Innodata(INOD) - 2020 Q3 - Quarterly Report

Part I – Financial Information This part presents Innodata Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Innodata Inc.'s unaudited condensed consolidated financial statements and detailed notes are presented for the periods ended September 30, 2020 and 2019 Condensed Consolidated Balance Sheets Innodata Inc.'s condensed consolidated balance sheets for September 30, 2020, and December 31, 2019, detail changes in assets, liabilities, and equity Table: Condensed Consolidated Balance Sheets Data | Metric | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :-------------------------------- | :------------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $15,336 | $10,874 | $4,462 | 41.0% | | Total current assets | $28,291 | $24,004 | $4,287 | 17.9% | | Total assets | $53,998 | $49,497 | $4,501 | 9.1% | | Total current liabilities | $19,246 | $15,754 | $3,492 | 22.2% | | Total liabilities | $31,701 | $27,382 | $4,319 | 15.8% | | Total stockholders' equity | $25,689 | $25,532 | $157 | 0.6% | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Three Months Ended September 30, 2020 and 2019) Innodata Inc.'s condensed consolidated statements of operations and comprehensive income (loss) are presented for the three months ended September 30, 2020 and 2019 Table: Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Three Months Ended Sep 30, 2020 and 2019) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Revenues | $14,553 | $13,846 | $707 | 5.1% | | Income (loss) before provision for income taxes | $143 | $(145) | $288 | -198.6% | | Consolidated net income (loss) | $213 | $(566) | $779 | -137.6% | | Net income (loss) attributable to Innodata Inc. and Subs. | $206 | $(563) | $769 | -136.6% | | Basic income (loss) per share | $0.01 | $(0.02) | $0.03 | -150.0% | | Diluted income (loss) per share | $0.01 | $(0.02) | $0.03 | -150.0% | Condensed Consolidated Statements of Operations and Comprehensive Loss (Nine Months Ended September 30, 2020 and 2019) Innodata Inc.'s condensed consolidated statements of operations and comprehensive loss are presented for the nine months ended September 30, 2020 and 2019 Table: Condensed Consolidated Statements of Operations and Comprehensive Loss (Nine Months Ended Sep 30, 2020 and 2019) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Revenues | $42,946 | $41,179 | $1,767 | 4.3% | | Loss before provision for income taxes | $(39) | $(1,226) | $1,187 | -96.8% | | Consolidated net loss | $(543) | $(1,719) | $1,176 | -68.4% | | Net loss attributable to Innodata Inc. and Subsidiaries | $(568) | $(1,709) | $1,141 | -66.8% | | Basic and diluted loss per share | $(0.02) | $(0.07) | $0.05 | -71.4% | Condensed Consolidated Statements of Cash Flows Innodata Inc.'s condensed consolidated statements of cash flows are presented for the nine months ended September 30, 2020 and 2019, detailing operating, investing, and financing activities Table: Condensed Consolidated Statements of Cash Flows Data | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Net cash provided by operating activities | $5,653 | $4,890 | $763 | 15.6% | | Net cash used in investing activities | $(1,076) | $(1,314) | $238 | -18.1% | | Net cash used in financing activities | $(53) | $(966) | $913 | -94.5% | | Net increase in cash and cash equivalents | $4,462 | $2,319 | $2,143 | 92.4% | | Cash and cash equivalents, end of period | $15,336 | $13,188 | $2,148 | 16.3% | Condensed Consolidated Statements of Stockholders' Equity Innodata Inc.'s condensed consolidated statements of stockholders' equity are presented for the periods ended September 30, 2020 and 2019 Table: Condensed Consolidated Statements of Stockholders' Equity Data | Metric | September 30, 2020 (in thousands) | September 30, 2019 (in thousands) | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Stockholders' Equity | $25,689 | $29,117 | | Net income (loss) attributable to Innodata Inc. and Subs. | $206 (Q3 2020) | $(563) (Q3 2019) | | Stock-based compensation (9 months) | $700 | $624 | Notes to Condensed Consolidated Financial Statements Detailed notes to Innodata Inc.'s condensed consolidated financial statements explain significant accounting policies and financial disclosures 1. Summary of Significant Accounting Policies This section outlines accounting policies for presentation, consolidation, estimates, revenue recognition, foreign currency, and income taxes, including COVID-19 impact - The unaudited interim financial statements include normal recurring adjustments and should be read in conjunction with the 2019 Annual Report on Form 10-K[20][21] - The condensed consolidated financial statements include Innodata Inc. and its wholly-owned subsidiaries, along with majority-owned Synodex and docGenix limited liability companies, with non-controlling interests accounted for[22] - Management makes estimates and assumptions, including those related to the possible effects of the COVID-19 pandemic, for items such as allowance for doubtful accounts, useful life of assets, goodwill impairment, deferred tax assets, stock-based compensation, litigation accruals, and tax exposures[23] - Revenue is recognized when services are rendered or goods are delivered, reflecting the expected consideration, with specific recognition policies applying to each segment: DDS (quantity/resources), Synodex (quantity/licensing), and Agility (subscriptions/media analysis/reseller)[24][27][28][29] - The functional currency for production operations in the Philippines, India, Sri Lanka, and Israel is the U.S. dollar, while subsidiaries in Germany, the United Kingdom, and Canada use their respective local currencies, with foreign currency translation adjustments included in Accumulated other comprehensive loss[33][34] - Deferred taxes are based on differences between financial statement and tax bases of assets and liabilities, with a valuation allowance provided when deferred tax assets are unlikely to be realized, and