Company Quick10K Filing
Quick10K
Innodata
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.25 26 $32
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-07 Earnings, Exhibits
8-K 2019-08-02 Earnings, Officers, Exhibits
8-K 2019-06-06 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-04-17 Enter Agreement, Officers, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-02-01 Officers
8-K 2019-02-01 Enter Agreement, Shareholder Rights, Shareholder Rights, Other Events, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-08-28 Enter Agreement, Officers, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-07 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-04-16 Officers, Exhibits
8-K 2018-03-14 Officers
8-K 2018-03-08 Earnings, Exhibits
8-K 2018-02-09 Officers
8-K 2018-01-17 Enter Agreement, Officers, Exhibits
8-K 2018-01-04 Officers
8-K 2017-12-06 Other Events
LDOS Leidos 12,157
FIVN Five9 3,798
AGYS Agilysys 630
CARB Carbonite 432
CPSI Computer Programs & Systems 305
PCYG Park City Group 111
VERI Veritone 90
STRM Streamline Health Solutions 32
NETE Net Element 20
PAGS PagSeguro 0
INOD 2019-09-30
Part I. Financial Information
Item 1. Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tm19195141d1_ex31-1.htm
EX-31.2 tm19195141d1_ex31-2.htm
EX-32.1 tm19195141d1_ex32-1.htm
EX-32.2 tm19195141d1_ex32-2.htm

Innodata Earnings 2019-09-30

INOD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tm19195141d1_10q.htm FORM 10-Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the quarterly period ended September 30, 2019
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________

 

Commission file number: 001-35774

 

INNODATA INC.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3475943
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
55 Challenger Road   07660
Ridgefield Park, New Jersey   (Zip Code)
(Address of principal executive offices)    

 

(201) 371-8000

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock INOD NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company x
Emerging growth company ¨      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of October 31, 2019 was 25,527,679.

 

 

  

 

 

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended September 30, 2019

 

INDEX

 

    Page No.
  Part I – Financial Information  
     
Item 1. Financial Statements  
  Condensed Consolidated Financial Statements (Unaudited):  
  Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 1
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2019 and 2018 2
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2019 and 2018 3
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 4
  Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 5
  Notes to Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
     
  Part II – Other Information
     
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
     
Item 6. Exhibits 49
     
Signatures  

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)    
ASSETS    
Current assets:          
Cash and cash equivalents  $13,188   $10,869 
Accounts receivable, net of allowance for doubtful accounts of $800 and $1,000, respectively   8,297    10,626 
Prepaid expenses and other current assets   4,829    5,778 
Total current assets   26,314    27,273 
Property and equipment, net   7,074    6,813 
Right-of-use asset   7,271    - 
Other assets   2,075    2,436 
Deferred income taxes   1,759    1,204 
Intangibles, net   5,597    6,275 
Goodwill   2,062    2,050 
Total assets  $52,152   $46,051 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $2,111   $1,834 
Accrued expenses   2,983    2,903 
Accrued salaries, wages and related benefits   4,479    4,494 
Income and other taxes   4,215    3,532 
Long-term obligations - current portion   699    1,529 
Operating lease liability - current portion   1,149    - 
Total current liabilities   15,636    14,292 
           
Deferred income taxes   528    571 
Long-term obligations, net of current portion   3,086    4,062 
Operating lease liability, net of current portion   6,949    - 
           
Non-controlling interests   (3,450)   (3,440)
Commitments and contingencies          
           
STOCKHOLDERS’ EQUITY:          
Series preferred stock; 5,000,000 shares authorized, none outstanding   -    - 
Common stock, $.01 par value; 75,000,000 shares authorized; 27,633,000 shares issued and 25,918,000 outstanding at September 30, 2019; 27,558,000 shares issued and 25,877,000 outstanding at December 31, 2018   275    275 
Additional paid-in capital   28,203    27,579 
Retained earnings   5,689    7,349 
Accumulated other comprehensive loss   (98)   (15)
    34,069    35,188 
Less: Treasury stock, 1,715,000 shares at September 30, 2019 and 1,681,000 shares at December 31, 2018 at cost   (4,666)   (4,622)
Total stockholders’ equity   29,403    30,566 
Total liabilities and stockholders’ equity  $52,152   $46,051 

 

See notes to condensed consolidated financial statements.

 

1

 

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

 

   Three Months Ended 
   September 30, 
   2019   2018 
Revenues  $13,846   $14,049 
Operating costs and expenses:          
Direct operating costs   9,019    9,237 
Selling and administrative expenses   4,951    3,640 
Interest expense, net   13    10 
    13,983    12,887 
           
Income (loss) before provision for income taxes   (137)   1,162 
           
Provision for income taxes   421    469 
           
Consolidated income (loss)   (558)   693 
           
Income (loss) attributable to non-controlling interests   (3)   5 
           
Income (loss) attributable to Innodata Inc. and Subsidiaries  $(555)  $688 
           
Income (loss) per share attributable to Innodata Inc. and Subsidiaries:          
Basic and diluted  $(0.02)  $0.03 
           
Weighted average shares outstanding:          
Basic   25,856    25,877 
Diluted   25,856    26,093 
           
Comprehensive income (loss):          
Consolidated income (loss)  $(558)  $693 
Pension liability adjustments, net of taxes   (41)   (57)
Change in fair value of derivatives, net of taxes   -    103 
Foreign currency translation adjustment   (252)   114 
Other comprehensive income (loss)   (293)   160 
Total comprehensive income (loss)   (851)   853 
Comprehensive income (loss) attributed to non-controlling interest   (3)   5 
Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries  $(848)  $848 

 

See notes to condensed consolidated financial statements.

 

2

 

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

 

   Nine Months Ended 
   September 30, 
   2019   2018 
Revenues  $41,179   $42,439 
Operating costs and expenses:          
Direct operating costs   28,154    29,060 
Selling and administrative expenses   14,166    11,223 
Goodwill impairment   -    675 
Interest expense, net   36    24 
    42,356    40,982 
           
Income (loss) before provision for income taxes   (1,177)   1,457 
           
Provision for income taxes   493    1,502 
           
Consolidated net loss   (1,670)   (45)
           
Income (loss) attributable to non-controlling interests   (10)   1 
           
Net loss attributable to Innodata Inc. and Subsidiaries  $(1,660)  $(46)
           
Loss per share attributable to Innodata Inc. and Subsidiaries:          
Basic and diluted  $(0.06)  $(0.00)
           
Weighted average shares outstanding:          
Basic and diluted   25,870    25,877 
           
Comprehensive loss:          
Consolidated net loss  $(1,670)  $(45)
Pension liability adjustment, net of taxes   (118)   (174)
Change in fair value of derivatives, net of taxes   -    (489)
Foreign currency translation adjustment   35    (251)
   Other comprehensive loss   (83)   (914)
Total comprehensive loss   (1,753)   (959)
Comprehensive income (loss) attributed to non-controlling interest   (10)   1 
Comprehensive loss attributable to Innodata Inc. and Subsidiaries  $(1,743)  $(960)

 

See notes to condensed consolidated financial statements.

 

3

 

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

 

   Nine Months Ended 
   September 30, 
   2019   2018 
Cash flows from operating activities:          
Consolidated net loss  $(1,670)  $(45)
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:          
Depreciation and amortization   2,248    2,558 
Goodwill impairment   -    675 
Stock-based compensation   624    539 
Deferred income taxes   (607)   285 
Pension cost   274    (15)
Changes in operating assets and liabilities:          
Accounts receivable   2,509    1,053 
Prepaid expenses and other current assets   752    (1,960)
Other assets   367    656 
Accounts payable and accrued expenses   (208)   (902)
Accrued salaries, wages and related benefits   (29)   (757)
Income and other taxes   669    1,919 
Net cash provided by operating activities   4,929    4,006 
           
Cash flows from investing activities:          
Capital expenditures   (1,393)   (1,700)
Net cash used in investing activities   (1,393)   (1,700)
           
Cash flows from financing activities:          
Payment of long-term obligations   (881)   (1,792)
Purchase of treasury stock   (44)   - 
Net cash used in financing activities   (925)   (1,792)
           
Effect of exchange rate changes on cash and cash equivalents   (292)   (31)
           
Net increase in cash and cash equivalents   2,319    483 
           
Cash and cash equivalents, beginning of period   10,869    11,407 
           
Cash and cash equivalents, end of period  $13,188   $11,890 
           
Supplemental disclosures of cash flow information:          
Cash paid for income taxes  $726   $426 
Cash paid for operating leases  $1,673   $1,951 

 

See notes to condensed consolidated financial statements.

