Innodata(INOD) - 2023 Q2 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, cash flows, and stockholders' equity, along with detailed notes on significant accounting policies, specific asset and liability accounts, and other financial disclosures Condensed Consolidated Balance Sheets The balance sheets show an increase in total assets and stockholders' equity from December 31, 2022, to June 30, 2023, with a corresponding increase in total liabilities | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------- | :----------------------------- | :------------------------------- | | Total assets | $51,605 | $48,042 | | Total liabilities | $31,678 | $29,996 | | Total stockholders' equity | $20,651 | $18,773 | | Cash and cash equivalents | $13,652 | $9,792 | | Accounts receivable, net | $8,359 | $9,528 | | Total current assets | $25,864 | $23,685 | | Total current liabilities | $21,383 | $20,816 | Condensed Consolidated Statements of Operations and Comprehensive Loss (Three Months) For the three months ended June 30, 2023, the company reported a significantly reduced net loss compared to the same period in 2022, primarily due to lower operating costs and expenses despite a slight decrease in revenues | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenues | $19,655 | $19,987 | | Operating costs and expenses | $20,282 | $23,268 | | Loss before provision for income taxes | $(627) | $(3,281) | | Consolidated net loss | $(815) | $(3,831) | | Net loss attributable to Innodata Inc. and Subsidiaries | $(815) | $(3,833) | | Basic and Diluted Loss per share | $(0.03) | $(0.14) | Condensed Consolidated Statements of Operations and Comprehensive Loss (Six Months) For the six months ended June 30, 2023, the company substantially reduced its net loss compared to the prior year, driven by a significant decrease in operating costs and expenses, despite a decline in total revenues | Metric | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Revenues | $38,494 | $41,179 | | Operating costs and expenses | $41,016 | $46,875 | | Loss from operations | $(2,522) | $(5,696) | | Consolidated net loss | $(2,928) | $(6,721) | | Net Loss attributable to Innodata Inc. and Subsidiaries | $(2,931) | $(6,648) | | Basic and Diluted Loss per share | $(0.11) | $(0.24) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company generated positive cash flow from operating activities, a significant improvement from the prior year, while investing activities continued to use cash, and financing activities provided cash | Metric | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by (used in) operating activities | $4,183 | $(3,872) | | Net cash used in investing activities | $(2,519) | $(3,638) | | Net cash provided by (used in) financing activities | $1,987 | $(297) | | Net increase (decrease) in cash and cash equivalents | $3,860 | $(8,421) | | Cash and cash equivalents, end of period | $13,652 | $10,481 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased from December 31, 2022, to June 30, 2023, primarily driven by additional paid-in capital from stock-based compensation and stock option exercises, despite the net loss - Total stockholders' equity increased from $18,773 thousand at January 1, 2023, to $20,651 thousand at June 30, 2023[18] - Additional paid-in capital increased by $4,151 thousand due to stock-based compensation and stock option exercises[18] - Deficit increased by $2,931 thousand due to net loss attributable to Innodata Inc. and subsidiaries[18] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and breakdowns of the figures presented in the condensed consolidated financial statements, covering accounting policies, specific asset and liability accounts, equity, and other financial commitments and contingencies 1. Summary of Significant Accounting Policies and Estimates This note outlines the basis of presentation for the unaudited interim financial statements, principles of consolidation, use of management estimates, and key accounting policies including revenue recognition, foreign currency translation, derivative instruments, capitalized developed software, and income taxes - Interim financial statements are unaudited, include normal recurring adjustments, and are prepared in accordance with U.S. GAAP and SEC rules, to be read in conjunction with the 2022 Form 10-K[20][21] - Consolidation includes Innodata Inc., its wholly-owned subsidiaries, and majority-owned docGenix, with all intercompany transactions eliminated[22] - Management makes significant estimates for items such as doubtful accounts, asset useful lives, impairment, deferred tax assets, stock-based compensation, and litigation accruals[23] - Revenue is recognized when services are rendered or goods delivered, with specific methods for DDS (quantity/resources), Synodex (quantity/licensing), and Agility (subscriptions/services/reseller)[24][25][27][28] - Foreign currency translation adjustments for certain subsidiaries are included as a component of accumulated other comprehensive loss in stockholders' equity[32][33] - Deferred taxes are based on financial statement and tax basis differences, with a valuation allowance maintained against US, Canadian, and European net deferred tax assets due to uncertainty of future taxable income[37][38] 2. Short Term Investments – other Short-term investments, primarily treasury bills and certificates of deposit, significantly decreased from December 31, 2022, to June 30, 2023 | Investment Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | | Treasury bills | $0 | $494 | | Certificates of deposit | $14 | $13 | | Total | $14 | $507 | 3. Accounts Receivable Net accounts receivable decreased from December 31, 2022, to June 30, 2023, with a slight increase in the allowance for doubtful accounts. The company adopted ASU 2019-04 with no material impact | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Gross Accounts receivable | $9,579 | $10,741 | | Allowance for doubtful accounts | $(1,220) | $(1,213) | | Accounts receivable, net | $8,359 | $9,528 | - Allowance for credit losses activity for the six months ended June 30, 2023, included $332 thousand in additions charged to expense and $331 thousand in write-offs against the allowance[47] 4. Goodwill and Intangible Assets Goodwill increased slightly due to foreign currency translation adjustments. The company holds significant acquired intangible assets and capitalized developed software, with estimated future amortization expenses detailed - Goodwill increased from $2,038 thousand at January 1, 2023, to $2,069 thousand at June 30, 2023, primarily due to foreign currency translation adjustment[48] - Total intangibles, net, were $13,489 thousand as of June 30, 2023, up from $12,526 thousand as of December 31, 2022[12][50] Amortization Expense (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :----------------------------- | :------ | :------ | :------ | :------ | | Acquired intangible assets | $200 | $200 | $400 | $500 | | Capitalized developed software | $600 | $400 | $1,200 | $800 | Estimated Future Amortization Expense for Intangible Assets (in thousands) | Year | Amortization | | :--- | :----------- | | 2023 | $3,049 | | 2024 | $4,378 | | 2025 | $3,451 | | 2026 | $940 | | 2027 | $460 | | Thereafter | $1,211 | | Total | $13,489 | 5. Income Taxes The company's income tax provision is primarily for foreign taxes, with disproportionate effective tax rates due to losses in certain subsidiaries and a valuation allowance on deferred tax assets. Unrecognized tax benefits increased, and the company is contesting significant service tax assessments in India Effective Tax Rate | Period | Effective Tax Rate | | :----- | :----------------- | | H1 2023 | 16.1% | | H1 2022 | 18.0% | - Unrecognized tax benefits increased from $1,680 thousand at January 1, 2023, to $1,752 thousand at June 30, 2023[55] - The Indian subsidiary is contesting a service tax inquiry for July 2012-November 2016, potentially subject to 12.36%-15% tax on $57.0 million revenue, plus interest and penalties[56] 6. Operating Leases The company has various operating lease agreements for its offices and service delivery centers, with total rent expense decreasing in both the three and six-month periods ended June 30, 2023, compared to 2022 Total Rent Expense (in thousands) | Period | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :----- | :------ | :------ | :------ | :------ | | Total rent expense | $395 | $481 | $799 | $974 | - Weighted-average remaining lease term is 47 months, and the weighted-average discount rate is 9.13% as of June 30, 2023[60] 7. Long-term obligations Total long-term obligations increased from December 31, 2022, to June 30, 2023, primarily due to higher pension obligations and the acquisition of Microsoft licenses | Obligation Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Pension obligations - accrued pension liability | $6,431 | $5,906 | | Settlement agreement | $0 | $50 | | Microsoft licenses | $1,082 | $0 | | Total long-term obligations | $7,513 | $5,956 | - The company renewed a vendor agreement for Microsoft software licenses, technical support, and upgrades through February 2026, with approximately $0.4 million in annual payments[61] 8. Commitments and Contingencies The company is involved in a significant legal proceeding in the Philippines with a potential payment of $5.9 million plus interest, which is currently enjoined in the US. Other legal claims exist, with potential adverse outcomes estimated at $450,000 beyond recorded amounts - A 2008 judgment in the Philippines against a