unremitted foreign earnings are indefinitely reinvested[37][38] 2. Goodwill and Intangible Assets Due to COVID-19, impairment analyses for goodwill and intangible assets were performed, concluding no impairment, with stable goodwill balances and detailed amortization - The company determined that adverse changes in macroeconomic trends due to the COVID-19 pandemic constituted a triggering event for impairment analysis, but concluded there was no impairment of long-lived assets (tangible or intangible) as of September 30, 2020[51] Table: Goodwill (in thousands) | Metric | September 30, 2020 (in thousands) | January 1, 2020 (in thousands) | | :------- | :-------------------------------- | :----------------------------- | | Goodwill | $2,069 | $2,108 | Table: Intangible Asset Carrying Amounts and Amortization (Sep 30, 2020, in thousands) | Intangible Asset Category | Gross Carrying Amount (Sep 30, 2020, in thousands) | Accumulated Amortization (Sep 30, 2020, in thousands) | | :------------------------ | :----------------------------------------------- | :---------------------------------------------------- | | Developed technology | $3,034 | $1,684 | | Customer relationships | $2,112 | $1,085 | | Trademarks and tradenames | $860 | $603 | | Patents | $42 | $27 | | Media Contact Database | $3,566 | $1,513 | | Total | $9,614 | $4,912 | Table: Amortization Expense (in thousands) | Period | Amortization Expense (in thousands) | | :-------------------------------------- | :---------------------------------- | | Three months ended September 30, 2020 | $200 | | Three months ended September 30, 2019 | $200 | | Nine months ended September 30, 2020 | $700 | | Nine months ended September 30, 2019 | $700 | Estimated Amortization Expense for Intangible Assets After September 30, 2020 (in thousands) | Year | Amortization | | :--------- | :----------- | | 2020 | $224 | | 2021 | $895 | | 2022 | $895 | | 2023 | $895 | | 2024 | $797 | | Thereafter | $996 | | Total | $4,702 | 3. Income Taxes The company recorded a tax benefit of $0.1 million for the three months ended September 30, 2020, a decrease from a $0.4 million provision in the prior year, primarily due to lower foreign tax provisions, with disproportionate effective income tax rates due to U.S. and Canadian losses, valuation allowances, and foreign operations' tax effects, and unrecognized tax benefits totaling $3.046 million as of September 30, 2020, with contested service tax assessments in India Table: Income Taxes (in thousands) | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Tax Benefit (Provision for income taxes) | $100 | $(400) | Table: Income Taxes (in thousands) | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Provision for income taxes | $504 | $493 | Effective Tax Rate Reconciliation (Nine Months Ended September 30) | Factor | 2020 | 2019 | | :------------------------------------------------------------------ | :-------- | :------- | | Federal income tax benefit at statutory rate | (21.0)% | (21.0)% | | Change in valuation allowance | (660.0)% | (15.1)% | | Foreign rate differential | (295.9)% | (1.8)% | | Tax effects of foreign operations | 1,610.6% | 84.8% | | Increase in unrecognized tax benefits (ASC 740) | 410.5% | 30.8% | | Effective tax rate | 1,292.3%| 40.2%| Roll-forward of Unrecognized Tax Benefits (in thousands) | Metric | September 30, 2020 | | :------------------------------------ | :----------------- | | Balance - January 1, 2020 | $2,957 | | Increase for current year tax position| $225 | | Decrease for prior year tax position | $(161) | | Interest accrual | $125 | | Foreign currency remeasurement | $(100) | | Balance - September 30, 2020 | $3,046 | - The company's Indian subsidiary is contesting a service tax assessment asserting that its services fall under 'online information and database access or retrieval services' (OID Services) instead of 'business support services' (BS Services), with potential service tax of 12.36% to 15% plus interest and penalties on approximately $66.0 million in revenues if unsuccessful, for which no tax liability has been recorded[63] 4. Commitments and Contingencies This section addresses the ongoing COVID-19 pandemic, stating no material adverse impact to date but acknowledging future uncertainty, and details a significant litigation in the Philippines with a potential payment of approximately $6.4 million, for which a U.S. court has issued a preliminary injunction against enforcement, with management believing the ultimate outcome of legal proceedings will not have a material adverse effect, though adverse outcomes up to $300,000 beyond recorded amounts are reasonably possible - The COVID-19 pandemic has created significant global economic downturn and market volatility, and while the company has not experienced a material adverse impact on its results of operations for the quarter and nine months ended September 30, 2020, the future impact remains uncertain[68][69] - The company believes its existing cash and cash equivalents provide sufficient liquidity for the next 12 months, and in the event of a significant or prolonged reduction in revenues, it would manage liquidity by reducing capital expenditures, deferring investments, and cutting operating costs[70] - A judgment was rendered in the Philippines in 2008 against a former subsidiary and purportedly Innodata Inc., with a potential payment of approximately $6.4 million plus legal interest, for which a U.S. District Court has issued a preliminary injunction preventing former employees from enforcing this judgment against Innodata Inc. in the U.S[71] - Management believes the ultimate outcome of current legal proceedings will not have a material adverse effect on the company's financial position and results of operations, though adverse outcomes that could reach approximately $300,000 in the aggregate beyond recorded amounts are reasonably possible[75][76] 5. Stock Options This section details stock option activity under the