 

4

 

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

(In thousands)

 

    Common Stock      Additional Paid-in      Retained      Accumulated Other Comprehensive     Treasury Stock     Total
Stockholders’
    Shares     Amount     Capital     Earnings     Income (Loss)     Shares     Amount     Equity  
January 1, 2018     27,558     $ 275     $ 27,275     $ 7,345     $ 846       1,681     $ (4,622 )   $ 31,119  
Net loss attributable to Innodata Inc. and Subsidiaries     -       -       -       (268 )                -       -       -       (268 )
Stock-based compensation     -       -       140       -                 -       -       -       140  
Pension liability adjustments, net of taxes     -       -       -       -       (59 )     -       -       (59 )
Foreign currency translation adjustment     -       -       -       -       (28 )     -       -       (28 )
Change in fair value of derivatives, net of taxes     -       -       -       -       (531 )     -       -       (531 )
March 31, 2018     27,558       275       27,415       7,077       228       1,681       (4,622 )     30,373  
Net loss attributable to Innodata Inc. and Subsidiaries     -       -       -       (466 )     -       -       -       (466 )
Stock-based compensation     -       -       131       -       -       -       -       131  
Pension liability adjustments, net of taxes     -       -       -       -       (58 )     -       -       (58 )
Foreign currency translation adjustment     -       -       -       -       (337 )     -       -       (337 )
Change in fair value of derivatives, net of taxes     -       -       -       -       (61 )     -       -       (61 )
June 30, 2018     27,558       275       27,546       6,611       (228 )     1,681       (4,622 )     29,582  
Net income attributable to Innodata Inc. and Subsidiaries     -       -       -       688       -       -       -       688  
Stock-based compensation     -       -       268       -       -       -       -       268  
Acquisition of non-controlling interest     -       -       (492 )     -       -       -       -       (492 )
Pension liability adjustments, net of taxes     -       -       -       -       (57 )     -       -       (57 )
Foreign currency translation adjustment, net of taxes     -       -       -       -       114       -       -       114  
Change in fair value of derivatives, net of taxes     -       -       -       -       103       -       -       103  
September 30, 2018     27,558     $ 275     $ 27,322     $ 7,299     $ (68 )     1,681     $ (4,622 )   $ 30,206  
                                                                 
January 1, 2019     27,558     $ 275     $ 27,579     $ 7,349     $ (15 )     1,681     $ (4,622 )   $ 30,566  
Net loss attributable to Innodata Inc. and Subsidiaries     -       -       -       (452 )     -       -       -       (452 )
Issuance of restricted stock     75       -       5       -       -       -       -       5  
Stock-based compensation     -       -       123       -       -       -       -       123  
Pension liability adjustments, net of taxes     -       -       -       -       (36 )     -       -       (36 )
Foreign currency translation adjustment     -       -       -       -       264       -       -       264  
March 31, 2019     27,633       275       27,707       6,897       213       1,681       (4,622 )     30,470  
Net loss attributable to Innodata Inc. and Subsidiaries     -       -       -       (653 )     -       -       -       (653 )
Issuance of restricted stock     -       -       9       -       -       -       -       9  
Stock-based compensation     -       -       136       -       -       -       -       136  
Pension liability adjustments, net of taxes     -       -       -       -       (41 )     -       -       (41 )
Foreign currency translation adjustment     -       -       -       -       23       -       -       23  
June 30, 2019     27,633       275       27,852       6,244       195       1,681       (4,622 )     29,944  
Net loss attributable to Innodata Inc. and Subsidiaries     -       -       -       (555 )     -       -       -       (555 )
Issuance of restricted stock     -       -       9       -       -       -       -       9  
Purchase of treasury stock     -       -       -       -       -       34       (44 )     (44 )
Stock-based compensation     -       -       342       -       -       -       -       342  
Pension liability adjustments, net of taxes     -       -       -       -       (41 )     -       -       (41 )
Foreign currency translation adjustment     -       -       -       -       (252 )     -       -       (252 )
September 30, 2019     27,633     $ 275     $ 28,203     $ 5,689     $ (98 )     1,715     $ (4,666 )   $ 29,403  

  

See notes to condensed consolidated financial statements.

 

5

  

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

1.Description of Business and Summary of Significant Accounting Policies

 

Description of Business - Innodata Inc. (including its subsidiaries, “we”, the “Company”, or “Innodata”) is a global services and technology company. We combine human expertise with advanced deep learning technologies to power leading information products and enterprise AI (artificial intelligence)/digital transformation.

 

The Company, founded in 1988 and headquartered in northern New Jersey, features a 3,000-strong global delivery and technology team spanning ten offices globally and a research and technology incubator, Innodata Labs, which focuses on applied machine learning and emerging artificial intelligence. The Company is organized and operates in three different operating segments: the Digital Data Solutions (DDS) segment, the Synodex segment, and the Agility segment.

 

The Company’s core services are (i) data acquisition, transformation, and enrichment at scale; (ii) digital operations management and analytics; and (iii) applications development. We report our core business as the DDS segment.

 

The Company also has venture businesses that leverage its core capabilities to provide specific industry solutions. The Company’s Synodex venture business delivers a software-as-a-service (SaaS) platform and managed services for digital transformation of medical data. The Company’s Agility PR Solutions (Agility) venture business delivers a SaaS platform and managed service for delivering news, information, and content to targeted journalists and influencers, as well as monitoring and analyzing coverage across traditional and social media sources. Each venture business is reported as a separate segment.

 

The Company’s DDS segment specializes in combining artificial neural networks and human expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to a digital product. For enterprises, “useable” means that the content can drive digital process transformation and artificial intelligence (AI). The Company works with all classes of data, including sensitive and protected data.

 

The Company also develops digital products for business information companies and digital systems which replace legacy systems and processes.

 

In 2019, the Company continued to execute a strategy we initiated in 2017 focused on technology differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner, more cost-effective operations.

 

The Company’s Synodex segment designs and develops new capabilities to enable clients in the insurance and healthcare sectors to transform medical records into useable digital data and to apply technologies to the digital data to augment decision support.

 

The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support services.

 

6

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The Company’s Synodex segment operates through the Company’s Innodata Synodex, LLC subsidiary. As of September 30, 2019, Innodata Inc. owned 92.5% of Innodata Synodex, LLC.

 

The Company’s Agility segment provides public relations (PR) tools and related professional services that enable PR and communications professionals to discover influencers, amplify messages, monitor coverage, and measure the impact of campaigns.

 

Agility’s software-as-a-service (SaaS) tools include:

 

·An influencer targeting solution to help PR professionals identify influencers. The Agility media database includes detailed contact information for over 840,000 unique influencers globally including journalists, outlets, and bloggers. Live social media streams to allow users to research influencers by tracking activity and keywords across multiple social media channels.

·An outreach and content amplification solution enabling PR professionals to distribute news, information, and content to targeted influencers.

·Integrated newswire services.

·A media monitoring solution to help PR professionals track what is being said about their brand, industry or competitors and track engagement. Users can monitor and report on coverage across print, broadcast, online and social media sources, including AI-powered image monitoring. The self-serve monitoring tool enables users to create alerts and compile and share coverage briefings and clipbooks.

·A media analysis solution to help PR professionals analyze coverage, determine PR campaign reach and effectiveness, and create and distribute reports.

 

Agility’s professional services include:

 

·Media monitoring and PR measurement services delivered by a team of media analysts who use the Company’s SaaS monitoring solution to pull coverage and curate daily news briefs. This powerful media monitoring solution is for clients with complex monitoring or reporting requirements.

·Advanced PR reporting and measurement services including custom reports, PR measurement and social media / influencer analysis.

 

Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility.

 

Basis of Presentation - The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of September 30, 2019, the results of its operations and comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018, cash flows for the nine months ended September 30, 2019 and 2018, and stockholders’ equity for the three and nine months ended September 30, 2019 and 2018. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

 

7

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, included in the Company's Annual Report on Form 10-K. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the consolidated financial statements for the year ended December 31, 2018.

 

Principles of Consolidation - The consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and the Synodex and docGenix limited liability companies that are majority-owned by the Company. The non-controlling interests in the Synodex and docGenix limited liability companies are accounted for in accordance with Financial Accounting Standards Board (FASB) non-controlling interest guidance. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates - In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those related to allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, valuation of stock-based compensation, litigation accruals and estimated accruals for various tax exposures.

 

Revenue Recognition – Commencing January 1, 2018, the Company recognizes revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The Company’s revenue is recognized when control of the promised services is transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services as per the agreement with the customer. In case there are agreements with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. The Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation, if any, and then evaluates how the services are transferred to the customer to determine the timing of revenue recognition.

 

8

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.

 

For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of our Synodex segment revenue is derived from licensing our functional software and providing access to our hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.

 

The Agility segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenues from the reseller agreements are recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the primary obligor in the sales transaction; assume the credit risk; set the price; can select suppliers; and are involved in the execution of the services, including after sales service.

 

Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.

 

The Company considers U.S. GAAP criteria for determining whether to report revenue gross as a principal versus net as an agent.  Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a customer may not pay for the services performed.  If there are circumstances where the above criteria are not met and therefore, we are not the principal in providing services, amounts received from customers are presented net of payments in the condensed consolidated statements of operations and comprehensive loss.

 

Contract acquisition cost, which is included in prepaid expenses and other current assets, for our Agility segment is amortized over the term of a subscription agreement that normally has a duration of 12 months or less. The Company reviews these costs on a periodic basis to determine the need to adjust the carrying values for pre-terminated contracts.

 

Foreign Currency - The functional currency of the Company’s production operations located in the Philippines, India, Sri Lanka and Israel is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees or Israeli shekels are translated to U.S. dollars at rates using the average rates in effect on the transaction dates.

 

9

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are prepared in these respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in the consolidated financial statements. Income, expenses and cash flows are translated at weighted average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulated other comprehensive loss in stockholders' equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

To the extent that the currencies of the Company’s production facilities located in the Philippines, India, Sri Lanka and Israel fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain client projects. In addition, the Company is exposed to the risk of foreign currency fluctuation on the non-U.S. dollar denominated revenues, and on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in local currency.

 

Income Taxes - Deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. While the Company considers future taxable income in assessing the need for the valuation allowance, in the event that the Company determines that it would be able to realize the deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company determines that it would not be able to realize the deferred tax assets in the future considering future taxable income, an adjustment to the deferred tax assets would decrease income in the period such determination was made. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States.

 

In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. and Canadian deferred tax assets will not be realizable. As the expectation of future taxable income resulting from the Synodex and Agility segments cannot be predicted with certainty, the Company maintains a valuation allowance against all the U.S. and Canadian deferred tax assets.

 

10

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions in income tax expense in the consolidated statements of operations and comprehensive loss.

 

Leases - In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as modified (ASU 2016-02), which replaced existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. The Company adopted ASU 2016-02 effective January 1, 2019. Upon adoption, the Company recognized a right-of-use asset and corresponding lease liability. Refer to Note 6, Operating Leases.

 

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

 

a.there is a change in contractual terms, other than a renewal or extension of the arrangement;
   
b.a renewal option is exercised, or extension granted, unless the term of the renewal or extension was initially included in the lease term;
   
c.there is a change in the determination of whether fulfillment is dependent on a specified asset; or
   
d.there is a substantial change to the asset.

