UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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:0-22196001-35774
INNODATA INC.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) (201) 371-8000
(Registrant’s telephone number, including area code)
[None]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 | The NASDAQ Stock Market LLC |
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 þ☑ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ☑ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ 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 ☑
Yes¨ Noþ
The number of outstanding shares of the registrant’s common stock, $.01$0.01 par value per share, as of October 31, 2017May 5, 2023 was 25,877,454.27,549,984.
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 2017March 31, 2023
INDEX
INDEX
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(inIn thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,468 | $ | 14,172 | ||||
| Accounts receivable, net | 9,577 | 9,952 | ||||||
| Prepaid expenses and other current assets | 3,761 | 3,124 | ||||||
| Total current assets | 25,806 | 27,248 | ||||||
| Property and equipment, net | 7,322 | 5,397 | ||||||
| Other assets | 3,136 | 2,377 | ||||||
| Deferred income taxes | 1,909 | 1,641 | ||||||
| Intangibles, net | 7,884 | 8,191 | ||||||
| Goodwill | 2,839 | 2,734 | ||||||
| Total assets | $ | 48,896 | $ | 47,588 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 856 | $ | 1,018 | ||||
| Accrued expenses | 4,492 | 4,333 | ||||||
| Accrued salaries, wages and related benefits | 5,418 | 5,040 | ||||||
| Income and other taxes | 1,764 | 1,330 | ||||||
| Current portion of long-term obligations | 2,124 | 1,120 | ||||||
| Total current liabilities | 14,654 | 12,841 | ||||||
| Deferred income taxes | 694 | 680 | ||||||
| Long-term obligations, net of current portion | 4,733 | 3,917 | ||||||
| Non-controlling interests | (3,888 | ) | (3,634 | ) | ||||
| Commitments and contingencies | - | - | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Serial preferred stock; 5,000,000 shares authorized, none outstanding | ||||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 27,559,000 shares issued and 25,878,000 outstanding at September 30, 2017 and 27,305,000 shares issued and 25,624,000 outstanding at December 31, 2016 | 275 | 273 | ||||||
| Additional paid-in capital | 27,242 | 26,057 | ||||||
| Retained earnings | 9,436 | 12,400 | ||||||
| Accumulated other comprehensive income (loss) | 372 | (324 | ) | |||||
| 37,325 | 38,406 | |||||||
| Less: treasury stock, 1,681,000 shares at September 30, 2017 and December 31, 2016, at cost | (4,622 | ) | (4,622 | ) | ||||
| Total stockholders’ equity | 32,703 | 33,784 | ||||||
| Total liabilities and stockholders’ equity | $ | 48,896 | $ | 47,588 | ||||
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 10,330 | | $ | 9,792 |
Short term investments – other | | | 512 | | | 507 |
Accounts receivable, net of allowance for doubtful accounts | |
| 8,462 | |
| 9,528 |
Prepaid expenses and other current assets | |
| 4,189 | |
| 3,858 |
Total current assets | |
| 23,493 | |
| 23,685 |
Property and equipment, net | |
| 2,590 | |
| 2,511 |
Right-of-use-asset, net | |
| 4,109 | |
| 4,309 |
Other assets | |
| 2,252 | |
| 1,498 |
Deferred income taxes, net | |
| 1,583 | |
| 1,475 |
Intangibles, net | |
| 13,064 | |
| 12,526 |
Goodwill | |
| 2,044 | |
| 2,038 |
Total assets | | $ | 49,135 | | $ | 48,042 |
| | | | | | |
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 2,225 | | $ | 2,630 |
Accrued expenses and other | |
| 6,843 | |
| 7,250 |
Accrued salaries, wages and related benefits | |
| 6,766 | |
| 6,136 |
Income and other taxes | |
| 3,582 | |
| 3,230 |
Long-term obligations - current portion | |
| 1,121 | |
| 877 |
Operating lease liability - current portion | |
| 633 | |
| 693 |
Total current liabilities | |
| 21,170 | |
| 20,816 |
Deferred income taxes, net | |
| 57 | |
| 65 |
Long-term obligations, net of current portion | |
| 6,288 | |
| 5,079 |
Operating lease liability, net of current portion | |
| 3,926 | |
| 4,036 |
Total liabilities | |
| 31,441 | |
| 29,996 |
| | | | | | |
Commitments and contingencies | |
| | |
| |
Non-controlling interests | |
| (724) | |
| (727) |
| |
|
| |
|
|
STOCKHOLDERS’ EQUITY: | |
|
| |
|
|
Serial preferred stock; 4,998,000 shares authorized, none outstanding | |
| - | |
| - |
Common stock, $.01 par value; 75,000,000 shares authorized; 30,734,000 shares issued and 27,550,000 outstanding at March 31, 2023 and 30,589,000 shares issued and 27,405,000 outstanding at December 31, 2022 | |
| 307 | |
| 306 |
Additional paid-in capital | |
| 37,097 | |
| 35,815 |
Deficit | |
| (10,891) | |
| (8,775) |
Accumulated other comprehensive loss | |
| (1,630) | |
| (2,108) |
| |
| 24,883 | |
| 25,238 |
Less: treasury stock, 3,184,000 shares at March 31, 2023 and December 31, 2022 at cost | |
| (6,465) | |
| (6,465) |
Total stockholders’ equity | |
| 18,418 | |
| 18,773 |
Total liabilities, non-controlling interests and stockholders’ equity | | $ | 49,135 | | $ | 48,042 |
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
2
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 15,018 | $ | 16,060 | ||||
| Operating costs and expenses: | ||||||||
| Direct operating costs | 11,463 | 12,422 | ||||||
| Selling and administrative expenses | 4,438 | 5,105 | ||||||
| Interest expense, net | 2 | 15 | ||||||
| Change in fair value of contingent consideration | - | 1,038 | ||||||
| 15,903 | 18,580 | |||||||
| Loss before provision for income taxes | (885 | ) | (2,520 | ) | ||||
| Provision for income taxes | 268 | 352 | ||||||
| Net loss | (1,153 | ) | (2,872 | ) | ||||
| Loss attributable to non-controlling interests | 85 | 106 | ||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (1,068 | ) | $ | (2,766 | ) | ||
| Loss per share attributable to Innodata Inc. and Subsidiaries: | ||||||||
| Basic and diluted | $ | (0.04 | ) | $ | (0.11 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic and diluted | 25,877 | 25,651 | ||||||
| Comprehensive loss: | ||||||||
| Net loss | $ | (1,153 | ) | $ | (2,872 | ) | ||
| Pension liability adjustment, net of taxes | (60 | ) | (83 | ) | ||||
| Change in fair value of derivatives, net of taxes | (37 | ) | (39 | ) | ||||
| Foreign currency translation adjustment | 482 | (118 | ) | |||||
| Other comprehensive income (loss) | 385 | (240 | ) | |||||
| Total comprehensive loss | (768 | ) | (3,112 | ) | ||||
| Comprehensive loss attributed to non-controlling interest | 85 | 106 | ||||||
| Comprehensive loss attributable to Innodata Inc. and Subsidiaries | $ | (683 | ) | $ | (3,006 | ) | ||
| | | | | | |
|
| Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Revenues | | $ | 18,839 | | $ | 21,192 |
Operating costs and expenses: | |
| | |
| |
Direct operating costs | |
| 12,874 | |
| 13,414 |
Selling and administrative expenses | |
| 7,797 | |
| 10,190 |
Interest expense, net | |
| 63 | |
| 3 |
| |
| 20,734 | |
| 23,607 |
Loss before provision for income taxes | | | (1,895) | | | (2,415) |
Provision for income taxes | | | 218 | | | 475 |
Consolidated net loss | |
| (2,113) | |
| (2,890) |
Income (loss) attributable to non-controlling interests | |
| 3 | |
| (75) |
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (2,116) | | $ | (2,815) |
Loss per share attributable to Innodata Inc. and Subsidiaries: | | | | | | |
Basic and Diluted | | $ | (0.08) | | $ | (0.10) |
| |
| | |
| |
Weighted average shares outstanding: | | | | | | |
Basic and Diluted | |
| 27,460 | |
| 27,158 |
| | | | | | |
Comprehensive Loss: | |
| | |
| |
Consolidated Net loss | | $ | (2,113) | | $ | (2,890) |
Pension liability adjustment, net of taxes | |
| (5) | |
| 40 |
Foreign currency translation adjustment | |
| 60 | |
| (26) |
Change in fair value of derivatives, net of taxes | |
| 423 | |
| 5 |
Other comprehensive income | |
| 478 | |
| 19 |
Total Comprehensive loss | |
| (1,635) | |
| (2,871) |
Less: Comprehensive income (loss) attributable to non-controlling interest | |
| 3 | |
| (75) |
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | | $ | (1,638) | | $ | (2,796) |
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 45,271 | $ | 47,400 | ||||
| Operating costs and expenses: | ||||||||
| Direct operating costs | 34,585 | 35,572 | ||||||
| Selling and administrative expenses | 13,106 | 14,469 | ||||||
| Interest expense (income), net | (9 | ) | 44 | |||||
| Change in fair value of contingent consideration | - | 1,038 | ||||||
| 47,682 | 51,123 | |||||||
| Loss before provision for income taxes | (2,411 | ) | (3,723 | ) | ||||
| Provision for income taxes | 807 | 1,128 | ||||||
| Net loss | (3,218 | ) | (4,851 | ) | ||||
| Loss attributable to non-controlling interests | 254 | 310 | ||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (2,964 | ) | $ | (4,541 | ) | ||
| Loss per share attributable to Innodata Inc. and Subsidiaries: | ||||||||
| Basic and diluted | $ | (0.11 | ) | $ | (0.18 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic and diluted | 25,795 | 25,514 | ||||||
| Comprehensive loss: | ||||||||
| Net loss | $ | (3,218 | ) | $ | (4,851 | ) | ||
| Pension liability adjustment, net of taxes | (183 | ) | (247 | ) | ||||
| Change in fair value of derivatives, net of taxes | 99 | 207 | ||||||
| Foreign currency translation adjustment | 780 | 246 | ||||||
| Other comprehensive income | 696 | 206 | ||||||
| Total comprehensive loss | (2,522 | ) | (4,645 | ) | ||||
| Comprehensive loss attributed to non-controlling interest | 254 | 310 | ||||||
| Comprehensive loss attributable to Innodata Inc. and Subsidiaries | $ | (2,268 | ) | $ | (4,335 | ) | ||
See notes to condensed consolidated financial statements.
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flow from operating activities: | ||||||||
| Net loss | $ | (3,218 | ) | $ | (4,851 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 2,771 | 2,200 | ||||||
| Stock-based compensation | 662 | 729 | ||||||
| Deferred income taxes | (287 | ) | (289 | ) | ||||
| Pension cost | 208 | 100 | ||||||
| Change in fair value of contingent consideration | - | 1,038 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 713 | 487 | ||||||
| Prepaid expenses and other current assets | (150 | ) | (78 | ) | ||||
| Other assets | (110 | ) | (272 | ) | ||||
| Accounts payable and accrued expenses | (183 | ) | (1,092 | ) | ||||
| Accrued salaries, wages and related benefits | 363 | 985 | ||||||
| Income and other taxes | 395 | (80 | ) | |||||
| Net cash provided by (used in) operating activities | 1,164 | (1,123 | ) | |||||
| Cash flow from investing activities: | ||||||||
| Capital expenditures | (2,887 | ) | (2,051 | ) | ||||
| Acquisition of business | - | (4,052 | ) | |||||
| Net cash used in investing activities | (2,887 | ) | (6,103 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Proceeds from equipment financing | 951 | - | ||||||
| Payment of long-term obligations | (1,030 | ) | (419 | ) | ||||
| Purchase of treasury stock | - | (134 | ) | |||||
| Net cash used in financing activities | (79 | ) | (553 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 98 | 148 | ||||||
| Net decrease in cash and cash equivalents | (1,704 | ) | (7,631 | ) | ||||
| Cash and cash equivalents, beginning of period | 14,172 | 24,908 | ||||||
| Cash and cash equivalents, end of period | $ | 12,468 | $ | 17,277 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 811 | $ | 928 | ||||
| Vendor financed software licenses acquired | $ | 1,213 | $ | - | ||||
| Common stock issued for MediaMiser acquisition | $ | 525 | $ | 569 | ||||
| | | | | | |
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: |
| |
|
| |
|
Consolidated net loss | | $ | (2,113) | | $ | (2,890) |
Adjustments to reconcile consolidated net loss to net cash | |
| | |
| |
provided by operating activities: | |
| | |
| |
Depreciation and amortization | | | 1,091 | | | 873 |
Stock-based compensation | | | 962 | | | 537 |
Deferred income taxes | |
| (94) | |
| 44 |
Pension cost | | | 253 | | | 11 |
Loss on lease termination | | | - | | | 125 |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| 1,149 | |
| 487 |
Prepaid expenses and other current assets | |
| 158 | | | (63) |
Other assets | |
| 21 | |
| 144 |
Accounts payable, accrued expenses and other | |
| (608) | |
| (533) |
Accrued salaries, wages and related benefits | |
| 627 | |
| (407) |
Income and other taxes | |
| 338 | |
| 176 |
Net cash provided by (used in) operating activities | |
| 1,784 | |
| (1,496) |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
Capital expenditures | |
| (1,702) | |
| (1,939) |
Purchase of short term investments - others | | | (5) | | | - |
Net cash used in investing activities | |
| (1,707) | |
| (1,939) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from stock option exercises | | | 321 | | | 26 |
Payment of long-term obligations | |
| (70) | |
| (39) |
Redemption of non-controlling interest | | | - | | | 1 |
Net cash provided by (used in) financing activities | | | 251 | | | (12) |
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| 210 | |
| (28) |
| | | | | | |
Net increase (decrease) in cash and cash equivalents | |
| 538 | |
| (3,475) |
| | | | | | |
Cash and cash equivalents, beginning of period | |
| 9,792 | |
| 18,902 |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 10,330 | | $ | 15,427 |
| | | | | | |
Supplemental disclosures of cash flow information: | |
| | |
| |
Vendor financed software licenses acquired | | $ | 1,162 | | $ | - |
Non cash redemption of non-controlling interest | | $ | - | | $ | (2,864) |
Cash paid for income taxes | | $ | 24 | | $ | 308 |
Cash paid for operating leases | | $ | 404 | | $ | 493 |
Cash paid for interest | | $ | 92 | | $ | 4 |
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
4
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2023 AND 20162022
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury | ||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Total | ||||||||||||||||||||||
| January 1, 2017 | 25,624 | $ | 273 | $ | 26,057 | $ | 12,400 | $ | (324 | ) | $ | (4,622 | ) | $ | 33,784 | |||||||||||||
| Net loss attributable to Innodata Inc. and subsidiaries | - | - | - | (2,964 | ) | - | - | (2,964 | ) | |||||||||||||||||||
| Stock-based compensation | - | - | 662 | - | - | - | 662 | |||||||||||||||||||||
| Issuance of common stock in connection with MediaMiser acquisition | 254 | 2 | 523 | - | - | - | 525 | |||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (183 | ) | - | (183 | ) | |||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 780 | - | 780 | |||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 99 | - | 99 | |||||||||||||||||||||
| September 30, 2017 | 25,878 | $ | 275 | $ | 27,242 | $ | 9,436 | $ | 372 | $ | (4,622 | ) | $ | 32,703 | ||||||||||||||
| January 1, 2016 | 25,445 | $ | 270 | $ | 24,590 | $ | 17,924 | $ | (84 | ) | $ | (4,488 | ) | $ | 38,212 | |||||||||||||
| Net loss attributable to Innodata Inc. and subsidiaries | - | - | - | (4,541 | ) | - | - | (4,541 | ) | |||||||||||||||||||
| Stock-based compensation | - | - | 729 | - | - | - | 729 | |||||||||||||||||||||
| Issuance of common stock in connection with MediaMiser acquisition | 236 | 3 | 566 | - | - | - | 569 | |||||||||||||||||||||
| Acquisition of non-controlling interest | - | - | (261 | ) | - | - | - | (261 | ) | |||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (247 | ) | - | (247 | ) | |||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 246 | - | 246 | |||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 207 | - | 207 | |||||||||||||||||||||
| Purchase of treasury stock | (57 | ) | - | - | - | - | (134 | ) | (134 | ) | ||||||||||||||||||
| September 30, 2016 | 25,624 | $ | 273 | $ | 25,624 | $ | 13,383 | $ | 122 | $ | (4,622 | ) | $ | 34,780 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | | | | | Additional | | Retained | | Other | | | | | | ||||||
| | Common Stock | | Paid-in | | Earnings | | Comprehensive | | Treasury Stock | | | ||||||||||
|
| Shares |
| Amount |
| Capital |
| (Deficit) |
| Loss |
| Shares | | Amount |
| Total | ||||||
January 1, 2023 | | 30,589 | | $ | 306 | | $ | 35,815 | | $ | (8,775) | | $ | (2,108) | | (3,184) | | $ | (6,465) | | $ | 18,773 |
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (2,116) | | | - | | - | | | - | | | (2,116) |
Stock-based compensation | | - | | | - | | | 962 | | | - | | | - | | - | | | - | | | 962 |
Stock option exercises | | 148 | | | 1 | | | 320 | | | - | | | - | | - | | | - | | | 321 |
Shares withheld for exercise net settlement | | (3) | | | - | | | - | | | - | | | - | | - | | | - | | | - |
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | (5) | | - | | | - | | | (5) |
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | 60 | | - | | | - | | | 60 |
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 423 | | - | | | - | | | 423 |
March 31, 2023 | | 30,734 | | | 307 | | | 37,097 | | | (10,891) | | | (1,630) | | (3,184) | | | (6,465) | | | 18,418 |
| | | | | | | | | | | | | | | | | | | | | | |
January 1, 2022 | | 30,347 | | $ | 303 | | $ | 35,121 | | $ | 3,160 | | $ | (2,192) | | (3,184) | | $ | (6,465) | | $ | 29,927 |
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (2,815) | | | - | | - | | | - | | | (2,815) |
Stock-based compensation | | - | | | - | | | 537 | | | - | | | - | | - | | | - | | | 537 |
Stock option exercises | | 23 | | | 1 | | | 26 | | | - | | | - | | - | | | - | | | 27 |
Shares withheld for taxes on restricted shares vesting | | (7) | | | - | | | (53) | | | - | | | - | | - | | | - | | | (53) |
Redemption of non-controlling interest | | - | | | - | | | (2,864) | | | - | | | - | | - | | | - | | | (2,864) |
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | 40 | | - | | | - | | | 40 |
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | (26) | | - | | | - | | | (26) |
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 5 | | - | | | - | | | 5 |
March 31, 2022 | | 30,363 | | | 304 | | | 32,767 | | | 345 | | | (2,173) | | (3,184) | | | (6,465) | | | 24,778 |
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
5
| Table of Contents |
DescriptionINNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Business - Innodata Inc.Significant Accounting Policies and Subsidiaries (the “Company”) is a global digital services and solutions company. Our technology and services power leading information products and online retail destinations around the world. Our solutions help prestigious enterprises harness the power of digital data to re-imagine how they operate and drive performance. We serve publishers, media and information companies, digital retailers, banks, insurance companies, government agencies and many other industries. Founded in 1988, we comprise a team of over 4,000 diverse people in eight countries who are dedicated to delivering services and solutions that help the world embrace digital data as a means of enhancing our lives and transforming our businesses.