Innodata Inc. 2013 Stock Plan, showing 6.99 million options outstanding at September 30, 2020, with a weighted-average exercise price of $1.70, with the fair value of options granted estimated using the Black-Scholes option pricing model, and total unrecognized compensation cost approximately $1.3 million, to be recognized over 24 months Stock Option Activity (as of September 30, 2020) | Metric | Number of Options | Weighted-Average Exercise Price | | :-------------------------------------- | :---------------- | :------------------------------ | | Outstanding at January 1, 2020 | 6,833,303 | $1.86 | | Granted | 1,080,000 | $1.37 | | Exercised | (278,333) | $1.13 | | Forfeited/Expired | (644,303) | $3.06 | | Outstanding at September 30, 2020 | 6,990,667 | $1.70 | | Exercisable at September 30, 2020 | 4,651,624 | $1.93 | | Vested and Expected to Vest at Sep 30, 2020 | 6,990,667 | $1.70 | Weighted-Average Fair Value of Options Granted and Assumptions (Nine Months Ended September 30) | Metric | 2020 | 2019 | | :-------------------------- | :---------------- | :---------------- | | Weighted average fair value | $0.61 | $0.56 | | Risk-free interest rate | 0.29%-0.56% | 1.7% - 2.6% | | Expected term (years) | 5-6 | 5-6 | | Expected volatility factor | 47% - 50% | 45% - 46% | | Expected dividends | None | None | - The compensation cost related to non-vested stock options and restricted stock awards not yet recognized as of September 30, 2020, totaled approximately $1.3 million, to be recognized over a weighted-average period of twenty-four months[79] Stock-Based Compensation Expense (in thousands) | Allocation | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Direct operating costs | $40 | $34 | $119 | $72 | | Selling and administrative expenses | $192 | $317 | $581 | $552 | | Total stock-based compensation| $232 | $351 | $700 | $624 | 6. Operating Leases The company accounts for various operating lease agreements for its offices and service delivery centers, with remaining lease terms ranging from two to ten years, with total rent expense for the nine months ended September 30, 2020, at $1.777 million, and the net present value of lease liabilities at $7.658 million Rent Expense for Operating Leases (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Rent expense for long-term operating leases | $402 | $453 | $1,266 | $1,360 | | Rent expense for short-term leases | $122 | $143 | $511 | $473 | | Total rent expense | $524 | $596 | $1,777 | $1,833 | Maturity Profile of Operating Lease Liabilities (as of September 30, 2020, in thousands) | Year | Amount | | :---------------- | :----- | | 2020 | $396 | | 2021 | $1,603 | | 2022 | $1,569 | | 2023 | $1,289 | | 2024 | $1,060 | | 2025 and thereafter | $4,612 | | Total lease payments| $10,529| | Less: Interest | $(2,871)| | Net present value of lease liabilities| $7,658| | Current portion | $967 | | Long-term portion | $6,691 | | Total | $7,658| Weighted-Average Lease Terms and Discount Rates (as of September 30, 2020) | Metric | Value | | :---------------------------- | :-------- | | Weighted-average lease term remaining | 75 months | | Weighted-average discount rate| 8.92% | 7. Long-term Obligations Total long-term obligations as of September 30, 2020, amounted to $7.379 million (gross), primarily comprising pension obligations, a settlement agreement, capital lease obligations, Microsoft licenses, and a Paycheck Protection Program (PPP) bank loan received in May 2020, with the PPP loan of $579,700 potentially forgivable and having a 1% interest rate over two years for any unforgiven portion Total Long-term Obligations (in thousands) | Obligation Category | September 30, 2020 | December 31, 2019 | | :---------------------------- | :----------------- | :---------------- | | Pension obligations | $5,224 | $4,611 | | Settlement agreement | $572 | $708 | | Capital lease obligations | $269 | $655 | | Microsoft licenses | $734 | - | | Bank loans payable | $580 | - | | Total (gross) | $7,379 | $5,974 | | Less: Current portion | $1,958 | $1,440 |\ | Totals (net of current portion)| $5,421 | $4,534 | - The company received $579,700 in loan proceeds under the Paycheck Protection Program (PPP) on May 4, 2020, which is forgivable if used for eligible purposes and payroll levels are maintained, with the unforgiven portion payable over two years at 1% interest[90] 8. Comprehensive Loss Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, foreign currency translation adjustments, and changes in fair value of derivatives, with the balance at September 30, 2020, at $(1.210) million, and a net amount of $145,000 reclassified to earnings for the nine months ended September 30, 2020 Components of Accumulated Other Comprehensive Loss (as of September 30, 2020, in thousands) | Component | Balance at Sep 30, 2020 | | :-------------------------------- | :---------------------- | | Pension Liability Adjustment | $(29) | | Fair Value of Derivatives | $0 | | Foreign Currency Translation Adjustment | $(1,181) | | Total Accumulated Other Comprehensive Loss| $(1,210) | - For the nine months ended September 30, 2020, a net amount of $145,000 was reclassified from Accumulated other comprehensive loss to earnings, impacting Direct operating costs[93] 9. Segment Reporting and Concentrations The company operates in three reporting segments: Digital Data Solutions (DDS), Synodex, and Agility, with revenues increasing across all segments for both the three and nine months ended September 30, 2020, and the DDS segment remaining the largest contributor to revenue, with significant client and geographic concentrations, including two DDS clients generating 23% of total revenues in Q3 2020 and non-U.S. clients accounting for 55% of total revenues - The company's operations are classified into three reporting segments: Digital Data Solutions (DDS), Synodex, and Agility[96] Revenues from External Clients (in thousands) | Segment | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------ | :---------- | :---------- | :---------- | :---------- | | DDS | $10,526 | $10,124 | $30,793 | $30,353 | | Synodex | $1,197 | $977 | $3,680 | $2,916 | | Agility | $2,830 | $2,745 | $8,473 | $7,910 | | Total | $14,553 | $13,846 | $42,946 | $41,179 | Income (Loss) Before Provision for Income Taxes (in thousands) | Segment | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------ | :------ | :------ | :------ | :------ | | DDS | $4 | $371 | $226 | $579 | | Synodex | $79 | $(70) | $356 | $(81) | | Agility | $60 | $(446) | $(621) | $(1,724)| | Total | $143| $(145)| $(39) | $(1,226)| Revenues by Geographic Region (in thousands) | Region | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :-------------- | :---------- | :---------- | :---------- | :---------- | | United States | $6,613 | $5,967 | $19,561 | $18,507 | | United Kingdom | $2,832 | $2,394 | $8,284 | $7,120 | | The Netherlands | $1,704 | $1,730 | $5,003 | $5,146 | | Canada | $1,434 | $1,634 | $4,304 | $4,594 | | Others | $1,970 | $2,121 | $5,794 | $5,812 | | Totals | $14,553 | $13,846 | $42,946 | $41,179 | - Two clients in the DDS segment generated approximately 23% of total revenues for the three months ended September 30, 2020, while one client in the DDS segment generated approximately 14% of total revenues for the nine months ended September 30, 2020[105][106] - Revenues from non-U.S. clients accounted for 55% of total revenues for the three months ended September 30, 2020, and 54% for the nine months ended September 30, 2020[105][106] - As of September 30, 2020, approximately 57% of the company's accounts receivable was from foreign (principally European) clients, and 24% was due from two clients[108] 10. Income (Loss) Per Share Basic and diluted income per share for the three months ended September 30, 2020, was $0.01, an improvement from a loss of $0.02 in the prior year, with basic and diluted loss per share for the nine months ended September 30, 2020, at $(0.02), an improvement from $(0.07) in the prior year, and options to purchase 2.3 million shares (Q3 2020) and 7.0 million shares (9M 2020) being anti-dilutive Income (Loss) Per Share Attributable to Innodata Inc. and Subsidiaries | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :-------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Net income (loss) (in thousands) | $206 | $(563) | $(568) | $(1,709) | | Weighted average common shares outstanding (in thousands) | 24,470 | 25,856 | 24,427 | 25,870 | | Dilutive effect of outstanding options (in thousands) | 790 | - | - | - | | Adjusted for dilutive computation (in thousands) | 25,260 | 25,856 | 24,427 | 25,870 | | Basic income (loss) per share | $0.01 | $(0.02) | $(0.02) | $(0.07) | | Diluted income (loss) per share | $0.01 | $(0.02) | $(0.02) | $(0.07) | - Options to purchase 2.3 million shares of common stock for the three months ended September 30, 2020, were outstanding but not included in diluted EPS computation because their exercise price was greater than the average market price, making them anti-dilutive[110] - Options to purchase 7.0 million shares of common stock were anti-dilutive for the nine months ended September 30, 2020[111] 11. Derivatives The company uses non-deliverable foreign currency forward contracts, expiring within six months, to manage its exposure to fluctuations in foreign currency exchange rates, with primary exposures arising from payroll and operating expenses in international markets (Philippines, India, Sri Lanka, Israel) and revenues denominated in Canadian dollars, Pound Sterling, and Euros, and does not use derivatives for trading purposes - The company uses non-deliverable foreign currency forward contracts, expiring within six months, to manage foreign currency exchange rate fluctuations[116] - Primary foreign currency exposures relate to payroll and operating expenses in the Philippines, India, Sri Lanka, and Israel, and revenues denominated in Canadian dollars, Pound Sterling, and Euros[112][113] - The company does not hold or issue derivatives for trading purposes; all derivatives are recognized at fair value[117] Effects of Foreign Currency Forward Contracts (in thousands) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------ | :------ | :------ | :------ | :------ | | Net gain (loss) recognized in OCI | $12 | - | $(154) | - | | Net (gain) loss reclassified from accumulated OCI into income | $39 | - | $121 | - | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Innodata Inc.'s financial condition, results of operations, business overview, and key accounting policies Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, including those related to the COVID-19 pandemic, client contract terminations, market development, revenue concentration, and technological factors, advising against undue reliance on these statements and noting that the company undertakes no obligation to update them - The report contains forward-looking statements regarding operations, economic performance, and financial condition, identified by words such as "project," "believe," "expect," etc[122] - These statements are subject to risks and uncertainties, including the effects of the COVID-19 pandemic, client contract terminations, reliance on project-based work, revenue concentration, difficulty integrating acquisitions, potential impairment of goodwill, changes in business strategy, market downturns, competition, and IT system risks[123] - Actual results could differ materially from forward-looking statements, and readers should not place undue reliance on them, with the company undertaking no obligation to update these statements[124][125] Correction of Immaterial Errors The company identified immaterial historical errors in accounting for capital leases, which resulted in an understatement of expenses from 2017 to 2019 and an overstatement for the first six months of 2020, and while these errors were not material enough to require a restatement of prior annual financial statements, the prior