UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the quarterly period ended | ||
| 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 |
| Preferred Stock Purchase Right | N/A | N/A |
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 xNo ¨
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 reportingcompany 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 May 1,November 4, 2020 was 24,459,359.24,742,692.
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended March 31,September 30, 2020
INDEX
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 10,745 | $ | 10,874 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $773 and $750, respectively | 9,505 | 9,723 | ||||||
| Prepaid expenses and other current assets | 3,676 | 3,418 | ||||||
| Total current assets | 23,926 | 24,015 | ||||||
| Property and equipment, net | 6,910 | 7,125 | ||||||
| Right-of-use-asset | 6,530 | 7,005 | ||||||
| Other assets | 2,442 | 2,110 | ||||||
| Deferred income taxes | 2,083 | 1,906 | ||||||
| Intangibles, net | 4,982 | 5,477 | ||||||
| Goodwill | 2,003 | 2,108 | ||||||
| Total assets | $ | 48,876 | $ | 49,746 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,853 | $ | 1,419 | ||||
| Accrued expenses | 3,451 | 3,340 | ||||||
| Accrued salaries, wages and related benefits | 4,199 | 4,265 | ||||||
| Income and other taxes | 4,529 | 4,183 | ||||||
| Long-term obligations - current portion | 856 | 912 | ||||||
| Operating lease liability - current portion | 922 | 1,107 | ||||||
| Total current liabilities | 15,810 | 15,226 | ||||||
| Deferred income taxes | 326 | 363 | ||||||
| Long-term obligations, net of current portion | 4,579 | 4,534 | ||||||
| Operating lease liability, net of current portion | 6,328 | 6,731 | ||||||
| Non-controlling interests | (3,406 | ) | (3,417 | ) | ||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Serial preferred stock; 4,998,000 shares authorized, none outstanding | - | - | ||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 27,643,000 shares issued and 24,459,000 outstanding at March 31, 2020 and December 31, 2019; | 275 | 275 | ||||||
| Additional paid-in capital | 28,596 | 28,426 | ||||||
| Retained earnings | 4,628 | 4,993 | ||||||
| Accumulated other comprehensive loss | (1,795 | ) | (920 | ) | ||||
| 31,704 | 32,774 | |||||||
| Less: treasury stock, 3,184,000 shares at March 31, 2020 and December 31, 2019 at cost | (6,465 | ) | (6,465 | ) | ||||
| Total stockholders’ equity | 25,239 | 26,309 | ||||||
| Total liabilities and stockholders’ equity | $ | 48,876 | $ | 49,746 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 15,336 | $ | 10,874 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $500 and $750, respectively | 8,843 | 9,723 | ||||||
| Prepaid expenses and other current assets | 4,112 | 3,407 | ||||||
| Total current assets | 28,291 | 24,004 | ||||||
| Property and equipment, net | 6,943 | 6,887 | ||||||
| Right-of-use assets | 6,923 | 7,005 | ||||||
| Other assets | 2,838 | 2,110 | ||||||
| Deferred income taxes | 2,232 | 1,906 | ||||||
| Intangibles, net | 4,702 | 5,477 | ||||||
| Goodwill | 2,069 | 2,108 | ||||||
| Total assets | $ | 53,998 | $ | 49,497 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,765 | $ | 1,419 | ||||
| Accrued expenses and other | 3,612 | 3,340 | ||||||
| Accrued salaries, wages and related benefits | 5,995 | 4,265 | ||||||
| Income and other taxes | 4,949 | 4,183 | ||||||
| Long-term obligations - current portion | 1,958 | 1,440 | ||||||
| Operating lease liability - current portion | 967 | 1,107 | ||||||
| Total current liabilities | 19,246 | 15,754 | ||||||
| Deferred income taxes | 343 | 363 | ||||||
| Long-term obligations, net of current portion | 5,421 | 4,534 | ||||||
| Operating lease liability, net of current portion | 6,691 | 6,731 | ||||||
| Total liabilities | 31,701 | 27,382 | ||||||
| Commitments and contingencies | - | - | ||||||
| Non-controlling interests | (3,392 | ) | (3,417 | ) | ||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Serial preferred stock; 4,998,000 shares authorized, none outstanding | - | - | ||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 27,921,000 shares issued and 24,737,000 outstanding at September 30, 2020; 27,643,000 shares issued and 24,459,000 outstanding at December 31, 2019 | 278 | 275 | ||||||
| Additional paid-in capital | 29,438 | 28,426 | ||||||
| Retained earnings | 3,648 | 4,216 | ||||||
| Accumulated other comprehensive loss | (1,210 | ) | (920 | ) | ||||
| 32,154 | 31,997 | |||||||
| Less: treasury stock, 3,184,000 shares at September 30, 2020 and December 31, 2019 at cost | (6,465 | ) | (6,465 | ) | ||||
| Total stockholders’ equity | 25,689 | 25,532 | ||||||
| Total liabilities and stockholders’ equity | $ | 53,998 | $ | 49,497 | ||||
See notes to Condensed Consolidated Financial Statements.
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, | ||||||||
| 2020 | 2019 | |||||||
| Revenues | $ | 14,553 | $ | 13,846 | ||||
| Operating costs and expenses: | ||||||||
| Direct operating costs | 9,784 | 9,019 | ||||||
| Selling and administrative expenses | 4,582 | 4,945 | ||||||
| Interest expense, net | 44 | 27 | ||||||
| 14,410 | 13,991 | |||||||
| Income (loss) before provision for income taxes | 143 | (145 | ) | |||||
| Provision for income taxes | (70 | ) | 421 | |||||
| Consolidated net income (loss) | 213 | (566 | ) | |||||
| Income (loss) attributable to non-controlling interests | 7 | (3 | ) | |||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 206 | $ | (563 | ) | |||
| Income (loss) per share attributable to Innodata Inc. and Subsidiaries: | ||||||||
| Basic | $ | 0.01 | $ | (0.02 | ) | |||
| Diluted | $ | 0.01 | $ | (0.02 | ) | |||
| Weighted average shares outstanding: | ||||||||
| Basic | 24,470 | 25,856 | ||||||
| Diluted | 25,260 | 25,856 | ||||||
| Comprehensive income (loss): | ||||||||
| Consolidated net income (loss) | $ | 213 | $ | (566 | ) | |||
| Pension liability adjustment, net of taxes | (1 | ) | (41 | ) | ||||
| Change in fair value of derivatives, net of taxes | 51 | - | ||||||
| Foreign currency translation adjustment, net of taxes | 216 | (252 | ) | |||||
| Other comprehensive income (loss) | 266 | (293 | ) | |||||
| Total comprehensive income (loss) | 479 | (859 | ) | |||||
| Comprehensive income (loss) attributed to non-controlling interests | 7 | (3 | ) | |||||
| Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 472 | $ | (856 | ) | |||
See notes to Condensed Consolidated Financial Statements.
1
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | 14,530 | $ | 13,694 | $ | 42,946 | $ | 41,179 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct operating costs | 9,743 | 9,560 | 29,209 | 28,154 | ||||||||||||
| Selling and administrative expenses | 4,723 | 4,602 | 13,663 | 14,154 | ||||||||||||
| Interest expense, net | 13 | 11 | 113 | 97 | ||||||||||||
| 14,479 | 14,173 | 42,985 | 42,405 | |||||||||||||
| Income (loss) before provision for income taxes | 51 | (479 | ) | |||||||||||||
| Loss before provision for income taxes | (39 | ) | (1,226 | ) | ||||||||||||
| Provision for income taxes | 405 | (28 | ) | 504 | 493 | |||||||||||
| Consolidated net loss | (354 | ) | (451 | ) | (543 | ) | (1,719 | ) | ||||||||
| Income attributable to non-controlling interests | 11 | 1 | ||||||||||||||
| Income (loss) attributable to non-controlling interests | 25 | (10 | ) | |||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (365 | ) | $ | (452 | ) | $ | (568 | ) | $ | (1,709 | ) | ||||
| Loss per share attributable to Innodata Inc. and Subsidiaries: | ||||||||||||||||
| Basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.07 | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic and diluted | 24,401 | 25,927 | 24,427 | 25,870 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Consolidated net loss | $ | (354 | ) | $ | (451 | ) | $ | (543 | ) | $ | (1,719 | ) | ||||
| Pension liability adjustment, net of taxes | 14 | (36 | ) | 24 | (118 | ) | ||||||||||
| Change in fair value of derivatives, net of taxes | (171 | ) | - | (33 | ) | - | ||||||||||
| Foreign currency translation adjustment, net of taxes | (718 | ) | 264 | (281 | ) | 35 | ||||||||||
| Other comprehensive loss | (875 | ) | 228 | (290 | ) | (83 | ) | |||||||||
| Total comprehensive loss | (1,229 | ) | (223 | ) | (833 | ) | (1,802 | ) | ||||||||
| Comprehensive income attributed to non-controlling interests | 11 | 1 | ||||||||||||||
| Comprehensive income (loss) attributed to non-controlling interests | 25 | (10 | ) | |||||||||||||
| Comprehensive loss attributable to Innodata Inc. and Subsidiaries | $ | (1,240 | ) | $ | (224 | ) | $ | (858 | ) | $ | (1,792 | ) | ||||
See notes to Condensed Consolidated Financial Statements.