The Company operates in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).
The Company’s DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products; and operational support of existing digital information products and systems.
The Company’s IADS segment designs and develops new capabilities to enable clients in the financial services, insurance and healthcare sectors to improve decision-support through digital technologies. IADS operates through two subsidiaries. Synodex offers a range of services for healthcare and insurance companies, and docGenix provides services to financial services institutions. As of September 30, 2017, Innodata owned 91% of Synodex and 94% of docGenix, both limited liability companies.
The Company’s MIS segment operates through our Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, the Company rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions, and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Limited.
Agility PR Solutions offers full and self-service solutions, consisting of Agility Enterprise, Agility and Agility Plus, that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact. Agility PR Solutions, through its Agility Enterprise product, provides media monitoring and analysis solutions and professional services to several Fortune 500 companies and Canadian government institutions, as well as small- and medium-sized businesses. Agility Enterprise enables companies to reduce the time and effort required to extract, analyze and share valuable business intelligence from traditional and online media sources. Agility is a global media contact database and email distribution platform and Agility Plus provides additional self-service media monitoring and analytics capabilities. The solution is offered as software-as-a-service (SaaS).
Bulldog Reporter is a news aggregation service for public relations and corporate communications professionals. Bulldog Reporter publishes a well-known daily e-newsletter, the Daily Dog. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital and social marketing, not-for-profit activity and overall outstanding PR performance.
Estimates
Basis of Presentation- The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) which,that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the Company“Company”) as of September 30, 2017,March 31, 2023 and December 31, 2022, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2017March 31, 2023 and 2016,2022, cash flows for the three months ended March 31, 2023 and cash flows2022, and stockholders’ equity for the ninethree months ended September 30, 2017March 31, 2023 and 2016.2022. 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.
TheseCertain information and note disclosures normally included in or 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 Securities and Exchange Commission (the “SEC”) and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K.2022. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the notes to the consolidated financial statements for the year ended December 31, 2016 consolidated financial statements.
2022.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Innodata Inc. and its wholly-ownedwholly owned subsidiaries, Agility PR Solutions Canada, a corporation in which the Company owns substantially all of the economic interest, and the Synodex and docGenix, a limited liability companiescompany that areis majority-owned by the Company. The non-controlling interestsinterest in the Synodex and docGenix limited liability companies are accounted forcompany has call and put options that can be settled in cash or stock. Accordingly, this is presented in temporary equity in accordance with the Financial Accounting Standards Board (FASB)Board’s (the “FASB”) non-controlling interest guidance. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates- In preparing the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”),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 atas of 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 and assumptions used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from those estimates. Significant estimates include those related to revenue recognition,the allowance for doubtful accounts and billing adjustments, useful life of long-lived assets, useful life of intangible assets, impairment of goodwill and intangible assets, valuation of deferred tax assets, valuation of securities underlying stock-based compensation, pension benefit plan assumptions, litigation accruals pension benefits, purchase price allocation of the net assets acquired in the acquisition of Agility, valuation of derivative instruments 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 the 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, the Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. For agreements with distinct performance obligations, 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.
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. Revenue from agreements billed on a time-and-materials basis is recognized as services are performed. Revenue from fixed-fee agreements, which is not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.
6
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of the Synodex segment revenue is derived from licensing the Company’s functional software and providing access to the 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. Revenue from the reseller agreements is recognized at the gross amount received for the goods in accordance with the Company functioning as a principal due to the Company meeting the following criteria: the Company acts as the primary obligor in the sales transaction; assumes the credit risk; sets the price; can select suppliers; and is involved in the execution of the services, including after sales service.
Revenue includes reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
Revenue associated with the services provided in one period and billed in a subsequent period is commonly referred to as unbilled revenues and is included under Accounts receivable.
The Company considers U.S. GAAP criteria for determining whether to report gross revenue as a principal versus net revenue as an agent. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is principal or agent in the arrangement.
Contract acquisition costs, which are included in prepaid expenses and other current assets, are amortized over the term of a subscription agreement or contract that normally has a duration of 12 months or less. The Company reviews these prepaid acquisition costs on a periodic basis to determine the need to adjust the carrying values for early-terminated contracts. Included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets are contract acquisition costs amounting to $0.7 million and $0.8 million as of March 31, 2023 and December 31, 2022, respectively. These acquisition costs relate to our Agility segment and are amortized over the term of the subscription agreement which normally has a duration of 12 months or less.
Foreign Currency Translation- The functional currency of the Company’s production operations locatedsubsidiaries in the Philippines, India, Sri Lanka, Israel, Hong Kong and IsraelCanada (other than the Agility subsidiary) is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees, or Israeli shekels, and Hong Kong and Canadian dollars are translated to U.S. dollars at rates which approximate those in effect on the transaction dates.dates. Monetary assets and all liabilities denominated in foreign currencies on March 31, 2023 and December 31, 2022 are translated at the exchange rate in effect as of those dates. Non-monetary assets and stockholders’ equity are translated at the appropriate historical rates. Included in direct operating costs were foreign exchange losses (gains) resulting from such transactions of approximately $309,000 and ($419,000) for the three months ended March 31, 2023 and 2022, respectively.
7
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and for the Company’s Agility subsidiary in Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are reportedprepared in thesetheir respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in itsthe Company’s condensed consolidated financial statements. Income, expenses and cash flows are translated at weighted averageweighted-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 income (loss)loss in stockholders'stockholders’ equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive loss.
Revenue RecognitionDerivative Instruments - For the DDS segment, revenue is recognized based on the quantity delivered or resources utilized andThe Company accounts for derivative transactions in the period in which services are performed and delivery has occurred. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts, which are not significant to the overall revenues, are recognized on the percentage of completion method of accounting, as services are performed or milestones are achieved.
For the IADS segment, revenue is recognized primarily based on the quantity delivered and the period in which services are performed and deliverables are made as per contracts. A portion of the Company’s IADS segment revenue is derived from licensing its software and providing access to its hosted software platform. Revenue from such services are recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured.
The MIS segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured. Revenue from enriched media analysis services is recognized when the services are performed and delivered to the client.
Revenue include reimbursement of out-of-pocket expenses,accordance with the corresponding out-of-pocket expenses included in direct operating costs.
Recent Accounting Pronouncements-In May 2014, the FASB issued guidance on revenue from contracts with clients. This update is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This accounting guidance is effective prospectively for annual reporting periods, and interim periods within those periods, beginning after December 15, 2017 and early adoption is permitted starting from the first quarter of 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the new standard when it takes effect. The Company will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption. The Company has undertaken an initial impact analysis, which includes reviewing the terms and conditions of the Company’s existing customer contracts and applying the five discrete criteria required for recognizing revenues as set forth in ASU 2014-09. Based upon its preliminary analysis undertaken through September 30, 2017, the Company currently does not expect the new revenue recognition guidance to have a material impact on its consolidated condensed financial statements, and expects to conclude such analysis by December 31, 2017. The Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may, in conjunction with the completion of the Company’s overall assessment of the new guidance, impact the Company’s current conclusions.
In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This new guidance is effective for annual periods beginning after December 15, 2018. Early application is permitted. The Company is in the process of evaluating the effect the guidance will have on its existing accounting policies and condensed consolidated financial statements, but expects there will be an increase in assets and liabilities on the condensed consolidated balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material.
In March 2016, the FASB issued guidance relating to share-based compensation. This new guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016. The Company adopted this standard in 2017 and there was no material impact on its condensed consolidated financial statements.
In March 2017, the FASB issued guidance on Compensation - Retirement Benefits relating to improvements in the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing U.S. GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in the guidance require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in the guidance will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance will be effective for the Company forinterim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.
In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of theFASB’s Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for interim(“ASC”) Topic 825, “Financial Instruments”. For derivative instruments that are designated and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.
Property and equipment are stated at cost less accumulated depreciation and amortization (in thousands), and consist of the following:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Equipment | $ | 14,332 | $ | 14,558 | ||||
| Software | 6,911 | 5,685 | ||||||
| Furniture and equipment | 2,452 | 2,119 | ||||||
| Leasehold improvements | 5,342 | 4,929 | ||||||
| Total | 29,037 | 27,291 | ||||||
| Less: accumulated depreciation and amortization | (21,715 | ) | (21,894 | ) | ||||
| $ | 7,322 | $ | 5,397 | |||||
Depreciation and amortization expense of property and equipment was approximately $0.6 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. Depreciation and amortization expense of property and equipment was approximately $1.9 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.
On July 14, 2016, Innodata’s MediaMiser subsidiary completed the acquisition of the Agility business from PR Newswire under an asset purchase agreement forqualify as cash consideration of $4.2 million.
The Agility business consists of two products – Agility, a global media contact database and email distribution platform and Agility Plus that provides additional self-service media monitoring and analytics capabilities. The acquisition helped the Company’s MIS segment foster growth in North America and Europe by bolstering its media intelligence solutions and media databases, improving its media outreach capabilities, and delivering stronger, more data-powered media intelligence to clients. With this acquisition, Agility PR Solutions can now offer self and full-service solutions that addressflow hedges, the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.
The transaction has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumedchange in a business combination be recognized at their fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was recorded as goodwill.
The Company has obtained third party valuations of certain intangible assets. The following table summarizes (in thousands) the final purchase price allocation for the acquisition:
| Amount | ||||
| Accounts receivable | $ | 771 | ||
| Media contact database | 3,610 | |||
| Developed technology | 994 | |||
| Tradenames and trademarks | 310 | |||
| Total identifiable assets acquired | 5,685 | |||
| Accrued salaries, wages and related benefits | 63 | |||
| Deferred revenues | 2,560 | |||
| Income and other taxes | 97 | |||
| Total liabilities assumed | 2,720 | |||
| Net identifiable assets acquired | 2,965 | |||
| Goodwill | 1,263 | |||
| Net assets acquired | $ | 4,228 | ||
The estimated fair value of the media contacts databasehedging instrument is recorded in Other comprehensive income (loss). When the amounts recorded in Other comprehensive income (loss) are reclassified to earnings, they are included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs.
Capitalized Developed Software - The Company incurs development costs related to software it develops for its internal use. Qualifying costs incurred during the application development stage are capitalized. These costs primarily consist of internal labor and tradenamesthird-party development costs and trademarks intangible assets was determinedare amortized using the “relief from royalty method” under the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on the cost savings that are available through ownership of the asset by the avoidance of paying royalties to license the use of the asset from another owner. The estimated fair value of the developed technology was determined based on the cost approach, which measures the value by the cost to reconstruct or replace the platform with another of like utility. Some of the more significant assumptions inherent in the development of these asset valuations include the projected revenue associated with the asset, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, as well as other factors. The discount rate used to arrive at the present value of the media contact database and tradenames and trademarks at the acquisition date, was 13.5%. The remaining useful lives of the media contact database, developed technology, and tradenames and trademarks were based on historical product development cycles, the projected rate of technology migration, a market participant’s use of these intangible assets and the pattern of projected economic benefit of these intangible assets.
The amounts assigned to the media contact database, developed technology, tradenames and trademarks are amortizedstraight-line method over the estimated useful life of 10the capitalized developed software, which generally ranges from three to ten years. All other research and maintenance costs are expensed as incurred.
Income Taxes - Estimated deferred taxes are determined based on the difference between the financial statement and tax basis 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 estimated 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 anticipates that it will be able to realize the estimated deferred tax assets in the future in excess of its net recorded amount, an adjustment to the provision for deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company anticipates that it will not be able to realize the estimated deferred tax assets in the future considering future taxable income, an adjustment to the provision for deferred tax assets would decrease income in the period such determination was made. In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the United States, Canadian and European (principally Germany and the United Kingdom) deferred tax assets will not be realizable. As the expectation of future taxable income cannot be predicted with certainty, the Company maintains a valuation allowance against all the United States, Canadian and European (principally Germany and the United Kingdom) net deferred tax assets. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change.
The Company fundedindefinitely reinvests the purchase price fromforeign earnings in its available cashforeign subsidiaries. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue as a liability the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
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.
8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Revenue - Deferred revenue represents advance billings made to customers where conditions for revenue recognition have not been met. These amounts are included in accrued expenses and other on hand. Transaction expenses amountedthe accompanying condensed consolidated balance sheets. We expect to $0.1 millionrecognize substantially all of these performance obligations over the next 12 months. The table below provides information about contract liabilities (deferred revenue) and have been expensed.the significant changes in the balance for the three months ended March 31, 2023 (in thousands):
| | | |
|
| Amount | |
Balance at December 31, 2022 | | $ | 4,366 |
Net deferred revenue in the period | |
| 2,585 |
Revenue recognized | |
| (2,744) |
Currency translations and other adjustments | |
| (18) |
Balance at March 31, 2023 | | $ | 4,189 |
2. Short Term Investments – other
The following unaudited pro forma summary presents consolidated informationShort-term investments include investments made by the Company in treasury bills and certificates of deposit which are considered as highly liquid investments having a maturity period of less than one year.
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Treasury bills | | $ | 499 | | $ | 494 |
Certificates of deposit | |
| 13 | |
| 13 |
Total | | $ | 512 | | $ | 507 |
3. Accounts Receivable
Accounts receivable consists of the Company as if the business combination had occurred onfollowing:
| | | | | | |
|
| March 31, |
| December 31, | ||
| | 2023 | | 2022 | ||
Gross Accounts receivable | | $ | 9,628 | | $ | 10,741 |
Allowance for doubtful accounts | |
| (1,166) | |
| (1,213) |
Accounts receivable, net | | $ | 8,462 | | $ | 9,528 |
As of January 1, 2016 (amounts2023, the Company has adopted ASU 2019-04 (Codification Improvements to Topic 326, Financial Instruments—Credit Losses), and based on its assessment there was no impact on the financial statements or other related disclosures. The basis of allowance for doubtful accounts remains similar to the earlier adopted estimation procedure which is further elaborated in thousands, except per share amounts).the paragraph below.
We maintain an allowance for credit losses for estimated losses resulting from the failure of our customers to make the required payments and provisions for billing adjustments relating to quality issues on delivered services. The pro forma informationallowance for credit losses is presented for informational purposes onlybased on a review of specifically identified accounts and is not necessarily indicativean overall aging analysis applied to accounts pooled based on similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices, and current economic trends based on our expectations over the expected life of the resultsreceivables, generally ninety days or less. Actual credit losses could differ from those estimates.
9
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Activity in the future.allowance for the credit losses for the three months ended March 31, 2023 was as follows (in thousands):
| | | |
|
| Amount | |
Balance at January 1, 2023 | | $ | 1,213 |
Additions charged to expense | |
| 180 |
Write-offs against allowance | |
| (230) |
Foreign currency translation adjustment | |
| 3 |
Balance at March 31, 2023 | | $ | 1,166 |
| Three Months Ended | Nine Months Ended | |||||||
| September 30, 2016 | September 30, 2016 | |||||||
| Revenues: | ||||||||
| As reported | $ | 16,060 | $ | 47,400 | ||||
| Proforma | $ | 16,280 | $ | 50,900 | ||||
| Net loss attributable to Innodata Inc. and Subsidiaries: | ||||||||
| As reported | $ | (2,766 | ) | $ | (4,541 | ) | ||
| Proforma | $ | (2,721 | ) | $ | (4,205 | ) | ||
| Basic and diluted net loss per share: | ||||||||
| As reported | $ | (0.11 | ) | $ | (0.18 | ) | ||
| Proforma | $ | (0.11 | ) | $ | (0.16 | ) | ||
4. Goodwill and Intangible Assets
The changeschange in the carrying amount of goodwill for the ninethree months ended September 30, 2017 and 2016 wereMarch 31, 2023 was as follows (in thousands):
| Goodwill | ||||
| Balance as of January 1, 2017 | $ | 2,734 | ||
| Foreign currency translation adjustment | 105 | |||
| Balance as of September 30, 2017 | $ | 2,839 | ||
| Balance as of January 1, 2016 | $ | 1,476 | ||
| Goodwill recorded in connection with an acquisition | 1,239 | |||
| Foreign currency translation adjustment | 33 | |||
| Balance as of September 30, 2016 | $ | 2,748 | ||
| | | |
Balance as of January 1, 2023 |
| $ | 2,038 |
Foreign currency translation adjustment | |
| 6 |
Balance as of March 31, 2023 | | $ | 2,044 |
The fair value measurement of goodwill for the Agility segment 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 and the market multiple approach using comparable entities to further validate the carrying values. 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. The carrying value of Goodwill was $2.0 million as of March 31, 2023, and December 31, 2022.
