Innodata office Philippines. HVG IT Park, Mandaue City, Cebu, 2023 Photo by Alfred Robles.

INOD

November 8, 2024 update: 

Hidden Grand Jury ​DOJ and SEC Investigations

​Into Innodata Revealed

​

• Buried in INOD’s just-released Q3 2024 report is a disclosure that it has been subpoenaed by a grand jury in a DOJ investigation. The subpoena was received August 7, 2024, the day before INOD released Q2 earnings, at which time the investigation was undisclosed.
• We believe that the concerns go beyond the February 15, 2024 Wolfpack report that brought on a class-action suit and an SEC investigation. The involvement of DOJ suggests potentially criminal conduct and validates our September allegations of potential fraud.
• INOD did not disclose this information for more than seven months and made no mention of the investigations on the earnings call last night. Given that sort of conduct, can investors trust INOD? We believe, at best, INOD numbers cannot be relied upon, and, at worst, you can’t rely on anything they say. The first letter from the SEC (Division of Enforcement) was received on March 25, 2024, and a subsequent subpoena from the SEC arrived on September 23, 2024.
• When a company fails to disclose investigations multiple times and puts out numbers that appear good, investors have to question why the information was hidden.
• The SEC is currently focused on curbing “AI washing,” and INOD looks very guilty of this.

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"Mag 7" agreements look far smaller than claimed, revenue

​and expenses exaggerated

A supposed META commitment for >$100 million could be overstated by 90%
​

September 20, 2024

J Capital Research ("J Cap")  is a stock-research company. ​J Cap  has analyzed the U.S.-listed company Innodata Inc. (“INOD”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We may benefit from a decline in the price of INOD shares, and, for this reason, there might be a conflict of interest.

• INOD’s stock is up 179% since April this year, when the company announced and later provided staged updates on its big “Mag 7” contract.
• Our forensic research unveils INOD’s marquee agreement, which formers say is with Meta Platforms, might be 90% overstated.
• We think that INOD has consistently misled investors on over $100 mln in spending “commitments” from META. We spoke to formers who said it was “very unlikely that INOD had this contract,” and a META executive who oversees outsourcing for AI said he hasn’t even heard of Innodata. META publicly has said nothing about INOD.
• The bull case for INOD is that the company can repeat the success it has had with META across other Mag 7 accounts. But how do you replicate business that may not exist?
• Local filings for INOD foreign subsidiaries don’t match SEC disclosures. Revenue may be overstated by around 25%
• INOD’s finance positions are a revolving door. A former finance executive suggested that the currently acting CFO is in place simply to sign off on the statements. He termed INOD’s closed culture a “hermit kingdom” and said INOD does not respond well to internal scrutiny of financials.​
• Based on headcount and average compensation in Asian financials, we estimate a minimum of $16 mln in inflated costs—at least 19%. 

• We do not think the reported $50 mln in “unremitted foreign earnings” can be real. Disclosures indicate low to negative profit overseas and near-zero taxes on the profit. We wonder whether INOD is ping-ponging money between inter-company accounts.
• Formers told us it’s unlikely margins will increase, since clients pay on a cost-plus basis and may drop at will.
• With 27% of group revenue from a single customer in Q2 2024, INOD can miss projections with no notice. This happened in Q1 2023, after the Twitter account dropped.
• INOD employs an Indian audit firm even though around 70% of revenue now comes from U.S.-based customers. 
  o Formers told us this was to save $225,000 a year in fees—despite company reports of $31 mln in annual selling and administration costs. Before BDO India, INOD used a low-tier auditor called CohnReznick. 
  o The IPO was underwritten-albeit a long time ago-by B. Riley, a troubled firm now under federal investigation for manipulating asset values. 
• Top directors have an unbroken record of failure at earlier companies characterized by 90%+ declines in the market value of companies the directors have overseen. 
• Interviews indicate that a 2024 boost in revenue could have been engineered to help management exit.
• Investors think INOD is recovering from accusations of “AI washing.” We believe it’s much worse: INOD appears to claim revenue that it does not have. As a former executive said to us, it’s just “people in Asia banging away at keyboards.”

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