2
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Consolidated net loss | $ | (354 | ) | $ | (451 | ) | $ | (543 | ) | $ | (1,719 | ) | ||||
| Adjustments to reconcile consolidated net loss to net cash | ||||||||||||||||
| provided by operating activities: | ||||||||||||||||
| Adjustments to reconcile consolidated net loss to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 643 | 809 | 1,720 | 2,106 | ||||||||||||
| Stock-based compensation | 170 | 129 | 700 | 624 | ||||||||||||
| Deferred income taxes | (71 | ) | (734 | ) | (412 | ) | (607 | ) | ||||||||
| Pension cost | 200 | 113 | 596 | 274 | ||||||||||||
| Loss on disposal of property and equipment | 33 | - | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (92 | ) | 2,543 | 568 | 2,509 | |||||||||||
| Prepaid expenses and other current assets | (439 | ) | 474 | (297 | ) | 904 | ||||||||||
| Other assets | (336 | ) | 75 | (8 | ) | 367 | ||||||||||
| Accounts payable and accrued expenses | 666 | 20 | ||||||||||||||
| Accounts payable, accrued expenses and other | 814 | (208 | ) | |||||||||||||
| Accrued salaries, wages and related benefits | (53 | ) | (1,047 | ) | 1,729 | (29 | ) | |||||||||
| Income and other taxes | 369 | 170 | 753 | 669 | ||||||||||||
| Net cash provided by operating activities | 703 | 2,101 | 5,653 | 4,890 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (578 | ) | (485 | ) | (1,115 | ) | (1,314 | ) | ||||||||
| Proceeds from disposal of property and equipment | 39 | - | ||||||||||||||
| Net cash used in investing activities | (578 | ) | (485 | ) | (1,076 | ) | (1,314 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from bank loan | 580 | - | ||||||||||||||
| Payment of long-term obligations | (57 | ) | (387 | ) | (800 | ) | (922 | ) | ||||||||
| Proceeds from exercise of stock options | 167 | - | ||||||||||||||
| Purchase of treasury stock | - | (44 | ) | |||||||||||||
| Net cash used in financing activities | (57 | ) | (387 | ) | (53 | ) | (966 | ) | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | (197 | ) | 63 | (62 | ) | (291 | ) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (129 | ) | 1,292 | |||||||||||||
| Net increase in cash and cash equivalents | 4,462 | 2,319 | ||||||||||||||
| Cash and cash equivalents, beginning of period | 10,874 | 10,869 | 10,874 | 10,869 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 10,745 | $ | 12,161 | $ | 15,336 | $ | 13,188 | ||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||||
| Cash paid for income taxes | $ | - | $ | 339 | $ | 209 | $ | 726 | ||||||||
| Cash paid for operating leases | $ | 504 | $ | 501 | $ | 1,412 | $ | 1,909 | ||||||||
| Vendor financed software licenses acquired | $ | 1,079 | $ | - | ||||||||||||
See notes to Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
(In thousands)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Retained | Other Comprehensive | Treasury Stock | Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| January 1, 2019 | 25,877 | $ | 275 | $ | 27,579 | $ | 7,349 | $ | (15 | ) | 1,681 | $ | (4,622 | ) | $ | 30,566 | 27,558 | $ | 275 | $ | 27,579 | $ | 7,349 | $ | (15 | ) | 1,681 | $ | (4,622 | ) | $ | 30,566 | ||||||||||||||||||||||||||||||||
| Revision adjustments | - | - | - | (237 | ) | - | - | - | (237 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (452 | ) | - | - | - | (452 | ) | - | - | - | (452 | ) | - | - | - | (452 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 75 | - | 129 | - | - | - | - | 129 | 75 | - | 128 | - | - | - | - | 128 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (36 | ) | - | - | (36 | ) | - | - | - | - | (36 | ) | - | - | (36 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 264 | - | - | 264 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 264 | - | - | 264 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2019 | 25,952 | $ | 275 | $ | 27,708 | $ | 6,897 | $ | 213 | 1,681 | $ | (4,622 | ) | $ | 30,471 | 27,633 | 275 | 27,707 | 6,660 | 213 | 1,681 | (4,622 | ) | 30,233 | ||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (694 | ) | - | - | - | (694 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 145 | - | - | - | - | 145 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 23 | - | - | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | 27,633 | 275 | 27,852 | 5,966 | 195 | 1,681 | (4,622 | ) | 29,666 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (563 | ) | - | - | - | (563 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 34 | (44 | ) | (44 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 351 | - | - | - | - | 351 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (252 | ) | - | - | (252 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | 27,633 | $ | 275 | $ | 28,203 | $ | 5,403 | $ | (98 | ) | 1,715 | $ | (4,666 | ) | $ | 29,117 | ||||||||||||||||||||||||||||||||||||||||||||||||
| January 1, 2020 | 27,643 | $ | 275 | $ | 28,426 | $ | 4,993 | $ | (920 | ) | 3,184 | $ | (6,465 | ) | $ | 26,309 | 27,643 | $ | 275 | $ | 28,426 | $ | 4,216 | $ | (920 | ) | 3,184 | $ | (6,465 | ) | $ | 25,532 | ||||||||||||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (365 | ) | - | - | - | (365 | ) | - | - | - | (365 | ) | - | - | - | (365 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | 170 | - | - | - | - | 170 | - | - | 170 | - | - | - | - | 170 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | 14 | - | - | 14 | - | - | - | - | 14 | - | - | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | (718 | ) | - | - | (718 | ) | - | - | - | - | (718 | ) | - | - | (718 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | (171 | ) | - | - | (171 | ) | - | - | - | - | (171 | ) | - | - | (171 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2020 | 27,643 | $ | 275 | $ | 28,596 | $ | 4,628 | $ | (1,795 | ) | 3,184 | $ | (6,465 | ) | $ | 25,239 | 27,643 | 275 | 28,596 | 3,851 | (1,795 | ) | 3,184 | (6,465 | ) | 24,462 | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (557 | ) | - | - | - | (557 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 298 | - | - | - | - | 298 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | 11 | - | - | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 221 | - | - | 221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 87 | - | - | 87 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2020 | 27,643 | 275 | 28,894 | 3,294 | (1,476 | ) | 3,184 | (6,465 | ) | 24,522 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revision adjustments | - | - | - | 148 | - | - | - | 148 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Innodata Inc. and Subsidiaries | - | - | - | 206 | - | - | - | 206 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares on stock option exercises | 278 | 3 | 312 | - | - | - | - | 315 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 232 | - | - | - | - | 232 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (1 | ) | - | - | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 216 | - | - | 216 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 51 | - | - | 51 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | 27,921 | $ | 278 | $ | 29,438 | $ | 3,648 | $ | (1,210 | ) | 3,184 | $ | (6,465 | ) | $ | 25,689 | ||||||||||||||||||||||||||||||||||||||||||||||||
See notes to Condensed Consolidated Financial Statements.
INNODATA INC. AND SUBSIDIARIES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
| 1. | Summary of Significant Accounting Policies |
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) that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the Company“Company”, “we”, “our” and “us”) as of March 31,September 30, 2020, the results of its operations and comprehensive loss for the three and nine months ended March 31,September 30, 2020 and 2019, cash flows for the threenine months ended March 31,September 30, 2020 and 2019, and stockholders’ equity for the three and nine months ended March 31,September 30, 2020 and 2019. 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.
Certain information and note disclosures normally included in theor with 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 statementsshould be read in conjunction with the condensed consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the Company'sCompany’s 2019 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 condensed consolidated financial statements for the year ended December 31, 2019.
Principles of Consolidation- The condensed 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 condensed consolidated 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Actual results could differ from those estimates. Significant estimates include those related to allowance for doubtful accounts and billing adjustments, useful life of long-lived assets, useful life of intangible assets, impairment of goodwill, valuation of deferred tax assets, valuation of stock-based compensation, litigation accruals and estimated accruals for various tax exposures.
Revenue Recognition- The Company’s revenue is recognized when services are rendered or goods are delivered to a customer, in an amount that reflects the consideration that we expectthe Company expects to receive in exchange for those services or goods as per the agreement with the customer. In cases where there are agreements with multiple performance obligations, we identifythe Company identifies each performance obligation and evaluateevaluates whether the performance obligation isobligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. TheFor agreements with distinct performance obligation, 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 performed for the customer to determine the timing of revenue recognition.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
For the Digital Data Solutions (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.
5
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed andperformance conditions are satisfied as per the agreement. A portion of ourthe Synodex segment revenue is derived from licensing our functional software and providing access to ourthe Company’s 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 the gross amount received for the goods in accordance with our functioning as a principal due to our meeting the following criteria. We actcriteria: the Company acts as the primary obligor in the sales transaction; assumeassumes the credit risk; setsets the price; can select suppliers; and areis 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 gross revenue gross as a principal versus net revenue as an agent. Factors considered includeThe Company evaluates whether we are the primary obligor, have risks and rewardsit is in control of ownership, and bear the risk that a customer may not pay for the services performed. If therebefore the same are circumstances wheretransferred to the above criteria are not met and therefore, we are not thecustomer to assess whether it is principal in providing services, amounts received from customers are presented net of paymentsor agent in the condensed consolidated statementsarrangement. Revenues are recognized on a gross basis if the Company is in the capacity of operationsprincipal and comprehensive loss.on a net basis if it falls in the capacity of an agent.
Contract acquisition cost,costs, which isare included in prepaid expenses and other current assets, for ourthe 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 and Israeli shekels are translated to U.S. dollars at rates using the average rates in effect on the transaction dates.
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 condensed 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.the condensed consolidated balance sheets. Foreign exchange transaction gains or losses are included in Direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive loss.income (loss).
INNODATA INC. AND SUBSIDIARIES
6NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
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 fluctuationfluctuations 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 currencies.
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 condensed 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 realizationrealizability 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 U.S. and Canadian operations cannot be predicted with certainty, the Company maintains a valuation allowance against all the U.S. and Canadian deferred tax assets.
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 condensed consolidated statements of operations and comprehensive loss.income (loss).
Deferred Revenue – - 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 and other on the condensed consolidated balance sheets includes $1.1 million of deferred revenue as of Marcheach of September 30, 2020 and December 31, 2019.
Unbilled Receivable - (classified along-with Accounts receivable): Work performed, and expenses incurred in advance of invoicing are recorded as unbilled receivables. Accounts receivable on the Condensed Consolidated Balance Sheets includes $0.4 million and $0.5 million of unbilled receivables as of September 30, 2020 and December 31, 2019, is deferred revenue amounting to $1.3 million and $1.1 million, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We do not expect that the adoption of the new guidance will have a material impact on our financial statements.
In August 2018,, the FASB issued Accounting Standards Update (ASU) No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General:Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), thatwhich 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 ASU 2018-14 but does not expect itASU 2018-14 to have a material impact on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit aLossesLosses on Financial InstrumentsStatements” (ASU 2016-13). ASU 2016-13 replacesrequires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the existing incurred loss impairment model with annet amount expected loss modelto be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which requiresclarifies codification and corrects unintended application of the useguidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies or addresses specific issues about certain aspects of forward-looking informationASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to calculateFinancial Instruments,” which modifies the measurement of expected credit loss estimates. The change will result in earlier recognitionlosses of credit losses.certain financial instruments. ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for smaller reporting companies;us if we continue to be classified as a Smaller Reporting Company, with early adoption is permitted.The Companyis currently evaluating ASU 2016-13 but does We do not expect it tothat the adoption of the new guidance will have a material impact on the Company’s condensed consolidatedour financial statements.
Correction of Immaterial Errors – During the preparation of the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating to the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses from 2017 to December 31, 2019 and an overstatement of expenses for the six months ended June 30, 2020.
7INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020, would be material to such period. Accordingly, the prior period financial statements are being corrected by revising the prior period condensed consolidated financial statements for comparability. For the September 30, 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet included in this Form 10-Q, the corrections are as follows:
| · | Increase in expenses of $8,000 for the three months ended September 30, 2019 and $49,000 for the nine months ended September 30, 2019. There was no impact on the loss per share for the three and nine month periods ended September 30, 2019. |
| · | An increase in December 31, 2019 liabilities of $528,000. |
| · | A decrease in December 31, |
| · | A decrease in December 31, 2019 total assets of $249,000. |
| · | The impact on cash flows for the nine months ended September 30, 2019 was: |
| · | A decrease in cash flows provided by operating activities of $38,000 |
| · | A decrease in cash flows used in investing activities of $79,000 |
| · | An increase in cash flows used in financing activities of $41,000 |
The Company evaluated each year’s/period’s errors under Staff Accounting Bulletins 99 and 108 and concluded that a restatement of year’s/prior periods’ consolidated financial statements is not required. Accordingly, the condensed consolidated financial statements and consolidated financial statements prior periods (March 31, 2020 and June 30, 2020) and year (December 31, 2019) consolidated financial statements will be revised in future Forms 10-Q and Form 10-K to be filed with the Securities and Exchange Commission. The September 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet have been revised in this Form 10-Q.
| 2. | Goodwill and Intangible Assets |
The Company has determined that recent adverse changes in macroeconomic trends as a consequence of the outbreak ofcontinuing COVID-19 constitutepandemic constituted a triggering event under U.S. GAAP (Accounting Standards Codification (ASC) No. 350, Intangibles-Goodwill“Intangibles - Goodwill and OtherOther” and Accounting Standards CodificationASC No. 360, Impairment and“Impairment or Disposal of Long-Lived Assets)Assets”). The Company has completed its impairment analysis procedures as of March 31, 2020 and has updated its impairment analysis on its reporting units as of March 31, 2020 and hasSeptember 30, 2020. The Company determined that there was no impairment of long-lived assets, tangible noror intangible, in any reporting units.units as of September 30, 2020.
The changes in the carrying amount of goodwill for the threenine months ended March 31,September 30, 2020 and 2019 were as follows (in thousands):
| Balance as of January 1, 2019 | $ | 2,050 | $ | 2,050 | ||||
| Foreign currency translation adjustment | 39 | 12 | ||||||
| Balance as of March 31, 2019 | $ | 2,089 | ||||||
| Balance as of September 30, 2019 | $ | 2,062 | ||||||
| Balance as of January 1, 2020 | $ | 2,108 | $ | 2,108 | ||||
| Foreign currency translation adjustment | (105 | ) | (39 | ) | ||||
| Balance as of March 31, 2020 | $ | 2,003 | ||||||
| Balance as of September 30, 2020 | $ | 2,069 | ||||||
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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
Information regarding the Company’s acquisition-related intangible assets was as follows (in thousands):
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | 3,108 | $ | 2,177 | $ | 871 | $ | 44 | $ | 3,605 | $ | 9,805 | $ | 3,108 | $ | 2,177 | $ | 871 | $ | 43 | $ | 3,606 | $ | 9,805 | ||||||||||||||||||||||||
| Foreign currency translation | (206 | ) | (184 | ) | (29 | ) | (3 | ) | (95 | ) | (517 | ) | (74 | ) | (65 | ) | (11 | ) | (1 | ) | (40 | ) | (191 | ) | ||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | 2,902 | $ | 1,993 | $ | 842 | $ | 41 | $ | 3,510 | $ | 9,288 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 3,034 | $ | 2,112 | $ | 860 | $ | 42 | $ | 3,566 | $ | 9,614 | ||||||||||||||||||||||||||||||||||||
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 2,999 | $ | 2,081 | $ | 855 | $ | 42 | $ | 3,546 | $ | 9,523 | $ | 2,999 | $ | 2,081 | $ | 855 | $ | 42 | $ | 3,546 | $ | 9,523 | ||||||||||||||||||||||||
| Foreign currency translation | 61 | 47 | 10 | 1 | 59 | 178 | 51 | 63 | 4 | 1 | (36 | ) | 83 | |||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | $ | 3,060 | $ | 2,128 | $ | 865 | $ | 43 | $ | 3,605 | $ | 9,701 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 3,050 | $ | 2,144 | $ | 859 | $ | 43 | $ | 3,510 | $ | 9,606 | ||||||||||||||||||||||||||||||||||||
8
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | 1,493 | $ | 983 | $ | 567 | $ | 24 | $ | 1,261 | $ | 4,328 | ||||||||||||
| Amortization expense | 230 | 134 | 41 | 3 | 271 | 679 | ||||||||||||||||||
| Foreign currency translation | (39 | ) | (32 | ) | (5 | ) | - | (19 | ) | (95 | ) | |||||||||||||
| Balance as of September 30, 2020 | $ | 1,684 | $ | 1,085 | $ | 603 | $ | 27 | $ | 1,513 | $ | 4,912 | ||||||||||||
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | 1,493 | $ | 983 | $ | 567 | $ | 24 | $ | 1,262 | $ | 4,329 | ||||||||||||
| Amortization expense | 78 | 45 | 14 | 1 | 90 | 228 | ||||||||||||||||||
| Foreign currency translation | (111 | ) | (87 | ) | (15 | ) | (2 | ) | (36 | ) | (251 | ) | ||||||||||||
| Balance as of March 31, 2020 | $ | 1,460 | $ | 941 | $ | 566 | $ | 23 | $ | 1,316 | $ | 4,306 | ||||||||||||
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 1,137 | $ | 766 | $ | 440 | $ | 19 | $ | 886 | $ | 3,248 | $ | 1,137 | $ | 766 | $ | 440 | $ | 19 | $ | 886 | $ | 3,248 | ||||||||||||||||||||||||
| Amortization expense | 77 | 45 | 30 | 1 | 89 | 242 | 230 | 133 | 90 | 3 | 269 | 725 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | 24 | 16 | 4 | - | 16 | 60 | 24 | 24 | 2 | 1 | (15 | ) | 36 | |||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | $ | 1,238 | $ | 827 | $ | 474 | $ | 20 | $ | 991 | $ | 3,550 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 1,391 | $ | 923 | $ | 532 | $ | 23 | $ | 1,140 | $ | 4,009 | ||||||||||||||||||||||||||||||||||||
Amortization expense relating to acquisition-related intangible assets was $0.2 million for each of the three months ended March 31,September 30, 2020 and 2019. Amortization expense relating to acquisition-related intangible assets was $0.7 million for each of the nine months ended September 30, 2020 and 2019.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
As of the date hereof, estimated amortization expense for intangible assets after March 31,September 30, 2020 is as follows (in thousands):
| Year | Amortization | ||||
| 2020 | $ | 648 | |||
| 2021 | 864 | ||||
| 2022 | 864 | ||||
| 2023 | 864 | ||||
| 2024 | 772 | ||||
| Thereafter | 970 | ||||
| $ | 4,982 | ||||
| Year | Amortization | |||
| 2020 | $ | 224 | ||
| 2021 | 895 | |||
| 2022 | 895 | |||
| 2023 | 895 | |||
| 2024 | 797 | |||
| Thereafter | 996 | |||
| $ | 4,702 | |||
| 3. | Income Taxes |
The Company recorded a tax benefit of $0.1 million and a provision for income taxes of $0.4 million and ($28,000) for the three months ended March 31,September 30, 2020 and 2019, respectively.respectively; and a tax provision of $0.5 million for each of the nine months ended September 30, 2020 and 2019. Taxes primarily consist of a provision for foreign taxes recorded by the Company’s foreign subsidiaries in accordance with 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, anda tax effectseffect of foreign operations, including foreign exchange gains and losses.losses and tax impact on uncertain tax position (ASC 740).
The reconciliations of the U.S. statutory rate with the Company’s effective tax rate for each of the three-month periodsnine months ended March 31,September 30, 2020 and 2019 are summarized in the table below:
9
| For the three months ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Federal income tax expense at statutory rate | 21.0 | % | 21.0 | % | ||||||||||||
| Federal income tax benefit at statutory rate | (21.0 | )% | (21.0 | )% | ||||||||||||
| Effect of: | - | |||||||||||||||
| Tax effects of foreign operations | 597.8 | (34.0 | ) | |||||||||||||
| Change in valuation allowance | (660.0 | ) | (15.1 | ) | ||||||||||||
| Foreign rate differential | (295.9 | ) | (1.8 | ) | ||||||||||||
| Return to provision true up | (14.8 | ) | (0.3 | ) | ||||||||||||
| Withholding tax | - | 4.5 | ||||||||||||||
| State income tax net of federal benefit | (120.1 | ) | 1.8 | |||||||||||||
| Foreign operations permanent difference - foreign exchange gains and losses | 355.3 | 104.2 | 90.3 | (39.3 | ) | |||||||||||
| Increase in unrecognized tax benefits (ASC 740) | 165.1 | (36.8 | ) | 410.5 | 30.8 | |||||||||||
| State income tax net of federal benefit | 39.8 | - | ||||||||||||||
| Withholding tax | 22.9 | - | ||||||||||||||
| Return to provision true up | 1.2 | (28.0 | ) | |||||||||||||
| Foreign rate differential | (85.5 | ) | (8.1 | ) | ||||||||||||
| Change in valuation allowance | (193.3 | ) | (7.9 | ) | ||||||||||||
| Other | (130.2 | ) | (4.6 | ) | ||||||||||||
| Tax effects of foreign operations | 1,610.6 | 84.8 | ||||||||||||||
| Effect of share based compensation | 263.7 | - | ||||||||||||||
| Others | 29.0 | (4.2 | ) | |||||||||||||
| Effective tax rate | 794.1 | % | 5.8 | % | 1,292.3 | % | 40.2 | % | ||||||||
As of March 31,September 30, 2020, 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 ourcertain foreign subsidiaries.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the threenine months ended March 31,September 30, 2020 (in thousands):
| Unrecognized tax benefits | Unrecognized tax benefits | |||||||
| Balance - January 1, 2020 | $ | 2,957 | $ | 2,957 | ||||
| Increase in tax position | 75 | |||||||
| Increase for current year tax position | 225 | |||||||
| Decrease for prior year tax position | (161 | ) | ||||||
| Interest accrual | 45 | 125 | ||||||
| Foreign currency remeasurement | (149 | ) | (100 | ) | ||||
| Balance - March 31, 2020 | $ | 2,928 | ||||||
| Balance - September 30, 2020 | $ | 3,046 | ||||||
The Company had unrecognized tax benefits of approximately $2.9 million and $3.0 million as of March 31, 2020 and December 31, 2019, respectively. The portion of unrecognized tax benefits relating to an increase in tax positions was approximately $0.1 million while the portion of unrecognized tax benefits relating to interest and penalties was approximately $45,000 for the three months ended March 31, 2020. The Company expects that unrecognized tax benefits as of March 31,September 30, 2020 and December 31, 2019, if recognized, would have a material impact on the Company’s effective tax rate.
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 2019.
10
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. The Company disagrees with the Service Tax Department’s position. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department’s position. The Company is contesting this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately 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%, and this subsidiary may also be liable for interest and penalties. 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 a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices 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. The Company disagrees with the basis of this decision and is contesting it. 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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
Substantial recovery against the Company in the above referenced 2015 Service Tax Department case could have a material adverse impact on the Company, and unfavorable rulings or recoveries in other tax proceedings could have a material adverse impact on the consolidated operating results of the period (and subsequent periods) in which the rulings or recovery occurs.
| 4. | Commitments and Contingencies |
COVID-19 Pandemic - The novel coronavirus disease 2019 (“COVID-19”), which the World Health Organization declared as a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, caused federal and regional governments to impose substantial restrictions on the operations of non-essential businesses and contributed to significant declines and volatility in financial markets. The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of COVID-19 on the Company’s performance and financial results.