10
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information regarding the Company’s acquisition-relatedCompany acquired intangible assets isand capitalized developed software was as follows (in thousands):
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||
| Balance as of January 1, 2017 | $ | 3,019 | $ | 2,112 | $ | 865 | $ | 43 | $ | 3,510 | $ | 9,549 | ||||||||||||
| Foreign currency translation | 204 | 170 | 22 | 3 | 137 | 536 | ||||||||||||||||||
| Balance as of September 30, 2017 | $ | 3,223 | $ | 2,282 | $ | 887 | $ | 46 | $ | 3,647 | $ | 10,085 | ||||||||||||
| | | | | | | | | | | | |
| | March 31, 2023 | ||||||||||
| | | | | | | | Foreign | | | | |
| | Gross | | | | | Currency | | Net | |||
| | Carrying | | Accumulated | | Translation | | Carrying | ||||
|
| Value |
| Amortization |
| Adjustment |
| Value | ||||
Acquired Intangible Assets | | | | | | | | | | | | |
Developed technology | | $ | 2,999 | | $ | (2,414) | | $ | 1 | | $ | 586 |
Customer relationships |
| | 2,096 |
| | (1,514) |
| | - |
| | 582 |
Trademarks and tradenames |
| | 852 |
| | (733) |
| | - |
| | 119 |
Patents |
| | 43 |
| | (37) |
| | - |
| | 6 |
Media Contact Database | | | 3,492 | | | (2,357) | | | 6 | | | 1,141 |
Total Acquired Intangible Assets | | $ | 9,482 | | $ | (7,055) | | $ | 7 | | $ | 2,434 |
| | | | | | | | | | | | |
Capitalized Developed Software | |
| | |
| | |
| | |
| |
Capitalized Developed Software | | $ | 11,778 | | $ | (4,779) | | $ | 3 | | $ | 7,002 |
Capitalized Developed Software - in Progress | |
| 3,631 | |
| - | |
| (3) | |
| 3,628 |
Total Capitalized Developed Software | | $ | 15,409 | | $ | (4,779) | | $ | - | | $ | 10,630 |
| | | | | | | | | | | | |
Total | | $ | 24,891 | | $ | (11,834) | | $ | 7 | | $ | 13,064 |
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||
| Balance as of January 1, 2016 | $ | 1,978 | $ | 2,036 | $ | 555 | $ | 41 | $ | - | $ | 4,610 | ||||||||||||
| Additions | $ | 994 | $ | - | $ | 310 | $ | - | $ | 3,610 | 4,914 | |||||||||||||
| Foreign currency translation | 98 | 108 | 10 | 3 | (25 | ) | 194 | |||||||||||||||||
| Balance as of September 30, 2016 | $ | 3,070 | $ | 2,144 | $ | 875 | $ | 44 | $ | 3,585 | $ | 9,718 | ||||||||||||
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
| | | | | | | | Foreign | | | | |
| | Gross | | | | | Currency | | Net | |||
|
| Carrying |
| Accumulated |
| Translation | | Carrying | ||||
|
| Value |
| Amortization |
| Adjustment |
| Value | ||||
Acquired Intangible Assets |
| |
|
| |
|
| |
|
| |
|
Developed technology | | $ | 3,169 | | $ | (2,468) | | $ | (43) | | $ | 658 |
Customer relationships | | | 2,228 | | | (1,560) | | | (42) | | | 626 |
Trademarks and tradenames | | | 880 | | | (740) | | | (8) | | | 132 |
Patents | |
| 45 | |
| (38) | | | 1 | | | 8 |
Media Contact Database | | | 3,648 | | | (2,358) | | | (68) | | | 1,222 |
Total Acquired Intangible Assets | | $ | 9,970 | | $ | (7,164) | | $ | (160) | | $ | 2,646 |
| | | | | | | | | | | | |
Capitalized Developed Software | | | | | | | | | | | | |
Capitalized Developed Software | | $ | 11,845 | | $ | (4,398) | | $ | (348) | | $ | 7,099 |
Capitalized Developed Software - in Progress | | | 2,787 | | | - | | | (6) | | | 2,781 |
Total Capitalized Developed Software | | $ | 14,632 | | $ | (4,398) | | $ | (354) | | $ | 9,880 |
| | | | | | | | | | | | |
Total | | $ | 24,602 | | $ | (11,562) | | $ | (514) | | $ | 12,526 |
11
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2017 | $ | 545 | $ | 425 | $ | 203 | $ | 10 | $ | 175 | $ | 1,358 | ||||||||||||
| Amortization expense | 233 | 135 | 90 | 3 | 271 | 732 | ||||||||||||||||||
| Foreign currency translation | 50 | 42 | 7 | 2 | 10 | 111 | ||||||||||||||||||
| Balance as of September 30, 2017 | $ | 828 | $ | 602 | $ | 300 | $ | 15 | $ | 456 | $ | 2,201 | ||||||||||||
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2016 | $ | 280 | $ | 240 | $ | 98 | $ | 5 | $ | - | $ | 623 | ||||||||||||
| Amortization expense | 180 | 133 | 75 | 3 | 90 | 481 | ||||||||||||||||||
| Foreign currency translation | 16 | 14 | 1 | 2 | (1 | ) | 32 | |||||||||||||||||
| Balance as of September 30, 2016 | $ | 476 | $ | 387 | $ | 174 | $ | 10 | $ | 89 | $ | 1,136 | ||||||||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense relating to acquisition-relatedacquired intangible assets was $0.2 million for each of the three monthsthree-month periods ended September 30, 2017March 31, 2023 and 2016.2022, respectively.
Amortization expense relating to acquisition-related intangible assetscapitalized developed software was $0.7$0.6 million and $0.5$0.4 million for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively.
EstimatedAs of March 31, 2023, estimated future amortization expense for intangible assets after September 30, 2017 iswas as follows (in thousands):
| Year | Amortization | |||
| 2017 | $ | 251 | ||
| 2018 | 1,004 | |||
| 2019 | 1,004 | |||
| 2020 | 939 | |||
| 2021 | 939 | |||
| Thereafter | 3,747 | |||
| $ | 7,884 | |||
| | | |
Year |
| Amortization | |
2023 | | $ | 3,623 |
2024 | | | 3,975 |
2025 | | | 3,054 |
2026 | | | 853 |
2027 | | | 460 |
Thereafter | | | 1,099 |
| | $ | 13,064 |
5. Income Taxes
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 United States, Canadian, German and the United Kingdom subsidiaries and a valuation allowance recorded on deferred taxes of these entities and tax effects of foreign operations, including foreign exchange gains and losses.
The Company had unrecognized tax benefitsreconciliations of approximately $1.3 million and $1.2 million as of September 30, 2017 and December 31, 2016, respectively. The portion of unrecognized tax benefits relating to interest and penalties was approximately $0.6 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively. The unrecognized tax benefits as of September 30, 2017 and December 31, 2016, if recognized, would have an impact onthe U.S. statutory rate with the Company’s effective tax rate.rate for the three months ended March 31, 2023 and 2022, respectively, are summarized in the table below:
| | | | | |
| | For the Three Months | | ||
| | Ended March 31, | | ||
|
| 2023 |
| 2022 | |
Federal income tax expense at statutory rate |
| (21.0) | % | (21.0) | % |
Effect of: |
| | | | |
Change in valuation allowance |
| 23.8 | | 35.1 | |
Tax effects of foreign operations | | 3.8 | | 5.9 | |
Foreign operations permanent difference - foreign exchange gains and losses | | 3.5 | | 4.4 | |
Increase in unrecognized tax benefits (ASC 740) | | 3.4 | | 1.1 | |
Foreign rate differential | | 0.9 | | (8.0) | |
State income tax net of federal benefit | | 0.3 | | 0.2 | |
Return to provision true up | | (0.4) | | 4.7 | |
Effect of stock based compensation | | (1.4) | | - | |
Deemed interest | | (4.6) | | (2.6) | |
Other | | 3.2 | | (0.1) | |
Effective tax rate | | 11.5 | % | 19.7 | % |
12
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the ninethree months ended September 30, 2017 (amounts in thousands):
| Unrecognized tax benefits | ||||
| Balance - January 1, 2017 | $ | 1,184 | ||
| Interest accrual | 34 | |||
| Foreign currency revaluation | 62 | |||
| Balance - September 30, 2017 | $ | 1,280 | ||
The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company is no longer subject to examination by Federal tax authorities for years prior to 2006 and by New Jersey tax authorities for years prior to 2012. Various foreign subsidiaries currently have open tax years from 2003 through 2016.
Pursuant to an income tax audit by the Indian Bureau of Taxation in 2009, the Company’s Indian subsidiary received a tax assessment approximating $339,000 including interest, through September 30, 2017 for the fiscal year ended March 31, 2006. Management disagrees with the basis2023 (in thousands):
| | | |
|
| Unrecognized | |
|
| tax benefits | |
Balance - January 1, 2023 | | $ | 1,680 |
Increase for current period tax positions | |
| 44 |
Interest accrual | |
| 21 |
Foreign currency remeasurement | |
| 9 |
Balance - March 31, 2023 | | $ | 1,754 |
The Company expects that unrecognized tax benefits as of this tax assessment, has filed an appeal against the assessment and is contesting it vigorously. In January 2012, the Indian subsidiary received a final tax assessment of approximately $1.0 million, including interest, for the fiscal year ended March 31, 2008, from2023, if recognized, would have a material impact on the Indian Bureau of Taxation. Management disagrees with the basis of thisCompany’s effective tax assessment, and has filed an appeal against it. Due to this assessment, the Company recorded a tax provision amounting to $543,000 including interest throughrate.
Tax Assessments
In September 30, 2017. In April 2015, the Company received a favorable judgment whereby the Appeal Officer reduced the tax assessment to $0.3 million. Under the Indian Income Tax Act, however, the income tax assessing officer has the right to appeal against the judgment passed by the Appeal Officer. In the third quarter of 2015, the income tax assessing officer exercised this right and filed an appeal. Based on recent experience, management believes that the tax provision of $543,000 including interest is adequate. As the Company is continually subject to tax audits by the Indian Bureau of Taxation, the Company continuously assesses the likelihood of an unfavorable assessment for all fiscal years for which the Company has not been audited and, as of September 30, 2017, the Company recorded a tax provision amounting to $213,000 including interest, through September 30, 2017.
In 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax BureauDepartment 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 BureauDepartment 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 approximately 14.5% of the subsidiary’s revenuesbetween 12.36% and 15%, and this would increase the operating costs of the Company by an equivalent amount.subsidiary may also be liable for interest and penalties. Therevenues revenue of the Company’s Indian subsidiary during this period was approximately $57.0 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 Company’s assessment in consultation with the Company’s tax 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 year ended December 31, 2016 were $16.8 million.Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $121,000 previously granted to the Company’s 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 $0.8 million recorded as a receivable. Based on the Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.
Substantial recovery against the Company in the above referenced 2015 Service Tax Bureau’s positionDepartment case could have a material adverse impact on the Company, and is vigorously contesting these assertions.
In 2017, the U.S. entity deferred $4.7 millionunfavorable rulings or recoveries in payments due to its Asian operating subsidiaries. The deferral in payments resulted in a deemed dividend that is taxable income to the U.S. entity and is set off against its net operating loss carryforwards. The Company projects that during the balance of 2017 through 2018 the U.S. entity will not have sufficient cash to pay in full amounts that will be payable by it to the Company’s Asian operating subsidiaries and that the cash deficit will amount to approximately $7.0 million. The resulting deferral in payments would similarly result in a deemed dividend that would be taxable income to the U.S. entity and would be set off against its net operating loss carryforwards. The Company adjusted its deferred tax assets and the corresponding valuation allowance as of September 30, 2017 to reflect the projected deferral in payments.
The Company from time to time is also subject to various other tax proceedings and claims for its Philippines subsidiaries. could have a material adverse impact on the consolidated operating results of the period (and subsequent periods) in which the rulings or recovery occurs.
13
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Operating Leases
The Company has recorded a tax provision amountingvarious lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to $185,000 including interest through September 30, 2017,the leased properties are retained by the lessors. Accordingly, these are accounted for several ongoing tax proceedingsas operating leases.
These lease agreements are for terms ranging from two to eleven 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 to the contract.
The table below summarizes the amounts recognized in the Philippines. Althoughcondensed consolidated financial statements related to operating leases for the ultimate outcome cannot be determined at this time,periods presented (in thousands):
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Rent expense for long-term operating leases | | $ | 309 | | $ | 376 |
Rent expense for short-term leases | |
| 95 | |
| 117 |
Total rent expense | | $ | 404 | | $ | 493 |
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 sheet as of March 31, 2023 (in thousands):
| | | |
Year |
| Amount | |
2023 | | $ | 761 |
2024 | |
| 858 |
2025 | |
| 890 |
2026 | |
| 927 |
2027 | |
| 912 |
2028 and thereafter | |
| 1,553 |
Total lease payments | |
| 5,901 |
Less: Interest | |
| (1,342) |
Net present value of lease liabilities | | $ | 4,559 |
| |
| |
Current portion | | $ | 633 |
Long-term portion | |
| 3,926 |
Total | | $ | 4,559 |
The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of March 31, 2023 were as follows:
| | | |
Weighted-average lease term remaining (in months) | 49 | | |
Weighted-average discount rate | 9.10 | % |
14
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.Long-term obligations
Total long-term obligations as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Pension obligations - accrued pension liability | | $ | 6,239 | | $ | 5,906 |
Settlement agreement | |
| - | |
| 50 |
Microsoft licenses (1) | |
| 1,170 | |
| - |
| | | 7,409 | | | 5,956 |
Less: Current portion of long-term obligations | |
| 1,121 | |
| 877 |
Totals | | $ | 6,288 | | $ | 5,079 |
(1) In March 2023, the Company continuesrenewed a vendor agreement to contest these claims vigorously.acquire certain additional software licenses, receive technical support and future software upgrades on software licenses through February 2026. Pursuant to this agreement, the Company is contractually liable to pay approximately $0.4 million annually over the term of the agreement.
8. Commitments and Contingencies
Litigation –In 2008, the Supreme Court of the Republic ofa judgment was rendered in the Philippines refused to review a decision of the Court of Appeals in Manila against a PhilippinesPhilippine subsidiary of the Company that is inactive and has no material assets,longer active and purportedly also against Innodata Inc., that orders the reinstatementin favor of certain former employees of the subsidiaryPhilippine subsidiary. The potential payment amount aggregates to their former positions and also orders the payment of back wages and benefits that aggregate approximately $7.0 million. The payment ordered by the Philippine courts accrued$5.9 million, plus legal interest that accrued at the rate of 12% per annum from August 13, 2008 to SeptemberJune 30, 2013, and has thereafter accrued and continues to accrue legal interest at the rate of 6% per annum. The potential payment amount of the payment as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. Based on consultationIn 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 legal counsel, the Company believes that financial recovery againstUSDC retaining jurisdiction over the Company is unlikely.matter and the preliminary injunction remaining in full force and effect.
The Company is also subject to various other legal proceedings and claims which arisethat have arisen in the ordinary course of business.
While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced PhilippinesPhilippine action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidated operating results ofin the period in which the ruling or recovery occurs. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above referenced legal proceedings could change in the future.
15
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s legal reservesaccruals related to legal proceedings and claims are based on athe Company’s determination of whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external counsel to assess probability and estimates of loss. The reservesaccruals are adjusted if necessary. While the Company intends to defend these matters vigorously, adverse outcomes that it estimates could reach approximately $0.3 million$450,000 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.
9. Stock Options and Restricted Stock Units
Foreign Currency- ToA summary of option activity under 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 on foreign currency fluctuation on the non-U.S. dollar denominated revenues, and on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in local currency.
Indemnifications- The Company is obligated under certain circumstances to indemnify directors, certain officers and employees against costs and liabilities incurred in actions or threatened actions brought against such individuals because such individuals acted in the capacity of director, officer and/or fiduciary of the Company. In addition, the Company has contracts with certain clients pursuant to whom the Company has agreed to indemnify the client for certain specified and limited claims. These indemnification obligations occur in the ordinary course of business and, in many cases, do not include a limit on potential maximum future payments. As of September 30, 2017, the Company has not recorded a liability for any obligations arising as a result of these indemnifications.
On June 7, 2016, stockholders of 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(the “2013 Plan”) and changes during each of the three-month periods ended March 31, 2023 and 2022 are presented below:
| | | | | | | | | | |
|
| |
| |
| Weighted-Average |
| | ||
| | Number of |
| Weighted - Average |
| Remaining Contractual | | Aggregate | ||
|
| Options |
| Exercise Price |
| Term (years) |
| Intrinsic Value | ||
Outstanding at January 1, 2023 |
| 6,690,490 | | $ | 3.09 |
|
|
| |
|
Granted* |
| 25,000 | |
| 3.31 |
|
|
| |
|
Exercised |
| (148,167) | |
| 2.31 |
|
|
| |
|
Forfeited/Expired |
| (64,666) | |
| 6.96 |
|
|
| |
|
Outstanding at March 31, 2023 |
| 6,502,657 | | $ | 3.07 |
| 6.94 | | $ | 35,414,546 |
|
| | |
| |
| | |
| |
Exercisable at March 31, 2023 |
| 4,041,942 | | $ | 2.03 | | 5.87 | | $ | 26,301,295 |
|
| | |
| |
| | |
| |
Vested and Expected to Vest at March 31, 2023 |
| 6,502,657 | | $ | 3.07 |
| 6.94 | | $ | 35,414,546 |
*On January 23, 2023 25,000 stock options were issued to herein asa non-employee member of the “Plan.”Company’s advisory board. The numberstock options vest in 12 monthly installments commencing in June 2023.
| | | | | | | | | | |
|
| |
| | |
| Weighted-Average |
| | |
| | Number of | | Weighted - Average | | Remaining Contractual | | Aggregate | ||
| | Options | | Exercise Price | | Term (years) | | Intrinsic Value | ||
Outstanding at January 1, 2022 | | 5,536,896 | | $ | 2.66 | |
| |
| |
Granted* |
| 1,479,558 |
| | 5.21 |
|
|
| |
|
Exercised |
| (22,500) |
| | 1.17 |
|
|
| |
|
Forfeited/Expired |
| (35,400) |
| | 5.10 |
|
|
| |
|
Outstanding at March 31, 2022 |
| 6,958,554 | | $ | 3.20 |
| 7.84 | | $ | 26,515,544 |
| | | | | | | | | | |
Exercisable at March 31, 2022 |
| 3,418,917 | | $ | 1.82 |
| 6.53 | | $ | 17,679,562 |
| | | | | | | | | | |
Vested and Expected to Vest at March 31, 2022 |
| 6,958,554 | | $ | 3.20 |
| 7.84 | | $ | 26,515,544 |
*Includes 110,000 stock options granted by the Company to a non-employee director of sharesthe Company during the three-month period ended March 31, 2022. The stock option fully vests on January 1, 2025.