period condensed consolidated financial statements in this Form 10-Q have been revised for comparability - Historical errors were identified relating to the accounting for capital leases, specifically that lease obligations were not recorded at present values and asset buyout prices were not reassessed[128] - These errors resulted in an understatement of expenses from 2017 to December 31, 2019, and an overstatement of expenses for the six months ended June 30, 2020[128] - The errors were not material quantitatively or qualitatively in any reported periods, but corrections, if recorded in Q3 2020, would be material to that period, therefore, prior period condensed consolidated financial statements in this Form 10-Q have been revised for comparability, without requiring a restatement of prior annual financial statements[129][130] Impact on Nine Months Ended September 30, 2019 Cash Flows (in thousands) | Metric | Impact | | :-------------------------------------- | :----- | | Decrease in cash flows provided by operating activities | $(38) | | Decrease in cash flows used in investing activities | $(79) | | Increase in cash flows used in financing activities | $41 | Business Overview Innodata Inc. is a global data engineering company providing AI-based data solutions and SaaS platforms, leveraging human expertise and machine learning - Innodata Inc. is a global data engineering company that solves complex data challenges for building and maintaining AI systems and analytics platforms[131][134] - The company utilizes a hybrid approach of human expertise (3,600+ employees across 10 countries) augmented by machine learning and deep learning technologies to deliver superior data quality[132] - Innodata also provides AI-augmented software-as-a-service (SaaS) platforms for clients to perform their own data engineering tasks and for niche, industry-specific data-intensive use cases[133] Data Annotation Innodata provides data annotation services and platforms to train AI models, offering high accuracy (e.g., 99.995%) for text, images, audio, and video data, supporting complex AI models like computer vision and sentiment analysis, catering to healthcare, compliance, scientific, financial, and legal markets - Provides data annotation services and platforms to train AI models by annotating text, images, audio, and video data at scale with industry-leading quality (e.g., 99.995% accuracy)[135] - Supports complex AI models including computer vision, sentiment analysis, entity linking, text categorization, and syntactic parsing/tagging[135] - Offers solutions for various complex requirements in healthcare, compliance, scientific, financial, and legal markets[138] Data Transformation The company offers AI-based data transformation solutions for high-accuracy data identification, aggregation, cleansing, augmentation, and extraction, leveraging highly trained AI models and experts to convert data from disparate formats, enrich it with metadata, and classify it, available via API or as a licensed platform - Provides AI-based data transformation solutions for high-accuracy data identification, aggregation, cleansing, augmentation, and extraction[139] - The platform extracts data from various sources, converts it from disparate formats (e.g., PDF), enriches it with semantics and metadata, and classifies it according to ontologies or knowledge graphs[140] - Solutions can be consumed via API for infrastructure use or licensed as a platform for performing analytics on extracted data points[141] Data Curation Innodata provides AI-based data curation solutions for clients who need to maintain mission-critical structured databases or consolidate separate databases into a single, unified, high-quality "golden source," with services including data collection, hygiene, consolidation, and compliance - Offers AI-based data curation solutions for clients needing to maintain mission-critical structured data or fuse databases into a single, unified, high-quality "golden source"[142] - Services include data collection across external and internal sources, data hygiene, data consolidation, and data compliance[142] Intelligent Automation The company deploys a range of technologies, including AI and robotic process automation (RPA), to re-invent business processes, aiming to eliminate repetitive tasks, automate operations, speed up processes, and enable internal talent to focus on creative and analytical work, particularly for critical functions involving unstructured data - Deploys AI and robotic process automation (RPA) to re-invent business processes, eliminate repetitive tasks, automate operations, and shift internal talent to creative and analytical work[144] - Provides intelligent automation for complex functions such as IP rights management, contract management, client relationship management, regulatory change management, underwriting, and content operations management[145] Intelligent Data Platforms Innodata builds and manages intelligent data platforms as SaaS and managed data solutions for specific niche market requirements, including Synodex, which transforms medical records into usable digital data, and Agility, which provides marketing communications and public relations professionals with tools for content targeting, distribution, monitoring, and analysis - Builds and manages intelligent data platforms as SaaS and managed data solutions for specific niche market requirements[146] - Synodex platform transforms medical records into usable digital data, with 20 clients at the end of 2019, including John Hancock Insurance[147] - Agility platform provides marketing communications and public relations professionals with tools to target and distribute content to influencers and monitor/analyze global news and social media channels[148] Other Services for Information Industry Clients In addition to its core data engineering and platform offerings, Innodata provides a variety of services to clients in the information industry, focusing