The situation surrounding the COVID-19 crisis remains fluid and the extent and duration of its impact toon the economy remains unclear. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact to itsthat the pandemic may have on the Company’s results of operations and financial condition. In late March, as a result of the COVID-19 crisis, the Company began to experience reduced demand for its services from existing and prospective customers. The potential for a material impact on the Company’s results of operations and financial position increases the longer the virus affects the level of economic activity in the United States and globally.
TheWith the current level of demand for our services, the Company believes it has existing cash and cash equivalents whichthat provide sufficient sources of liquidity to satisfy the Company’s financial needs for the next 12 months from the filing date of this Quarterly Report while sustaining the current level of reduced demand for our services for a period of time.on Form 10-Q. In the event the Company experiences a significant or prolonged reduction in revenues, the likelihood of which is uncertain, it would seek to manage its liquidity by reducing capital expenditures, deferring investinginvestment activities and reducing operating costs, as it would likely have no other source of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
11
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 potential payment amount aggregates to approximately $6.4 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 potential 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 themselves 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.
The Company is also subject to various other legal proceedings and claims that have arisen in the ordinary course of business.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
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 consolidatedand 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 consolidatedfinancial position and operating results of the Company. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidatedand results of operations for the above referenced legal proceedings could change in the future.
The Company’s legal accruals related to legal proceedings and claims are based on the Company’s determination of whether or not a loss is probable. The Company reviewsoutstandingproceedings and claims with external counsel to assess probability and estimates of loss. The accruals are adjusted if necessary. While the Company intends to vigorously defend against these matters, vigorously, adverse outcomes that it estimates could reach approximately $300,000 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.
12
| 5. | Stock Options |
On June 7, 2016, stockholdersA summary of stock option activity under the Company approved amendments to the Innodata Inc. 2013 Stock Plan. 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.
A summary of stock option activity under the Plan(Plan), as of March 31,September 30, 2020, and changes during the threenine months then ended, are presented below:
| Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||||||||||||||
| Outstanding at January 1, 2020 | 6,833,303 | $ | 1.86 | 6,833,303 | $ | 1.86 | ||||||||||||||||||||||||||
| Granted | - | 1,080,000 | 1.37 | |||||||||||||||||||||||||||||
| Exercised | - | (278,333 | ) | 1.13 | ||||||||||||||||||||||||||||
| Forfeited/Expired | (544,303 | ) | 3.39 | (644,303 | ) | 3.06 | ||||||||||||||||||||||||||
| Outstanding at March 31, 2020 | 6,289,000 | $ | 1.73 | 7.19 | $ | - | ||||||||||||||||||||||||||
| Outstanding at September 30, 2020 | 6,990,667 | $ | 1.70 | 7.07 | $ | 9,704,426 | ||||||||||||||||||||||||||
| Exercisable at March 31, 2020 | 4,108,622 | $ | 2.01 | 6.29 | $ | - | ||||||||||||||||||||||||||
| Exercisable at September 30, 2020 | 4,651,624 | $ | 1.93 | 6.15 | $ | 5,420,040 | ||||||||||||||||||||||||||
| Vested and Expected to Vest at March 31, 2020 | 6,289,000 | $ | 1.73 | 7.19 | $ | - | ||||||||||||||||||||||||||
| Vested and Expected to Vest at September 30, 2020 | 6,990,667 | $ | 1.70 | 7.07 | $ | 9,704,426 | ||||||||||||||||||||||||||
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:
13INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
| For the three months ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Weighted average fair value of options granted | $ | - | $ | 0.64 | $ | 0.61 | $ | 0.56 | ||||||||
| Risk-free interest rate | - | 2.55 | % | 0.29%-0.56% | 1.7% - 2.6% | |||||||||||
| Expected term (years) | - | 6 | 5-6 | 5-6 | ||||||||||||
| Expected volatility factor | - | 45 | % | 47% - 50% | 45% - 46% | |||||||||||
| Expected dividends | - | None | None | None | ||||||||||||
A summary of restricted shares under the Company’s Plan as of March 31,September 30, 2020 are presented below:
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Granted | 75,000 | $ | 1.38 | |||||
| Vested | (25,000 | ) | - | |||||
| Forfeited/Expired | - | - | ||||||
| Unvested at March 31, 2020 | 50,000 | $ | 1.38 | |||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Granted | 75,000 | $ | 1.38 | |||||
| Vested | (25,000 | ) | ||||||
| Forfeited/Expired | - | |||||||
| Unvested at September 30, 2020 | 50,000 | |||||||
The compensation cost related to non-vested stock options and restricted stock awards not yet recognized as of March 31,September 30, 2020 totaled approximately $1.2$1.3 million. The weighted-average period over which these costs will be recognized is twenty-threetwenty-four months.
The stock-based compensation expense related to the Company’s various stock awards was allocated as follows (in thousands):
| For the three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Direct operating costs | $ | 40 | $ | 18 | ||||
| Selling and administrative expenses | 130 | 111 | ||||||
| Total stock-based compensation | $ | 170 | $ | 129 | ||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Direct operating costs | $ | 40 | $ | 34 | $ | 119 | $ | 72 | ||||||||
| Selling and administrative expenses | 192 | 317 | 581 | 552 | ||||||||||||
| Total stock-based compensation | $ | 232 | $ | 351 | $ | 700 | $ | 624 | ||||||||
| 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 forhave remaining lease terms ranging from two to eleventen 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.
14
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The Company adopted ASU No. 2016-02, “Leases (Topic 842)”,” beginning January 1, 2019 and applied the practical expedients consistently for all of its leases.
The table below summarizes the amounts recognized in the condensed consolidated financial statements related to operating leases for the periods presented (in thousands):
| For the three months ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Rent expense for long-term operating leases | $ | 443 | $ | 415 | $ | 402 | $ | 453 | $ | 1,266 | $ | 1,360 | ||||||||||||
| Rent expense for short-term leases | 61 | 86 | 122 | 143 | 511 | 473 | ||||||||||||||||||
| Total rent expense | $ | 504 | $ | 501 | $ | 524 | $ | 596 | $ | 1,777 | $ | 1,833 | ||||||||||||
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 condensed consolidated balance sheetsheets as of March 31,September 30, 2020 (in thousands):
| Year | Amount | |||
| 2020 | $ | 1,188 | ||
| 2021 | 1,232 | |||
| 2022 | 1,182 | |||
| 2023 | 1,031 | |||
| 2024 | 1,048 | |||
| 2025 and thereafter | 4,585 | |||
| Total lease payments | 10,266 | |||
| Less: Interest | (3,016 | ) | ||
| Net present value of lease liabilities | $ | 7,250 | ||
| Current portion | $ | 922 | ||
| Long-term portion | 6,328 | |||
| Total | $ | 7,250 | ||
| Year | Amount | |||
| 2020 | $ | 396 | ||
| 2021 | 1,603 | |||
| 2022 | 1,569 | |||
| 2023 | 1,289 | |||
| 2024 | 1,060 | |||
| 2025 and thereafter | 4,612 | |||
| Total lease payments | 10,529 | |||
| Less: Interest | (2,871 | ) | ||
| Net present value of lease liabilities | $ | 7,658 | ||
| Current portion | $ | 967 | ||
| Long-term portion | 6,691 | |||
| Total | $ | 7,658 | ||
The weighted-average remaining lease terms and discount rates for all of our operating leases as of March 31,September 30, 2020 were as follows:
| Weighted-average lease term remaining | |||
| Weighted-average discount rate | 8.92% | ||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
| 7. | Long-term Obligations |
Total long-term obligations of the Company as of March 31,September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
15
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Pension obligations - accrued pension liability | $ | 4,670 | $ | 4,611 | $ | 5,224 | $ | 4,611 | ||||||||
| Settlement agreement(1) | 652 | 708 | 572 | 708 | ||||||||||||
| Capital lease obligations | 113 | 127 | 269 | 655 | ||||||||||||
| Microsoft licenses (2) | 734 | - | ||||||||||||||
| Bank loans payable (3) | 580 | - | ||||||||||||||
| 5,435 | 5,446 | 7,379 | 5,974 | |||||||||||||
| Less: Current portion of long-term obligations | 856 | 912 | 1,958 | 1,440 | ||||||||||||
| Totals | $ | 4,579 | $ | 4,534 | $ | 5,421 | $ | 4,534 | ||||||||
(1) Represents payment to be made pursuant to a settlement agreement entered into in December 2018 between a subsidiary of the Company and 19 former employees of such subsidiary. The balance is payable in monthly installments through March 2023.
(2) In April 2020, 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 2023. Pursuant to this agreement, the Company is obligated to pay approximately $0.4 million annually over the term of the agreement.
(3) On May 4, 2020, we received loan proceeds of $579,700 under the Paycheck Protection Program which was established as part of the Coronavirus Aid, Relief and Economic Security Act. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan, if any, is payable over two years at an interest rate of 1% per year, with a deferral of payments until the date that the Small Business Administration remits the borrower’s loan forgiveness amount to the lender.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(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 March 31,September 30, 2020, and reclassifications out of Accumulated other comprehensive loss, for the threenine months ended March 31,September 30, 2020 and 2019, were as follows (net of tax) (in thousands):
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at January 1, 2020 | $ | (53 | ) | $ | 33 | $ | (900 | ) | $ | (920 | ) | |||||
| Other comprehensive loss before reclassifications, net of taxes | - | (166 | ) | (718 | ) | (884 | ) | |||||||||
| Total other comprehensive loss before reclassifications, net of taxes | (53 | ) | (133 | ) | (1,618 | ) | (1,804 | ) | ||||||||
| Net amount reclassified to earnings | 14 | (5 | ) | - | 9 | |||||||||||
| Balance at March 31, 2020 | $ | (39 | ) | $ | (138 | ) | $ | (1,618 | ) | $ | (1,795 | ) | ||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at July 1, 2020 | $ | (28 | ) | $ | (51 | ) | $ | (1,397 | ) | $ | (1,476 | ) | ||||
| Other comprehensive income before reclassifications, net of taxes | - | 12 | 216 | 228 | ||||||||||||
| Total other comprehensive loss before reclassifications, net of taxes | (28 | ) | (39 | ) | (1,181 | ) | (1,248 | ) | ||||||||
| Net amount reclassified to earnings | (1 | ) | 39 | - | 38 | |||||||||||
| Balance at September 30, 2020 | $ | (29 | ) | $ | - | $ | (1,181 | ) | $ | (1,210 | ) | |||||
| 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 | - | - | 264 | 264 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,451 | - | (1,202 | ) | 249 | |||||||||||
| Net amount reclassified to earnings | (36 | ) | - | - | (36 | ) | ||||||||||
| Balance at March 31, 2019 | $ | 1,415 | $ | - | $ | (1,202 | ) | $ | 213 | |||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive 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 January 1, 2020 | $ | (53 | ) | $ | 33 | $ | (900 | ) | $ | (920 | ) | |||||
| Other comprehensive loss before reclassifications, net of taxes | - | (154 | ) | (281 | ) | (435 | ) | |||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | (53 | ) | (121 | ) | (1,181 | ) | (1,355 | ) | ||||||||
| Net amount reclassified to earnings | 24 | 121 | - | 145 | ||||||||||||
| Balance at September 30, 2020 | $ | (29 | ) | $ | - | $ | (1,181 | ) | $ | (1,210 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (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 | ) | ||||||
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.
