.0–$2.0 million of capital expenditures over the next 12 months.
- Balance sheet: Cash was $11.71 million; current assets $25.01 million; current liabilities $15.52 million; working capital $9.50 million. Total assets were $45.59 million and stockholders’ equity $29.58 million. Long-term obligations, including current maturities, totaled $5.26 million; components included capital leases, lease-related obligations, software-license obligations, and accrued pension liability. The company reported no bank facilities or lines of credit.
Material changes versus the prior comparable period
- Revenue declined 7% in Q2 and 6% for the first half. DDS revenue fell about 10% and 11%, respectively, primarily because a large project ended and other client volumes fluctuated. Synodex revenue increased 11% in Q2 and 25% for the first half; Agility increased 4% in Q2 and was slightly higher for the first half.
- First-half net loss narrowed to $0.73 million from $1.90 million, while Q2 net loss attributable to Innodata increased to $0.47 million from $0.17 million. Q2 included a $0.68 million goodwill impairment and a $0.45 million tax provision.
- First-half adjusted EBITDA rose to $2.98 million from $0.79 million. Agility remained loss-making: its first-half adjusted EBITDA loss was $0.06 million, compared with $0.02 million in 2017. Synodex improved to positive $0.13 million from a loss of $0.72 million.
- Goodwill fell from $2.83 million at year-end 2017 to $2.11 million at June 30. The company recorded a full $0.68 million impairment of DDS goodwill after a continuing share-price decline prompted an interim impairment test.
Outlook, risks, contingencies, and unusual items
- Management said existing cash and internally generated funds should meet financial needs at least through August 2019. This is subject to risks including operating losses, capital spending, acquisitions, or adverse legal outcomes; the company has no credit lines.
- No specific revenue or earnings guidance was provided. Management noted that projects may end, be reduced, delayed, or canceled; DDS relies on project-based work and a limited number of clients. Two DDS clients generated approximately 31% of revenue in both Q2 and the first half of 2018.
- A Philippines labor judgment against a subsidiary and purportedly Innodata was recalculated at approximately $6.2 million, plus interest (12% annually through June 30, 2013 and 6% thereafter). A U.S. preliminary injunction preventing 97 former employees from pursuing enforcement against Innodata remained in force after the U.S. court administratively closed the action in June 2018. The company said a substantial recovery could materially affect it. Separately, management estimated other reasonably possible legal losses of approximately $0.35 million beyond recorded amounts.
- Indian tax matters include a disputed service-tax classification claim concerning approximately $70 million of subsidiary revenue from July 2012 through November 2016. If the tax authority prevails, the stated applicable rates are 12.36%–15%; the filing does not provide a clear estimate of the resulting liability. The company also reported Indian tax assessments and service-tax refund disputes, including about $1.0 million of service-tax credits recorded as a receivable.
- Foreign exchange is a risk given international operations and non-U.S.-dollar revenue and costs. Forward-contract notional amounts were $6.0 million at June 30, down from $15.9 million at year-end; the contracts had a $0.25 million fair-value liability.
- Management expects adoption of the lease accounting standard to increase reported assets and liabilities, potentially significantly. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether DDS can replace completed projects and reduce customer concentration as revenue declines.
- Cash generation, liquidity through the stated August 2019 horizon, and upcoming capital and contractual commitments.
- The status and potential financial exposure of the Philippines labor judgment and Indian tax/service-tax disputes.
- Whether the DDS goodwill impairment signals further impairment risk, and whether Agility can improve profitability.
- Customer receivable concentration and collection risk: 41% of accounts receivable was due from three clients at June 30, 2018.
- The assumptions and exclusions in adjusted EBITDA, a non-GAAP measure, and the company’s actual performance relative to any subsequent outlook.