Innodata(INOD) - 2019 Q1 - Quarterly Report

Part I – Financial Information Financial Statements Unaudited Q1 2019 financials show revenues at $13.7 million, a $0.5 million net loss, and total assets at $52.7 million, influenced by new lease accounting standards Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $12,161 | $10,869 | | Total current assets | $25,728 | $27,273 | | Right of use asset | $7,784 | - | | Total assets | $52,680 | $46,051 | | Total current liabilities | $14,600 | $14,292 | | Total liabilities | $22,209 | $22,051 | | Total stockholders' equity | $30,471 | $30,566 | Condensed Consolidated Statement of Operations (in thousands, except per share amounts) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Revenues | $13,694 | $14,120 | | Direct operating costs | $9,560 | $9,894 | | Selling and administrative expenses | $4,602 | $3,916 | | Net loss | $(451) | $(276) | | Loss per share (Basic and diluted) | $(0.02) | $(0.01) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,101 | $1,652 | | Net cash used in investing activities | $(485) | $(625) | | Net cash used in financing activities | $(387) | $(301) | | Net increase in cash and cash equivalents | $1,292 | $772 | Notes to Condensed Consolidated Financial Statements Notes detail business segments, new lease accounting standard adoption, a $7.8 million right-of-use asset, ongoing tax inquiry, and significant client concentration - The company operates in three segments: Digital Data Solutions (DDS) as its core business, and two venture businesses, Synodex (medical data transformation) and Agility PR Solutions (SaaS platform for PR)[24][25] - Effective January 1, 2019, the company adopted the new lease accounting standard (ASU 2016-02), recognizing a right-of-use asset and a corresponding lease liability on the balance sheet[58][94] - The company is contesting a tax inquiry in India regarding service classification for periods between July 2012 and November 2016, which could subject approximately $67.0 million in revenue to service tax if unsuccessful[77] - A 2008 judgment in the Philippines against a former subsidiary, purportedly also against Innodata Inc., amounts to approximately $6.2 million plus interest The company has obtained a preliminary injunction in the U.S. against enforcement of this judgment[80] - There is significant client concentration, with two clients in the DDS segment accounting for 26% of total revenues for the three months ended March 31, 2019[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 3% revenue decrease to $13.7 million, an 18% rise in selling and administrative expenses, and an increased net loss of $0.5 million, while maintaining adequate liquidity Business Overview Innodata is a global services and technology company structured into a core DDS segment and venture businesses Synodex and Agility, leveraging a three-tiered AI infrastructure - The company's core business is the Digital Data Solutions (DDS) segment, which combines deep neural networks and human expertise to make unstructured information usable for digital products and AI[130][132] - Venture businesses include Synodex (SaaS platform for medical data) and Agility PR Solutions (SaaS platform for PR professionals), which leverage core capabilities to target specific industry solutions[131][155] - The company's technology infrastructure is built on a three-tiered system: an orchestration layer to configure workflows, a microservices layer of deep learning networks for automated tasks, and a human-expert layer for review and continuous machine learning improvement[147][148][151] Results of Operations Q1 2019 total revenues decreased 3% to $13.7 million, direct operating costs remained stable, but selling and administrative expenses rose 18%, leading to a wider $0.5 million net loss Revenues by Segment (in thousands) | Segment | Q1 2019 | Q1 2018 | Change (%) | | :--- | :--- | :--- | :--- | | DDS | $10,177 | $10,477 | -3% | | Synodex | $1,024 | $981 | +4% | | Agility | $2,493 | $2,662 | -6% | | Total | $13,694 | $14,120 | -3% | - Direct operating costs decreased by $0.3 million (3%) to $9.6 million, remaining stable at 70% of total revenues for both Q1 2019 and Q1 2018[188] - Selling and administrative expenses increased by $0.7 million (18%) to $4.6 million, primarily driven by a $0.6 million increase in the DDS segment due to higher professional fees, incentives, and new hires[193][194] Adjusted EBITDA by Segment (in thousands) | Segment | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | DDS | $565 | $1,231 | | Synodex | $162 | $7 | | Agility | $(257) | $96 | | Consolidated | $470 | $1,334 | Liquidity and Capital Resources As of March 31, 2019, the company held $12.2 million in cash, with $2.1 million from operating activities, maintaining sufficient liquidity for the next 12 months Liquidity Measures (in thousands) | Measure | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $12,161 | $10,869 | | Working capital | $11,128 | $12,981 | - Of the $12.2 million in cash, $5.7 million was held by foreign subsidiaries and $6.5 million was held in the United States[206] - Net cash provided by operating activities was $2.1 million for the quarter, mainly due to a $2.5 million decrease in accounts receivable from improved collection efforts[210] - The company anticipates capital expenditures of approximately $1.0 million to $2.0 million over the next 12 months for technology and infrastructure upgrades[213] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Disclosure is not applicable for smaller reporting companies[224] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting - Based on an evaluation as of March 31, 2019, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[227] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[228] Part II – Other Information Legal Proceedings This section refers to the 'Legal Proceedings' disclosure in the company's 2018 Annual Report on Form 10-K for detailed information - For details on legal proceedings, the report refers to the disclosure in the Annual Report on Form 10-K for the year ended December 31, 2018[230] Risk Factors No material changes to risk factors were reported compared to those disclosed in the company's 2018 Annual Report on Form 10-K - No material changes to risk factors were reported compared to those disclosed in the 2018 Form 10-K[231] Other Items (Items 2, 3, 4, 5) The company reported no unregistered sales of equity securities, no defaults, no mine safety disclosures, and no other information under Item 5 - The company reported 'None' for the following items: Unregistered Sales of Equity Securities and Use of Proceeds, Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information[232][233][234] Exhibits The report lists various exhibits filed with the Form 10-Q, including a Rights Agreement, an Offer of Employment, and CEO/CFO certifications - Key exhibits filed include a Rights Agreement (4.1), an Offer of Employment for Robert O'Connor (10.1), and CEO/CFO certifications (31.1, 31.2, 32.1, 32.2)[237]