 

Whenever a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

 

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. All of the Company’s leases are classified as operating leases. Operating lease payments are recognized as an operating expense on a straight-line basis over the lease term.

 

Deferred Revenue - represents payments received from clients in advance of providing services and amounts deferred if conditions for revenue recognition have not been met. Included in accrued expenses on the accompanying consolidated balance sheets as of September 30, 2019 and December 31, 2018 is deferred revenue amounting to $1.0 million and $1.1 million, respectively.

 

11

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

Recent Accounting Pronouncements

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted this standard in the first quarter of 2019, and it did not have a material impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities; early adoption is permitted. The Company is currently evaluating the early adoption of ASU 2018-14 but does not expect it to have a material impact on the Company’s consolidated financial statements.

 

2.Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2019 and 2018 were as follows (in thousands):

 

Balance as of January 1, 2019  $2,050 
Foreign currency translation adjustment   12 
Balance as of September 30, 2019  $2,062 
      
Balance as of January 1, 2018  $2,832 
Foreign currency translation adjustment   (35)
Goodwill impairment   (675)
Balance as of September 30, 2018  $2,122 

 

As of September 30, 2018, the Company recorded a full goodwill impairment of $675,000 for its DDS segment.

 

The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value. The continued decline in the Company’s stock price was viewed by the Company as a triggering event under ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”, (ASU 2017-04) which required an assessment for possible goodwill impairment as of June 30, 2018. Under the provisions of ASU 2017-04, which the Company opted to early adopt, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value.

 

12

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The Company performed this assessment as of June 30, 2018 and determined that the fair value of the Agility segment exceeded its carrying value, but the fair value of the DDS segment was below its carrying value. As a result, the Company recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit as of June 30, 2018.

 

The Company performed its annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, the Company adhered to the provisions of ASU 2017-04 by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on the Company’s assessment, the Company reached the conclusion that there was no goodwill impairment because the fair value of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the nine months ended September 30, 2019.

 

The fair value measurement of goodwill was classified within Level 3 of the fair value hierarchy because the Company used the income approach, which utilizes significant inputs that are unobservable in the market. The Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit as of the impairment test measurement date.

 

Information regarding the Company’s acquisition-related intangible assets was as follows (in thousands):

 

           Trademarks       Media     
   Developed   Customer   and trade       Contact     
   technology   relationships   names   Patents   Database   Total 
Gross carrying amounts:                              
Balance as of January 1, 2019  $2,999   $2,081   $855   $42   $3,546   $9,523 
Foreign currency translation   51    63    4    1    (36)   83 
Balance as of September 30, 2019  $3,050   $2,144   $859   $43   $3,510   $9,606 

 

   Developed
technology
   Customer
relationships
   Trademarks
and trade
names
   Patents   Media
Contact
Database
   Total 
Gross carrying amounts:                              
Balance as of January 1, 2018  $3,204   $2,264   $884   $46   $3,647   $10,045 
Foreign currency translation   (63)   (53)   (9)   (1)   (42)   (168)
Balance as of September 30, 2018  $3,141   $2,211   $875   $45   $3,605   $9,877 

 

13

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

   Developed
technology
   Customer
relationships
   Trademarks
and trade
names
   Patents   Media
Contact
Database
   Total 
Accumulated amortization:                              
Balance as of January 1, 2019  $1,137   $766   $440   $19   $886   $3,248 
Amortization expense   230    133    90    3    269    725 
Foreign currency translation   24    24    2    1    (15)   36 
Balance as of September 30, 2019  $1,391   $923   $532   $23   $1,140   $4,009 

 

   Developed
technology
   Customer
relationships
   Trademarks
and trade
names
   Patents   Media
Contact
Database
   Total 
Accumulated amortization:                              
Balance as of January 1, 2018  $902   $645   $330   $15   $547   $2,439 
Amortization expense   238    139    91    3    274    745 
Foreign currency translation   (22)   (16)   (3)   1    (10)   (50)
Balance as of September 30, 2018  $1,118   $768   $418   $19   $811   $3,134 

 

Amortization expense relating to acquisition-related intangible assets was $0.2 million for each of the three months ended September 30, 2019 and 2018. Amortization expense relating to acquisition-related intangible assets was $0.7 million for each of the nine months ended September 30, 2019 and 2018.

 

As of the date hereof, estimated amortization expense for intangible assets after September 30, 2019 is as follows (in thousands):

 

Year  Amortization 
2019  $240 
2020   893 
2021   893 
2022   893 
2023   893 
Thereafter   1,785 
   $5,597 

 

3.Income Taxes

 

The Company recorded a provision for income taxes of $0.4 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively; and $0.5 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively. Taxes primarily consist of a provision for foreign taxes recorded by the Company’s foreign subsidiaries in accordance with the local tax regulations. Effective income tax rates are disproportionate due to the losses incurred by the Company’s U.S. entities and Canadian subsidiaries and a valuation allowance recorded on deferred taxes of these entities and tax effects of foreign operations, including foreign exchange gains and losses.

 

14

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the nine-month period ended September 30, 2019 is summarized in the table below:

 

   September 30, 2019 
Federal income tax benefit at statutory rate   21.0%
Effect of:     
Tax effects of FX gains and losses   39.3 
Change in valuation allowance   15.1 
Foreign rate differential   1.8 
Return to provision true up   0.3 
State income tax net of federal benefit   (1.8)
Withholding tax   (4.5)
Increase in unrecognized tax benefits (FIN 48)   (30.8)
Tax effects of foreign operations   (84.8)
Others   2.4 
Effective tax rate (expense)   (42.0)%

 

As of September 30, 2019, the Company performed a calculation of the Global Intangible Low-Taxed Income (GILTI) provisions and concluded that it continues to have no impact on account of the net losses of our foreign subsidiaries.

 

The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the nine months ended September 30, 2019 (in thousands):

 

   Unrecognized tax benefits 
Balance - January 1, 2019  $2,424 
Increase in tax position   229 
Interest accrual   135 
Foreign currency remeasurement   (34)
Balance - September 30, 2019  $2,754 

 

The Company had unrecognized tax benefits of approximately $2.8 million and $2.4 million as of September 30, 2019 and December 31, 2018, respectively. The portion of unrecognized tax benefits relating to an increase in tax positions was approximately $0.2 million while the portion of unrecognized tax benefits relating to interest and penalties was approximately $0.1 million for the nine months ended September 30, 2019. The unrecognized tax benefits as of September 30, 2019 and December 31, 2018, if recognized, would have an impact on the Company’s effective tax rate.

 

15

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open periods for U.S. Federal and state taxes from 2015 through 2018. Various foreign subsidiaries currently have open tax years from 2003 through 2018.

 

Tax Assessments

 

In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. Management disagrees with the Service Tax Department’s position and is vigorously contesting these assertions. In the event the Service Tax Department is successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between 12.36% and 15%. The revenue of our Indian subsidiary during this period was approximately $66.0 million. In accordance with new rules promulgated by the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case.

 

In October 2016, the Company’s Indian subsidiary received notices of appeal from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services and not BS Services. The appeal was determined in favor of the Service Tax Department. Management disagrees with the basis of this decision and is contesting it vigorously. The Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently has service tax credits of approximately $1.0 million recorded as a receivable. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case.

 

4.Commitments and Contingencies

 

Litigation – In 2008, a judgment was rendered in the Philippines against a Philippine subsidiary of the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the Philippine subsidiary. The payment amount aggregates to approximately $6.2 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to them in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (USDC) entered a preliminary injunction that enjoins these former employees from pursuing or seeking recognition or enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and until further order of the USDC. In June 2018, the USDC entered a consent order administratively closing the action subject to return of the action to the active docket upon the written request of Innodata Inc. or the former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction remaining in full force and effect.

 

16

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The Company is also subject to various other legal proceedings and claims which arise in the ordinary course of business.

 

While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced Philippine action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidated operating results of the period in which the ruling or recovery occurs. In addition, the Company’s estimate of potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above referenced legal proceedings could change in the future.

 

The Company’s legal reserves related to legal proceedings and claims are based on a determination of whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external counsel to assess probability and estimates of loss. The reserves are adjusted if necessary. While the Company intends to defend against these matters vigorously, adverse outcomes that it estimates could reach approximately $275,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.

 

5.Stock Options

 

The Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016, is referred to herein as the “Plan.” The number of shares of common stock of Innodata Inc. that may be delivered, purchased or used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under the Plan after June 7, 2016 is 5,858,892 (the Share Reserve). Shares subject to an option or stock appreciation right granted under the Plan after June 7, 2016 count against the Share Reserve as one share for every share granted, and shares subject to any other type of award granted under the Plan after June 7, 2016 count against the Share Reserve as two shares for every share granted. Any award, or portion of an award, under the Plan or under the Company’s 2009 Stock Plan (as amended and restated (the Prior Plan)) that expires or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or canceled as to any shares without delivery of shares or other consideration will be added back to the Share Reserve as one share for each such share that was subject to an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was subject to an award other than an option or stock appreciation right granted under the Plan or the Prior Plan. If any shares are withheld, tendered or exchanged by a participant in the Plan as full or partial payment to Innodata of the exercise price under an option under the Plan or the Prior Plan or in satisfaction of a participant’s tax withholding obligations with respect to any award under the Plan or the Prior Plan, there will be added back to the Share Reserve one share for each such share that was withheld, tendered or exchanged in respect of an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was withheld, tendered or exchanged in respect of an award other than an option or stock appreciation right granted under the Plan or the Prior Plan.