INNODATA INC. AND SUBSIDIARIES
16NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
| 9. | Segment Reporting and Concentrations |
The Company’s operations are classified in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
The DDS segment provides a range of solutions and platforms for solving complex data challenges that companies face when they seek to obtain the benefits of artificial intelligence (AI) systems and analytics platforms. These include data annotation, data transformation, data curation and intelligent automation. The DDS segment also provides a variety of services for clients in the information industry that relate to content operations and product development.
The Synodex segment provides an intelligent data platform that transforms medical records into useable digital data organized in accordance with our proprietary data models or client data models.
The Agility segment provides an intelligent data platform that provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.
A significant portion of the Company’s revenues isare generated from its 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 for the periods presented were as follows (in thousands):
| For the three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| DDS | $ | 10,409 | $ | 10,177 | ||||
| Synodex | 1,282 | 1,024 | ||||||
| Agility | 2,839 | 2,493 | ||||||
| Total Consolidated | $ | 14,530 | $ | 13,694 | ||||
| Income (loss) before provision for income taxes(1): | ||||||||
| DDS | $ | 129 | $ | 74 | ||||
| Synodex | 196 | 119 | ||||||
| Agility | (274 | ) | (672 | ) | ||||
| Total Consolidated | $ | 51 | $ | (479 | ) | |||
| Income (loss) before provision for income taxes(2): | ||||||||
| DDS | $ | 59 | $ | 12 | ||||
| Synodex | 241 | 159 | ||||||
| Agility | (249 | ) | (650 | ) | ||||
| Total Consolidated | $ | 51 | $ | (479 | ) | |||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| DDS | $ | 10,526 | $ | 10,124 | $ | 30,793 | $ | 30,353 | ||||||||
| Synodex | 1,197 | 977 | 3,680 | 2,916 | ||||||||||||
| Agility | 2,830 | 2,745 | 8,473 | 7,910 | ||||||||||||
| Total Consolidated | $ | 14,553 | $ | 13,846 | $ | 42,946 | $ | 41,179 | ||||||||
| Income (loss) before provision for income taxes(1): | ||||||||||||||||
| DDS | $ | 4 | $ | 371 | $ | 226 | $ | 579 | ||||||||
| Synodex | 79 | (70 | ) | 356 | (81 | ) | ||||||||||
| Agility | 60 | (446 | ) | (621 | ) | (1,724 | ) | |||||||||
| Total Consolidated | $ | 143 | $ | (145 | ) | $ | (39 | ) | $ | (1,226 | ) | |||||
| Income (loss) before provision for income taxes(2): | ||||||||||||||||
| DDS | $ | (64 | ) | $ | 304 | $ | 27 | $ | 391 | |||||||
| Synodex | 124 | (26 | ) | 487 | 42 | |||||||||||
| Agility | 83 | (423 | ) | (553 | ) | (1,659 | ) | |||||||||
| Total Consolidated | $ | 143 | $ | (145 | ) | $ | (39 | ) | $ | (1,226 | ) | |||||
| September 30, 2020 | December 31, 2019 | |||||||
| Total assets: | ||||||||
| DDS | $ | 27,433 | $ | 23,115 | ||||
| Synodex | 564 | 675 | ||||||
| Agility | 26,001 | 25,707 | ||||||
| Total Consolidated | $ | 53,998 | $ | 49,497 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| Goodwill: | ||||||||
| Agility | $ | 2,069 | $ | 2,108 | ||||
| Total Consolidated | $ | 2,069 | $ | 2,108 | ||||
17
| March 31, 2020 | December 31, 2019 | |||||||
| Total assets: | ||||||||
| DDS | $ | 21,537 | $ | 23,196 | ||||
| Synodex | 598 | 675 | ||||||
| Agility | 26,741 | 25,875 | ||||||
| Total Consolidated | $ | 48,876 | $ | 49,746 | ||||
| March 31, 2020 | December 31, 2019 | |||||||
| Goodwill: | ||||||||
| Agility | $ | 2,003 | $ | 2,108 | ||||
| Total Consolidated | $ | 2,003 | $ | 2,108 |
(1) Before elimination of any inter-segment profits
(2) After elimination of any inter-segment profits
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The following table summarizes revenues by geographic region (determined and based upon customer’scustomers’ domicile) for the periods presented (in thousands):
| For the Three Months | For the Nine Months | |||||||||||||||||||||||
| For the three months ended March 31, | Ended September 30, | Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | 6,690 | $ | 6,531 | $ | 6,613 | $ | 5,967 | $ | 19,561 | $ | 18,507 | ||||||||||||
| United Kingdom | 2,771 | 2,318 | 2,832 | 2,394 | 8,284 | 7,120 | ||||||||||||||||||
| The Netherlands | 1,640 | 1,722 | 1,704 | 1,730 | 5,003 | 5,146 | ||||||||||||||||||
| Canada | 1,545 | 1,484 | 1,434 | 1,634 | 4,304 | 4,594 | ||||||||||||||||||
| Others - principally Europe | 1,884 | 1,639 | 1,970 | 2,121 | 5,794 | 5,812 | ||||||||||||||||||
| Totals | $ | 14,530 | $ | 13,694 | $ | 14,553 | $ | 13,846 | $ | 42,946 | $ | 41,179 | ||||||||||||
Long-lived assets of the Company as of March 31,September 30, 2020 and December 31, 2019, respectively, by geographic region, were comprised of the following (in thousands):
| March 31, 2020 | December 31, 2019 | |||||||
| United States | $ | 4,455 | $ | 4,591 | ||||
| Foreign countries: | ||||||||
| Canada | 8,216 | 8,876 | ||||||
| United Kingdom | 1,738 | 1,907 | ||||||
| Philippines | 4,998 | 5,135 | ||||||
| India | 381 | 508 | ||||||
| Sri Lanka | 632 | 678 | ||||||
| Israel | 4 | 19 | ||||||
| Germany | 1 | 1 | ||||||
| Total foreign | 15,970 | 17,124 | ||||||
| Totals | $ | 20,425 | $ | 21,715 | ||||
18
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| United States | $ | 4,162 | $ | 4,521 | ||||
| Foreign countries: | ||||||||
| Canada | 8,532 | 8,708 | ||||||
| United Kingdom | 1,699 | 1,907 | ||||||
| Philippines | 4,688 | 5,135 | ||||||
| India | 1,025 | 508 | ||||||
| Sri Lanka | 529 | 678 | ||||||
| Israel | 1 | 19 | ||||||
| Germany | 1 | 1 | ||||||
| Total foreign | 16,475 | 16,956 | ||||||
| Totals | $ | 20,637 | $ | 21,477 | ||||
Long-lived assets include the unamortized balance of right-of-use assets amounting to $6.5$6.9 million and $7.0 million as of March 31,September 30, 2020 and December 31, 2019, respectively.
Two clients in the DDS segment generated approximately 23% and 25% of the Company’s total revenues for the three months ended September 30, 2020 and September 30, 2019, respectively. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 55% and 57% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively.
One client in the DDS segment generated approximately 14% of the Company’s total revenues for the three months ended March 31, 2020 and 16% of the Company’s total revenues for the threenine months ended March 31, 2019.September 30, 2020 and 2019, respectively. Another client in the DDS segment generated less than 10% of the Company’s total revenues for the threenine months ended March 31, 2020 and 10% of the Company’s total revenues for the three months ended March 31,September 30, 2019. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 54% and 52% of the Company’s total revenues for each of the threenine months ended March 31,September 30, 2020 and 2019, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
As of March 31,September 30, 2020, approximately 59%57% of the Company'sCompany’s accounts receivable was from foreign (principally European) clients and 28%24% of the Company’s accounts receivable was due from two clients. As of December 31, 2019, approximately 60% of the Company'sCompany’s accounts receivable was from foreign (principally European) clients and 44% of the Company’s accounts receivable was due from three clients.
| 10. |
| For the three months ended March 31, | (In thousands) | |||||||||||||||||||||||
| 2020 | 2019 | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (365 | ) | $ | (452 | ) | ||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 206 | $ | (563 | ) | $ | (568 | ) | $ | (1,709 | ) | |||||||||||||
| Weighted average common shares outstanding | 24,401 | 25,927 | 24,470 | 25,856 | 24,427 | 25,870 | ||||||||||||||||||
| Dilutive effect of outstanding options | - | - | 790 | - | - | - | ||||||||||||||||||
| Adjusted for dilutive computation | 24,401 | 25,927 | 25,260 | 25,856 | 24,427 | 25,870 | ||||||||||||||||||
Basic lossincome (loss) per share is computed using the weighted-average number of common shares outstanding during the year. Diluted lossincome (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the two-class method of computing lossincome (loss) per share is used.
Options to purchase 6.32.3 million shares and 5.0 million sharesof common stock for the three months ended March 31,September 30, 2020, and 2019, respectively, were outstanding but not included in the computation of diluted lossincome (loss) per share because the exercise price of the options waswere greater than the average market price of the common shares and therefore have not been considered as potential equity shares. Diluted loss per share and Basic loss per share are the effect would have been anti-dilutive.same due to the reported loss for three months ended September 30, 2019. Options to purchase 6.9 million shares of common stock were anti-dilutive for three months ended September 30, 2019.
Diluted loss per share and Basic loss per share are the same due to the reported loss for the nine months ended September 30, 2020 and September 30, 2019. Options to purchase 7.0 million shares and 6.9 million shares of common stock were anti-dilutive for nine months ended September 30, 2020 and September 30, 2019, respectively.
| 11. | Derivatives |
The Company conducts a large portion of its operations in international markets that subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.
In addition, although most of the Company’s revenues are denominated in U.S. dollars, a significant portion of the total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
INNODATA INC. AND SUBSIDIARIES
19NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
To manage its exposure to fluctuations in foreign currency exchange rates, the Company enters into foreign currency forward contracts, authorized under Company policies. The Company utilizes non-deliverable forward contracts expiring within six months to reduce its foreign currency risk.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedging transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. The totalThere were no notional amount foramounts outstanding derivatives as of March 31, 2020 and December 31, 2019 was $3.2 million and $4.3 million, respectively, which was comprised of cash flow hedges denominated in U.S. dollars.September 30, 2020.
