Innodata Inc. — Q3 2017 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2017. Innodata provides digital data services through Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $15.0 | $16.1 | $45.3 | $47.4 |
| Net loss attributable to Innodata | $(1.1) | $(2.8) | $(3.0) | $(4.5) |
| Loss per share, basic and diluted | $(0.04) | $(0.11) | $(0.11) | $(0.18) |
| Adjusted EBITDA | $0.2 | $(0.4) | $1.0 | $0.3 |
- Q3 direct operating costs were $11.5 million, or 77% of revenue, and selling and administrative expense was $4.4 million, or 29% of revenue. Nine-month figures were $34.6 million (76% of revenue) and $13.1 million (29%), respectively.
- For the nine months, operating cash flow was $1.2 million, versus cash used of $1.1 million in 2016. Investing used $2.9 million, chiefly for office relocation and technology capital expenditures; financing used $0.1 million.
- Cash was $12.5 million at September 30, 2017, down from $14.2 million at year-end 2016; working capital was $11.2 million, down from $14.4 million. Current assets were $25.8 million and current liabilities $14.7 million.
- Long-term obligations totaled $6.9 million, including $2.1 million current and $4.7 million non-current. The company reported no bank facilities or lines of credit.
- Total assets were $48.9 million and stockholders’ equity was $32.7 million at quarter-end.
Changes versus comparable periods
- Q3 revenue declined 7% year over year. DDS revenue fell 4% on lower client volumes; MIS fell 27%; IADS rose 16% with additional Synodex volume.
- Nine-month revenue declined 4%. DDS fell 11%, including a $3.1 million decline from a key e-book client and lower volumes from other clients. MIS grew 31%, primarily reflecting the 2016 Agility acquisition; IADS grew 10%.
- Losses narrowed and Adjusted EBITDA improved in both comparisons. Lower operating and administrative costs contributed; the 2016 comparative period also included a $1.0 million charge tied to amended MediaMiser acquisition consideration.
- Nine-month capital expenditures increased to $2.9 million from $2.1 million. Cash declined by $1.7 million in the first nine months of 2017, compared with a $7.6 million decline in 2016.
Outlook, risks, and unusual items
- Management said existing cash and internally generated funds were expected to cover financial needs for the next 12 months, while warning that continued cash reductions could adversely affect the company. Planned near-term investment is $0.1–$0.4 million per quarter in IADS and $0.4–$0.8 million per quarter in MIS; anticipated capital expenditures over the next 12 months are $2–$3 million.
- IADS has incurred losses since inception. MIS reported a $0.9 million Q3 loss, with revenue down year over year. Management cited ongoing client-volume, project replacement, client concentration, competition, acquisition integration, wage inflation, and technology risks.
- Two DDS clients represented approximately 30% of Q3 revenue and 29% of nine-month revenue. Foreign clients generated about half of nine-month revenue. Foreign exchange exposure is partly hedged with forward contracts; their notional amount was $20 million.
- The U.S. entity deferred $4.7 million in payments to Asian subsidiaries during 2017. Management projected a further cash shortfall of approximately $7.0 million through 2018, with tax effects from deemed dividends offset against U.S. net operating loss carryforwards.
- A Philippine labor judgment seeks approximately $7.0 million plus accrued interest. Management believes recovery against the company is unlikely, but a substantial recovery could materially affect the company. Other legal matters could have adverse effects; management estimated reasonably possible losses beyond recorded amounts of approximately $0.3 million in aggregate.
- Tax matters include Indian tax assessments and a service-tax dispute that, if resolved adversely, could subject the Indian subsidiary’s revenue to an approximately 14.5% service tax. The company also reported $1.3 million of unrecognized tax benefits at quarter-end.
- No specific revenue or earnings guidance was provided. The company planned to adopt the new revenue standard in January 2018 using the modified retrospective method and preliminarily expected no material impact; lease accounting adoption may materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether DDS can stabilize volumes and replace reduced work from the key e-book client, and whether MIS revenue and margins recover.
- Cash generation relative to planned investment, capital expenditures, contractual obligations, and the projected $7.0 million U.S. cash deficit.
- Progress and potential exposure in the Philippine litigation, Indian tax assessments, and Indian service-tax dispute.
- Client concentration, foreign-exchange movements, and the effectiveness of hedging arrangements.
- Whether the company’s stated 12-month liquidity outlook remains supportable given the absence of bank credit facilities.