on content operations and product development - Provides a variety of services for clients in the information industry related to content operations and product development[149] Inflation, Seasonality and Prevailing Economic Conditions This section discusses the impact of the COVID-19 pandemic, inflation risks related to wage rates in Asia, and seasonal fluctuations in revenue and earnings, noting that while COVID-19 has not materially impacted Q3 and 9M 2020 results, future effects remain uncertain, and the company faces high wage inflation in Asia and experiences quarterly fluctuations due to project changes and holiday-related overtime, with the Synodex segment showing specific seasonality linked to life insurance applications Prevailing Economic Conditions (COVID-19) The COVID-19 pandemic has caused significant global economic downturn and market volatility, with Innodata's Business Continuity Plan allowing operations to continue without material adverse impact in Q3 and 9M 2020, though future impact remains uncertain, and the company believes it has sufficient liquidity for the next 12 months but would reduce capital expenditures and operating costs if revenues significantly decline, with no impairment of long-lived assets found as of September 30, 2020 - The COVID-19 pandemic has created significant global economic downturn, disrupted trade, and caused market volatility[151] - The company triggered its Business Continuity Plan, enabling continued operations without material adverse impact on results for the quarter and nine months ended September 30, 2020[152][153] - The future impact of the COVID-19 crisis on results of operations and financial condition remains unclear and cannot be reasonably estimated with certainty[154] - The company believes existing cash and cash equivalents provide sufficient liquidity for the next 12 months, and in case of significant revenue reduction, it would manage liquidity by reducing capital expenditures, deferring investments, and cutting operating costs[155] - Despite COVID-19 constituting a triggering event for impairment analysis, no impairment of long-lived assets (tangible or intangible) was found as of September 30, 2020[156] Inflation Innodata's most significant costs are the salaries and benefits of its employees in Asia, exposing the company to high wage inflation in those countries, requiring the company to anticipate these increases, particularly for fixed-price contracts, with no assurance that cost increases can be fully recovered through pricing - The company's most significant costs are salaries and related benefits of employees in Asia, exposing it to high wage inflation in those countries[157] - The company must adequately anticipate wage increases, especially for fixed-price contracts, and cannot assure recovery of cost increases through higher service prices[157] Seasonality Innodata's quarterly operating results are subject to fluctuations due to project changes, start-up delays, or inability to replace projects, with the fourth quarter typically incurring higher wages due to overtime during holidays in Asian facilities, reducing margins, and the Synodex subsidiary experiencing seasonal revenue fluctuations, with the lowest in Q3 and highest in Q4, directly linked to life insurance applications - Quarterly operating results fluctuate due to project replacement, new project start-up delays, or inability to replace projects[158] - Fourth-quarter results typically incur higher wages due to overtime during holidays in Asian facilities, which reduces margins[158] - The Synodex subsidiary experiences seasonal revenue fluctuations, with revenue typically lowest in the third quarter and highest in the fourth quarter, directly linked to the number of life insurance applications[159] Results of Operations (Three Months Ended September 30, 2020 and 2019) For the three months ended September 30, 2020, Innodata Inc. reported a 6% increase in total revenues to $14.6 million, leading to a net income of $0.2 million, a significant improvement from a net loss of $0.6 million in the prior year, driven by increased volumes across all segments and reduced selling and administrative expenses, despite a rise in direct operating costs Revenues (Three Months) Total revenues for the three months ended September 30, 2020, increased by 6% to $14.6 million, primarily due to increased volumes across all segments, with DDS revenues rising by 5% from new clients, Synodex by 20% from an existing client, and Agility by 4% due to increased subscriptions, and non-U.S. clients accounting for 55% of total revenues Revenues (in millions) | Segment | Q3 2020 | Q3 2019 | Change (YoY) | % Change (YoY) | | :------ | :------ | :------ | :----------- | :------------- | | Total | $14.6 | $13.8 | $0.8 | 6% | | DDS | $10.6 | $10.1 | $0.5 | 5% | | Synodex | $1.2 | $1.0 | $0.2 | 20% | | Agility | $2.8 | $2.7 | $0.1 | 4% | - The increase in DDS revenues was primarily attributable to new clients, Synodex's increase was due to higher volumes from one existing client, and Agility's increase was principally attributable to an increase in the number of subscriptions to its intelligent data platform and newswire products[164][165][166] - Two clients in the DDS segment generated approximately 23% of the company's total revenues for the three months ended September 30, 2020, and revenues from non-U.S. clients accounted for 55% of total revenues[167] Direct Operating Costs (Three Months) Direct operating costs increased by $0.8 million to $9.8 million for the three months ended September 30, 2020, primarily due to higher labor-related costs and technology expenditures for the COVID-19 Business Continuity Plan, partially offset by reductions in occupancy costs, with direct operating costs as a percentage of total revenues rising to 67% from 65%, mainly driven by the DDS segment Direct Operating Costs (in millions) | Metric | Q3 2020 | Q3 2019 | Change (YoY) | % Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | :------------- | | Total Direct Operating Costs | $9.8 | $9.0 | $0.8 | 8.9% | | As % of Total Revenues | 67% | 65% | 2 pp | | | DDS Segment Direct Operating Costs | $7.4 | $6.5 | $0.9 | 13.8% | | DDS Segment as % of DDS Revenues | 70% | 64% | 6 pp | | | Synodex Segment Direct Operating Costs | $0.9 | $0.8 | $0.1 | 12.5% | | Synodex Segment as % of Synodex Revenues | 75% | 80% | -5 pp | | | Agility Segment Direct Operating Costs | $1.5 | $1.7 | $(0.2) | -11.8% | | Agility Segment as % of Agility Revenues | 54% | 63% | -9 pp | | - The increase in total direct operating costs was primarily due to increases in labor-related costs ($0.9 million) and technology-related expenditures for the COVID-19 BCP ($0.3 million), partially offset by reductions in occupancy and other operating costs[170] - The increase in Direct operating costs as a percentage of total revenues was primarily attributable to increased Direct operating costs in the DDS segment[170] Selling and Administrative Expenses (Three Months) Selling and administrative expenses decreased by $0.4 million to $4.6 million for the three months ended September 30, 2020, driven by lower labor-related costs, operating costs, and provision for doubtful accounts, with these expenses as a percentage of total revenues decreasing to 32% from 36%, primarily due to increased revenues across all segments Selling and Administrative Expenses (in millions) | Metric | Q3 2020 | Q3 2019 | Change (YoY) | % Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | :------------- | | Total Selling and Administrative Expenses | $4.6 | $5.0 | $(0.4) | -8.0% | | As % of Total Revenues | 32% | 36% | -4 pp | | | Agility Segment as % of Agility Revenues | 39% | 56% | -17 pp | | - The decrease in total selling and administrative expenses was attributable to lower labor-related costs ($0.2 million), lower operating costs ($0.1 million), and a lower provision for doubtful accounts ($0.1 million)[175] - The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues in all segments[175] Income Taxes (Three Months) The company recorded a tax benefit of $0.1 million for the three months ended September 30, 2020, a decrease from a $0.4 million provision in the prior year, primarily due to a lower tax provision for foreign subsidiaries, with effective income tax rates disproportionate due to losses incurred by U.S. and Canadian entities, valuation allowances, and tax effects of foreign operations Income Taxes (in millions) | Metric | Q3 2020 | Q3 2019 | | :-------------- | :------ | :------ | | Tax Benefit (Provision) | $0.1 | $(0.4) | - The decrease in income tax provision was primarily due to a lower tax provision for foreign subsidiaries in the three months ended September 30, 2020[181] - Effective income tax rates are disproportionate due to losses incurred by U.S. and Canadian entities, a valuation allowance on deferred taxes, and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax positions[180] Net Income (Loss) (Three Months) Innodata achieved a net income of $0.2 million during the three months ended September 30, 2020, representing an $0.8 million improvement from a net loss of $0.6 million in the prior year, resulting from $0.3 million pre-tax income and a $0.5 million tax benefit, with the Synodex and Agility segments showing improved net income, while the DDS segment remained at a net loss Net Income (Loss) (in millions) | Segment | Q3 2020 | Q3 2019 | Change (YoY) | | :------ | :------ | :------ | :----------- | | Total | $0.2 | $(0.6) | $0.8 | | DDS | $(0.1) | $(0.1) | $0.0 | | Synodex | $0.1 | $0.0 | $0.1 | | Agility | $0.2 | $(0.5) | $0.7 | - The $0.8 million improvement in consolidated net income (loss) was a result of $0.3 million pre-tax income and a $0.5 million tax benefit in the current quarter[182] - Synodex's net income increase was primarily attributable to higher revenues, and Agility's improvement was due to higher revenues and lower operating costs[183][184] Results of Operations (Nine Months Ended September 30, 2020 and 2019) For the nine months ended September 30, 2020, total revenues increased by 4% to $42.9 million, leading to a reduced net loss of $0.6 million, an improvement from a $1.7 million net loss in the prior year, primarily due to revenue growth and better cost management in the Synodex and Agility segments, although the DDS segment experienced an increased net loss Revenues (Nine Months) Total revenues for the nine months ended September 30, 2020, increased by 4% to $42.9 million, with growth across all segments, with DDS revenues rising by 1% from new clients, Synodex by 28% from an existing client, and Agility by 8% from increased subscriptions, and non-U.S. clients accounting for 54% of total revenues Revenues (in millions) | Segment | 9M 2020 | 9M 2019 | Change (YoY) | % Change (YoY) | | :------ | :------ | :------ | :----------- | :------------- | | Total | $42.9 | $41.2 | $1.7 | 4% | | DDS | $30.7 | $30.4 | $0.3 | 1% | | Synodex | $3.7 | $2.9 | $0.8 | 28% | | Agility | $8.5 | $7.9 | $0.6 | 8% | - The increase in DDS revenues was primarily attributable to new clients, Synodex's increase was due to higher volumes from one existing client, and Agility's increase was attributable to an increase in the number of subscriptions to its database[187][188][189] - One client in the DDS segment generated approximately 14% of the company's total revenues for the nine months ended September 30, 2020, and revenues from non-U.S. clients accounted for 54% of total revenues[190] Direct Operating Costs (Nine Months) Direct operating costs increased by $1.0 million to $29.2 million for the nine months ended September 30, 2020, driven by higher labor costs, unfavorable foreign exchange, and BCP technology expenditures, with these increases partially offset by reductions in occupancy, content acquisition, and a one-time charge in 2019, and direct operating costs remaining stable at 68% as a percentage of total revenues