Innodata Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated figures; dollar amounts are in millions unless otherwise noted. Innodata provides data engineering services and platforms through its Digital Data Solutions (DDS), Synodex and Agility segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $14.6 | $13.8 | $42.9 | $41.2 |
| Net income (loss) attributable to Innodata | $0.2 | $(0.6) | $(0.6) | $(1.7) |
| Basic/diluted earnings (loss) per share | $0.01 | $(0.02) | $(0.02) | $(0.07) |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $5.7 | $4.9 |
- Q3 revenue grew about 5% year over year; nine-month revenue grew about 4%. Q3 segment revenue was DDS $10.5 million, Synodex $1.2 million and Agility $2.8 million.
- Q3 direct operating costs were 67% of revenue, versus 65% a year earlier; selling and administrative expenses were 32%, versus 36%. Q3 net margin was approximately 1.4%, compared with a net loss margin of approximately 4.1% in Q3 2019.
- For the first nine months, direct operating costs were 68% of revenue in both years; selling and administrative expenses were 32%, versus 34%. Net loss margin improved to approximately 1.3% from 4.1%.
- Q3 pretax income was $143,000 and included a $70,000 income-tax benefit. Nine-month pretax loss was $39,000, alongside a $504,000 tax provision; the filing attributes the disproportionate tax impact to foreign taxes, losses and valuation allowances, among other items.
Liquidity, cash flow and obligations
- At September 30, cash and cash equivalents were $15.3 million, current assets $28.3 million, current liabilities $19.2 million and working capital $9.0 million. Cash increased from $10.9 million at December 31, 2019.
- Nine-month operating cash flow was $5.7 million; investing cash use was $1.1 million, including capital expenditures of $1.1 million. Financing cash use was $53,000. Management cited working-capital sources, including higher accrued payroll and lower receivables, as contributors to operating cash flow. DSO was 59 days, versus 66 days at year-end 2019.
- Long-term obligations totaled $7.4 million, including $5.2 million in accrued pension liability, $572,000 under a settlement agreement, $269,000 in capital lease obligations, $734,000 for software licenses and a $580,000 PPP loan. The balance sheet separately reports $7.7 million of operating lease liabilities.
- The company has no bank facilities or lines of credit. It received approximately $580,000 under the Paycheck Protection Program; forgiveness depends on meeting program conditions. Management said cash and internally generated funds should cover financial needs for the next 12 months.
Changes, outlook and risks
- Management said revenue increased across all segments. Synodex growth reflected higher volumes from an existing client; Agility growth reflected more subscriptions. For the nine months, DDS revenue rose only 1%, while its segment net loss increased to $0.8 million from $0.1 million. Agility’s nine-month net loss narrowed to $0.3 million from $1.6 million; Synodex reported $0.5 million net income versus approximately breakeven.
- Management reported no material adverse impact from COVID-19 on results through Q3, but said future effects cannot be reliably estimated. Potential impacts include customers reducing, delaying or cancelling projects, especially at-will DDS work. If revenue falls significantly or for a prolonged period, the company may cut capital spending, defer investments and reduce costs; it said it likely has no other liquidity source to support operations without significant business detriment.
- Expected capital expenditures over the next 12 months are approximately $2.0–$2.3 million, funded from operating cash. The company cited wage inflation, project replacement and start-up variability, customer concentration, foreign-exchange exposure and fourth-quarter holiday-related overtime as risks to performance and margins.
- COVID-19-related impairment testing identified no impairment of goodwill or other long-lived assets as of September 30, 2020. No specific revenue or earnings guidance was provided.
- Accounting correction: The company identified immaterial prior-period errors in capital lease accounting. It revised comparative 2019 figures in this filing; the corrections increased December 2019 liabilities by $528,000, reduced retained earnings by $777,000 and reduced total assets by $249,000. Management concluded restatement was not required, but said prior interim and annual statements would be revised in future filings. The errors would have been material if recorded entirely in Q3 2020.
- Controls: Disclosure controls were deemed ineffective, and the company identified a material weakness in controls over lease accounting. It plans additional quarterly review procedures.
- Contingencies: An Indian service-tax dispute concerns the classification of services provided from July 2012 through November 2016; approximately $66 million of subsidiary revenue during that period could be subject to tax of 12.36%–15%, plus interest and penalties if the authorities prevail. No liability was recorded based on counsel’s assessment. Separately, about $1.0 million of Indian service-tax credits are recorded as a receivable and refunds may be delayed. A Philippine court judgment potentially involves approximately $6.4 million plus interest; a U.S. preliminary injunction remains in effect. Other adverse legal outcomes estimated at approximately $300,000 beyond recorded amounts are reasonably possible.
Important facts for investors to verify
- Whether Q4 and later-period results sustain revenue growth and improve DDS costs and profitability.
- Customer concentration and project renewal or cancellation exposure: two DDS clients represented about 23% of Q3 revenue; one DDS client represented about 14% of nine-month revenue.
- Cash generation, planned capital expenditures, access to liquidity and the status of PPP loan forgiveness.
- Progress in remediating the lease-accounting material weakness and revisions to previously filed financial statements.
- Developments in the Indian tax matters and Philippine judgment, including possible financial exposure and timing.
- Effects of COVID-19, foreign-exchange movements, wage inflation and the company’s ability to maintain margins.