16
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of option activity under the Innodata Inc. (“Stock”) that may be delivered, purchased or used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under the2021 Equity Compensation 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 shall 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 shall 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 2009 Stock Plan (as amended and restated effective as of April 11, 2022 (the “Prior“2021 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 shall be added back to and changes during the Share Reserve as one share for each such share that was subject to an option or stock appreciation right grantedthree-month periods ended March 31, 2023 are presented below. There were no outstanding options 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 the2021 Plan as full or partial payment to Innodata of March 31, 2022.
| | | | | | | | | | |
| | | | | | Weighted-Average | | | ||
| | Number of | | Weighted - Average | | Remaining Contractual | | Aggregate | ||
|
| Options |
| Exercise Price |
| Term (years) |
| Intrinsic Value | ||
Outstanding at January 1, 2023 |
| 1,027,500 | | $ | 3.46 |
|
|
| |
|
Granted |
| - | |
| - |
|
|
| |
|
Exercised |
| - | |
| - |
|
|
| |
|
Forfeited/Expired |
| (33,500) | |
| 3.41 |
|
|
| |
|
Outstanding at March 31, 2023 |
| 994,000 | | $ | 3.46 |
| 9.51 | | $ | 5,051,370 |
| | | | | | | | | | |
Exercisable at March 31, 2023 |
| 31,250 | | $ | 5.20 |
| 9.29 | | $ | 104,500 |
| | | | | | | | | | |
Vested and Expected to Vest at March 31, 2023 |
| 994,000 | | $ | 3.46 |
| 9.51 | | $ | 5,051,370 |
During the exercisethree months ended March 31, 2023, a total of 148,167 options were exercised at an average 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 shall 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.$2.31.
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted averageweighted-average fair valuesvalue of the options granted, and weighted averageweighted-average assumptions arewere as follows:
| Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2017 | 5,169,169 | $ | 2.88 | |||||||||||||
| Granted | 40,000 | 1.50 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited/Expired | (75,237 | ) | 2.93 | |||||||||||||
| Outstanding at September 30, 2017 | 5,133,932 | $ | 2.87 | 5.08 | $ | - | ||||||||||
| Exercisable at September 30, 2017 | 4,116,869 | $ | 2.95 | 4.18 | $ | - | ||||||||||
| Vested and Expected to Vest at September 30, 2017 | 5,133,932 | $ | 2.87 | 5.08 | $ | - | ||||||||||
| | | | | | | |
| | For the Three Months Ended March 31, | | ||||
|
| 2023 |
| 2022 | | ||
Weighted average fair value of options granted | | $ | 1.79 | | $ | 3.10 | |
Risk-free interest rate | | | 3.88 | % | | 1.94%-2.33 | % |
Expected term (years) | | | 3.0 | | | 6.0-6.42 | |
Expected volatility factor | | | 79.95 | % | | 62.00 | % |
Expected dividends | | | - | | | - | |
There were no outstanding awards of restricted stock under the 2013 Plan or the 2021 Plan (collectively, the “Equity Plans”) during each of the three-month periods ended March 31, 2023 and 2022.
In March 2022, the Company granted restricted stock units (“RSU”) to key executives, pursuant to the Equity Plans. Each RSU has vesting conditions based on both the achievement of performance-based metrics and the continuation of employment over a defined period. The level of performance determines the number of RSUs that performance-vest, and performance vested RSUs must also time-vest in order to be fully vested. Each fully vested RSU represents the right to receive one share of the Company’s common stock or the fair market value of one share of common stock, at the Company’s discretion, and is classified as an equity award. Each RSU vests pursuant to the vesting schedule found in the respective RSU agreement. RSUs are generally subject to graduated vesting schedules and stock-based compensation expense is computed by tranche and recognized on a straight-line basis over the tranches’ applicable vesting period based on the expected achievement level. The fair value of restricted stock optionsunits is estimated on the date of grant using the Black-ScholesBinomial option pricing model. The weighted average fair values
17
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted stock unit activity under the Equity Plans during each of the options grantedthree-month periods ended March 31, 2023 and weighted average assumptions2022 are as follows:presented below:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Weighted average fair value of options granted | $ | 0.72 | $ | 1.08 | ||||
| Risk-free interest rate | 1.91 | % | 1.26% - 1.49 | % | ||||
| Expected life (years) | 6 | 5-6 | ||||||
| Expected volatility factor | 49.62 | % | 49 | % | ||||
| Expected dividends | - | - | ||||||
| | | | | |
| | Number of |
| Weighted-Average | |
| | Restricted Stock | | Grant Date | |
|
| Units |
| Fair Value | |
Unvested at January 1, 2023 | | 700,000 | | $ | 5.59 |
Granted |
| - |
| | - |
Vested |
| - |
| | - |
Forfeited/Expired |
| - |
| | - |
Unvested at March 31, 2023 |
| 700,000 | | $ | 5.59 |
| | | | | |
|
| Number of |
| Weighted-Average | |
| | Restricted Stock | | Grant Date | |
| | Units | | Fair Value | |
Unvested at January 1, 2022 |
| - |
| $ | - |
Granted* |
| 700,000 | | | 5.59 |
Vested |
| - | |
| - |
Forfeited/Expired |
| - | |
| - |
Unvested at March 31, 2022 |
| 700,000 | | $ | 5.59 |
* 200,000 RSUs were issued under the 2013 Plan and 500,000 RSUs were issued under the 2021 Plan.
The total compensation cost related to non-vested stock awardsoptions not yet recognized as of September 30, 2017March 31, 2023 totaled approximately $1.2$6.2 million. The weighted-average period over which these costs will be recognized is twenty-one23 months.
During the fiscal year ended December 31, 2022, 700,000 performance-based restricted stock units were granted and remain unvested at March 31, 2023. Vesting of the performance-based restricted stock units is contingent on the achievement of certain financial performance goals and service vesting conditions. There were no restricted stock units granted during the three months ended March 31, 2023.
The compensation cost related to non-vested restricted stock units not yet recognized as of March 31, 2023 totaled approximately $2.8 million. The weighted-average period over which these costs will be recognized is 24 months.
The stock-based compensation expense related to the Company’s various stock awards wasEquity Plans were allocated as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
| | | | | | | ||||||||||||||||
| | For the Three Months Ended | ||||||||||||||||||||
| | March 31, | ||||||||||||||||||||
|
| 2023 |
| 2022 | ||||||||||||||||||
| Direct operating costs | $ | 55 | $ | 81 | $ | 204 | $ | 245 | | $ | 63 | | $ | 52 | ||||||||
| Selling and administrative expenses | 130 | 126 | 458 | 484 | |
| 899 | |
| 485 | ||||||||||||
| Total stock-based compensation | $ | 185 | $ | 207 | $ | 662 | $ | 729 | | $ | 962 | | $ | 537 | ||||||||
18
Total long-term obligations asINNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Redemption of September 30, 2017 andnon-controlling interest
The Condensed Consolidated Balance Sheets for the fiscal period ended December 31, 2016 consist2022 includes a $2.9 million charge against additional paid-in-capital representing the carrying value of the following (in thousands):
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Capital lease obligations | $ | 955 | $ | 224 | ||||
| Deferred lease payments(1) | 787 | 705 | ||||||
| Microsoft licenses(2) | 751 | - | ||||||
| Acquisition related liability(3) | 806 | 1,492 | ||||||
| Lease incentive liability(4) | 684 | - | ||||||
| Pension obligations - accrued pension liability | 2,874 | 2,616 | ||||||
| 6,857 | 5,037 | |||||||
| Less: Current portion of long-term obligations | 2,124 | 1,120 | ||||||
| Totals | $ | 4,733 | $ | 3,917 | ||||
(1) Deferred lease payments represent the effect of straight-lining operating lease payments over the respective lease terms.
(2)In March 2017,non-controlling interest in Innodata Synodex, LLC which was redeemed by the Company renewed a vendor agreement to acquire certain additional software licenses and to receive support and subsequent software upgrades on these and other currently owned software licenses through February 2020. Pursuant to this agreement, theMarch 31, 2022. The Company is obligated to pay approximately $0.4 million annually over the term of the agreement. The total cost, net of deferred interest (in thousands), was allocated to the following asset accounts in 2017:
| Prepaid expenses and other current assets | $ | 404 | ||
| Other assets | 809 | |||
| $ | 1,213 |
(3)On September 30, 2016 the Company and the other parties toaccounted for the transaction in accordance with ASC Topic 810, “Consolidation,” which discusses the Company acquired MediaMiser amended the terms on which a subsidiaryproper accounting treatment of the Company is required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments on March 31, 2017 and 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. The Company has the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. stock. In March 2017, the Company paid 70% of the first installment by issuing 253,622 shares of Innodata Inc.’s common stock and paid 30% of the first installment in cash in April 2017.
(4) In the second quarter of 2017, the Company moved both its U.S. and Canadian headquarters to new premises. As an incentivecarrying value for the Company to lease in their respective office spaces, the lessors for each of the properties offered to partially defray the construction cost by offering a tenant improvement allowance.non-controlling interest. Under the termsstandard, any change in ownership that does not result in a loss of the lease contracts the Company is liable to refund any unamortized portion of this allowance should it decide to terminate the lease before the expiry of the specified lock-in period. This amount willcontrol must be amortized based on the contractual liability and recognizedaccounted for as a reduction in rent expense for the period covered.an equity transaction.
11. Comprehensive loss
Accumulated other comprehensive income (loss),loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustment net of taxes and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive income (loss)loss as of September 30, 2017,March 31, 2023 and 2022, and reclassifications out offrom accumulated other comprehensive income (loss)loss for the three months then ended, are presented below (in thousands):
| | | | | | | | | | | | |
| | Pension Liability | | Fair Value of | | Foreign Currency | | Accumulated Other | ||||
|
| Adjustment |
| Derivatives |
| Translation Adjustment |
| Comprehensive Loss | ||||
Balance at January 1, 2023 | | $ | (86) | | $ | (365) | | $ | (1,657) | | $ | (2,108) |
Other comprehensive loss before reclassifications, net of taxes | |
| - | |
| 242 | |
| 60 | |
| 302 |
Total other comprehensive loss before reclassifications, net of taxes | |
| (86) | |
| (123) | |
| (1,597) | |
| (1,806) |
Net amount reclassified to earnings | |
| (5) | |
| 181 | |
| - | |
| 176 |
Balance at March 31, 2023 | | $ | (91) | | $ | 58 | | $ | (1,597) | | $ | (1,630) |
| | | | | | | | | | | | |
|
| | |
| | |
| Foreign Currency |
| | | |
| | Pension Liability | | Fair Value of | | Translation | | Accumulated Other | ||||
| | Adjustment | | Derivatives | | Adjustment | | Comprehensive Loss | ||||
Balance at January 1, 2022 | | $ | (858) | | $ | (353) | | $ | (981) | | $ | (2,192) |
Other comprehensive loss before reclassifications, net of taxes |
|
| - | |
| (78) | |
| (26) | |
| (104) |
Total other comprehensive loss before reclassifications, net of taxes |
|
| (858) | |
| (431) | |
| (1,007) | |
| (2,296) |
Net amount reclassified to earnings |
|
| 40 | |
| 83 | |
| - | |
| 123 |
Balance at March 31, 2022 | | $ | (818) | | $ | (348) | | $ | (1,007) | | $ | (2,173) |
Taxes related to each component of other comprehensive loss were not material for each of the three-month periods presented and nine months ended September 30, 2017 and 2016, were as follows (net of tax):therefore not disclosed separately.
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at July 1, 2017 | $ | 1,264 | $ | (182 | ) | $ | (1,095 | ) | $ | (13 | ) | |||||
| Other comprehensive income (loss) before reclassifications, net of taxes | - | (119 | ) | 482 | 363 | |||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,264 | (301 | ) | (613 | ) | 350 | ||||||||||
| Net amount reclassified to earnings | (60 | ) | 82 | - | 22 | |||||||||||
| Balance at September 30, 2017 | $ | 1,204 | $ | (219 | ) | $ | (613 | ) | $ | 372 | ||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at July 1, 2016 | $ | 1,359 | $ | 81 | $ | (1,078 | ) | $ | 362 | |||||||
| Other comprehensive loss before reclassifications, net of taxes | - | (11 | ) | (118 | ) | (129 | ) | |||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,359 | 70 | (1,196 | ) | 233 | |||||||||||
| Net amount reclassified to earnings | (83 | ) | (28 | ) | - | (111 | ) | |||||||||
| Balance at September 30, 2016 | $ | 1,276 | $ | 42 | $ | (1,196 | ) | $ | 122 | |||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at January 1, 2017 | $ | 1,387 | $ | (318 | ) | $ | (1,393 | ) | $ | (324 | ) | |||||
| Other comprehensive income before reclassifications, net of taxes | - | 42 | 780 | 822 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,387 | (276 | ) | (613 | ) | 498 | ||||||||||
| Net amount reclassified to earnings | (183 | ) | 57 | - | (126 | ) | ||||||||||
| Balance at September 30, 2017 | $ | 1,204 | $ | (219 | ) | $ | (613 | ) | $ | 372 | ||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at January 1, 2016 | $ | 1,523 | $ | (165 | ) | $ | (1,442 | ) | $ | (84 | ) | |||||
| Other comprehensive income before reclassifications, net of taxes | - | 223 | 246 | 469 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,523 | 58 | (1,196 | ) | 385 | |||||||||||
| Net amount reclassified to earnings | (247 | ) | (16 | ) | - | (263 | ) | |||||||||
| Balance at September 30, 2016 | $ | 1,276 | $ | 42 | $ | (1,196 | ) | $ | 122 | |||||||
All reclassifications out offrom accumulated other comprehensive income (loss)loss had an impact on direct operating costs in the condensed consolidated statements of operations and comprehensive loss.
19
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Segment reporting and concentrations
The Company’s operations are classified intoin three reportablereporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS)Synodex and Media Intelligence Solutions (MIS).Agility.
The DDS segment provides solutions to digital retailers, informationAI data preparation services, companies, publisherscollecting or creating training data, annotating training data, and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products;training AI algorithms for its customers, and operational support of existing digital information productsAI model deployment and systems.
integration. The IADSDDS segment performs advanced data analysis. IADS operates through two subsidiaries: Synodex and docGenix. Synodex offersalso provides a range of data analysisengineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, data compliance, and master data management.
The Synodex segment provides an industry platform that transforms medical records into useable digital data organized in accordance with its proprietary data models or customer data models.
The Agility segment provides an industry platform that provides marketing communications and public relations professionals with the healthcare, medicalability to target and insurance areas. docGenix provides servicesdistribute content to financial services institutions.journalists and social media influencers world-wide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.
The Company’s MIS segment operates through its Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, the Company rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Ltd. Agility PR Solutions offers self and full-service solutions that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.
A significant portion of the Company’s revenuesrevenue is generated from its production facilitieslocations in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.
Revenues from external clients andcustomers, segment operating profit (loss), and other reportable segment information are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
| | | | | | | ||||||||||||||||
| | For the Three Months Ended March 31, | ||||||||||||||||||||
|
| 2023 |
| 2022 | ||||||||||||||||||
| Revenues: |
| |
|
| |
| ||||||||||||||||
| DDS | $ | 11,617 | $ | 12,052 | $ | 34,772 | $ | 38,928 | | $ | 12,746 | | $ | 15,911 | ||||||||
| IADS | 1,193 | 1,028 | 3,406 | 3,090 | ||||||||||||||||||
| MIS | 2,208 | 2,980 | 7,093 | 5,382 | ||||||||||||||||||
Synodex | |
| 1,865 | |
| 1,669 | ||||||||||||||||
Agility | |
| 4,228 | |
| 3,612 | ||||||||||||||||
| Total Consolidated | $ | 15,018 | $ | 16,060 | $ | 45,271 | $ | 47,400 | | $ | 18,839 | | $ | 21,192 | ||||||||
| |
| | |
| | ||||||||||||||||
| Income (loss) before provision for income taxes(1): | |
| | |
| | ||||||||||||||||
| DDS | $ | 1,077 | $ | (1,132 | ) | $ | 2,230 | $ | 1,195 | | $ | (281) | | $ | 1,452 | |||||||
| IADS | (1,016 | ) | (1,296 | ) | (2,978 | ) | (3,754 | ) | ||||||||||||||
| MIS | (946 | ) | (92 | ) | (1,663 | ) | (1,164 | ) | ||||||||||||||
Synodex | |
| (111) | |
| (988) | ||||||||||||||||
Agility | |
| (1,503) | |
| (2,879) | ||||||||||||||||
| Total Consolidated | $ | (885 | ) | $ | (2,520 | ) | $ | (2,411 | ) | $ | (3,723 | ) | | $ | (1,895) | | $ | (2,415) | ||||
| |
| | |
| | ||||||||||||||||
| Income (loss) before provision for income taxes(2): | |
| | |
| | ||||||||||||||||
| DDS | $ | 297 | $ | (1,882 | ) | $ | (46 | ) | $ | (980 | ) | | $ | (423) | | $ | 1,296 | |||||
| IADS | (257 | ) | (553 | ) | (750 | ) | (1,598 | ) | ||||||||||||||
| MIS | (925 | ) | (85 | ) | (1,615 | ) | (1,145 | ) | ||||||||||||||
Synodex | |
| 14 | |
| (859) | ||||||||||||||||
Agility | |
| (1,486) | |
| (2,852) | ||||||||||||||||
| Total Consolidated | $ | (885 | ) | $ | (2,520 | ) | $ | (2,411 | ) | $ | (3,723 | ) | | $ | (1,895) | | $ | (2,415) | ||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||
| Total assets: | ||||||||||||||||||||||
| DDS | $ | 26,190 | $ | 29,804 | ||||||||||||||||||
| IADS | 1,567 | 1,282 | ||||||||||||||||||||
| MIS | 21,139 | 16,502 | ||||||||||||||||||||
| Total Consolidated | $ | 48,896 | $ | 47,588 | ||||||||||||||||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||
| Goodwill: | ||||||||||||||||||||||
| DDS | $ | 675 | $ | 675 | ||||||||||||||||||
| MIS | 2,164 | 2,059 | ||||||||||||||||||||
| Total Consolidated | $ | 2,839 | $ | 2,734 | ||||||||||||||||||
20
(1) Before elimination of any inter-segment profitsINNODATA INC. AND SUBSIDIARIES
(2) After elimination of any inter-segment profitsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | |
|
| March 31, 2023 |
| December 31, 2022 | ||
Total assets: |
| |
|
| |
|
DDS | | $ | 26,251 | | $ | 25,758 |
Synodex | |
| 3,433 | |
| 3,270 |
Agility | |
| 19,451 | |
| 19,014 |
Total Consolidated | | $ | 49,135 | | $ | 48,042 |
| | | | | | |
|
| March 31, 2023 |
| December 31, 2022 | ||
Goodwill: |
| |
|
| |
|
Agility | | $ | 2,044 | | $ | 2,038 |
Total | | $ | 2,044 | | $ | 2,038 |
| (1) | Before elimination of any inter-segment profits |
| (2) | After elimination of any inter-segment profits |
The table below shows intersegment revenues which are eliminated in consolidation (in thousands).