The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 (in thousands):
| Balance Sheet Location | Fair Value | |||||||||
| 2020 | 2019 | |||||||||
| Derivatives designated as hedging instruments: | ||||||||||
| Foreign currency forward contracts | Accrued expenses | $ | 138 | $ | - | |||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | - | $ | 33 | |||||
The effects of foreign currency forward contracts designated as cash flow hedges on the Company’s condensed consolidated statements of operations and comprehensive loss for the threenine months ended March 31,September 30, 2020 and 2019, respectively, were as follows (in thousands):
| For the three months ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Net gain (loss) recognized in OCI(1) | $ | (166 | ) | $ | - | ||
| Net (gain) loss reclassified from accumulated OCI into income(2) | $ | (5 | ) | $ | - | ||
| Net gain recognized in income(3) | $ | - | $ | - | |||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net gain (loss) recognized in OCI(1) | $ | 12 | $ | - | $ | (154 | ) | $ | - | |||||||
| Net (gain) loss reclassified from accumulated OCI into income(2) | $ | 39 | $ | - | $ | 121 | $ | - | ||||||||
| Net gain recognized in income(3) | $ | - | $ | - | $ | - | $ | - | ||||||||
(1)Net change in fair value of the effective portion classified into other comprehensive income ("OCI")
(2)Effective portion classified within direct operating costs
(3)There were no ineffective portions for the periodperiods presented.
On May 4, 2020, the Company received loan proceeds of $579,700 under the Paycheck Protection Program (PPP) established as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan is payable over two years at an interest rate of 1% per year, with a deferral of payments for the first six months.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Disclosures in this Quarterly Report on Form 10-Q (this Report) contain certain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “point to,” “predict,” “likely,” “goals,” “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,the expected or potential effecteffects of the novel coronavirus (COVID-19) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; that contracts may be terminated by clients; projected or committed volumes of work may not materialize; continuing reliance on project-based work in the DDS segment and the primarily at-will nature of such 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 SolutionsDDS segment revenue concentration in a limited number of clients; continuing Digital Data Solutions segment reliance on project-based work;potential 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; a continued downturn in or depressed market conditions;conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growinggrowth in existing 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, client, 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.
Our actual results could differ materially from the results referred to in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainty around the novel coronavirus (COVID-19)COVID-19 pandemic and the effects of the global response thereto and the risks discussed in Part I, Item 1A. “Risk Factors” included in this Report,” and in Part I, Item 1A. “Risk Factors,” Part“Part II, Item 7. Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 16, 2020,. and in other filings that we may make with the Securities and Exchange Commission. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements 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.
21
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)(MD&A) is intended to help the reader understand the results of operations and financial condition of Innodata Inc. and its subsidiaries. The current MD&A is provided as a supplement to, and should be read in conjunction with the 2019 MD&A and the condensed consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 and our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly ReportReport.
Correction of Immaterial Errors – During the preparation of the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating to the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses from 2017 to December 31, 2019 and an overstatement of expenses for the six months ended June 30, 2020.
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020, would be material to such period. Accordingly, the prior period financial statements are being corrected by revising the prior period condensed consolidated financial statements for comparability. For the September 30, 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet included in this Form 10-Q, the corrections are as follows:
| · | Increase in expenses of $8,000 for the three months ended September 30, 2019 and $49,000 for the nine months ended September 30, 2019. There was no impact on the loss per share for the three and nine month periods ended September 30, 2019. |
| · | An increase in December 31, 2019 liabilities of $528,000. |
| · | A decrease in December 31, 2019 retained earnings of $777,000. |
| · | A decrease in December 31, 2019 total assets of $249,000. |
| · | The impact on cash flows for the nine months ended September 30, 2019 was: |
| · | A decrease in cash flows provided by operating activities of $38,000 |
| · | A decrease in cash flows used in investing activities of $79,000 |
| · | An increase in cash flows used in financing activities of $41,000 |
The Company evaluated each year’s/period’s errors under Staff Accounting Bulletins 99 and 108 and concluded that a restatement of year’s/prior periods’ consolidated financial statements is not required. Accordingly, the condensed consolidated financial statements and consolidated financial statements prior periods (March 31, 2020 and June 30, 2020) and year (December 31, 2019) consolidated financial statements will be revised in future Forms 10-Q and Form 10-K to be filed with the Securities and Exchange Commission. The September 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet have been revised in this Form 10-Q.
Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a global data engineering company. We solve complex data challenges that companies face when they build and maintain artificial intelligence (AI) systems and analytics platforms.
To deliver our services and solutions, we use a combination of human expertise and technology. Our 3,000+3,600+ employees span 10 countries and are experts in data pertaining to many professional fields. Our core technology harnesses machine learning and deep learning (branches of AI) to augment human expertise. Our hybrid approach of using AI in conjunction with human experts enables us to deliver superior data quality with even the most complex and sensitive data.
We also provide AI-augmented software-as-a-service (SaaS) platforms for customers who wish to perform their own data engineering tasks and for niche, industry-specific data-intensive use cases.
We provide a range of solutions and platforms for solving complex data challenges that companies face when they seek to obtain the benefits of AI systems and analytics platforms.
| (i) | Data Annotation |
We help our clients train AI models by annotating data at scale and at industry-leading levels of quality such as 99.995% accuracy with an error rate that does not exceed 50 per million. The quality of training data is critical for ensuring that a client’s AI models to perform well. We annotate text, images, audio and video data for the most complex AI models, including computer vision, sentiment analysis, entity linking, text categorization, and syntactic parsing/tagging.
Our image and video annotation services and platforms may be used to annotate, or label, objects, or people in images/video for facial recognition systems and automated object identification systems and in aerial/satellite imagery for autonomous driving/flying applications.
Our text annotation services and platforms may be used to convert raw text data into richly tagged, AI training data. We accommodate a wide range of input formats and taxonomies, and we perform a wide variety of complex tasks including entity annotation, relationship annotation, co-reference annotation, event annotation, multi-label annotation, and document labelling.
We provide image/video data annotation and text annotation as full solutions, in which we provide all required technology, infrastructure and expert resources. Beginning in early 2020, weWe will also provide image/video data annotation platforms and text annotation platforms for our clients to license for internal use.
22
We provide data annotation for a variety of complex requirements in healthcare, compliance, scientific, financial and legal markets.
| (ii) | Data Transformation |
We provide AI-based data transformation solutions for high-accuracy data identification, aggregation, cleansing, augmentation and extraction. Our solutions utilize highly trained AI models and experts who custom-traincustom train the models for our clients’ most complex and unique requirements.
Our data transformation platform enables data to be extracted from websites, as well as internal data stores; converted from disparate formats including PDF; enriched with the necessary semantics, metadata and linking; and classified in accordance with an ontology or knowledge graph.
Our data transformation solutions may be consumed via API, so that they can be utilized as infrastructure by clients with ongoing needs for such services. We also provide a platform for clients to license for performing analytics on extracted data points.
| (iii) | Data Curation |
For clients that need to maintain mission-critical databases of structured data, or fuse separately-created databases into a single, unified, high-quality source of data that can be relied upon for a variety of corporate functions and products (often referred to as a “golden source” of data), we provide AI-based data curation solutions that include data collection across external and internal data sources, data hygiene, data consolidation, and data compliance.
| (iv) | Intelligent Automation |
Enterprises are increasingly looking to re-invent business processes to take advantage of advancements in AI and machine learning, computing, and storage. Many seek easier ways to train, deploy, and leverage these advanced capabilities can be trained, deployed, and leveraged.capabilities. For clients with critical business processes that involve documents, images, text, emails and other unstructured data, we deploy a range of technologies, including AI and robotic process automation (RPA), to eliminate repetitive tasks, automate where possible, speed up operations, and shift internal talent to creative and analytical work.
We provide intelligent automation for an increasing diversity of complex functions. At present, these include IP rights management, contract management, client relationship management, regulatory change management, underwriting, and content operations management.
| (v) | Intelligent Data Platforms |
We build and manage intelligent data platforms that address specific, niche market requirements with our data engineering technologies. We deploy these platforms assoftware-as-a-service (SaaS) SaaS and as managed data solutions. To date, we have built an intelligent data platform for medical records data transformation (which we brand as “Synodex”) and for marketing communications/public relations workflow (which we brand as “Agility”).
Our Synodex intelligent data platform transforms medical records into useable digital data organized in accordance with our proprietary data models or client data models. At the end of 2019, we had 20 clients utilizing our Synodex platform, including John Hancock Insurance, the insurance operating unit of John Hancock Financial (a division of Manulife) and one of the largest life insurers in the United States.
23
Our Agility intelligent data platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wideworldwide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.
| (vi) | Other Services for Information Industry Clients |
In addition, we provide a variety of services for clients in the information industry that relate to content operations and product development.
The Company’s operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS),DDS, Synodex and Agility.
Inflation, Seasonality and Prevailing Economic Conditions
Prevailing Economic Conditions
The novel coronavirus disease 2019, (“COVID-19”), which the World Health Organization declared as a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, caused federal and regional governments to impose substantial restrictions on the operations of non-essential businesses and contributed to significant declines and volatility in financial markets. The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of COVID-19 on our performance and financial results.
Prior to the pandemic being declared, we prepared a Business Continuity Plan (“BCP”)(BCP) for our 12 global delivery centers and offices. When COVID-19 was declared to be a pandemic, we triggered our BCP, resulting in 3,600 of our data analysts and support team members globally (91% of total) being able to work remotely with near full productivity as of March 30. From March 30 to April 20, we increased remote working from 91% to 93%. By triggering our BCP, we have been ableenabling us to continue operations for most of our customers while safeguarding the health and welfare of our employees.
While the pandemic presented, and may in the future present, new risks to our business and there have been logistical and other challenges, there was no material adverse impact on our results of operations for the quarter and nine months ended March 31,September 30, 2020.
The situation surrounding the COVID-19 crisis remains fluid and the extent and duration of its impact to the economy remains unclear. For this reason, we cannot reasonably estimate with any degree of certainty the future impact to itsthat it may have on our results of operations and financial condition. In late March, as a result of the COVID-19 crisis, we began to experience reduced demand for our services from existing and prospective customers. The potential for a material impact on our results of operations and financial position increases the longer the virus affects the level of economic activity in the United States and globally.
WeWith the current level of demand for our services, we believe we have existing cash and cash equivalents whichthat provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months from the date of the filing of this Report while sustaining the current level of reduced demand for our services for a period of time (refer to Item 2 “Liquidity2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information). In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investinginvestment activities, and reducing operating costs as we would likely have no other sources of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
24
We have determined that recent adverse changes in macroeconomic trends as a consequence of the outbreak ofcontinuing COVID-19 constitutepandemic constituted a triggering event under U.S. GAAP (Accounting Standards Codification No. 350, Intangibles-Goodwill“Intangibles-Goodwill and OtherOther” and Accounting Standards Codification No. 360, Impairment and“Impairment or Disposal of Long-Lived Assets)Assets”). We have completed our impairment analysis procedures as of March 31, 2020 and have updated our impairment analysis on our reporting units as of March 31, 2020 andSeptember 30, 2020. We have determined that there was no impairment of long-lived assets, tangible nor intangible, in any reporting units.units as of September 30, 2020.
Inflation
Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to high 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.
Seasonality
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.
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.
ReferFor further information refer to Risk Factors,the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.” in Part I, Item 1A1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations
Amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.