 

17

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

A summary of stock option activity under the Plan as of September 30, 2019, and changes during the nine months then ended, are presented below:

 

   Number of
Options
   Weighted -
Average Exercise
Price
   Weighted-Average
Remaining
Contractual Term
(years)
   Aggregate
Intrinsic Value
 
Outstanding at January 1, 2019   4,982,040   $2.14           
Granted   2,112,500    1.25           
Exercised   -                
Forfeited/Expired   (214,237)   2.46           
Outstanding at September 30, 2019   6,880,303   $1.86    7.11   $591,955 
                     
Exercisable at September 30, 2019   4,067,655   $2.31    5.53   $234,016 
                     
Vested and Expected to Vest at September 30, 2019   6,880,303   $1.86    7.11   $591,955 

 

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted and weighted-average assumptions were as follows:

 

   For the Nine Months Ended September 30, 
   2019   2018 
Weighted-average fair value of options granted  $0.56   $0.54 
           
Risk-free interest rate   1.7% - 2.6%    2.77%
Expected life (years)   5-6    5-6 
Expected volatility factor   45-46%    49%
Expected dividends   -    - 

 

18

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

A summary of restricted shares under the Company’s Plan as of September 30, 2019 are presented below:

 

   Number of Shares   Weighted-Average
Grant Date Fair
Value
 
Granted   75,000   $1.38 
Vested   -    - 
Forfeited/Expired   -    - 
Unvested at September 30, 2019   75,000   $1.38 

 

The compensation cost related to non-vested stock options and restricted stock awards not yet recognized as of September 30, 2019 totaled approximately $1.6 million. The weighted-average period over which these costs will be recognized is 28 months.

 

The stock-based compensation expense related to the Company’s various stock awards was allocated as follows (in thousands):

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2019   2018   2019   2018 
Direct operating costs  $34   $62   $72   $171 
Selling and administrative expenses   317    206    552    368 
Total stock-based compensation  $351   $268   $624   $539 

 

6.Operating Leases

 

The Company has various operating lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.

 

These lease agreements are for terms ranging from two to 11 years and, in most cases, provide for rental escalations ranging from 1.75% to 10%. Most of these agreements are renewable at the mutual consent of the parties in the contract.

 

The Company adopted Accounting Standards Codification ASU 2016-02, beginning January 1, 2019 and applied the practical expedients consistently for all of its leases. Accordingly, the Company:

 

1.Did not reassess whether any expired or existing contracts are or contain leases.
2.Did not reassess the lease classification for any expired or existing leases.
3.Did not reassess initial direct costs for any existing leases.

 

19

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

In addition, the Company elected to retrospectively determine the lease term and assess impairment of the right-of-use asset.

 

At the date of transition, the Company recognized an operating lease liability and right-of-use asset. The amount of lease liability is equal to the present value of the remaining lease payments as of January 1, 2019, discounted using the incremental borrowing rate of each respective country.

 

A right-of-use asset is measured as the amount of the lease liability adjusted for the amount of deferred straight-line rent, prepaid rent and lease incentive allowances previously recognized.

 

The table below summarizes the amounts recognized in the financial statements related to operating leases for the periods presented (in thousands):

 

   For the three
months ended
   For the nine
months ended
 
   September 30,
2019
   September 30,
2019
 
Rent expense for long-term operating leases  $453   $1,360 
Rent expense for short-term leases   66    237 
Total rent expense  $519   $1,597 

 

The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the consolidated balance sheet as of September 30, 2019 (in thousands).

 

Year  Amount 
2019  $461 
2020   1,736 
2021   1,331 
2022   1,249 
2023   1,047 
2024 and thereafter   5,685 
Total lease payments   11,509 
Less: Interest   (3,411)
Net present value of lease liabilities  $8,098 
      
Current portion  $1,149 
Long-term portion   6,949 
Total  $8,098 

 

20

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

The weighted average remaining lease terms and discount rates for all of our operating leases as of September 30, 2019 were as follows:

 

Weighted-average lease term remaining   70 months 
Weighted-average discount rate   8.98%

 

7.Long-term Obligations

 

Total long-term obligations of the Company as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 

   September 30,   December 31, 
   2019   2018 
Pension obligations - accrued pension liability  $2,781   $2,591 
Settlement agreement (1)   748    1,010 
Capital lease obligations   256    574 
Microsoft licenses (2)   -    355 
Deferred lease payments   -    489 
Lease incentive liability   -    572 
    3,785    5,591 
Less: Current portion of long-term obligations   699    1,529 
Totals  $3,086   $4,062 

 

(1) Represents payment to be made pursuant to a settlement agreement between a subsidiary of the Company and 19 former employees of such subsidiary in December of 2018. The balance is payable in monthly installments through March 2023.

 

(2) In March 2017, the Company renewed a vendor agreement to acquire certain additional software licenses and to receive support and subsequent software upgrades on these and other currently owned software licenses through February 2020. Pursuant to this agreement, the Company is obligated to pay approximately $0.4 million annually over the term of the agreement.

 

21

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

8.Comprehensive Loss

 

Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustments, net of taxes and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive loss as of September 30, 2019, and reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2019 and 2018, were as follows (net of tax) (in thousands):

 

   Pension
Liability
Adjustment
   Fair Value of
Derivatives
   Foreign Currency
Translation
Adjustment
   Accumulated Other
Comprehensive
Income (Loss)
 
Balance at July 1, 2019  $1,374   $-   $(1,179)  $195 
Other comprehensive loss before reclassifications, net of taxes   -    -    (252)   (252)
Total other comprehensive income (loss) before reclassifications, net of taxes   1,374    -    (1,431)   (57)
Net amount reclassified to earnings   (41)   -    -    (41)
Balance at September 30, 2019  $1,333   $-   $(1,431)  $(98)

 

   Pension
Liability
Adjustment
   Fair Value of
Derivatives
   Foreign Currency
Translation
Adjustment
   Accumulated Other
Comprehensive
Loss
 
Balance at July 1, 2018  $1,074   $(250)  $(1,052)  $(228)
Other comprehensive income (loss) before reclassifications, net of taxes   -    (50)   114    64 
Total other comprehensive income (loss) before reclassifications, net of taxes   1,074    (300)   (938)   (164)
Net amount reclassified to earnings   (57)   153    -    96 
Balance at September 30, 2018  $1,017   $(147)  $(938)  $(68)

 

   Pension
Liability
Adjustment
   Fair Value of
Derivatives
   Foreign Currency
Translation
Adjustment
   Accumulated Other
Comprehensive
Loss
 
Balance at January 1, 2019  $1,451   $-   $(1,466)  $(15)
Other comprehensive income before reclassifications, net of taxes   -    -    35    35 
Total other comprehensive income (loss) before reclassifications, net of taxes   1,451    -    (1,431)   20 
Net amount reclassified to earnings   (118)   -    -    (118)
Balance at September 30, 2019  $1,333   $      -   $(1,431)  $(98)

 

   Pension
Liability
Adjustment
   Fair Value of
Derivatives
   Foreign Currency
Translation
Adjustment
   Accumulated Other
Comprehensive
Income (Loss)
 
Balance at January 1, 2018  $1,191   $342   $(687)  $846 
Other comprehensive loss before reclassifications, net of taxes   -    (734)   (251)   (985)
Total other comprehensive income (loss) before reclassifications, net of taxes   1,191    (392)   (938)   (139)
Net amount reclassified to earnings   (174)   245    -    71 
Balance at September 30, 2018  $1,017   $(147)  $(938)  $(68)

 

All reclassifications out of accumulated other comprehensive loss had an impact on direct operating costs in the condensed consolidated statements of operations and comprehensive loss.

 

22

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

9.Segment Reporting and Concentrations

 

The Company’s operations are classified in three reporting segments: DDS, Synodex and Agility.

 

The DDS segment specializes in combining deep neural networks and human expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to a digital product. For enterprises, “useable” means that the content can drive digital process transformation and AI. The Company works with all classes of data, including sensitive and protected data.

 

The Synodex segment enables clients in the insurance and healthcare sectors to transform medical records into useable digital data and to apply technologies to the digital data to augment decision support.

 

The Agility segment provides tools and related professional services that enable PR and communications professionals to discover influencers, amplify messages, monitor coverage, and measure the impact of campaigns. Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility.

 

A significant portion of the Company’s revenues is generated from its production facilities in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.

 

Revenues from external clients and segment operating profit (loss), and other reportable segment information were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2019   2018   2019   2018 
Revenues:                    
DDS  $10,124   $10,756   $30,353   $32,059 
Synodex   977    1,013    2,916    3,008 
Agility   2,745    2,280    7,910    7,372 
Total Consolidated  $13,846   $14,049   $41,179   $42,439 
                     
Income (loss) before provision for income taxes(1):                    
DDS  $376   $1,731   $603   $2,843 
Synodex   (70)   91    (81)   144 
Agility   (443)   (660)   (1,699)   (1,530)
Total Consolidated  $(137)  $1,162   $(1,177)  $1,457 
                     
Income (loss) before provision for income taxes(2):                    
DDS  $309   $1,673   $415   $2,663 
Synodex   (26)   132    42    266 
Agility   (420)   (643)   (1,634)   (1,472)
Total Consolidated  $(137)  $1,162   $(1,177)  $1,457 

 

23

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

   September 30,
2019
   December 31,
2018
 
Total assets:          
DDS  $29,186   $22,334 
Synodex   752    787 
Agility   22,214    22,930 
Total Consolidated  $52,152   $46,051 

 

   September 30,
2019
   December 31,
2018
 
Goodwill:          
Agility  $2,062   $2,050 

 

(1) Before elimination of inter-segment profits

(2) After elimination of inter-segment profits

 

The following table summarizes revenues by geographic region (determined and based upon customer’s domicile) (in thousands):

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
United States  $6,022   $6,481   $18,776   $18,452 
United Kingdom   2,394    2,403    7,120    8,387 
The Netherlands   1,730    1,896    5,146    5,485 
Canada   1,634    1,459    4,594    4,397 
Other - principally Europe   2,066    1,810    5,543    5,718 
   $13,846   $14,049   $41,179   $42,439 

 

Long-lived assets of the Company as of September 30, 2019 and December 31, 2018, respectively, by geographic region, were comprised of the following (in thousands):

 

   September 30,   December 31, 
   2019   2018 
United States  $4,740   $4,383 
           
Foreign countries:          
Canada   8,709    7,023 
United Kingdom   1,840    2,045 
Philippines   5,326    900 
India   634    475 
Sri Lanka   733    280 
Israel   21    30 
Germany   1    2 
Total foreign   17,264    10,755 
   $22,004   $15,138 

 

24

 

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

Long-lived assets include the unamortized balance of right-of-use assets amounting to $7.3 million as of September 30, 2019.