The following table summarizes revenues
| | | | | | |
|
| For the Three Months Ended March 31, | ||||
| | 2023 | | 2022 | ||
Revenues of DDS Segment from: |
| |
| |
|
|
Synodex |
| $ | 447 | | $ | 564 |
Agility |
| | 32 | |
| 33 |
Totals |
| $ | 479 | | $ | 597 |
Revenues for the period ended March 31, 2023 and 2022 by geographic region (determined and based upon customer’s domicile), were as follows (in thousands):
| Three months ended | Nine months ended | |||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
| | | | | | | ||||||||||||||||
| | March 31, | ||||||||||||||||||||
|
| 2023 |
| 2022 | ||||||||||||||||||
| United States | $ | 7,637 | $ | 8,263 | $ | 22,630 | $ | 24,614 | | $ | 11,409 | | $ | 13,393 | ||||||||
| United Kingdom | 2,320 | 2,006 | 7,767 | 7,096 | |
| 2,555 | |
| 3,082 | ||||||||||||
| The Netherlands | 1,704 | 2,417 | 5,187 | 6,397 | |
| 1,723 | |
| 1,652 | ||||||||||||
| Canada | 1,367 | 1,491 | 4,212 | 4,465 | |
| 1,438 | |
| 1,377 | ||||||||||||
| Other - principally Europe | 1,990 | 1,883 | 5,475 | 4,828 | ||||||||||||||||||
| $ | 15,018 | $ | 16,060 | $ | 45,271 | $ | 47,400 | |||||||||||||||
Others - principally Europe | |
| 1,714 | |
| 1,688 | ||||||||||||||||
Totals | | $ | 18,839 | | $ | 21,192 | ||||||||||||||||
21
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-lived assets as of September 30, 2017March 31, 2023 and December 31, 2016, respectively,2022 by geographic region arewere comprised of (in thousands):
| September 30, | December 31, | |||||||||||||
| 2017 | 2016 | |||||||||||||
| | | | | | | ||||||||
|
| March 31, |
| December 31, | ||||||||||
|
| 2023 |
| 2022 | ||||||||||
| United States | $ | 5,419 | $ | 4,669 | | $ | 7,944 | | $ | 7,205 | ||||
| |
| | |
| | ||||||||
| Foreign countries: | |
| | |
| | ||||||||
| Canada | 6,760 | 5,085 | |
| 7,633 | |
| 7,675 | ||||||
| United Kingdom | 2,440 | 2,376 | |
| 1,160 | |
| 1,198 | ||||||
| Philippines | 1,629 | 1,940 | |
| 3,631 | |
| 3,682 | ||||||
| India | 1,189 | 1,520 | |
| 991 | |
| 1,195 | ||||||
| Sri Lanka | 569 | 683 | |
| 446 | |
| 426 | ||||||
| Israel | 37 | 47 | |
| 2 | |
| 3 | ||||||
| Germany | 2 | 2 | | | - | | | - | ||||||
| Total foreign | 12,626 | 11,653 | |
| 13,863 | |
| 14,179 | ||||||
| $ | 18,045 | $ | 16,322 | |||||||||||
Totals | | $ | 21,807 | | $ | 21,384 | ||||||||
Two clientsLong-lived assets include the unamortized balance of right-of-use assets amounting to $4.1 million and $4.3 million as of March 31, 2023 and December 31, 2022, respectively.
One customer in the DDS segment generated approximately 30%11% and another customer in the DDS segment generated 11% of the Company’s total revenues for the three months ended September 30, 2017 and 27%March 31, 2023. Another customer in the DDS segment generated approximately 21% of the Company’s total revenues for the three months ended September 30, 2016.March 31, 2022. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2017March 31, 2023 and 2016,2022, revenues from non-U.S. clientscustomers accounted for 49%39% and 48%37%, respectively, of the Company’s total revenues.
Two clients in the DDS segment generatedAs of March 31, 2023, approximately 29%38% of the Company’s total revenues for the nine months ended September 30, 2017accounts receivable was due from foreign (principally European) customers and 30% of the Company’s total revenues foraccounts receivable was due from two customers. As of December 31, 2022, approximately 44% of the nine months ended September 30, 2016.Company’s accounts receivable was due from foreign (principally European) customers and 45% of the Company’s accounts receivable was due from four customers. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 50% and 48%, respectively, of the Company’s total revenues.
As of September 30, 2017, approximately 56% of the Company's accounts receivable was from foreign (principally European) clientsas of March 31, 2023 and 50% of accounts receivable was due from four clients. As of December 31, 2016, approximately 73% of the Company's accounts receivable was from foreign (principally European) clients and 52% of accounts receivable was due from three clients.2022.
13. Loss Per Share
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Net Loss attributable to Innodata Inc. and Subsidiaries | | $ | 2,116 | | $ | 2,815 |
Weighted average common shares outstanding | |
| 27,460 | |
| 27,158 |
Dilutive effect of outstanding options | |
| - | |
| - |
Adjusted for dilutive computation | |
| 27,460 | |
| 27,158 |
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (1,068 | ) | $ | (2,766 | ) | $ | (2,964 | ) | $ | (4,541 | ) | ||||
| Weighted average common shares outstanding | 25,877 | 25,651 | 25,795 | 25,514 | ||||||||||||
| Dilutive effect of outstanding options | - | - | - | - | ||||||||||||
| Adjusted for dilutive computation | 25,877 | 25,651 | 25,795 | 25,514 | ||||||||||||
Basic net lossincome (loss) per share is computed using the weighted-average number of common shares outstanding during the period.year. Diluted net 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 averageweighted-average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two-class” method of computing income (loss) per share is used.
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INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 5.16.6 million shares and 4.27.0 million shares of common stock for the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively, were outstanding but not included in the computation of diluted net loss per share because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
14. Derivatives
Options to purchase 5.1 million shares and 4.2 million shares of common stock for the nine months ended September 30, 2017 and 2016, respectively, were outstanding but not included in the computation of diluted net loss per share, because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
The Company conducts a large portion of its operations in international markets, that subjectwhich subjects 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 is also subject to wage inflation and other government mandated increases and operating expenses in Asian countries where the Company has the majority of its operations. The Company’s primary inflation and 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 arerevenue is denominated in U.S. dollars, a significant portion of the total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period of up to 12 months. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded to Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) are reclassified to earnings and included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs.
To manage its exposure to fluctuations in foreign currency exchange rates, the Company entered into foreign currency forward contracts, authorized under Company policies, with counterparties that were highly rated financial institutions. The Company utilized non-deliverable forward contracts expiring within twelve 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 objective and strategy for undertaking hedge 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 total notional amount for outstanding derivatives designated as hedges was $9.8 million and $14.2 million as of September 30, 2017March 31, 2023 and December 31, 2016 was $20 million and $19.3 million, respectively, which is comprised of cash flow hedges denominated in U.S. dollars.2022, respectively.
The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of September 30, 2017March 31, 2023 and December 31, 20162022 (in thousands):
| Balance Sheet Location | Fair Value | |||||||||||||||||
| 2017 | 2016 | |||||||||||||||||
| | | | | | | | | ||||||||||
| | Balance Sheet Location | | Fair Value | ||||||||||||||
|
| |
| 2023 |
| 2022 | ||||||||||||
| Derivatives designated as hedging instruments: |
|
|
| |
|
| |
| ||||||||||
| | | | | | | | | ||||||||||
| Foreign currency forward contracts | Accrued expenses | $ | 219 | $ | 318 |
| Prepaid expenses and other current assets | | $ | 58 | | $ | - | |||||
| | | | | | | | | ||||||||||
Foreign currency forward contracts |
| Accrued expenses and other | | $ | - | | $ | 365 | ||||||||||
23
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effectseffect of foreign currency forward contracts designated as cash flow hedges on the Company’s condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017March 31, 2023 and 2016, respectively,2022 were as follows (in thousands):
| | | | | | |
|
| For the Three Months Ended | ||||
|
| March 31, | ||||
|
| 2023 |
| 2022 | ||
Net gain (loss) recognized in OCI(1) | | $ | 242 | | $ | (78) |
Net (gain) loss reclassified from accumulated OCI into income(2) | | $ | 181 | | $ | 83 |
Net gain recognized in income(3) | | $ | - | | $ | - |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net gain (loss) recognized in OCI(1) | $ | (119 | ) | $ | (11 | ) | $ | 42 | $ | 223 | ||||||
| Net gain (loss) reclassified from accumulated OCI into income(2) | $ | (82 | ) | $ | 28 | $ | (57 | ) | $ | 16 | ||||||
| Net gain recognized in income(3) | $ | - | $ | - | $ | - | $ | - | ||||||||
(1)
| (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 period presented. |
15. Subsequent Event
On April 4, 2023, Innodata Inc. entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, Innodata Synodex, LLC, Innodata docGenix, LLC, and Agility PR Solutions LLC. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the effective portion classified intoborrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other comprehensive income (loss) ("OCI")
(2)Effective portion classified within direct operating costs
(3)There were no ineffective portions forreserves and adjustments. The Credit Agreement contains a financial covenant that will require the periods presented.
The carrying amountsBorrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of September 30, 2017 andnot less than 1.10 to 1.00 by December 31, 2016, because of the relative short maturity of these instruments.
“Fair Value Measurements and Disclosures” defines fair value2023. Except as the price that would be received for an asset or paid to transfer a liability (an exit price)set forth in the principal or most advantageous market forCredit Agreement, borrowings under the asset or liability in an orderly transaction between market participants onRevolving Credit Facility bear interest at a rate equal to the measurement date.daily simple secured overnight financing rate (“SOFR”) plus 2.25%.
The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three levels. The three levels are defined as follows:
·Level 1: Unadjusted quoted price in active market for identical assets and liabilities.
·Level 2: Observable inputs other than those included in Level 1.
·Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
The following tables set forth the liabilities as of September 30, 2017 and December 31, 2016 that the Company measured at fair value, on a recurring basis by level, within the fair value hierarchy (in thousands). As required by the standard, liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
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| September 30, 2017 | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities | ||||||||||||
| Derivatives | $ | - | $ | 219 | $ | - | ||||||
| December 31, 2016 | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities | ||||||||||||
| Derivatives | $ | - | $ | 318 | $ | - | ||||||
Item 2.
The Level 2 liabilities contain foreign currency forward contracts. Fair value is determined based on the observable market transactions of spot and forward rates. The fair value of these contracts as of September 30, 2017 and December 31, 2016 are included in accrued expenses in the accompanying condensed consolidated balance sheets.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking statements includingwithin the meaning of Section 21E of the Securities 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. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The wordsWords such as “project,” “head start,“believe,” "believe," "expect,"“expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” "anticipate," "indicate," "point to," “forecast,“will,” “anticipate,” “indicate,” “predict,” “likely,” “goals,“estimate,” “optimistic,“plan,” “foster,“potential,” “estimate”or the negatives thereof, and other similar expressions generally identify forward-looking statements which speak only as of their dates.
.
These forward-looking statements are based largely on ourmanagement’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (“COVID-19”) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; that contracts may be terminated by clients;customers; projected or committed volumes of work may not materialize; our Innodata Advanced Data Solutions ("IADS")pipeline opportunities and customer discussions which may not materialize into work or expected volumes of work; continuing reliance on project-based work in the DDS segment is a venture formed in 2011 that has incurred losses since inception and has recorded impairment charges for all of its fixed assets; we currently intend to continue to invest in IADS; the primarily at-will nature of such contracts with our Digital Data Solutions clients and the ability of these clientscustomers 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;customers; potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Media Intelligence SolutionsAgility 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; changesa continued downturn in our business or growth strategy; 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 clientscustomers and prospective clientscustomers to execute business plans whichthat 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, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time inon our filings with the Securities and Exchange Commission.
Our actual results could differ materially from the results referred to in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Part I, Item 1A. “Risk Factors”, “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2023 and in our 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 contained in this Form 10-Q will occur.
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 information,statements, whether as a result of new information, future developments or otherwise.otherwise, except as may be required by the federal securities laws.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Innodata Inc. and its subsidiaries and should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Report.
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Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a global digital services and solutionsleading data engineering company. Our mission is to help the world’s most prestigious companies deliver the promise of ethical, high-performing artificial intelligence (“AI”), which we believe will contribute to a safer and more prosperous world.
Innodata was founded on a simple idea: engineer the highest quality data so organizations across broad industry segments could make smarter decisions. Today, we believe we’re delivering the highest quality data for some of the world’s most innovative technology companies to use to train the AI models of the future.
AI holds the promise that computers can perceive and understand the world, enabling products and services power leading informationthat would have been previously unimaginable and impossible with traditional coding. AI learns from data, and the highest-performing AI will have learned from the highest-quality data. We believe that we can contribute meaningfully by harnessing our capabilities, honed over 30 years, in collecting and annotating data at scale with consistency and high accuracy.
We are also helping companies deploy and integrate AI into their operations and products and online retail destinations aroundproviding innovative AI-enabled industry platforms, helping ensure that our customers’ businesses are prepared for a world in which machines augment human activity in ways previously unimaginable.
We developed our capabilities and honed our approaches progressively over the world. last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately seven years ago, we formed Innodata Labs, a research and development center, to research, develop and apply machine learning and emerging AI to our large-scale, human-intensive data operations. In 2019, we began packaging the capabilities that emerged from our R&D efforts in order to align with several fast-growing new markets and help companies use AI/ML to drive performance benefits and business insights.
Our historical core competency in high-quality data, combined with these R&D efforts in applied AI, created the foundation for the evolution of our offerings, which include AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms.
AI Data Preparation
We collect or create training data, annotate training data, and train AI algorithms for social media companies, robotics companies, financial services companies, and many others, working with images, text, video and audio. We utilize a variety of leading third-party image and video annotation tools. For text, we use our proprietary data annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary data annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. The platform encapsulates many of the innovations we conceived in the course of our 30-year history of creating high-quality data.
In addition, because collecting real-world data is often impracticable (due to data privacy regulations or rarity of cohorts and outliers), we create high-quality synthetic data that maintains all of the statistical properties of real-world data, using a combination of domain specialists and machine technologies that leverage large language models (LLMs).
AI Model Deployment and Integration
We help businesses leverage the latest AI technologies to achieve their goals. We develop custom AI models (where we select the appropriate algorithms, tune hyperparameters, train and validate the models, and update the models as required). We also help businesses fine-tune their own custom versions of our proprietary models and third-party foundation models to address domain-specific and customer-specific use cases.
In addition to deploying and integrating AI models, we often provide a range of data engineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, data compliance, and master data management.
26
Our customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns of our AI solutions help prestigious enterprises harnessand platforms.
AI-Enabled Industry Platforms
Our AI-enabled industry platforms address specific, niche market requirements we believe we can innovate with AI/ML technologies. We deploy these industry platforms as software-as-a-service (SaaS) and as managed services. These platforms benefit from our technology infrastructure, our industry-specific knowledge, our strong customer relationships and experience merging technology with the powerbusiness processes of our customers. To date, we have built an industry platform for medical records data extraction and transformation (which we brand as “Synodex®”) and an industry platform for public relations (which we brand as “Agility PR Solutions”). We are in the development with an additional AI-enabled industry platform to serve financial services institutions.
Our Synodex industry platform transforms medical records into useable digital data organized in accordance with our proprietary data models or customer data models.
Our Agility industry platform provides marketing communications and public relations professionals with the ability to re-imagine how they operatetarget and drive performance. We serve publishers,distribute content to journalists and social media influencers world-wide and information companies, digital retailers, banks, insurance companies, government agenciesto monitor and many other industries. Founded in 1988, we comprise a team of 4,000 diverse people in eight countries whoanalyze global news (print, web, radio and TV) and social media.
Our operations are dedicated to delivering servicespresently classified and solutions that help the world embrace digital data as a means of enhancing our lives and transforming our businesses.
The Company operatesreported in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).
Our DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products; and operational support of existing digital information products and systems.
Many of our clients are driving or are responding to rapid and fundamental changes in the way end users discover, consume and create published information. For some of our publishing and information services clients, this means transforming information products from print to digital; for others, it means migrating already-digital products from web-only distribution to multiple-channel distribution that includes mobile and tablet devices and incorporates mobility, social platform and semantic search; and for others still, it means re-tooling pure search-based information products into workflow-embedded analytical tools that combine content with software to enable context-aware decision-making; and for a select number of our information services clients, it means embracing the content-as-a-service model to integrate content with other tools, applications and data. Each of these transformations requires shifts in products, as well as the technology and the operations that support them.
For our enterprise publishing clients, changes in the way end users discover, consume and create published information often necessitates replacing old processes and technologies that generated static, whole documents with new processes and technologies that enable content to reside as modular components which are re-combined dynamically to create up-to-date, product-specific assembly guides, engineering diagrams/schematics, compliance documentation, field operations guides and clinical documentation destined for simultaneous access on the web, from PCs, tablets and smartphones.
By blending consulting, technology and operations sourcing with deep domain expertise, we provide measurable outcomes for publishing companies, information services companies and enterprises through business transformation, accelerating innovation and efficient operations.