Three Months Ended March 31,September 30, 2020 and 2019
Revenues
Total revenues were $14.5$14.6 million for the three months ended March 31,September 30, 2020, compared to $13.7$13.8 million for the three months ended March 31,September 30, 2019, an increase of approximately $0.8 million or 6%. The increase was primarily attributable to increased revenue acrossvolumes in all segments.
Revenues from the DDS segment were $10.4 million and $10.2$10.6 million for the three months ended March 31,September 30, 2020, andcompared to $10.1 million for the three months ended September 30, 2019, respectively, an increase of approximately $0.2$0.5 million or 2%5%. The increase was primarily attributable to volumerevenues generated from new customers.clients.
25
Revenues from the Synodex segment were $1.3$1.2 million andfor the three months ended September 30, 2020, compared to $1.0 million for the three months ended March 31, 2020 andSeptember 30, 2019, respectively, an increase of approximately $0.3$0.2 million or 30%20%. The increase was primarily attributed to higher revenuesvolumes from one existing client.
Revenues from the Agility segment were $2.8 million and $2.5for the three months ended September 30, 2020, compared to $2.7 million for the three months ended March 31,September 30, 2019, an increase of $0.1 million or approximately 4%. The increase was principally attributable to an increase in the number of subscriptions to our Agility intelligent data platform and newswire products.
Two clients in the DDS segment generated approximately 23% and 25% of the Company’s total revenues for the three months ended September 30, 2020 and September 30, 2019, respectively. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 55% and 57% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively.
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.
Direct operating costs were $9.8 million and $9.0 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $0.8 million. This increase was primarily due to increases in labor related costs of $0.9 million and technology related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.3 million or approximately 12%.million. The increase was principallyoffset in part by reductions in occupancy and related costs of $0.3 million and other operating costs of $0.1 million due to COVID-19. Direct operating costs as a percentage of total revenues were 67% and 65% for the three months ended September 30, 2020 and 2019, respectively. The increase in Direct operating costs as a percentage of total revenues was primarily attributable to increased Direct operating costs in the DDS segment.
Direct operating costs for the DDS segment were approximately $7.4 million and $6.5 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $0.9 million. This increase was primarily due to an increase in labor related costs of $0.8 million, an unfavorable foreign exchange remeasurement effect of $0.1 million, and technology related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.3 million. The increase was offset in part by reductions in occupancy and related costs of $0.3 million. Direct operating costs as percentage of segment revenues were 70% and 64% for the three months ended September 30, 2020 and 2019, respectively. The increase in Direct operating costs as a percentage of segment revenues was primarily attributable to the higher Direct operating costs.
Direct operating costs for the Synodex segment were $0.9 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 75% and 80% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues was primarily due to higher revenues.
Direct operating costs for the Agility segment were $1.5 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 54% and 63% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues was primarily due to higher revenues from subscriptions to our Agility intelligent data platform and newswire products.
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.
Selling and administrative expenses were $4.6 million and $5.0 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $0.4 million. This decrease was attributable to lower labor related costs of $0.2 million, lower operating costs of $0.1 million and a lower provision for doubtful accounts of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 32% and 36% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues in all segments.
Selling and administrative expenses for the DDS segment were $3.3 million for each of the three months ended September 30, 2020 and 2019. As a percentage of DDS revenues, DDS selling and administrative expenses were 31% and 33% for the three months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Synodex segment were $0.2 million for each of the three-month periods ended September 30, 2020 and 2019. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 17% and 20% for the three months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Agility segment were $1.1 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $0.4 million. This decrease was primarily due to a reduction in labor related costs of $0.1 million; a provision for doubtful accounts of $0.1 million and net decreases in other selling and administrative expenses of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 39% and 56% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of segment revenues was primarily due to higher revenue from subscriptions to our Agility intelligent data platform and newswire products.
Income Taxes
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, a valuation allowance recorded on deferred taxes on these entities, and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax position (ASC 740).
We recorded a tax benefit of $0.1 million for the three months ended September 30, 2020 and a provision for income taxes of $0.4 million for the three months ended September 30, 2019. The decrease is primarily due to a lower tax provision for our foreign subsidiaries in the three months ended September 30, 2020.
Net Income (Loss)
Net income was $0.2 million during the three months ended September 30, 2020, compared to a net loss of $0.6 million during the three months ended September 30, 2019. The improvement of $0.8 million was a result of $0.3 million pre-tax income and $0.5 million tax benefit in the current quarter.
Net loss for the DDS segment was $0.1 million for each of the three months ended September 30, 2020 and September 30, 2019. The pre-tax net loss of $0.5 million was offset by a $0.5 million tax benefit in the current quarter.
Net income for the Synodex segment was $0.1 million for the three months ended September 30, 2020 compared to breakeven for the three months ended September 30, 2019, an increase of $0.1 million. The increase was primarily attributable to the higher revenues in the current quarter.
Net income for the Agility segment was $0.2 million for the three months ended September 30, 2020, compared to a net loss of $0.5 million for the three months ended September 30, 2019. The improvement of $0.6 million was due to higher revenues and lower operating costs in the current quarter.
Nine Months Ended September 30, 2020 and 2019
Revenues
Total revenues were $42.9 million for the nine months ended September 30, 2020, compared to $41.2 million for the nine months ended September 30, 2019, an increase of $1.7 million or 4%. The increase was attributable to increased revenues across all segments.
Revenues from the DDS segment were $30.7 million and $30.4 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of approximately $0.3 million or 1%. The increase in revenues was primarily attributable to revenue generated from new clients.
Revenues from the Synodex segment were $3.7 million and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.8 million or 28%. The increase was primarily attributable to higher volumes from one existing client.
Revenues from the Agility segment were $8.5 million and $7.9 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.6 million or 8%. The increase was attributable to an increase in the number of subscriptions to our Agility database.
One client in the DDS segment generated approximately 14% of the Company’s total revenues for the three months ended March 31, 2020 and 16% of the Company’s total revenues for the threenine months ended March 31, 2019.September 30, 2020 and 2019, respectively. Another client in the DDS segment generated less than 10% of the Company’s total revenues for the threenine months ended March 31, 2020 and 10% of the Company’s total revenues for the three months ended March 31,September 30, 2019. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 54% and 52% of the Company’s total revenues for each of the threenine months ended March 31,September 30, 2020 and 2019, respectively.
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.
Direct operating costs were $9.8$29.2 million and $9.6$28.2 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively, an increase of $0.2$1.0 million. This increase was primarily due to technologyan increase in labor related costs of $1.6 million, unfavorable foreign exchange remeasurement effect of $0.1 million, and technology-related expenditures in connection with our business continuity plan (BCP)BCP in response to the COVID-19 pandemic.pandemic of $0.8 million. The increase was offset in part by reductions in occupancy and related costs of $0.8 million, content acquisition costs of $0.2 million, and other operating costs of $0.1 million, and by a one-time charge of $0.4 million in the second quarter of 2019 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affected companies generally. Direct operating costs as a percentage of total revenues were 68% and 70% for each of the threenine months ended March 31,September 30, 2020 and 2019, respectively. The increase was attributable to increased direct operating costs in the Synodex and Agility segments, partially offset by reductions in the DDS segment.2019.
Direct operating costs for the DDS segment were approximately $7.2$21.7 million and $7.3$20.8 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively, a decreasean increase of $0.1$0.9 million. The decreaseThis increase was primarily due to lower depreciation during the quarter but was offset in part by an increase in technology relatedpayroll-related costs of $1.4 million, unfavorable foreign exchange remeasurement of $0.1 million, and technology-related expenditures in connection with our BCP in response to the COVID-19 pandemic.pandemic of $0.8 million. The increase was offset in part by reductions in occupancy and related costs of $0.8 million and decreases in other operating costs of $0.1 million due to COVID-19 and by a one-time charge of $0.4 million in the second quarter of 2019 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affected companies generally. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 69%71% and 71%68% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decreaseincrease in directDirect operating costs as a percentage of segment revenues duringwas primarily attributable to the quarter was due to higher revenues.
Direct operating costs.
Direct operating costs for the Synodex segment were $0.9$2.6 million and $0.7$2.4 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively, an increase of $0.2 million net of intersegment profits.million. The increase was principally due to labor costs associated with the cost of software upgrades expensed during the quarter and higher consulting fees.increase in revenues. Direct operating costs for the Synodex segment as a percentage of segment revenues were 69%70% and 71%83% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decrease in directDirect operating costs as a percentage of segment revenues during the quarter was primarily due to higher revenue from an existing client.revenue.
Direct operating costs for the Agility segment were $1.7$4.9 million and $1.6$5.0 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively. Therespectively, a decrease of $0.1 million increase ismillion. This decrease was primarily a result of expendituresdue to reduction in support of increased revenues. Directcontent acquisition costs. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 61%58% and 64%63% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues during the quarter was primarily due to higher revenue from subscriptions to our Agility intelligent data platform and newswire products.
26
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.
Selling and administrative expenses were $4.7$13.8 million for the threenine months ended March 31,September 30, 2020, compared to $4.6$14.2 million for the threenine months ended March 31,September 30, 2019, an increasea decrease of $0.1$0.4 million. This increase is a result of headcount changesdecrease was primarily due to lower labor related costs during the quarter.period. Selling and administrative expensesas a percentage of total revenues were 32% and 34% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues and lower Selling and administrative expenses in the current quarter.
Selling and administrative expenses for the DDS segment were $3.1$9.3 million for nine months ended September 30, 2020 and $3.0$9.2 million for the threenine months ended March 31, 2020 and 2019, respectively, anSeptember 30, 2019. The increase of $0.1 million. The increase in selling and administrative expenses for the DDS segmentmillion was primarily due to continuing investments in strategic initiatives designed to expand our addressable market, higher compensationlabor related costs, recruitment and professional fees of approximately $0.2 million.costs. As a percentage of DDS revenues, DDS selling and administrative expenses were 30% for the threeeach of the nine months ended March 31,September 30, 2020 and 29% for the three months ended March 31, 2019.2019, respectively.
Selling and administrative expenses for the Synodex segment were $0.2$0.6 million and $0.1$0.5 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively. Therespectively, an increase of $0.1 millionmillion. The increase is attributableprimarily due to higher professional fees incurred for the period.labor related costs. Selling and administrative expenses for the Synodex segmentas a percentage of Synodex segment revenues were 15%16% and 17% for the threenine months ended March 31,September 30, 2020 and 13% for the three months ended March 31, 2019.2019, respectively.
Selling and administrative expenses for the Agility segment were $1.4$3.9 million and $1.5$4.5 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decrease of $0.1$0.6 million iswas primarily due to lower compensation costs, provisions for doubtful accounts and marketinglabor related costs. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 50%46% and 57% for the threenine months ended March 31, September 30, 2020 and 61% for the three months ended March 31, 2019.2019, respectively. The decrease in sellingSelling and administrative expenses as a percentage of segment revenues during the quarter was primarily due to a combination of higher revenues and lower operating costsSelling and higher revenues.administrative expenses in the current nine-month period.