Direct Operating Costs (in millions) | Metric | 9M 2020 | 9M 2019 | Change (YoY) | % Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | :------------- | | Total Direct Operating Costs | $29.2 | $28.2 | $1.0 | 3.5% | | As % of Total Revenues | 68% | 68% | 0 pp | | | DDS Segment Direct Operating Costs | $21.7 | $20.8 | $0.9 | 4.3% | | DDS Segment as % of DDS Revenues | 71% | 68% | 3 pp | | | Synodex Segment Direct Operating Costs | $2.6 | $2.4 | $0.2 | 8.3% | | Synodex Segment as % of Synodex Revenues | 70% | 83% | -13 pp | | | Agility Segment Direct Operating Costs | $4.9 | $5.0 | $(0.1) | -2.0% | | Agility Segment as % of Agility Revenues | 58% | 63% | -5 pp | | - The increase in total direct operating costs was primarily due to increases in labor-related costs ($1.6 million), unfavorable foreign exchange remeasurement effect ($0.1 million), and technology-related expenditures for the COVID-19 BCP ($0.8 million), offset by reductions in occupancy, content acquisition, and a one-time charge in 2019 for retroactive foreign social security contributions[192] Selling and Administrative Expenses (Nine Months) Selling and administrative expenses decreased by $0.4 million to $13.8 million for the nine months ended September 30, 2020, primarily due to lower labor-related costs, with these expenses as a percentage of total revenues decreasing to 32% from 34%, driven by increased revenues and lower expenses, particularly in the Agility segment Selling and Administrative Expenses (in millions) | Metric | 9M 2020 | 9M 2019 | Change (YoY) | % Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | :------------- | | Total Selling and Administrative Expenses | $13.8 | $14.2 | $(0.4) | -2.8% | | As % of Total Revenues | 32% | 34% | -2 pp | | | Agility Segment as % of Agility Revenues | 46% | 57% | -11 pp | | - The decrease in total selling and administrative expenses was primarily due to lower labor-related costs during the period[198] - The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues and lower Selling and administrative expenses in the current nine-month period[198] Income Taxes (Nine Months) The company recorded a provision for income taxes of $0.5 million for both the nine months ended September 30, 2020, and 2019, with effective tax rates remaining disproportionate due to losses incurred by U.S. and Canadian entities, valuation allowances on deferred taxes, and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax positions Income Taxes (in millions) | Metric | 9M 2020 | 9M 2019 | | :-------------- | :------ | :------ | | Tax Provision | $0.5 | $0.5 | - Effective income tax rates are disproportionate due to losses incurred by U.S. and Canadian entities, a valuation allowance recorded on deferred taxes, and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax positions[202] Net Loss (Nine Months) Innodata reduced its net loss to $0.6 million during the nine months ended September 30, 2020, an improvement from a $1.7 million net loss in the prior year, primarily resulting from higher revenues outpacing operating costs in the Synodex and Agility segments, although the DDS segment experienced a higher net loss due to increased operating costs Net Loss (in millions) | Segment | 9M 2020 | 9M 2019 | Change (YoY) | | :------ | :------ | :------ | :----------- | | Total | $(0.6) | $(1.7) | $1.1 | | DDS | $(0.8) | $(0.1) | $(0.7) | | Synodex | $0.5 | $0.0 | $0.5 | | Agility | $(0.3) | $(1.6) | $1.3 | - The improvement in consolidated net loss was primarily a result of higher revenue that outpaced operating costs in the Synodex and Agility segments[204] - The DDS segment's higher net loss was primarily attributable to higher operating costs ($1.0 million) offset in part by an increase in revenues ($0.3 million)[205] Liquidity and Capital Resources Innodata's cash and cash equivalents increased to $15.3 million as of September 30, 2020, with working capital of $9.0 million, indicating sufficient liquidity for the next 12 months, with the company receiving a $0.6 million PPP loan and planning capital expenditures of $2.0-$2.3 million for technology upgrades, and net cash provided by operating activities increasing to $5.7 million for 9M 2020, driven by non-cash expenses and working capital improvements Cash Flows Net cash provided by operating activities increased to $5.7 million for the nine months ended September 30, 2020, driven by non-cash expenses and working capital improvements, despite a net loss, with investing activities using $1.1 million for network infrastructure related to the BCP, and financing activities primarily influenced by the $0.6 million PPP loan proceeds and payments of long-term obligations Selected Liquidity and Capital Resources Measures (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :---------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $15,336 | $10,874 | | Working capital | $9,045 | $8,250 | - Net cash provided by operating activities for the nine months ended September 30, 2020, was $5.7 million, primarily due to non-cash expenses ($2.6 million) and working capital improvements ($3.6 million), despite a net loss of $0.5 million[213] - Days' sales outstanding (DSO) improved to 59 days for the nine months ended September 30, 2020, from 66 days for the year ended December 31, 2019[215] - Cash used in investing activities for the nine months ended September 30, 2020, was $1.1 million, mainly for network infrastructure related to COVID-19 BCP initiatives[216] - Anticipated capital expenditures for ongoing technology, equipment, and infrastructure upgrades for the next 12 months are approximately $2.0 million to $2.3 million, funded by cash generated from operations[219][220] - Cash provided by financing activities included $0.6 million from the PPP Loan and $0.2 million from stock option exercises, offset by $0.8 million in payments of long-term obligations for the nine months ended September 30, 2020[221] Critical Accounting Policies and Estimates The pre