We help our clients develop high-value information products. Our clients include four of the ten largest information industry companies in the world, spanning financial, legal, healthcare and scientific information.
We work with clients at a strategic business and technology level to address business process and technology challenges related to digital content supply chain optimization and strategy. By aligning operations and technology with business goals, we help businesses accelerate new product development and introduction; control cost; consolidate and leverage technology investment; and obtain benefits of scale.
Many enterprises are embracing new digital information technologies and workflow processes within their operations in order to improve internal decision-support systems. We formed our IADS segment in mid-2011 to design and develop new capabilities to enable clients in the financial services, insurance and healthcare sectors to improve decision-support through digital technologies. We believe that by creating and commercializing innovative business strategies and technology solutions we will be able to accelerate our growth and reduce our revenue volatility.
Our IADS segment operates through our Synodex and docGenix subsidiaries. AsAgility.
Prevailing Economic Conditions and Seasonality
Prevailing Economic Conditions
With the current level of September 30, 2017demand for our services, we owned 91% of Synodex and 94% of docGenix.
The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management and clinical trial support services. Synodex has developed and deployed its APS.Extract® product for specific use with life insurance underwriting and claims.
The main focus of the docGenix business is the extraction and classification of data from unstructured legal documents in order to improve an organization’s ability to analyze documentation and feed actionable data to downstream applications.
The IADS subsidiariesbelieve we have incurred losses since their inception in 2011. Our investment net of revenues in these subsidiaries in the third quarter of 2017 was approximately $0.3 million (consisting mainly of operating expenses). We wrote off all of the fixed assets of IADS in the third quarter of 2013 and have expensed all investments in IADS since that time. In the immediate future we intend to continue to invest in these subsidiaries net of revenues at the combined rate of $0.1 to $0.4 million per quarter.
Our MIS segment operates through our Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, we rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions, and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Limited.
Agility PR Solutions offers full and self-service solutions, consisting of Agility Enterprise, Agility and Agility Plus, that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact. Agility PR Solutions, through its Agility Enterprise product, provides media monitoring and analysis solutions and professional services to several Fortune 500 companies and Canadian government institutions, as well as small- and medium-sized businesses. Agility Enterprise enables companies to reduce the time and effort required to extract, analyze and share valuable business intelligence from traditional and online media sources.
Agility Enterprise’s proprietary technology platform monitors, aggregates, analyzes and distributes summaries of coverage from more than 200,000 content sources including traditional and digital media. The platform includes a powerful sentiment analysis engine that identifies whether opinions expressed in a particular document are positive, negative or neutral.
Increasingly, organizations seek to quantify the impact of public relations (PR) and communications activities and to understand what is being said about them across traditional and digital media. Social media has also dramatically changed how organizations manage and respond to crisis. Organizations need to respond quickly to negative customer feedback or coverage and track ongoing conversations to protect their brand and reputation. Agility Enterprise, with its powerful analytics and human augmented analysis and reporting, is designed to fit these needs.
Agility is a global media contact database and email distribution platform and Agility Plus provides additional self-service media monitoring and analytics capabilities. The solution is offered as software-as-a-service (SaaS).
Bulldog Reporter is a news aggregation service for PR and corporate communications professionals. Bulldog Reporter publishes a well-known daily e-newsletter, the Daily Dog. In addition, it offers a paid subscription service focused specifically on the health industry, a daily e-newsletter—Inside Health Media—that provides a health-related media list and media intelligence services by leveraging the data from the Agility platform. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital and social marketing, not-for-profit activity and overall outstanding PR performance.
Our services are organized and managed around three vectors: a vertical industry focus, a horizontal service/process focus, and a supportive operations focus.
The vertically-aligned groups understand our clients’ businesses and strategic initiatives. The vertical group for each particular industry includes experts hired from that industry.
Our service/process-aligned groups include engineering personnel and delivery personnel. Our engineering teams are responsible for creating secure and efficient custom workflows and integrating proprietary and third-party technologies to automate manual processes and improve the consistency and quality of our work product. These tools include categorization engines that utilize pattern recognition algorithms based on comprehensive rule sets and related heuristics, data extraction tools that automatically retrieve specific types of information from large data sources, and workflow systems that enable various tasks and activities to be performed across our multiple facilities.
Our globally distributed delivery personnel are responsible for executing our client engagements in accordance with service-level agreements. We deliver services from facilities in the United States, the Philippines, India, Sri Lanka, Israel, the United Kingdom, Germany and Canada.
Other support groups are responsible for managing diverse enabling functions including human resources, organizational development, network and communications technology infrastructure support and physical infrastructure and facilities management.
Our sales staff, program managers and consultants operate primarily from our North American and European locations, as well as from client sites.
Revenues
In our DDS segment, we recognize revenues based on the quantity delivered or resources utilized and in the period in which the services are performed and delivery has occurred. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts, which are not significant to the overall revenues, are recognized on the percentage of completion method of accounting, as services are performed or milestones are achieved.
In our IADS segment we recognize revenues primarily based on the quantity delivered, and the period in which services are performed and deliverables are made as per contracts. A portion of our IADS segment revenue is derived from licensing our software and providing access to our hosted software platform. Revenue from such services are recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured.
Our MIS segment derives its revenues primarily from subscription arrangements and provision of enriched media analysis services. Revenue from subscriptions are recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured. Revenues from enriched media analysis services are recognized when the services are performed and delivered to the client.
We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances where the above criteria are not met and therefore we are not the principal in providing services, amounts received from clients are presented net of payments in the condensed consolidated statements of operations and comprehensive loss.
Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
Direct Operating Costs
Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, third-party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Adjusted EBITDA Performance Metric
In addition to measures of financial performance presented in our consolidated financial statements, we monitor “Adjusted EBITDA” to help us evaluate our ongoing operating performance including our ability to operate the business effectively.
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and subsidiaries in accordance with U.S. GAAP before income taxes, depreciation, amortization of intangible assets, impairment charges, changes in fair value of contingent consideration, stock-based compensation, loss attributable to non-controlling interests and interest income (expense).
We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes. In particular, it facilitates comparisons of the core operating performance of our Company from period to period on a consistent basis and helps us to identify underlying trends in our business. We believe it provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making. We use this measure to establish operational goals for managing our business and evaluating our performance.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under U.S. GAAP. Some of these limitations are:
Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, U.S. GAAP net income.
The following table reconciles net income (loss) to Adjusted EBITDA for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (1,068 | ) | $ | (2,766 | ) | $ | (2,964 | ) | $ | (4,541 | ) | ||||
| Depreciation and amortization | 919 | 876 | 2,771 | 2,200 | ||||||||||||
| Stock-based compensation | 185 | 207 | 662 | 729 | ||||||||||||
| Provision for income taxes | 268 | 352 | 807 | 1,128 | ||||||||||||
| Change in fair value of contingent consideration | - | 1,038 | - | 1,038 | ||||||||||||
| Interest expense (income), net | 2 | 15 | (9 | ) | 44 | |||||||||||
| Non-controlling interests | (85 | ) | (106 | ) | (254 | ) | (310 | ) | ||||||||
| Adjusted EBITDA | $ | 221 | $ | (384 | ) | $ | 1,013 | $ | 288 | |||||||
| DDS Segment | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net income (loss) attributable to DDS Segment | $ | 107 | $ | (2,147 | ) | $ | (615 | ) | $ | (1,842 | ) | |||||
| Depreciation and amortization | 546 | 585 | 1,732 | 1,618 | ||||||||||||
| Stock-based compensation | 183 | 205 | 658 | 741 | ||||||||||||
| Provision for income taxes | 278 | 370 | 829 | 1,173 | ||||||||||||
| Change in fair value of contingent consideration | - | 1,038 | - | 1,038 | ||||||||||||
| Interest expense (income), net | (2 | ) | 15 | (16 | ) | 44 | ||||||||||
| Non-controlling interests | (85 | ) | (106 | ) | (254 | ) | (310 | ) | ||||||||
| Adjusted EBITDA - DDS Segment | $ | 1,027 | $ | (40 | ) | $ | 2,334 | $ | 2,462 | |||||||
| IADS Segment | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Adjusted EBITDA: | �� | |||||||||||||||
| Net loss attributable to IADS Segment | $ | (256 | ) | $ | (553 | ) | $ | (749 | ) | $ | (1,598 | ) | ||||
| Stock-based compensation | - | 2 | 2 | (12 | ) | |||||||||||
| Adjusted EBITDA - IADS Segment | $ | (256 | ) | $ | (551 | ) | $ | (747 | ) | $ | (1,610 | ) | ||||
| MIS Segment | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net loss attributable to MIS Segment | $ | (919 | ) | $ | (66 | ) | $ | (1,600 | ) | $ | (1,101 | ) | ||||
| Depreciation and amortization | 373 | 291 | 1,039 | 582 | ||||||||||||
| Stock-based compensation | 2 | - | 2 | - | ||||||||||||
| Benefit from income taxes | (10 | ) | (18 | ) | (22 | ) | (45 | ) | ||||||||
| Interest expense, net | 4 | - | 7 | - | ||||||||||||
| Adjusted EBITDA - MIS Segment | $ | (550 | ) | $ | 207 | $ | (574 | ) | $ | (564 | ) | |||||
Results of Operations
Three Months Ended September 30, 2017 and 2016
Revenues
Total revenues were $15.0 million for the three months ended September 30, 2017 compared to $16.1 million for the three months ended September 30, 2016, a decrease of approximately $1.1 million or approximately 7%.
Revenues from the DDS segment were $11.6 million and $12.1 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of approximately $0.5 million or approximately 4%. The decline was on account of lower volume from clients.
Revenues from the IADS segment were $1.2 million and $1.0 million for the three months ended September 30, 2017 and September 30, 2016. The increase reflects additional volume from Synodex clients.
Revenues from the MIS segment were $2.2 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.8 million or approximately 27% during the period following the acquisition of Agility in July 2016.
Two clients in the DDS segment generated approximately 30% of the Company’s total revenues for the three months ended September 30, 2017 and 27% of the Company’s total revenues for the three months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 49% and 48%, respectively, of the Company’s total revenues.
Direct Operating Costs
Direct operating costs were $11.5 million and $12.4 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.9 million or 7%. Direct operating costs as a percentage of total revenues was 77% for each of the three months ended September 30, 2017 and September 30, 2016.
Direct operating costs for the DDS segment were approximately $8.7 million and $9.6 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.9 million or 9%. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 75% and 80% for the three months ended September 30, 2017 and 2016, respectively. The decline in direct operating costs and as a percentage of revenues reflects the decline in revenues as well as cost rationalization.
Direct operating costs for the IADS segment were $1.2 million for the three months ended September 30, 2017 and $1.3 million for the three months ended September 30, 2016, net of intersegment profits. The decline in direct operating costs reflects efficiencies in the production headcount. Direct operating costs for the IADS segment as a percentage of IADS segment revenues were 100% and 127% for the three months ended September 30, 2017 and 2016, respectively.
Direct operating costs for the MIS segment were $1.6 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively. Direct operating costs for the MIS segment as a percentage of MIS segment revenues were 73% and 50% for the three months ended September 30, 2017 and 2016, respectively. The increased percentage reflects the 27% decline in MIS revenues during the period following the acquisition of Agility in July 2016.
Selling and Administrative Expenses
Selling and administrative expenses were $4.4 million for the three months ended September 30, 2017 compared to $5.1 million for the three months ended September 30, 2016, a decrease of $0.7 million or approximately 14%. Selling and administrative expenses as a percentage of total revenues decreased to 29% for the three months ended September 30, 2017 from 32% for the three months ended September 30, 2016.
Selling and administrative expenses for the DDS segment were $2.7 million and $3.3 million for the three months ended September 30, 2017 and September 30, 2016, respectively, a decline of $0.6 million or 18%. For the three months ended September 30, 2016, the DDS segment incurred $0.25 million of legal, professional and other costs in connection with an internal investigation and there were miscellaneous administrative cost savings during the three months ended September 30, 2017. As a percentage of DDS revenues, DDS selling and administrative expenses were 23% for the three months ended September 30, 2017 and 27% for the three months ended September 30, 2016. The decline as a percentage of revenues was primarily caused by the decline in selling and administrative expenses.
Selling and administrative expenses for the IADS segment were $0.2 million and $0.3 million for each of the three months ended September 30, 2017 and 2016, respectively. Selling and administrative expenses for the IADS segment as a percentage of IADS segment revenueswas17% and 26% for the three months ended September 30, 2017 and 2016, respectively.
Selling and administrative expenses for the MIS segment were $1.5 million for each of the three months ended September 30, 2017 and 2016. Selling and administrative expenses for the MIS segment as a percentage of MIS segment revenues was 68% for the three months ended September 30, 2017 and 56% for the three months ended September 30, 2016. The increased percentage reflects the 27% decline in MIS revenues during the period following the acquisition of Agility in July 2016.
Contingent Consideration
On September 30, 2016, we and the other parties involved in the acquisition of MediaMiser amended the terms on which one of our subsidiaries was required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments. The first instalment was paid on March 31, 2017 and the second instalment is payable on March 31, 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. We have the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. common stock. We recorded a $1.0 million charge in our statement of operations for the third quarter of 2016 to reflect the amendment.
Income Taxes
We recorded a provision for income taxes of $0.3 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively. 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 subsidiary and a valuation allowance recorded on deferred taxes on these entities. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduce our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earnings are repatriated.
We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on deferred tax assets of our Canadian subsidiary on account of continuing losses.
Net Loss
We incurred a net loss of $1.1 million during the three months ended September 30, 2017 compared to net loss of $2.8 million during the three months endedSeptember 30, 2016.
Net income for the DDS segment was $0.1 million for the three months ended September 30, 2017, compared to net loss of $2.1 million for the three months endedSeptember 30, 2016, net of intersegment profits. The change was due to the decline in revenues offset by a decline in direct operating costs and selling and administrative expenses that were mentioned above, and a charge to our operations referred to under “Contingent Consideration” for the three months ended September 30, 2016.
Net loss for the IADS segment was $0.3 million for the three months ended September 30, 2017 compared to net loss of $0.6 million for the three months endedSeptember 30, 2016, net of intersegment profits. The decline in net loss is primarily due to an increase in revenues and a decline in direct operating costs and selling and administrative expense.
Net loss for the MIS segment was $0.9 million for the three months ended September 30, 2017 compared to net loss of $0.1 million for the three months ended September 30, 2016. The increase in net loss was due to lower revenues.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2017 was $0.2 million compared to a loss of $0.4 million for the three months ended September 30, 2016. Adjusted EBITDA for the DDS segment was $1.0 million for the three months ended September 30, 2017 compared to break-even for the three months ended September 30, 2016. Adjusted EBITDA was a loss of $0.3 million and a loss of $0.6 million for the IADS segment for the three months ended September 30, 2017 and 2016, respectively. Adjusted EBITDA was a loss of $0.5 million for the three months ended September 30, 2017 compared to $0.2 million for the three months ended September 30, 2016 for the MIS segment.
Nine Months Ended September 30, 2017 and 2016
Revenues
Total revenues were $45.3 million for the nine months ended September 30, 2017 compared to $47.4 million for the nine months ended September 30, 2016, a decline of approximately $2.1 million or 4%.
Revenues from the DDS segment were $34.8 million and $38.9 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $4.1 million or 11%. The decline was primarily on account of reduced volume from a key e-book client amounting to $3.1 million and lower volume from other clients. The decline was partially offset by an increase in revenue for one new client for whom services began in the fourth quarter of 2016.
Revenues from the IADS segment were $3.4 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $0.3 million or 10%. The increase primarily reflects additional volume from docGenix clients.
Revenues from the MIS segment were $7.1 million for the nine months ended September 30, 2017 and $5.4 million for the nine months ended September 30, 2016, an increase of $1.7 million or 31%. The increase is attributable to the acquisition of the Agility business in July 2016.
Two clients in the DDS segment generated approximately 29% of the Company’s total revenues for the nine months ended September 30, 2017 and 30% of the Company’s total revenues for the nine months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 50% and 48%, respectively, of the Company’s total revenues.
Direct Operating Costs
Direct operating costs were $34.6 million and $35.6 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $1 million or 3%. Direct operating costs as a percentage of total revenues increased to 76% for the nine months ended September 30, 2017 compared to 75% for the nine months ended September 30, 2016.
Direct operating costs for the DDS segment were $26.7 million and $28.8 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $2.1 million or approximately 7%. The decline in direct operating costs is due to a decline in revenues excluding revenues that were previously deferred for one client, and it also reflects cost rationalization. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 77% and 74% for the nine months ended September 30, 2017 and 2016, respectively. The increase in direct operating costs as a percentage of DDS segment revenues primarily reflects a decline in DDS segment direct operating costs relative to a decline in revenues.
Direct operating costs for the IADS segment were $3.3 million for the nine months ended September 30, 2017 and $3.7 million for the nine months ended September 30, 2016, net of intersegment profits. The decline in direct operating costs reflects efficiencies in the production headcount. Direct operating costs for the IADS segment as a percentage of IADS segment revenues were 97% and 119% for the nine months ended September 30, 2017 and 2016, respectively.
Direct operating costs for the MIS segment were $4.6 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of approximately 48%. The increase in direct operating costs was primarily on account of the acquisition of the Agility business in July 2016. Direct operating costs for the MIS segment as a percentage of MIS segment revenues were 65% and 57% for the nine months ended September 30, 2017 and 2016, respectively.
Selling and Administrative Expenses
Selling and administrative expenses were $13.1 million for the nine months ended September 30, 2017 compared to $14.5 million for the nine months ended September 30, 2016, a decrease of $1.4 million or approximately 10%. Selling and administrative expenses as a percentage of total revenues were 29% for the nine months ended September 30, 2017 and 31% for the nine months ended September 30, 2016.
Selling and administrative expenses for the DDS segment were $8.2 million and $10.1 million for the nine months ended September 30, 2017 and September 30, 2016, respectively, a decrease of $1.9 million or 19%. For the nine months ended September 30, 2016, the DDS segment incurred $1.5 million of legal, professional and other costs in connection with an internal investigation and for the nine months ended September 30, 2017, DDS selling and administrative expenses were reduced by the recovery of the approximately $0.3 million of accounts receivable from two clients. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues decreased to 24% for the nine months ended September 30, 2017 compared to 26% for the nine months ended September 30, 2016. The decline as a percentage of revenues was primarily caused by the decline in selling and administrative expenses.
