Innodata(INOD) - 2023 Q1 - Quarterly Report

Part I – Financial Information Financial Statements The unaudited condensed consolidated financial statements for the quarter ended March 31, 2023, show a decrease in total revenues and a reduced net loss compared to the same period in 2022, with a positive turn in cash flow from operations Condensed Consolidated Balance Sheets Total assets slightly increased to $49.1 million as of March 31, 2023, while total stockholders' equity saw a minor decrease to $18.4 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $10,330 | $9,792 | | Total current assets | $23,493 | $23,685 | | Total assets | $49,135 | $48,042 | | Liabilities & Equity | | | | Total current liabilities | $21,170 | $20,816 | | Total liabilities | $31,441 | $29,996 | | Total stockholders' equity | $18,418 | $18,773 | Condensed Consolidated Statements of Operations and Comprehensive Loss For Q1 2023, revenues decreased to $18.8 million, but the net loss improved to $2.1 million, driven by a significant reduction in selling and administrative expenses Q1 2023 vs. Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenues | $18,839 | $21,192 | | Direct operating costs | $12,874 | $13,414 | | Selling and administrative expenses | $7,797 | $10,190 | | Loss before income taxes | ($1,895) | ($2,415) | | Net loss attributable to Innodata | ($2,116) | ($2,815) | | Basic and Diluted EPS | ($0.08) | ($0.10) | Condensed Consolidated Statements of Cash Flows Net cash from operating activities was a positive $1.8 million in Q1 2023, a significant improvement from a $1.5 million use of cash in the prior-year period Q1 2023 vs. Q1 2022 Cash Flows (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,784 | ($1,496) | | Net cash used in investing activities | ($1,707) | ($1,939) | | Net cash provided by (used in) financing activities | $251 | ($12) | | Net increase (decrease) in cash | $538 | ($3,475) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, segment performance, a tax contingency in India, a legal contingency in the Philippines, and a new $10.0 million credit facility - The company's operations are classified into three reporting segments: Digital Data Solutions (DDS), Synodex, and Agility[80] - The company is contesting a tax assessment in India that could subject approximately $57.0 million in revenue from July 2012 to November 2016 to service tax, for which no liability has been recorded[53] - On April 4, 2023, the company entered into a new Credit Agreement with Wells Fargo for a secured revolving line of credit of up to $10.0 million, maturing in April 2026[99] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses an 11% year-over-year revenue decrease to $18.8 million, an improved net loss of $2.1 million due to cost controls, and sufficient liquidity for the next 12 months Business Overview Innodata is a data engineering company focused on high-performing AI, with offerings in AI data preparation, model deployment, and AI-enabled industry platforms - The company's mission is to help companies deliver on the promise of ethical, high-performing AI[108] - Core offerings include AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms[113] - The company added 129 new customers in Q1 2023, a 3% increase over the quarterly average in 2022[125] Results of Operations Q1 2023 revenues fell 11% to $18.8 million, driven by a 20% decline in the DDS segment, but a 24% reduction in S&A expenses improved net loss and Adjusted EBITDA Revenue by Segment - Q1 2023 vs Q1 2022 (in millions) | Segment | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | DDS | $12.7 | $15.9 | -20% | | Synodex | $1.9 | $1.7 | +12% | | Agility | $4.2 | $3.6 | +17% | | Total | $18.8 | $21.2 | -11% | - Selling and administrative expenses decreased by $2.4 million (24%) YoY, primarily due to cost optimization efforts, including lower recruitment, professional fees, and marketing expenses[154] Adjusted EBITDA Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss attributable to Innodata | ($2,116) | ($2,815) | | Adjustments (Taxes, Interest, D&A, etc.) | $2,917 | $1,813 | | Adjusted EBITDA | $801 | ($1,002) | Liquidity and Capital Resources With $10.3 million in cash and a new $10.0 million credit facility, management believes liquidity is sufficient for the next 12 months, with $6.5 million in planned capital expenditures Liquidity Measures (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $10,330 | $9,792 | | Working capital | $2,323 | $2,869 | - A new secured revolving credit facility of up to $10.0 million was established with Wells Fargo on April 4, 2023, enhancing liquidity[178] - The company anticipates capital expenditures of approximately $6.5 million over the next 12 months, primarily for software development and technology upgrades[182] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Disclosure is not applicable for smaller reporting companies[187] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[189] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[190] Part II – Other Information Legal Proceedings The company is contesting a significant judgment in the Philippines against a former subsidiary with a potential payment of approximately $5.9 million plus interest - Information regarding legal proceedings is incorporated by reference from Note 8, Commitments and Contingencies[192] Risk Factors New risks related to the company's Revolving Credit Facility have been added, including variable interest rate exposure and the impact of restrictive covenants - A new risk factor was added concerning the variable interest rate (based on SOFR) of the new Revolving Credit Facility, which could increase borrowing costs[193] - The Revolving Credit Facility contains restrictive covenants, including a fixed charge coverage ratio, which may limit management's discretion and the company's ability to conduct its business[194] Unregistered Sales of Equity Securities and Use of Proceeds No sales of unregistered equity securities or repurchases of equity securities occurred during the first quarter of 2023 - No unregistered sales of equity securities or share repurchases occurred in Q1 2023[195] Exhibits This section lists filed exhibits, including agreements for the new Wells Fargo credit facility and required CEO and CFO certifications - Filed exhibits include the Credit Agreement, Security Agreement, and Guaranty related to the new Wells Fargo credit facility, as well as Sarbanes-Oxley certifications[200]