 

Two clients in the DDS segment together generated approximately 25% of the Company’s total revenues for the three months ended September 30, 2019 and 29% of the Company’s total revenues for the three months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 57% and 54% of the Company’s total revenues for the three months ended September 30, 2019 and 2018, respectively.

 

Two clients in the DDS segment together generated approximately 26% of the Company’s total revenues for the nine months ended September 30, 2019 and 30% of the Company’s total revenues for the nine months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2019 and 2018, revenues from non-U.S. clients accounted for 54% and 57%, respectively, of the Company’s total revenues.

 

As of September 30, 2019, approximately 59% of the Company's accounts receivable was from foreign (principally European) clients and 43% of the Company’s accounts receivable was due from three clients. As of December 31, 2018, approximately 57% of the Company's accounts receivable was from foreign (principally European) clients and 48% of the Company’s accounts receivable was due from three clients.

 

10.Income (loss) Per Share

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2019   2018   2019   2018 
    (in thousands)   (in thousands) 
Net income (loss) attributable to Innodata Inc. and Subsidiaries  $(555)  $688   $(1,660)  $(46)
                     
Weighted average common shares outstanding   25,856    25,877    25,870    25,877 
Dilutive effect of outstanding options   -    216    -    - 
Adjusted for dilutive effects   25,856    26,093    25,870    25,877 

 

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. For those securities that are not convertible into a class of common stock, the “two-class” method of computing income (loss) per share is used.

 

Options to purchase 6.9 million shares and 3.5 million shares of common stock for the three months ended September 30, 2019 and 2018, respectively, were outstanding but not included in the computation of diluted income (loss) per share because the exercise price of the options was greater than the average market price of the common shares and therefore the effect would have been anti-dilutive. Options to purchase 6.9 million shares and 5.5 million shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, were outstanding but not included in the computation of diluted net loss per share because the effect would have been anti-dilutive.

 

11.Subsequent Event

 

In October 2019, the Company re-purchased 390,625 shares of its common stock in a privately negotiated transaction at $1.28 per share, for a total cost of $500,000.

 

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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

Disclosures in this Form 10-Q contain certain forward-looking statements, including without limitation, statements concerning our operations, economic performance, and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “project,” “head start,” "believe," "expect," “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” "anticipate," "indicate," "point to," “forecast,” “predict,” “likely,” “goals,” “optimistic,” “foster,” “estimate,” “plan”, “potential”, or the negatives thereof, and other similar expressions generally identify forward-looking statements.

 

These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, that contracts may be terminated by clients; projected or committed volumes of work may not materialize; the primarily at-will nature of contracts with our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing Digital Data Solutions segment revenue concentration in a limited number of clients; continuing Digital Data Solutions segment reliance on project-based work; inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for our services; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. Such risks and uncertainties may be in addition to the risks described in Part I, Item 1A, “Risk Factors;” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Our actual results could differ materially from the results referred to in the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements contained in this Form 10-Q will occur, and you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof.

 

We undertake no obligation to update or review any guidance or other forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the federal securities laws.

 

26

 

Business Overview

 

Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we” or “our”) is a global services and technology company. We combine human expertise with deep learning technologies to power leading information products and enterprise artificial intelligence (AI)/digital transformation.

 

The Company, founded in 1988 and headquartered in northern New Jersey, features a 3,000-strong global delivery and technology team spanning ten offices globally and a research and technology incubator, Innodata Labs, which focuses on applied machine learning and emerging artificial intelligence. The Company is organized and operates in three different operating segments: the Digital Data Solutions (DDS) segment, the Synodex segment, and the Agility segment.

 

Our core services are (i) data acquisition, transformation, and enrichment at scale; (ii) digital operations management and analytics; and (iii) content applications. We report our core business as the DDS segment.

 

We also have venture businesses that leverage our core capabilities to provide specific industry solutions. In the Synodex segment, our Synodex venture business delivers a software-as-a-service (SaaS) platform and managed services for digital transformation of medical data. In our Agility segment, our Agility venture business delivers a SaaS platform and managed service for delivering news, information, and content to targeted journalists and influencers, as well as monitoring and analyzing coverage across traditional and social media sources.

 

Our Core Business (Digital Data Solutions (DDS) Segment)

 

We specialize in combining deep neural networks and human expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to a digital product. For enterprises, “useable” means that the content can drive digital process transformation and AI. We work with all classes of data, including sensitive and protected data.

 

We also develop digital products for business information companies and digital systems which replace legacy systems and processes.

 

We continued to implement a strategy we initiated in 2017 focused on technology differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner, more cost-effective operations.

 

Our Approach: Deep Neural Networks and Experts-in-the-loop

 

Finding the right approach for mixing machines and experts-in-the-loop for each customer requirement is one of our core competencies. On the human side, we have over three thousand staff with deep domain expertise in legal, tax, regulatory, scientific, technical, and health-related content. Many hold advanced degrees. They work from our global operations centers in North and South America, Europe, Israel, India, Sri Lanka and the Philippines. Our operations centers in Asia are ISO 27001 certified. On the technology side, we use deep learning, a sophisticated machine learning technique which is a branch of artificial intelligence that has enjoyed great success in real-world applications.

 

27

 

In our approach, content is fed first into our deep learning machines that automate much of the work but distinguish between what they can automatically process and what requires human intervention. Work that requires humans is “pushed” to human experts. Once human experts perform tasks, their output is then fed back to the machines, which, as a result, become “smarter” and achieve over time progressively greater levels of automation. (See “Our Technology and Infrastructure”, below.)

 

Our Customers

 

Our customers include leading digital businesses in banking and financial services, technology, and digital retailing and four of the largest information industry companies in the world, spanning financial, legal, healthcare and scientific vertical markets. Our customers often seek to use digital data in combination with AI to support their businesses or to digitally transform operations. Our information industry customers sell subscriptions to data products that require enhanced digital data.

 

Our Services

 

(i)Data Acquisition, Transformation, and Enrichment at Scale

 

In order to use content in an information product or in AI, there are often significant obstacles that must be overcome: the content may be contained in multiple websites; it may be in disparate formats; and it may lack the necessary semantics and metadata to make it product- or AI-ready. We overcome these obstacles by combining advanced technology and human subject matter experts, enabling us to produce highly refined product- and AI-ready content efficiently and at scale.

 

Acquiring unstructured data often involves monitoring thousands of sources such as websites in real-time for new or changing content and then automatically extracting the changed content. One of the challenges with web data monitoring and extraction is that the HTML code underlying web pages often changes, causing programs and scripts to break. We overcome this by using enterprise-class tools for content change detection and extraction. These tools use both machine learning-based visual data abstraction combined with traditional programmatic approaches. With visual abstraction, the technology knows what the content “looks like” and recognizes when a data element moves from one spot on a Web page to another.

 

Digital data transformation can refer to a large number of very specific tasks necessary to create well-structured, valid XML, such as text zoning, editing, format tagging, format conversion, extraction, cross-reference capture, and linking.

 

Digital data enrichment often includes structural tagging as well as semantic enrichment such as entity tagging and normalization. Data enrichment also includes text categorization - classifying content to systems that organize knowledge such as ontologies and knowledge graphs. This kind of enrichment enables powerful information retrieval and discovery and provides hooks for integration and interoperability.

 

28

 

(ii)Digital Operations Management and Analytics

 

We provide digital operations management and analytics for an increasing diversity of complex functions. At present, these include IP rights management, contract management, customer relations, data processing, regulatory reporting, publishing workflow management, publisher relationship management, and transaction management. Our services draw on a combination of industry and functional expertise from our thousands of global delivery resources, many with advanced degrees, augmented by sophisticated machine learning and robotics process automation (RPA) technology.

 

Our digital operations management solutions often leverage our core competency in augmenting human expert effort with advanced technology and configuring the technology to continually improve as a result of expert feedback. In this way, we provide high-quality, cost-effective solutions for our customers that become increasingly automated, resulting in further cost and improvements in both productivity and response time.

 

Many of the operations we manage are mission-critical for our customers (as opposed to back-office) are unique, and have multiple contingencies and potential points of failure. To manage this complexity, we have developed methodologies and best practices around process management and risk mitigation, and we work with clients at a strategic business and technology level.

 

(iii)Content Applications

 

We develop and maintain applications used in conjunction with product- or AI-ready content we create. Our content applications address knowledge representation, search/discovery, and digital transformation of customer workflows. Our scope of services spans full-stack development, knowledge engineering, and integration support.

 

Our Technology and Infrastructure

 

Our deep learning technologies are built on frameworks such as TensorFlow and Torch that layer algorithms to create artificial neural networks that continuously learn on the job, constantly improving the quality and accuracy of results.

 

Our content processing application infrastructure consists of three integrated tiers. The first tier is an orchestration layer featuring a console we use to configure our workflow engines. Each workflow is customized around the content acquisition, transformation, and enrichment tasks required to transform a specific input into a specific output. This is where we oversee and manage AI, setting our accuracy thresholds and quality assurance parameters to decide when cognitive tasks that have been performed by machines are sent for human review.

 

The second tier of our data processing application infrastructure is a microservices layer of deep learning networks which perform discrete tasks automatically. Microservices are invoked by workflows via RESTful APIs. Our deep neural networks are trained to understand domain-specific terms and meaning and can be deployed to enforce privacy and maintain customer-proprietary learning. We have built domain-specific and task-specific microservices that perform deep sequence labelling, text categorization, and computer vision. The technology works by observing text patterns using algorithms and assigning labels based on these observed values.