Selling and administrative expenses for the IADS segment were $0.8 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in selling and administrative expenses is on account of cost optimization. Selling and administrative expenses for the IADS segment as a percentage of IADS segment revenues decreased to 24% for the nine months ended September 30, 2017 compared to 32% for the nine months ended September 30, 2016. The decrease in selling and administrative expenses as a percentage of IADS segment revenues was principally attributable to the increase in IADS revenues and the decline in selling and administrative expenses.
Selling and administrative costs for the MIS segment were $4.1 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $0.7 million or 21%. The increase in selling and administrative costs was primarily on account of the acquisition of the Agility business in July 2016. Selling and administrative expenses for the MIS segment as a percentage of MIS segment revenues declined to 58% for the nine months ended September 30, 2017 from 63% for the nine months ended September 30, 2016.
Contingent Consideration
On September 30, 2016, we and the other parties involved in the acquisition of MediaMiser amended the terms on which one of our subsidiaries was required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments. The first instalment was paid on March 31, 2017 and the second instalment is payable on March 31, 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. We have the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. common stock. We recorded a $1.0 million charge in our statement of operations for the third quarter of 2016 to reflect the amendment.
Income Taxes
We recorded a provision for income taxes of $0.8 million and $1.1 million for the nine months ended September 30, 2017 and 2016, respectively. 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 subsidiary and a valuation allowance recorded on deferred taxes on these entities. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduce our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earnings are repatriated.
We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on deferred tax assets of our Canadian subsidiary on account of continuing losses.
Net Loss
We incurred a net loss of $3.0 million during the nine months ended September 30, 2017 compared to net loss of $4.5 million during the nine months endedSeptember 30, 2016.
Net loss for the DDS segment was a net loss of $0.6 million for the nine months ended September 30, 2017, compared to a net loss of $1.8 million for the nine months ended September 30, 2016, net of intersegment profits. The change was due to the decline in revenues offset by a decline in direct operating costs and selling and administrative expenses that were mentioned above, and a charge to our operations referred to under “Contingent Consideration” for the nine months ended September 30, 2016.
Net loss for the IADS segment was $0.8 million for the nine months ended September 30, 2017 compared to net loss of $1.6 million for the nine months endedSeptember 30, 2016, net of intersegment profits. The decline in net loss is primarily due to an increase in revenues and a decline in direct operating costs and selling and administrative expense.
Net loss for the MIS segment was $1.6 million for the nine months ended September 30, 2017 compared to net loss of $1.1 million for the nine months ended September 30, 2016. The increased net loss is mainly due to the decline in revenues and an increase in direct operating costs and selling and administrative expenses.
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2017 was $1.0 million compared to $0.3 million for the nine months ended September 30, 2016, an increase of $0.7 million. Adjusted EBITDA for the DDS segment was $2.3 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $0.2 million or approximately 8%. Adjusted EBITDA was a loss of $0.7 million and a loss of $1.6 million for the IADS segment for the nine months ended September 30, 2017 and 2016, respectively. Adjusted EBITDA was a loss of $0.6 million for the MIS segment for each of the nine months ended September 30, 2017 and 2016.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, are as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| Cash and cash equivalents | $ | 12,468 | $ | 14,172 | ||||
| Working capital | 11,152 | 14,407 | ||||||
At September 30, 2017, we had cash and cash equivalents of $12.5 million, of which $9.2 million was held by our foreign subsidiaries, and the $3.3 million balance was held in the United States. If needed, amounts held by foreign subsidiaries could be repatriated to the United States to satisfy working capital needs of the U.S. entity, but under current law, they would be subject to United States federal income taxes. As of September 30, 2017, our intent is to permanently reinvest these funds outside the United States, except for $7.0 million in projected deemed dividends described below.
We have used, and plan to use, our cash and cash equivalents for (i) investments in IADS which are expected to be at the rate of $0.1-0.4 million per quarter in the immediate future; (ii) investments in MIS which are expected to be at the rate of $0.4-0.8 million per quarter in the immediate future; (iii) the expansion of our other operations; (iv) general corporate purposes, including working capital; and (v) possible business acquisitions. As of September 30, 2017, we had working capital of approximately $11.2 million, as compared to working capital of approximately $14.4 million as of December 31, 2016.
We believe that our existing cash and cash equivalents and internally generated funds willthat provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 months. However,months from the date of the filing of this Report (refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information). In the event we have no bank facilitiesexperience a significant or linesprolonged reduction in revenues, the likelihood of credit, and continuing material reductions inwhich is uncertain, we would seek to manage our cash and cash equivalents from operating losses,liquidity by utilizing the Revolving Credit Facility, reducing capital expenditures, acquisitions or otherwise could materiallydeferring investment activities, and adversely affect us. See the risk factor entitled “Our liquidity could be affected if our losses continue.” in our Report on Form 10K for the year ended December 31, 2016.
During the nine months ended September 30, 2017, our U.S. entity deferred $4.7 million in payments due to its Asianreducing operating subsidiaries. The deferral in payments resulted in a deemed dividend that is taxable income to the U.S. entity and is set off against its net operating loss carryforwards. We project that during the balance of 2017 through 2018 our U.S. entity will not have sufficient cash to pay in full amounts that will be payable by it to its Asian operating subsidiaries and that the cash deficit will amount to approximately $7.0 million. The resulting deferral in payments would similarly result in a deemed dividend that would be taxable income to the U.S. entity and would be set off against its net operating loss carryforwards. We adjusted our deferred tax assets and the corresponding valuation allowance as of September 30, 2017 to reflect the projected deferral in payments.
costs.
Net Cash Provided By (Used In) Operating ActivitiesSeasonality
Cash provided by our operating activities for the nine months ended September 30, 2017 was $1.2 million, resulting from a net loss of $3.2 million and adjustments for non-cash items of $3.4 million and $1.0 million from working capital. Adjustments for non-cash items primarily consisted of $2.8 million for depreciation and amortization, stock option expense of $0.7 million and a reduction in tax provisions of $0.3 million. Working capital activities primarily consisted of a source of cash of $0.7 million due to an increase in accounts receivable and a $0.3 million increase in the other working capital accounts.
Cash used in our operating activities for the nine months ended September 30, 2016 was $1.1 million, resulting from a net loss of $4.9 million and adjustments for non-cash items of $3.8 million. Adjustments for non-cash items primarily consisted of $2.2 million for depreciation and amortization, change in fair value of contingent consideration of $1.0 million, stock option expense of $0.7 million and reduction in tax provisions of $0.3 million.
Our days’ sales outstanding (DSO) for the nine months ended September 30, 2017 was 59 days compared to 55 days for the year ended December 31, 2016. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the “accounts receivable turnover.” Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressed in number of days.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2017 cash used in our investing activities was $2.9 million. These expenditures principally consisted of construction costs related to the relocation of our new corporate offices in the US and Canada and the purchase of technology equipment including servers, network infrastructure and workstations. We continue to expense all capital expenditures for the IADS segment.
For the nine months ended September 30, 2016, cash used in our investing activities was $6.1 million. These expenditures consisted of $4.1 million paid to acquire Agility in July 2016 and capital expenditures of $2.0 million principally for the purchase of technology equipment including servers, network infrastructure and workstations.
During the next twelve months, we anticipate that capital expenditures for ongoing technology, equipment, infrastructure upgrades and development of our proprietary software platform, tools and technologies will approximate $2.0 to $3.0 million, a portion of which we may finance.
Net Cash Used in Financing Activities
For the nine months ended September 30, 2017, cash used in financing activities consisted of proceeds from equipment financing of $1.0 million and total payments of long-term obligations of $1.1 million. For the nine months ended September 30, 2016, cash used in financing activities was comprised of total payments of long term obligations of $0.6 million.
Contractual Obligations
The table below summarizes our contractual obligations (in thousands) at September 30, 2017 and the effects that those obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||
| Capital lease | $ | 955 | $ | 452 | $ | 503 | $ | - | $ | - | ||||||||||
| Vendor obligations | 751 | 406 | 345 | - | - | |||||||||||||||
| Non cancellable operating leases | 3,692 | 1,006 | 1,391 | 763 | 532 | |||||||||||||||
| Total contractual cash obligations | $ | 5,398 | $ | 1,864 | $ | 2,239 | $ | 763 | $ | 532 | ||||||||||
Future expected obligations under our pension benefit plan have not been included in the contractual cash obligations in the table above.
Inflation, Seasonality and Prevailing Economic Conditions
Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higher inflation in wage rates in the countries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients.
Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.
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.
Trends
We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the three-month period ending March 31, 2023, we added 129 new customers. This is a 39% increase over the 93 new customers we added on average per quarter in 2021 and a 3% increase over the 126 new customers we added on average per quarter in 2022.
For further information, refer to 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 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.
27
Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP (“GAAP”), we provide certain non-GAAP financial information. We believe that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results. In some respects, management believes non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents by making adjustments that management believes are reflective of the ongoing performance of the business.
We believe that the presentation of this non-GAAP financial information provides investors with greater transparency by providing investors a more complete understanding of our financial performance, competitive position, and prospects for the future, particularly by providing the same information that management and our Board of Directors use to evaluate our performance and manage the business. However, the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.
Adjusted Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as revenues less direct operating costs attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP plus, depreciation and amortization of intangible assets, stock-based compensation, non-recurring severance and other one-time costs.
We define Adjusted Gross Margin by dividing Adjusted Gross Profit over total U.S. GAAP revenues.
We use Adjusted Gross Profit and Adjusted Gross Margin to evaluate results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.
The following table contains a reconciliation of Gross Profit and Gross Margin in accordance with the U.S. GAAP attributable to Innodata Inc. and its subsidiaries to Adjusted Gross Profit and Adjusted Gross Margin for the three months ended March 31, 2023 and 2022 (in thousands).
| | | | | |
| | Three Months Ended March 31, |
| ||
Consolidated |
| 2023 |
| 2022 |
|
| | | | | |
Gross Profit attributable to Innodata Inc. and Subsidiaries |
| 5,965 |
| 7,778 | |
Depreciation and amortization |
| 1,065 |
| 839 | |
Severance** |
| 327 |
| - | |
Stock-based compensation |
| 63 |
| 52 | |
Adjusted Gross Profit |
| 7,420 |
| 8,669 | |
| | | | | |
Gross Margin |
| 32 | % | 37 | % |
Adjusted Gross Margin |
| 39 | % | 41 | % |
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| | | | | |
| | Three Months Ended March 31, |
| ||
DDS Segment |
| 2023 |
| 2022 |
|
| | | | | |
Gross Profit attributable to DDS Segment |
| 4,159 |
| 6,554 | |
Depreciation and amortization |
| 200 |
| 190 | |
Severance** |
| 28 |
| - | |
Stock-based compensation |
| 51 |
| 44 | |
Adjusted Gross Profit |
| 4,438 |
| 6,788 | |
| | | | | |
Gross Margin |
| 33 | % | 41 | % |
Adjusted Gross Margin |
| 35 | % | 43 | % |
| | | | | |
| | Three Months Ended March 31, |
| ||
Synodex Segment |
| 2023 |
| 2022 |
|
| | | | | |
Gross Profit/(Loss) attributable to Synodex Segment |
| 203 |
| (230) | |
Depreciation and amortization |
| 162 |
| 41 | |
Severance** |
| - |
| - | |
Stock-based compensation |
| - |
| - | |
Adjusted Gross Profit |
| 365 |
| (189) | |
| | | | | |
Gross Margin |
| 11 | % | (14) | % |
Adjusted Gross Margin |
| 20 | % | (11) | % |
| | | | | |
| | Three Months Ended March 31, |
| ||
Agility Segment |
| 2023 |
| 2022 |
|
| | | | | |
Gross Profit attributable to Agility Segment |
| 1,603 |
| 1,454 | |
Depreciation and amortization |
| 703 |
| 608 | |
Severance** |
| 299 |
| - | |
Stock-based compensation |
| 12 |
| 8 | |
Adjusted Gross Profit |
| 2,617 |
| 2,070 | |
| | | | | |
Gross Margin |
| 38 | % | 40 | % |
Adjusted Gross Margin |
| 62 | % | 57 | % |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before interest expense, income taxes, depreciation and amortization of intangible assets (which derives EBITDA), plus additional adjustments for loss on impairment of intangible assets and goodwill, stock-based compensation, income (loss) attributable to non-controlling interests, non-recurring severance, and other one-time costs. We use Adjusted EBITDA to evaluate core results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.
The following table contains a reconciliation of U.S. GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three months ended March 31, 2023 and 2022 (in thousands).
29
| | | | | | |
|
| Three Months Ended March 31, | ||||
Consolidated |
| 2023 |
| 2022 | ||
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (2,116) | | $ | (2,815) |
Provision for income taxes | | | 218 | | | 475 |
Interest expense, net | | | 63 | | | 3 |
Depreciation and amortization | | | 1,091 | | | 873 |
Severance** | | | 580 | | | - |
Stock-based compensation | | | 962 | | | 537 |
Non-controlling interests | | | 3 | | | (75) |
Adjusted EBITDA / (loss) | | $ | 801 | | $ | (1,002) |
| | | | | | |
|
| Three Months Ended March 31, | ||||
DDS Segment | | 2023 |
| 2022 | ||
Net income (loss) attributable to DDS Segment | | $ | (641) | | $ | 763 |
Provision for income taxes | | | 215 | | | 533 |
Interest expense, net | | | 62 | | | 3 |
Depreciation and amortization | | | 225 | | | 224 |
Severance** | | | 33 | | | - |
Stock-based compensation | | | 806 | | | 371 |
Non-controlling interests | | | 3 | | | - |
Adjusted EBITDA | | $ | 703 | | $ | 1,894 |
| | | | | | |
|
| Three Months Ended March 31, | ||||
Synodex Segment | | 2023 |
| 2022 | ||
Net income (loss) attributable to Synodex Segment | | $ | 14 | | $ | (785) |
Depreciation and amortization | | | 162 | |
| 41 |
Severance** | | | 6 | | | - |
Stock-based compensation | |
| 58 | |
| 49 |
Non-controlling interests | |
| - | |
| (75) |
Adjusted EBITDA / (loss) | | $ | 240 | | $ | (770) |
| | | | | | |
|
| Three Months Ended March 31, | ||||
Agility Segment | | 2023 |
| 2022 | ||
Net loss attributable to Agility Segment | | $ | (1,489) | | $ | (2,793) |
Provision for income taxes | | | 3 | | | (58) |
Interest expense, net | | | 1 | | | - |
Depreciation and amortization | | | 704 | | | 608 |
Severance** | | | 541 | | | - |
Stock-based compensation | | | 98 | | | 117 |
Adjusted EBITDA (loss) | | $ | (142) | | $ | (2,126) |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
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Results of Operations
The amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.
Three Months Ended March 31, 2023 and 2022
Revenues
Total revenues were $18.8 million and $21.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or approximately 11%.
Revenues from the DDS segment were $12.7 million and $15.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, a decrease of $3.2 million or approximately 20%. The decrease was primarily attributable to lower volume from one customer offset in part by an increase in volume from another customer.
Revenues from the Synodex segment were $1.9 million and $1.7 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.2 million or approximately 12%. The increase was primarily attributable to higher volume from existing customers.
Revenues from the Agility segment were $4.2 million and $3.6 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.6 million or approximately 17%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
One customer in the DDS segment generated approximately 11% and another customer in the DDS segment generated 11% of the Company’s total revenues for the three months ended March 31, 2023. Another customer in the DDS segment generated approximately 21% of the Company’s total revenues for the three months ended March 31, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended March 31, 2023 and 2022, revenues from non-U.S. customers accounted for 39% and 37% respectively, of the Company’s total revenues.
Direct Operating Costs
Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, 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 customers.
Direct operating costs were $12.9 million and $13.4 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.5 million or 4%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.8 million primarily on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, higher depreciation and amortization of capitalized developed software of $0.1 million and an increase in other direct operating costs of $0.4 million. Direct operating costs as a percentage of total revenues were 69% and 63% for the three-month periods ended March 31, 2023 and 2022, respectively. The increase in direct operating cost as a percentage of total revenues was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.
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Direct operating costs for the DDS segment were approximately $8.6 million and $9.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.7 million or 8%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.9 million primarily, on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, an increase in other direct operating costs of $0.4 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 68% and 58% for the three months ended March 31, 2023 and 2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower direct operating costs.
Direct operating costs for the Synodex segment were $1.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.2 million or 11%. The cost decrease was primarily due to lower direct labor costs of $0.3 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 89% and 112% for the three months ended March 31, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and a decrease in direct operating costs.
Direct operating costs for the Agility segment were $2.6 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $0.4 million or 18%. The cost increase was primarily due to higher revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The cost increase was primarily due to an increase in direct labor costs of $0.4 million including severance higher depreciation and amortization of capitalized developed software of $0.1 million, offset in part by a decrease in other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 62% and 61% for the three months ended March 31, 2023 and 2022, respectively. The increase in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to an increase in direct operating costs, offset in part by increased revenues from subscriptions to our Agility AI-enabled platform and newswire products.
Gross Profit and Gross Margin
Gross profit is derived by revenues less direct operating costs, while Gross margin in percentage is derived by dividing gross profit over revenues.
Gross profit was $6.0 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022. The $1.8 million decrease in gross profit was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs. Gross margin was 32% and 37% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs.
Gross profit for the DDS segment was $4.2 million for the three months ended March 31, 2023 compared to $6.6 million for the three months ended March 31, 2022. The $2.4 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 41% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.
Gross profit for the Synodex segment was $0.2 million for the three months ended March 31, 2023 compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.4 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 11% and (14%) for the three months ended March 31, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment was primarily due to higher revenues and lower direct operating costs.
32
Gross profit for the Agility segment was $1.6 million for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022. The $0.1 million increase in gross profit for the Agility segment was primarily due to higher revenues, offset in part by higher direct operating costs. Gross margin for the Agility segment was 38% and 40% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin for the Agility segment was primarily due to higher direct operating costs, offset in part by higher revenues.