Income Taxes
We recorded a provision for income taxes of $0.4 million and ($28,000) for the three months ended March 31, 2020 and 2019, respectively. The $0.4 million increase is primarily due to a higher tax provision for our foreign subsidiaries attributable to foreign exchange gains in the three months ended March 31, 2020.
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.losses and tax impact on uncertain tax position (ASC 740).
We recorded a provision for income taxes of $0.5 million for each of the nine months ended September 30, 2020 and 2019.
Net Loss
We incurred a net loss of $0.4$0.6 million during the threenine months ended March 31,September 30, 2020, compared to a net loss of $0.5$1.7 million during the threenine months ended March 31,September 30, 2019. The decreaseimprovement in net loss was primarily a result of improvementshigher revenue that outpaced operating costs in the Synodex and Agility segment.segments in the current nine-month period.
27
Net loss for the DDS segment was $0.4$0.8 million for the threenine months ended March 31,September 30, 2020, compared to a net loss of $0.1 million for the nine months ended September 30, 2019. The higher net loss of $0.7 million was primarily attributable to higher operating costs of $1.0 million offset in part by an increase in revenues of $0.3 million in the current nine-month period.
Net income for the Synodex segment was $0.5 million for the nine months ended September 30, 2020, compared to breakeven for the threenine months endedMarch 31, September 30, 2019, an increase of $0.5 million. The improvement in net of intersegment profits. The net loss of $0.4 million is attributableincome was due to higher tax provision of $0.4 millionrevenues in the current nine-month period.
Net income for Synodex segment was $0.2 million for each of the three-month periods ended March 31, 2020and 2019, net of intersegment profits.
Net loss for the Agility segment was $0.2$0.3 million for the threenine months ended March 31,September 30, 2020, compared to $0.6$1.6 million for the threenine months ended March 31, 2019, net of intersegment profits.September 30, 2019. The decreaseimprovement in net loss iswas due to higher revenues and lower operating costs.costs in the current nine-month period.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| March 31, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||||||||||
| Cash and cash equivalents | $ | 10,745 | $ | 10,874 | $ | 15,336 | $ | 10,874 | ||||||||
| Working capital | 8,116 | 8,789 | 9,045 | 8,250 | ||||||||||||
At March 31,On September 30, 2020, we had cash and cash equivalents of $10.7$15.3 million, of which $5.4$7.5 million was held by our foreign subsidiaries, and $5.3$7.8 million was held in the United States.Despite our ability under existing tax law to repatriate funds from overseas after paying the toll charge, it is our intent as of March 31,September 30, 2020, to permanently reinvest the overseas funds in our foreign subsidiaries on account of the withholding tax that we would have to incur on the actual remittances.remittances and the working capital need of foreign subsidiaries.
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 innovation; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of March 31,September 30, 2020, we had working capital of approximately $8.1$ 9.0 million, as compared to working capital of approximately $8.8$8.3 million as of December 31, 2019.
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 from the date of issuance of these financial statements. However, we have no bank facilities or lines of credit. Reductions in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.
Subsequent Event
On May 4, 2020, we received loan proceeds of $579,700 under the Paycheck Protection Program (PPP), which was established as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act).Act. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan is payable over two years at an interest rate of 1% per year, with a deferral of payments for until the first six months.date that the Small Business Administration remits the borrower’s loan forgiveness amount to the lender.
28
Cash Flows
Net Cash Provided by Operating Activities
Cash provided by our operating activities for the threenine months ended March 31,September 30, 2020 was $0.7$5.7 million primarily on account of the following factors: our net loss for the period of $0.4$0.5 million; a source of $1.0$2.6 million from non-cash expenses consisting of depreciation and amortization of $0.6$1.7 million, stock-based compensation of $0.7 million and pension cost of $0.2$0.6 million, and stock-based compensationwhich factors were offset in part by an increase in deferred tax provisions of $0.2$0.4 million; and net changes from working capital accounts whichthat contributed an additional source of $0.1 million.$3.6 million brought about by an increase in accrued salaries, wages and other related benefits of $1.7 million, an increase in accounts payable, accrued expenses and other of $0.8 million, a $0.6 million decrease in accounts receivable, and a net increase of $0.5 million in other working capital items. Refer to the condensed consolidated statements of cash flows for further details.
Cash provided by our operating activities for the threenine months ended March 31,September 30, 2019 was $2.1$4.9 million primarily on account of the $2.5 million decrease in our accounts receivable, a $0.9 million decrease in prepaid and other current assets, a $0.7 million increase in income and other taxes and a $0.1 million net decreaseincrease in other working capital accounts.items. This favorable result was reduced by our net loss of $0.5$1.7 million in the quarter.period. The reduction in accounts receivable iswas a result of improvements in our collection effortcollections during the period. Refer to the condensed consolidated statements of cash flows for further details.
Our days’ sales outstanding (DSO) were 6059 days for the threenine months ended March 31,September 30, 2020 and 66 days for the year ended December 31, 2019. 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 threenine months ended March 31,September 30, 2020, cash used in our investing activities was $0.6$1.1 million. These expenditures principally consisted of purchases to augment our network infrastructure in relation to our BCP initiatives in response to the ongoing COVID-19 pandemic.
For the nine months ended September 30, 2019, cash used in our investing activities was $1.3 million. These expenditures principally consisted of purchases of technology equipment including servers, network infrastructure and workstations.
For the three months ended March 31, 2019, cash used in our investing activities was $0.5 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, respectively.
The source of funds for the anticipated capital expenditures will be cash generated from our operations.
Net Cash Provided by and Used in Financing Activities
Cash provided by financing activities was from the proceeds of the PPP Loan received amounting to $0.6 million and proceeds from stock option exercises of $0.2 million. Cash used in financing activities was for payments of long-term obligations of $0.1$0.8 million and $0.4$0.9 million for the threenine months ended March 31,September 30, 2020 and March 31,September 30, 2019, respectively.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of thesethe condensed 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 condensed consolidated financial statements.
29
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 August 2018,December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We do not expect that the adoption of the new guidance will have a significant impact on our financial statements.
In August 2018, the FASB issued (ASU) No. 2018-14, “Compensation-Retirement Benefits-Defined Benefits Plans-General:Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), thatwhich 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 evaluatingThe Company does not expect ASU 2018-14 but do not expect it to have a material impact toon the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial InstrumentsStatements” (ASU 2016-13). ASU 2016-13 replacesrequires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the existing incurred loss impairment model with annet amount expected loss modelto be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which requiresclarifies codification and corrects unintended application of the useguidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies or addresses specific issues about certain aspects of forward-looking informationASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to calculateFinancial Instruments,” which modifies the measurement of expected credit loss estimates. The change will result in earlier recognitionlosses of credit losses.certain financial instruments. ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for smaller reporting companies;us if we continue to be classified as a Smaller Reporting Company, with early adoption is permitted.The Companyis currently evaluating ASU 2016-13 but does We do not expect it tothat the adoption of the new guidance will have a material impact on the Company’s consolidatedour financial statements.
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”)(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'sCommission’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.
30
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 March 31,September 30 2020. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of March 31,September 30, 2020, our disclosure controls and procedures were not effective. This was due to the lack of appropriate review procedures related to evaluation and proper accounting for lease contracts consistent with capital lease accounting under U.S. GAAP.
The Company determined that it did not maintain effective controls to ensure that leasing transactions were properly accounted for in accordance with U.S. GAAP, which constitutes a material weakness in internal control over financial reporting. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial information will not be prevented or detected on a timely basis.
To address these deficiencies, we will remediate our control procedures to reduce the likelihood of these errors recurring. We will implement additional quarterly control procedures to review any changes in events affecting our leasing transactions to ensure proper accounting under U.S. GAAP.
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 March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. These changes relate to remediation of the material weaknesses identified in our December 31, 2019 10-K. The Company’s strengthened its accounting for refundable taxes, accrued expenses and income and other taxes by instituting controls and procedures designed to prevent and detect errors in the said accounts and improve our overall internal control over financial reporting.
31
Reference is made to the disclosure under “Legal Proceedings” in Part I, Item 33. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2019.
For information regarding Risk Factors, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the following additional risk factor, and the information regarding forward-looking statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Report.
The effects of the COVID-19 pandemic could materially adversely affect our results of operations and financial condition
The novel coronavirus disease 2019 (“COVID-19”), which the World Health Organization declared a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, and contributed to significant declines and volatility in financial markets. In response to COVID-19, countries and local governments have imposed restrictions on the operations of non-essential businesses and services, imposed travel restrictions and implemented societal lockdowns. Additionally, companies are taking precautions, such as requiring employees to work remotely and temporarily closing businesses. All of these factors have had, and are likely to continue to have, a severe adverse effect on global economic conditions, underemployment and unemployment, consumer spending and reductions in non-essential spending by governments and private companies, as well as uncertainty in financial markets. We have experienced limited operational disruptions and declines in customer demand for services to date; however, depending upon the extent and duration of the COVID-19 pandemic, we may experience a material adverse effect on our results of operations and financial condition as a result of the effects of COVID-19.
In response to the declaration of the COVID-19 pandemic we triggered our Business Continuity Plan for our 12 global delivery centers and offices. As of April 30, 2020, approximately 93% of our workforce was working remotely with near full productivity,offices, enabling us to continue operations for most of our customers while safeguarding the health and welfare of our employees. While the pandemic presented, and may in the future present, new risks to our business and there have been logistical and other challenges, there was no material adverse impact on our financial condition or results of operations for the quarter ended March 31,September 30, 2020. In late March 2020, as a result of the COVID-19 crisis, we began to experience reduced demand for our services from existing and prospective customers. In addition, the COVID-19 pandemic could have a material adverse effect on our results of operations and financial condition by, among others, customers with at-will contracts, particularly in our DDS segment, reducing, delaying or cancelling orders; reduced spending by customers on third-party service providers as part of cost-rationalization efforts or otherwise,otherwise; or customers determining to bring services in-house and/or customers delaying or postponing data engineering needs. Additionally, the effects of COVID-19 could exacerbate any other risks or uncertainties to which we are subject. Lastly, should we experience material adverse effects on our results of operations or financial condition, we may not be able to access additional sources of liquidity at rates that are acceptable to us, if at all.
32
The situation surrounding COVID-19 crisis remains fluid and the extent and duration of its impact to the economy remains unclear. For this reason, we cannot reasonably estimate with any degree of certainty the future impact to our results of operations and financial condition. The potential for a material impact on our results of operations and financial condition increases the longer the virus affects the level of economic activity in the United States and globally. In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investment activities, and reducing operating costs as we would likely have no other source of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities or repurchases of equity securities during the three months ended March 31,September 30, 2020.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
3340
| 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. | |
| 10-Q. |
| ** | Filed herewith. |
| *** | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
34
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.
| /s/ Jack Abuhoff | |||||
| Jack Abuhoff | |||||
| Chief Executive Officer and President | |||||
| Date: November 12, 2020 | /s/ Mark A. Spelker | ||||
| Mark A. Spelker | |||||
| Chief Financial Officer and Principal Accounting Officer | |||||
35