 

29

 

For each cognitive decision, the machines provide a result together with a confidence score. A high confidence score means the machine is confident that it has performed accurately, and the content is ready to be deployed in an information product or for AI. A low confidence score means expert review is required.

 

Our third layer is human experts-in-the-loop. When an expert review is required, the human experts use tools we refer to as “workbenches” to apply their expertise to a task. The workbenches are integrated with the microservice endpoints in one of two ways. In one deployment, only low-confidence data is sent to workbenches for human review. In an alternative deployment, we send both high-confidence and low-confidence data back to the workbench, displaying the confidence level for each decision taken by the machine. In both of these deployments, human-reviewed work is retroactively fed back into the deep neural network, enabling it to get smarter. The result is continuous, predictable improvement and progressively greater levels of automation.

 

Our data storage and application hosting platform has been built utilizing an innovative enterprise infrastructure platform enabling robust performance scaling, strong security, high availability, and advanced business continuity. We support a range of strategies to suit our customers’ needs for data security, compliance, scalability and reliability. We can host data and applications in our own data centers at our production facilities or we can utilize third-party cloud services which provide the benefit of “infinite scalability” of hardware resources. When we are processing sensitive information for banks and insurance companies, we utilize U.S.-based, co-located data centers in combination with advanced data encryption (both at rest and in motion to the Advanced Encryption Standard 256 or similar standard) and desktop virtualization technologies, ensuring that data never leaves secured environments in the U.S. We employ a range of security features including monitored firewalls and intrusion detection devices. We can deploy on-premises, as well, and our machine learning microservices can be consumed via API.

 

We comply with the requirements of the United States Health Insurance Portability and Accountability Act of 1996 as amended (HIPAA) (including by the Health Information Technology for Economic and Clinical Health Data (HITECH)) and the United Kingdom’s Data Protection Act 2018, as applicable. Innodata Inc. is certified to the EU-U.S. Privacy Shield framework, which certification includes Synodex and Agility as covered entities.

 

Our DDS segment includes our Innodata docGenix, LLC subsidiary (docGenix). As of September 30, 2019, Innodata Inc. owned 94% of docGenix.

 

Our Venture Businesses

 

Our venture businesses provide specific industry solutions. We have chosen to invest in these businesses because they leverage one or more of our core capabilities (typically data acquisition/transformation/enrichment at scale, content applications, and global workforce deployment), have attractive business models such as SaaS (software-as-a-service), and expand our addressable market. Each venture business is reported as its own business segment.

 

30

 

Synodex Segment

 

Synodex enables clients in the insurance and healthcare sectors to transform medical records into useable digital data and to apply technologies to the digital data to augment decision support.

 

The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support services. Synodex has developed and deployed its APS.Extract® product for specific use with life insurance underwriting and claims.

 

Our Synodex segment operates through our Innodata Synodex, LLC subsidiary. As of September 30, 2019, Innodata Inc. owned 92.5% of Innodata Synodex, LLC. More information about our Synodex segment can be found at www.synodex.com.

 

Agility Segment

 

Agility provides tools and related professional services that enable public relations (PR) and communications professionals to discover influencers, amplify messages, monitor coverage, and measure the impact of campaigns. Agility has been ranked as the #1 easiest to use media and influencer targeting platform out-performing significantly larger, more established competitors.1 The media intelligence solutions market is highly fragmented, with only a limited number of providers of integrated solutions such as Agility.

 

Agility’s software-as-a-service (SaaS) tools include:

 

·An influencer targeting solution to help PR professionals identify influencers. The Agility media database includes detailed contact information for over 840,000 unique influencers globally including journalists, outlets, and bloggers. Live social media streams to allow users to research influencers by tracking activity and keywords across multiple social media channels.

·An outreach and content amplification solution enabling PR professionals to distribute news, information, and content to targeted influencers.

·Integrated newswire services.

·A media monitoring solution to help PR professionals track what is being said about their brand, industry or competitors and track engagement. Users can monitor and report on coverage across print, broadcast, online and social media sources, including AI-powered image monitoring. The self-serve monitoring tool enables users to create alerts, compile and share coverage briefings and clipbooks.

 

 

1 G2 Crowd Inc., https://www.g2.com/gated_content/tokens/5ca8f8c7-7fd5-41ad-a9c9-1b7d0a47932a

 

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·A media analysis solution to help PR professionals analyze coverage, determine PR campaign reach and effectiveness, and create and distribute reports.

 

Agility’s professional services include:

 

·Media monitoring and PR measurement services delivered by a team of media analysts who use our SaaS monitoring solution to pull coverage and curate daily news briefs. This powerful media monitoring solution is for clients with complex monitoring or reporting requirements.

·Advanced PR reporting and measurement services including custom reports, PR measurement and social media / influencer analysis.

 

To provide our services, we maintain a big data engine that stores and indexes media content. We index approximately two billion media items each year.

 

Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility. More information about our Agility segment can be found at www.agilitypr.com.

 

Revenues

 

Revenue Recognition – Commencing January 1, 2018, we recognize revenue in accordance with Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. Revenue is recognized when control of the promised services is transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services as per the agreement with the customer. In case there are agreements with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. We allocate the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation, if any, and then evaluate how the services are transferred to the customer to determine the timing of revenue recognition.

 

For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.

 

For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of our Synodex segment revenue is derived from licensing our functional software and providing access to our hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.

 

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The Agility segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenues from the reseller agreements, which are not significant to the overall revenues, are recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the primary obligor in the sales transaction; assume the credit risk; set the price; can select suppliers; and are involved in the execution of the services, including after sales service.

 

Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.

 

We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus net as an agent.  Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a customer may not pay for the services performed.  If there are circumstances where the above criteria are not met and therefore, we are not the principal in providing services, amounts received from customers are presented net of payments in the condensed consolidated statements of operations and comprehensive loss.

 

Contract acquisition cost for our Agility segment, which is included in prepaid expenses and other current assets, is amortized over the term of a subscription agreement that normally has a duration of 12 months or less. We review these costs on a periodic basis to determine the need to adjust the carrying values for pre-terminated contracts.

 

Direct Operating Costs

 

Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.

 

Selling and Administrative Expenses

 

Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, third-party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.

 

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Valuation of Goodwill and Intangible Assets

 

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible assets are amortized into direct operating costs ratably over their expected related revenue streams over their useful lives.

 

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level annually during the third quarter of each fiscal year (as of September 30 of that quarter) or when an event occurs, or circumstances change, that indicates the carrying value may not be recoverable. In 2018, the Company adopted ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”. Under the newly adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”) remained unchanged versus the prior guidance. However, the requirement to complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying value of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying value of goodwill in that reporting unit.

 

Adjusted EBITDA

 

In addition to measures of financial performance presented in our consolidated financial statements, we monitor “Adjusted EBITDA” to help us evaluate our ongoing operating performance including our ability to operate the business effectively.

 

We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before income taxes, depreciation and amortization of intangible assets, impairment charges, stock-based compensation, loss attributable to non-controlling interests and interest income (expense).

 

We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes. In particular, Adjusted EBITDA facilitates period-to-period comparisons of our operating results on a consistent basis by excluding items that are not reflective of our core operations or are not within our control and helps us identify underlying trends in our business. In this regard, we believe it provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making. We also use this measure to establish operational goals for managing our business and evaluating our performance. 

 

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Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under U.S. GAAP. Some of these limitations are:

 

·Adjusted EBITDA does not reflect tax payments, and such payments reflect a reduction in cash available to us;
·Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs and for our cash expenditures or future requirements for capital expenditures or contractual commitments;
·Adjusted EBITDA excludes the potential dilutive impact of stock-based compensation expense related to our workforce, interest income (expense) and net loss attributable to non-controlling interests, and these items may represent a reduction or increase in cash available to us;
·Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and
·Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently from our calculation, limiting its usefulness as a comparative measure.

 

Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, U.S. GAAP net income (loss).

 

The following tables reconcile net income (loss) to Adjusted EBITDA (loss) for the periods presented (in thousands):

 

Consolidated

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Adjusted EBITDA:                    
Net income (loss) attributable to Innodata Inc. and Subsidiaries  $(555)  $688   $(1,660)  $(46)
Depreciation and amortization   687    833    2,248    2,558 
Goodwill impairment    -    -    -    675 
Stock-based compensation   351    268    624    539 
Provision for income taxes   421    469    493    1,502 
Interest expense, net   13    10    36    24 
Non-controlling interests   (3)   5    (10)   1 
Adjusted EBITDA - Consolidated  $914   $2,273   $1,731   $5,253 

 

DDS Segment

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018  2019   2018 
Adjusted EBITDA:                    
Net income (loss) attributable to DDS Segment  $(125)  $1,194   $(110)  $1,135 
Depreciation and amortization   282    444    1,072    1,408 
Goodwill impairment      -         -         -    675 
Stock-based compensation   330    266    574    533 
Provision for income taxes   432    481    526    1,538 
Interest expense, net   12    8    33    16 
Non-controlling interests   2    (2)   (4)   (11)
Adjusted EBITDA - DDS Segment  $933   $2,391   $2,091   $5,294 

 

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Synodex Segment

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Adjusted EBITDA:                    
Net income (loss) attributable to Synodex Segment  $(20)  $125   $49   $254 
Stock-based compensation   6    -    12    - 
Non-controlling interests   (5)   7    (6)   12 
Adjusted EBITDA (loss) - Synodex Segment  $(19)  $132   $55   $266 

 

Agility Segment

 

    Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Adjusted EBITDA:                    
Net loss attributable to Agility Segment  $(410)  $(631)  $(1,599)  $(1,435)
Depreciation and amortization   405    389    1,176    1,150 
Stock-based compensation   15    2    38    6 
Provision for income taxes   (11)   (12)   (33)   (36)
Interest expense, net   1    2    3    8 
Adjusted EBITDA loss - Agility Segment  $-   $(250)  $(415)  $(307)

 

Results of Operations

 

Three Months Ended September 30, 2019 and 2018

 

Revenues

 

Total revenues were $13.8 million for the three months ended September 30, 2019 compared to $14.0 million for the three months ended September 30, 2018, a decrease of approximately $0.2 million or 1%.