Selling and Administrative Expenses
Selling and administrative expenses consist of sales, marketing, new services research and related software development, administrative payroll and related costs including commissions, bonuses, stock-based compensation, marketing costs, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $7.8 million and $10.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or 24%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.9 million, primarily on account of headcount reduction, offset in part by salary increases and severance; lower recruitment and professional fees of $1.0 million, marketing expenses of $0.5 million and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also offset in part by higher provisions for doubtful accounts of $0.2 million. Selling and administrative expenses as a percentage of total revenues were 41% and 48% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower expenditures in all segments, offset in part by lower revenues in the DDS segment.
Selling and administrative expenses for the DDS segment were $4.5 million and $5.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.8 million or 15%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower administrative and selling labor and related expenses of $0.1 million, primarily on account of headcount reductions; lower recruitment and professional fees of $0.5 million, and a decrease in other selling and administrative expenses of $0.2 million, primarily from lower marketing expenses and lower provision for doubtful accounts. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 35% and 33% for each of the three-month periods ended March 31, 2023 and 2022, respectively. The increase in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower selling and administrative expenses.
Selling and administrative expenses for the Synodex segment were $0.2 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.4 million or 67%. The decrease in selling and administrative expenses was primarily attributable to lower professional fees of $0.3 million and lower payroll-related costs of $0.2 million; offset by an increase in other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 11% and 35% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses, offset in part by higher revenues.
33
Selling and administrative expenses for the Agility segment were $3.1 million and $4.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $1.2 million or 28%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.6 million, primarily on account of headcount reduction and severance; lower recruitment and professional fees of $0.2 million, marketing expenses of $0.4 million, and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also offset in part by a higher provision for doubtful accounts of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 74% and 119% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses, offset in part by an increase in revenues.
Income Taxes
We recorded a provision for income taxes of $0.2 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.
Tax-related charges primarily consisted of a provision for foreign taxes recorded in accordance with local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate primarily due to losses incurred by our U.S. entities, Canadian and European principally (Germany and the United Kingdom) subsidiaries, and a valuation allowance recorded on the deferred taxes of the U.S., Canadian, German and the United Kingdom subsidiaries.
Net Loss
We incurred a net loss of $2.1 million and $2.8 million during the three months ended March 31, 2023 and 2022, respectively. The $0.7 million change was a result of lower operating costs in all segments in the current quarter, offset in part by higher revenues in the Synodex and Agility segments.
Net loss for the DDS segment was $0.6 million for the three months ended March 31, 2023, compared to a net income of $0.8 million for the three months ended March 31, 2022. The $1.4 million change was primarily attributable to lower revenues in the current quarter offset in part by lower operating costs and lower tax provision.
The Synodex segment was breakeven for the three months ended March 31, 2023, compared to a net loss of $0.8 million for the three months ended March 31, 2022. The $0.8 million change was due to lower operating costs, offset in part by higher revenues in the current quarter.
Net loss for the Agility segment was $1.5 million for the three months ended March 31, 2023, compared to a net loss of $2.8 million for the three months ended March 31, 2022. The $1.3 million change was due to higher revenues, lower selling and administrative costs, offset in part by higher direct operating costs in the current quarter.
Adjusted Gross Profit
Adjusted gross profit for the three months ended March 31, 2023 was $7.4 million compared to $8.7 million for the three months ended March 31, 2022. The $1.3 million decrease in adjusted gross profit is due to a lower gross profit, offset in part by higher depreciation and amortization, and non- recurring severance. Adjusted gross margin was 39% and 41% for the three months ended March 31, 2023 and 2022, respectively. The decrease in adjusted gross margin was due to a lower gross profit, offset in part by higher depreciation and amortization, and non-recurring severance.
Adjusted gross profit for the DDS segment was $4.4 million and $6.8 million for the three months ended March 31, 2023 and 2022, respectively. The $2.4 million decrease in adjusted gross profit for the DDS Segment is due to lower gross profit, offset in part by higher non-recurring severance. Adjusted gross margin for the DDS segment was 35% and 43% for the three months ended March 31, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment was due to lower gross profit, offset in part by higher non-recurring severance.
34
Adjusted gross profit for the Synodex segment for the three months ended March 31, 2023 was $0.4 million compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.6 million increase in adjusted gross profit in the Synodex segment is due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Synodex segment was 20% and (11%) for the three months ended March 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit and higher depreciation and amortization.
Adjusted gross profit for the Agility segment was $2.6 million and $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $0.5 million increase in adjusted gross profit for the Agility segment is due to higher gross profit, higher non-recurring severance, and depreciation and amortization. Adjusted gross margin for the Agility segment was 62% and 57% for the three months ended March 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization.
Adjusted EBITDA
Adjusted EBITDA for the three months ended March 31, 2023 was $0.8 million compared to a loss of $1.0 million for the three months ended March 31, 2022. The $1.8 million increase in Adjusted EBITDA was due to a lower net loss, higher stock-based compensation, and higher depreciation and amortization and non-recurring severance, offset in part by a lower tax provision.
Adjusted EBITDA for the DDS segment was $0.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively. The $1.2 million decrease in Adjusted EBITDA in the DDS Segment is due to a higher net loss and lower tax provision, offset in part by higher stock-based compensation and higher non-recurring severance.
Adjusted EBITDA for the Synodex segment for the three months ended March 31, 2023 was $0.2 million compared to a loss of $0.8 million for the three months ended March 31, 2022. The $1.0 million increase in Adjusted EBITDA in the Synodex segment is due to a lower net loss and higher depreciation and amortization.
Adjusted EBITDA for the Agility segment was a loss of $0.1 million and loss of $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $2.0 million increase in Adjusted EBITDA in the Agility segment is due to a lower net loss and higher depreciation and amortization and non-recurring severance.
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin, and Adjusted EBITDA” above.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| | | | | | |
|
| March 31, |
| December 31, | ||
| | 2023 | | 2022 | ||
Cash and cash equivalents | | $ | 10,330 | | $ | 9,792 |
Short term investments - other | | | 512 | | | 507 |
Working capital | |
| 2,323 | |
| 2,869 |
On March 31, 2023, we had cash and cash equivalents of $10.3 million and short-term investments of $0.5 million, of which $3.1 million was held by our foreign subsidiaries, and $7.2 million was held in the United States. The short-term investments of $0.5 million were held in the United States. Despite the passage of the new tax law under which we may repatriate funds from overseas after paying the toll charge, it is our intent, as of March 31, 2023, to indefinitely reinvest the overseas funds in our foreign subsidiaries due to the withholding tax that we would have to incur on the actual remittances.
35
We have used, and plan to use, our cash and cash equivalents for (i) capital investments; (ii) the expansion of our 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, 2023, we had working capital of approximately $2.3 million, as compared to working capital of approximately $2.9 million as of December 31, 2022. The decrease in working capital is due to additional accruals for severance costs and payroll related taxes offset in part by decrease in accounts receivable, accounts payable and accrued expenses during the three months ended March 31, 2023.
We did not have any material commitments for capital expenditures as of March 31, 2023.
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 at least the next 12 months from the date of this Report. On April 4, 2023, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, Innodata Synodex, LLC, Innodata docGenix, LLC, and Agility PR Solutions LLC. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other reserves and adjustments. As of the date of entry into the Credit Agreement, such borrowing base calculation equaled approximately $3.3 million. Reference is made to Note 15, “Subsequent Events” in the condensed consolidated financial statements of this Report, which is incorporated by reference herein. Any material decreases in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.
Cash Flows
Net Cash Provided by (Used in) Operating Activities
Cash provided by our operating activities for the three months ended March 31, 2023 was $1.8 million primarily on account of the following factors: our net loss for the period of $2.1 million; a source of $2.3 million from non-cash expenses consisting of depreciation and amortization of $1.1 million, stock-based compensation of $1.0 million, pension costs of $0.3 million; partially offset by a decrease in deferred taxes of $0.1 million. Net changes from working capital accounts further sourced an additional $1.6 million in working capital, mainly from a decrease in accounts receivable of $1.1 million, a decrease in prepaid expenses and other current assets of $0.2 million; an increase in accrued salaries, wages and related benefits of $0.6 million and an increase in income and other taxes of $0.3 million; offset in part by a decrease in accounts payable, accrued expenses and other of $0.6 million. Refer to the condensed consolidated statements of cash flows for further details.
Cash used in our operating activities for the three months ended March 31, 2022 was $1.5 million primarily on account of the following factors: our net loss for the period of $2.9 million; a source of $1.6 million from non-cash expenses consisting of depreciation and amortization of $0.9 million, stock-based compensation of $0.5 million, a loss of $0.1 million on termination of one of our operating lease contracts and $0.1 million due to other non-cash transactions. Net changes from working capital accounts further utilized an additional $0.2 million in working capital, mainly from an increase in accounts payable and accrued expenses of $0.5 million and an increase in accrued salaries, wages and related benefits of $0.4 million; offset in part by a decrease in accounts receivable of $0.5 million and a net reduction in other working capital accounts of $0.2 million. Refer to the condensed consolidated statements of cash flows for further details.
Net Cash Used in Investing Activities
For the three months ended March 31, 2023 and 2022, cash used in our investing activities was $1.7 million and $1.9 million, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software.
During the next 12 months, it is anticipated that capital expenditures for capitalized developed software and ongoing technology, equipment and infrastructure upgrades will approximate to $6.5 million, a portion of which we may finance.
36
Net Cash Provided by (Used in) Financing Activities
Cash provided by financing activities for the three months ended March 31, 2023 was primarily from proceeds of stock option exercises of $0.3 million.
Cash used in financing activities for the three months ended March 31, 2022 was primarily for payments of long-term obligations of $39,000, offset in part by proceeds from stock option exercises of $26,000 and redemption of non-controlling interest of $1,000.
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 accounting principles generally accepted in the United States of America.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 condensed consolidated results of operations and financial position. For a discussion of our critical
The significant accounting policies see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”used in preparing our condensed consolidated financial statements contained in this Report are the same as those described in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2016. There have been no material changes to ourunless otherwise noted, and we believe those critical accounting policies during the nine months ended September 30, 2017.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance on revenue from contracts with customers. This update is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timingaffect our more significant estimates and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This accounting guidance is effective prospectively for annual reporting periods, and interim periods within that period, beginning after December 15, 2017, and early adoption is permitted in the first quarterpreparation of 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the new standard when it takes effect. We will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption. We have undertaken an initial impact analysis, which includes reviewing the terms and conditions of our Company’s existing customer contracts and applying the five discrete criteria required for recognizing revenues as set forth in ASU 2014-09. Based upon its preliminary analysis undertaken through September 30, 2017, we currently do not expect the new revenue recognition guidance to have a material impact on our consolidated condensed financial statements, and expects to conclude such analysis by December 31, 2017. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may, in conjunction with the completion of our overall assessment of the new guidance, impact our current conclusions.
In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This new standard is effective for annual periods beginning after December 15, 2018. Early application is permitted. We are in the process of evaluating the effect the guidance will have on our existing accounting policies and condensed consolidated financial statements, but expect there will be an increase in assets and liabilities on the condensed consolidated balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material.
In March 2016, the FASB issued guidance relating to share-based compensation. This new guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016. Early application is permitted. We adopted this standard and there was no material impact on our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In March 2017, the FASB issued guidance on Compensation - Retirement Benefits relating to improvements in the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing U.S. GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in the guidance require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in the guidance will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance will be effective for us forinterim and annual periods beginning after December 15, 2018. Early adoption is permitted. We do not anticipate that adoption of this standard will have a material impact on our condensed consolidated financial statements.None.
In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements.
In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for us for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We do not anticipate that the adoption of this guidance will have a material impact on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Interest Rate Risk
Our equipment sales leaseback financing and capital lease transactions carry a fixed interest rate. Thus, as of September 30, 2017 we are not exposed to any market risk due to interest rate fluctuations.
Foreign Currency Risk
Although the majority of our revenues is denominated in U.S. dollars, a significant portion of our revenues is denominated in Canadian dollars, Pound Sterling and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, the United Kingdom, Germany, Canada and Israel, is incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S. denominated transactions into U.S. dollars in accordance with accounting principles generally accepted in the United States. As a result, we are exposed to the risk that fluctuations in the value of these currencies relative to the U.S. dollar could have a direct impact on our revenues and our results of operations.
To mitigate the exposure of fluctuating future cash flows due to changes in foreign exchange rates, we entered into foreign currency forward contracts. These foreign currency forward contracts were entered into with a maximum term of twelve months and have an aggregate notional amount of approximately $20.0 million as of September 30, 2017. The total unrealized loss on the outstanding hedges was $0.2 million as of September 30, 2017.
The impact of foreign currency fluctuations will continue to present economic challenges to us and could negatively impact our overall results of operations. A 10% appreciation in the U.S. dollar’s value relating to hedged currencies would decrease the forward contracts’ fair value by approximately $1.8 million as of September 30, 2017. Similarly, a 10% depreciation in the U.S. dollar’s value relative to hedged currencies would increase the forward contracts’ fair value by approximately $2.2 million. Any increase or decrease in the fair value of our currency exchange-rate-sensitive forward contracts, if utilized, would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying cash flows.
We may continue to enter into these, or other such instruments, in the future to reduce foreign currency exposure to appreciation or depreciation in the value of these foreign currencies.
Other than the aforementioned forward contracts, we have not engaged in any hedging activities nor have we entered into off-balance-sheet transactions or arrangements. In addition, as of September 30, 2017, our foreign locations held cash and cash equivalents totaling approximately $9.2 million. These assets are exposed to foreign exchange risk arising from changes in foreign exchange rates. At present, we do not enter into any hedging instruments to mitigate foreign exchange risk on such assets; however, we may do so in the future.
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 (Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we performed an evaluation underUnder the supervision, and with the participation of our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act Rule 13a-15(e), as of 1934 (the Exchange Act)).March 31, 2023. Based upon thaton this evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerour principal financial officer concluded that, as of the end of the period covered by this Quarterly Report,March 31, 2023, our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates,three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II.OTHER INFORMATION
Reference is madeSee Note 8, Commitments and Contingencies of the Notes to the disclosure under “Legal Proceedings”Condensed Consolidated Financial Statements included in Part II, Item 1. in ourthis Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2017.which is incorporated by reference herein.
TheFor information in the next paragraph is in additionregarding Risk Factors, please refer to the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Our common stock may become subject to delisting from The Nasdaq Stock Market.Nasdaq may under Nasdaq Listing Rule 5810 delist the Company’s common stock if the closing bid price for its common stock is less than $1.00 per share for 30 consecutive business days and the Company does not thereafter cure all listing deficiencies during Nasdaq-designated compliance periods.
The information in2022, as supplemented by the following paragraphs replacesadditional risk factors, which shall be deemed to replace, in its entirety, the disclosure under “We are the subject of continuing litigation, including litigation by certain of our former employees” in Part I, Item 1A. “Risk Factors”risk factor in our Annual Report on Form 10-K for the year ended December 31, 2016. Other than the disclosures in this Item 1A. there wereentitled, “We have no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” inbank facilities or line of credit.”
Debt under our Annual Report on Form 10-K for the year ended December 31, 2016.
In 2008, the Supreme CourtRevolving Credit Facility has a variable rate of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against a Philippines subsidiary of the Companyinterest that is inactivebased on SOFR which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future.
Debt outstanding under our Revolving Credit Facility has no material assets, and purportedly also against Innodata Inc., that orders the reinstatement of certain former employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $7.0 million. The payment ordered by the Philippine courts accrued legal interest at thea variable rate of 12% per annum from August 13, 2008 to September 30, 2013,interest that is based on the secured overnight financing rate (“SOFR”) which may have consequences for us that cannot be reasonably predicted and has thereafter accrued and continues to accrue legal interest at the ratemay increase our cost of 6% per annum. The amount of the payment as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. Based on consultation with legal counsel, the Company believes that financial recovery against the Company is unlikely.
We are also subject to various other legal proceedings and claims which ariseborrowing in the ordinary coursefuture. The future performance of business.
While we currently believe thatSOFR cannot be predicted based on historical performance and the ultimate outcomefuture level of these proceedings will notSOFR may have a material adverse effect on our financial positionlittle or overall trendsno relation to historical levels of SOFR. Any patterns in results of operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above referenced Philippines action could have a material adverse impact on us, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the operating results of the period in which the ruling or recovery occurs. In addition, our estimate of potential impact on our financial position or overall results of operations for the above legal proceedings couldmarket variable behaviors, such as correlations, may change in the future. See “Legal Proceedings.”Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR.
Our Revolving Credit Facility contains restrictive covenants that may impair our ability to conduct business.
Our Revolving Credit Facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. For example, the Revolving Credit Facility contains a financial covenant that requires us, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. As a result of these covenants and restrictions, we may be limited in how we conduct our business, and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our Revolving Credit Facility and may impair our ability to conduct business. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, there are no assurances that we will be able to obtain waivers from the lender and/or amend the covenants.
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 September 30, 2017.March 31, 2023.
Item 3. Defaults Upon Senior Securities
None.
None.
Item 4. Mine Safety Disclosures
None.
None.
None.
None.
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Exhibit No. | Description | |
| | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
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** | |
| | |
32.2** | | |
| | |
101 | | The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited); (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 and (v) Notes to Condensed Consolidated Financial Statements (unaudited). |
| | |
104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
101. INS XBRL Instance Document
101. SCH XBRL Taxonomy Extension Schema Document
101. CAL XBRL Taxonomy Extension Calculation Link base Document
101. DEF XBRL Taxonomy Extension Definition Link base Document
101. LAB XBRL Taxonomy Extension Label Link base Document
101. PRE XBRL Taxonomy Extension Presentation Link base Document
* | Filed herewith. |
** | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INNODATA INC.
| ||||||
| Date: | May 11, 2023 | /s/ Jack S. Abuhoff | | ||
| Jack S. Abuhoff | |||||
| Chief Executive Officer and President | |||||
| | |||||
| Date: | May 11, 2023 | /s/ | | ||
| Marissa B. Espineli | |||||
| Interim Chief Financial Officer | |||||
| (Principal Financial Officer and | |||||
| Principal Accounting | |||||
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