 

Revenues from the DDS segment were $10.1 million and $10.8 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of approximately $0.7 million or 6%. The decrease is attributable to lower volume from three clients.

 

Revenues from the Synodex segment were $1.0 million for each of the three-month periods ended September 30, 2019 and 2018.

 

Revenues from the Agility segment were $2.7 million and $2.3 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $0.4 million or approximately 17%. The increase is attributable to higher revenues from subscriptions to our Agility media database.

 

Two clients in the DDS segment together generated approximately 25% of the Company’s total revenues for the three months ended September 30, 2019 and 29% of the Company’s total revenues for the three months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 57% and 54% of the Company’s total revenues for the three months ended September 30, 2019 and 2018, respectively.

 

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Direct Operating Costs

 

Direct operating costs were $9.0 million and $9.2 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $0.2 million or 2%. Direct operating costs as a percentage of total revenues were 65% and 66% for the three months ended September 30, 2019 and 2018, respectively.

 

Direct operating costs for the DDS segment were approximately $6.5 million and $6.9 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $0.4 million or 6%.  The decrease is due to a reduction in direct operating costs of $0.6 million as part of our continuing cost rationalization initiatives, offset in part by foreign exchange transaction losses of $0.2 million. The reduction of $0.6 million is primarily a result of lower compensation related costs of $0.3 million, lower occupancy costs and related depreciation of $0.2 million, and lower other facility related costs of $0.1 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 64% for each of the three-month periods ended September 30, 2019 and 2018.

 

Direct operating costs for the Synodex segment were $0.8 million for each of the three-month periods ended September 30, 2019 and 2018, net of intersegment profits. Direct operating costs for the Synodex segment as a percentage of revenues were 85% and 80% for the three months ended September 30, 2019 and 2018, respectively. Direct operating costs as a percentage of revenues increased in the third quarter of 2019 primarily due to lower revenue from one client.

 

Direct operating costs for the Agility segment were $1.7 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively. The $0.2 million increase is primarily a result of expenditures in support of increased revenues. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 63% and 70% for the three-month periods ended September 30, 2019 and 2018, respectively.

 

Selling and Administrative Expenses

 

Selling and administrative expenses were $5.0 million for the three months ended September 30, 2019, compared to $3.7 million for the three months ended September 30, 2018, an increase of $1.3 million or approximately 35%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. Innodata has made prescient, early investments in machine learning and artificial intelligence and is now positioned to turn these into new products and services. Selling and administrative expenses as a percentage of total revenues were 36% for the three months ended September 30, 2019 and 26% for the three months ended September 30, 2018. 

 

Selling and administrative expenses for the DDS segment were $3.3 million and $2.2 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $1.1 million or 50%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. The savings realized from our cost rationalization initiatives were channeled into our strategic initiatives. The increase in selling and administrative expenses for the DDS segment were primarily due to higher compensation related costs of $0.9 million and recruitment and professional fees of approximately $0.2 million. As a percentage of DDS revenues, DDS selling and administrative expenses were 33% for the three months ended September 30, 2019 and 20% for the three months ended September 30, 2018. The increase in selling and administrative expenses as a percentage of revenues is due to lower revenues combined with increased selling and administrative expenses.

 

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Selling and administrative expenses for the Synodex segment were $0.2 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively. The increase is attributable to higher professional fees incurred for the period. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 20% for the three months ended September 30, 2019 and 10% for the three months ended September 30, 2018.

 

Selling and administrative expenses for the Agility segment were $1.5 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively. The increase is primarily due to additional provisions for doubtful accounts and higher marketing costs in support of sales initiatives. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 56% for the three months ended September 30, 2019 and 61% for the three months ended September 30, 2018.

 

Goodwill Impairment

 

We performed our annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, we adhered to the provisions of ASU 2017-04, by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on our assessment, we reached the conclusion that there was no goodwill impairment because the fair value of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the three months ended September 30, 2019.

 

Income Taxes

 

We recorded a provision for income taxes of $0.4 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively. The $0.1 million decrease is primarily due to a lower tax provision by our foreign subsidiaries attributable to foreign exchange gains in the three months ended September 30, 2018.

 

Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries and a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses.

 

Net Loss

 

We incurred a net loss of $0.6 million during the three months ended September 30, 2019, compared to a net income of $0.7 million during the three months ended September 30, 2018.

 

Net loss for the DDS segment was $0.1 million for the three months ended September 30, 2019, compared to net income of $1.2 million for the three months ended September 30, 2018, net of intersegment profits. The decrease in net income of $1.3 million is attributable to lower revenues of $0.6 million and higher operating expenses of $0.7 million in the period.

 

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The Synodex segment was breakeven for the three months ended September 30, 2019, compared to a net income of $0.1 million for the three months ended September 30, 2018, net of intersegment profits. The decrease is due to revenue timing from one client.

 

Net loss for the Agility segment was $0.5 million for the three months ended September 30, 2019, compared to $0.6 million for the three months ended September 30, 2018, net of intersegment profits. The decrease in net loss is due to higher revenues offset by an increase in operating costs.

 

Adjusted EBITDA

 

Adjusted EBITDA for the three months ended September 30, 2019 was $0.9 million, compared to $2.3 million for the three months ended September 30, 2018.

 

Adjusted EBITDA for the DDS segment was $0.9 million for the three months ended September 30, 2019, compared to $2.4 million for the three months ended September 30, 2018, a decrease of $1.5 million or 64%. The decrease is primarily attributable to the $1.3 million lower income and $0.2 million lower depreciation and amortization in the three months ended September 30, 2019.

 

Adjusted EBITDA for the Synodex segment was breakeven for the three months ended September 30, 2019, compared to $0.1 million for the three months ended September 30, 2018, a decrease of $0.1 million. The decrease is due to revenue timing from one client.

 

Adjusted EBITDA for the Agility segment was breakeven for the three months ended September 30, 2019, compared to a loss of $0.2 million for the three months ended September 30, 2018. The improvement is a result of a lower loss incurred for the period.

 

Nine Months Ended September 30, 2019 and 2018

 

Revenues

 

Total revenues were $41.2 million for the nine months ended September 30, 2019 compared to $42.4 million for the nine months ended September 30, 2018, a decrease of $1.2 million or 3%.

 

Revenues from the DDS segment were $30.4 million and $32 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of approximately $1.6 million or 5%. The decrease in revenues is primarily attributable to lower volume from one client.

 

Revenues from the Synodex segment were $2.9 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $0.1 million or 3%. This decrease is primarily due to lower volume from one client.

 

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Revenues from the Agility segment were $7.9 million and $7.4 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $0.5 million or approximately 7%. The increase is attributable to higher revenues from subscriptions to our Agility media database.

 

Two clients in the DDS segment together generated approximately 26% of the Company’s total revenues for the nine months ended September 30, 2019 and 30% of the Company’s total revenues for the nine months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2019 and 2018, revenues from non-U.S. clients accounted for 54% and 57%, respectively, of the Company’s total revenues.

 

Direct Operating Costs

 

Direct operating costs were $28.2 million and $29.1 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $0.9 million or 3%. Direct operating costs as a percentage of total revenues were 68% and 69% for the nine months ended September 30, 2019 and 2018, respectively.

 

Direct operating costs for the DDS segment were approximately $20.8 million and $22.1 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $1.3 million or 6%.  The decrease is due to a reduction in direct operating costs of $2.4 million as part of our continuing cost rationalization initiatives offset in part by foreign exchange transaction losses of $0.7 million and a one-time charge of $0.4 million for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affects companies generally. The reduction of $2.4 million is primarily a result of lower compensation related costs of $1.2 million, lower occupancy costs and related depreciation of $0.7 million, and lower other facility related costs of $0.5 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 68% and 69% for the nine months ended September 30, 2019 and 2018, respectively.

 

Direct operating costs for the Synodex segment were $2.4 million for the nine months ended September 30, 2019 and $2.3 million for the nine months ended September 30, 2018, net of intersegment profits. The increase is due to the cost of hardware and software upgrades expensed during the year. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 83% and 77% for the nine months ended September 30, 2019 and 2018, respectively. The increase in direct operating costs as a percentage of revenues in the nine months ended September 30, 2019 is primarily due to lower revenue from one client combined with the higher cost of hardware and software upgrades, expensed during the year.

 

Direct operating costs for the Agility segment were $5.0 million and $4.7 million for the nine months ended September 30, 2019 and 2018, respectively. The $0.3 million increase is primarily a result of expenditures in support of increased revenues. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 63% and 64% for the nine months ended September 30, 2019 and 2018, respectively.  The increase is due to higher content related costs.

 

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Selling and Administrative Expenses

 

Selling and administrative expenses were $14.2 million for the nine months ended September 30, 2019, compared to $11.2 million for the nine months ended September 30, 2018, an increase of $3.0 million or 27%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. Selling and administrative expenses as a percentage of total revenues increased to 34% for the nine months ended September 30, 2019 from 26% for the nine months ended September 30, 2018.

 

Selling and administrative expenses for the DDS segment were $9.2 million and $6.6 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $2.6 million or 39%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. The savings realized from our cost rationalization initiatives were channeled into our strategic initiatives. The increase in selling and administrative expenses for the DDS segment were primarily due to higher compensation related costs of $1.8 million, recruitment and professional fees of $0.6 million, and other selling and marketing costs of $0.2 million. As a percentage of DDS revenues, DDS selling and administrative expenses were 30% and 21% for the nine months ended September 30, 2019 and 2018, respectively. The increase in selling and administrative expenses as a percentage of revenues is due to lower revenues combined with increased selling and administrative expenses.

 

Selling and administrative expenses for the Synodex segment were $0.5 million for each of the nine-month periods ended September 30, 2019 and 2018. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 17% for each of the nine-month periods ended September 30, 2019 and 2018.

 

Selling and administrative expenses for the Agility segment were $4.5 million and $4.2 million for the nine months ended September 30, 2019 and 2018, respectively. The $0.3 million increase is primarily due to compensation related expenses, additional provisions for doubtful accounts and higher marketing costs in support of sales initiatives. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 57% and 55% for the nine months ended September 30, 2019 and 2018, respectively.

 

Goodwill Impairment

 

We performed our annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, we adhered to the provisions of ASU 2017-04, by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on our assessment, we reached the conclusion that there was no goodwill impairment because the fair value of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the nine months ended September 30, 2019.

 

The Company performed an assessment as of June 30, 2018 and determined that the fair value of the Agility segment exceeded its carrying value, but the fair value of the DDS segment was below its carrying value. As a result, the Company recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit during the nine months ended September 30, 2018.

 

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Income Taxes

 

We recorded a provision for income taxes of $0.5 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively. The $1.0 million decrease is primarily due to a higher tax provision by our foreign subsidiaries attributable to foreign exchange gains in the nine months ended September 30, 2018.

 

Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries and a valuation allowance recorded on deferred taxes on these entities. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates, which reduce our overall effective tax rate when compared to the U.S. statutory tax rate.

 

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the nine-month period ended September 30, 2019 is summarized in the table below:

 

   September 30, 2019 
Federal income tax benefit at statutory rate   21.0%
Effect of:     
Tax effects of FX gains and losses   39.3 
Change in valuation allowance   15.1 
Foreign rate differential   1.8 
Return to provision true up   0.3 
State income tax net of federal benefit   (1.8)
Withholding tax   (4.5)
Increase in unrecognized tax benefits (FIN 48)   (30.8)
Tax effects of foreign operations   (84.8)
Others   2.4 
Effective tax rate (expense)   (42.0)%

 

As of September 30, 2019, we performed a calculation of the GILTI provisions and concluded that it continues to have no impact on account of the net losses of our foreign subsidiaries.

 

Despite access to overseas earnings and the resulting toll charge, we intend to indefinitely reinvest foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding taxes that we would have to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to approximately $18.5 million at September 30, 2019. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.

 

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We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on the deferred tax assets of our Canadian subsidiaries. Our Canadian subsidiaries also have research and development expenditures available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes.

 

The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open periods for U.S. Federal and state taxes from 2016 through 2019. Various foreign subsidiaries currently have open tax years from 2003 through 2018. Refer to Item 1, Note 3 for more information about Tax Assessments.

 

Net Loss

 

We incurred a net loss of $1.7 million for the nine months ended September 30, 2019, compared to a net loss of $46,000 for the nine months ended September 30, 2018.

 

The net loss for the DDS segment was $0.1 million for the nine months ended September 30, 2019, compared to a net income of $1.1 million for the nine months ended September 30, 2018, net of intersegment profits. Net loss for the nine months ended September 30, 2019 includes a one-time charge of $400,000 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affects companies generally. The decrease in net income of $1.2 million is attributable to lower revenues of $1.6 million, higher operating expenses of $1.3 million, a decrease in tax provisions of $1.0 million, and a decrease in goodwill impairment of $0.7 million.

 

The Synodex segment was breakeven for the nine months ended September 30, 2019, compared to a net income of $250,000 for the nine months ended September 30, 2018, net of intersegment profits. The decrease is due to revenue timing from one client.

 

The net loss for the Agility segment was $1.6 million for the nine months ended September 30, 2019, compared to a net loss of $1.4 million for the nine months ended September 30, 2018. The $0.2 million increase in net loss is primarily a result of expenditures in support of increased revenues.

 

Adjusted EBITDA

 

Adjusted EBITDA for the nine months ended September 30, 2019 was $1.7 million, compared to Adjusted EBITDA of $5.3 million for the nine months ended September 30, 2018.

 

Adjusted EBITDA for the DDS segment was $2.0 million for the nine months ended September 30, 2019, compared to $5.3 million for the nine months ended September 30, 2018, a decrease of $3.3 million or 62%. The decrease is primarily attributable to a $1.1 million higher tax provision by our foreign subsidiaries due to foreign exchange gains and $0.7 million of goodwill impairment in the nine months ended September 30, 2018.

 

Adjusted EBITDA for the Synodex segment was $0.1 million for the nine months ended September 30, 2019, compared to $0.3 million for the nine months ended September 30, 2018. The decrease is due to revenue timing from one client.

 

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Adjusted EBITDA for the Agility segment was a loss of $0.4 million for the nine months ended September 30, 2019, compared to a loss of $0.3 million for the nine months ended September 30, 2018. The increase is a result of a higher net loss incurred for the period.

 

Liquidity and Capital Resources

 

Selected measures of liquidity and capital resources, expressed in thousands, are as follows:

 

   September 30, 2019   December 31, 2018 
Cash and cash equivalents  $13,188   $10,869 
Working capital   10,678    12,981 

 

At September 30, 2019, we had cash and cash equivalents of $13.2 million, of which $5.9 million was held by our foreign subsidiaries, and the $7.3 million balance was held in the United States. Based on our calculations, as a result of the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits, we will not have any liability for taxes with respect to repatriated foreign earnings under Internal Revenue Service Regulation 956 until our cumulative exposure for unrepatriated foreign earnings reaches a threshold of $25.8 million. Although we do not currently intend to repatriate amounts held by foreign subsidiaries, we could if needed repatriate these amounts less up to 21% in withholding taxes of foreign jurisdictions.

 

We have used, and plan to use, our cash and cash equivalents for (i) investments in the Agility segment; (ii) the expansion of our other operations; (iii) technology innovations; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of September 30, 2019, we had working capital of approximately $10.7 million, as compared to working capital of approximately $13.0 million as of December 31, 2018.

 

We did not have any material commitments for capital expenditures as of September 30, 2019. In October 2019, we re-purchased 390,625 shares of our common stock in a privately negotiated transaction at $1.28 per share, for a total cost of $500,000.

  

We believe that our existing cash and cash equivalents and internally generated funds will provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months. However, we have no debt facilities or lines of credit, and reductions in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise would materially and adversely affect the Company.

 

Cash Flows

 

Net Cash Provided by Operating Activities

 

Cash provided by our operating activities for the nine months ended September 30, 2019 was $4.9 million primarily on account of the $2.5 million decrease in our accounts receivable, a $0.8 million decrease in prepaid and other current assets, a $0.7 million decrease in in income and other taxes and a $0.1 million increase in other working capital. This favorable result was reduced by our net loss of $1.7 million in the period. The reduction in accounts receivable is a result of improvements in our collections during the period. Refer to the condensed consolidated statements of cash flows for further details.

 

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Our days’ sales outstanding (DSO) were 62 days for the nine months ended September 30, 2019 and 66 days for the year ended December 31, 2018. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the “accounts receivable turnover.” Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressed in number of days.

 

Net Cash Used in Investing Activities

 

For the nine months ended September 30, 2019, cash used in our investing activities was $1.4 million. These expenditures principally consisted of purchases of technology equipment including servers, network infrastructure and workstations.

 

During the next 12 months, we anticipate that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate $2.0 million to $2.3 million. The source of funds for the anticipated capital expenditures will be cash generated from our operations.

 

Net Cash Used in Financing Activities

 

For the nine months ended September 30, 2019, cash used in financing activities was for payments of long-term obligations of $0.9 million and repurchasing of 34,150 shares of our common stock at a cost of approximately $44,000 at a volume-weighted average price of $1.29 per share. The repurchase was made under the 2019 authorization approved by the Board of Directors.

 

Inflation, Seasonality and Prevailing Economic Conditions

 

Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higher inflation in wage rates in the countries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients.

 

Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.

 

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Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our results of operations, liquidity and capital resources is based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of Agility, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our consolidated results of operations and financial position. We believe the following critical accounting policies affect our more significant estimates and judgments in the preparation of our consolidated financial statements.

 

The significant accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted this standard in the first quarter of 2019, and it did not have a material impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefits Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities; early adoption is permitted. We are currently evaluating the early adoption of ASU 2018-14 but do not expect it to have a material impact to the Company’s consolidated financial statements.

 

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Off-Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for smaller reporting companies.

 

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of September 30, 2019. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.        OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Reference is made to the disclosure under “Legal Proceedings” in Part I, Item 3 in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 1A. Risk Factors

 

There were no material changes from the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no sales of unregistered equity securities during the three months ended September 30, 2018.

 

We purchased 34,150 shares of our common stock, for a total cost of approximately $44,054, during the three months ended September 30, 2019, as shown in the table below:

 

Period  Total
Number of
Shares (or
Units)
Purchased
   Average Price
Paid per
Share (or
Unit)
   Total Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
  

Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
Available for
Repurchase

 
August 1-31, 2019   34,150   $1.29    34,150   $1,955,947 

 

In July 2019, our Board of Directors authorized the repurchase of up to $2.0 million of its issued and outstanding common stock in open market or privately negotiated transactions. There is no expiration date associated with the program.

 

Item 3. Defaults Upon Senior Securities

 

None.

  

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit No.Description

  

31.1*Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1**Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2**Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018; (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited); (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 and (v) Notes to Condensed Consolidated Financial Statements (unaudited).

 

 

* Filed herewith.

 

** In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

INNODATA INC.

  

Date: November 7, 2019 /s/ Jack Abuhoff
    Jack Abuhoff
    Chairman of the Board,
    Chief Executive Officer and President
     
Date: November 7, 2019 /s/ Robert O’Connor
    Chief Financial Officer and Principal Accounting Officer