former subsidiary and Innodata Inc. for approximately $5.9 million plus interest (12% until June 2013, then 6% per annum) is currently enjoined from enforcement in the US by a preliminary injunction[62] - The company is subject to various other legal proceedings and claims in the ordinary course of business[63] - Potential adverse outcomes from legal proceedings could reach approximately $450,000 in the aggregate beyond recorded amounts[65] 9. Stock Options and Restricted Stock Units Stock-based compensation expense remained stable. The company has outstanding stock options under the 2013 and 2021 plans, with a significant number exercised in H1 2023. Restricted Stock Units (RSUs) were granted, with vesting contingent on employment and financial goals Total Stock-based Compensation Expense (in thousands) | Period | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :----- | :------ | :------ | :------ | :------ | | Total stock-based compensation | $1,019 | $1,028 | $1,981 | $1,565 | - As of June 30, 2023, 5,767,840 stock options were outstanding under the 2013 Plan (weighted-average exercise price of $3.16) and 960,500 options under the 2021 Plan (weighted-average exercise price of $3.38)[67][72] - During the six months ended June 30, 2023, a total of 896,884 options were exercised at an average price of $2.50[74] - As of June 30, 2023, 728,804 unvested Restricted Stock Units (RSUs) were outstanding, with approximately $3.0 million in related compensation cost yet to be recognized over a weighted-average period of 20 months[76][78] 10. Comprehensive loss Accumulated other comprehensive loss decreased from December 31, 2022, to June 30, 2023, primarily due to positive foreign currency translation adjustments and changes in the fair value of derivatives - Accumulated other comprehensive loss decreased from $(2,108) thousand at January 1, 2023, to $(1,459) thousand at June 30, 2023[79] - Foreign currency translation adjustment contributed $127 thousand in income for H1 2023, a positive change from a $(626) thousand loss in H1 2022[15] - Change in fair value of derivatives, net of taxes, contributed $531 thousand in income for H1 2023, a positive change from a $(536) thousand loss in H1 2022[15] 11. Segment reporting and concentrations The company operates in three segments: Digital Data Solutions (DDS), Synodex, and Agility. Total revenues decreased for both the three and six-month periods, with DDS declining while Synodex and Agility grew. Non-U.S. customers represent a significant portion of revenues and accounts receivable Segment Revenues (in thousands) | Segment | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :------ | :------ | :------ | :------ | :------ | | DDS | $13,180 | $14,181 | $25,927 | $30,092 | | Synodex | $2,112 | $1,945 | $3,976 | $3,614 | | Agility | $4,363 | $3,861 | $8,591 | $7,473 | | Total Consolidated | $19,655 | $19,987 | $38,494 | $41,179 | Segment Operating Profit (Loss) before income taxes (in thousands) | Segment | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :------ | :------ | :------ | :------ | :------ | | DDS | $(216) | $(72) | $(497) | $1,381 | | Synodex | $(22) | $(831) | $(133) | $(1,819) | | Agility | $(389) | $(2,378) | $(1,892) | $(5,258) | | Total Consolidated | $(627) | $(3,281) | $(2,522) | $(5,696) | - For Q2 2023, one DDS customer generated approximately 10% of total revenues. For H1 2023, two DDS customers generated approximately 10.7% and 10.6% of total revenues, respectively[92][93] - Revenues from non-U.S. customers accounted for 44% of total revenues in Q2 2023 (up from 38% in Q2 2022) and 42% in H1 2023 (up from 38% in H1 2022)[92][93] - As of June 30, 2023, approximately 49% of accounts receivable was due from foreign (principally European) customers, and 25% was due from two customers[94] 12. Loss Per Share Basic and diluted loss per share improved for both the three and six-month periods ended June 30, 2023, compared to 2022. Options to purchase 6.7 million shares were anti-dilutive and excluded from diluted EPS calculation | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to Innodata Inc. and Subsidiaries (in thousands) | $815 | $3,833 | $2,931 | $6,648 | | Weighted average common shares outstanding (in thousands) | 27,860 | 27,226 | 27,661 | 27,192 | | Basic and Diluted Loss per share | $(0.03) | $(0.14) | $(0.11) | $(0.24) | - Options to purchase 6.7 million shares of common stock were outstanding but not included in the computation of diluted loss per share because their effect would have been anti-dilutive[98] 13. Derivatives The company uses foreign currency forward contracts to hedge exposure to foreign currency fluctuations, primarily in operating costs. These derivatives are designated as cash flow hedges, with changes in fair value recorded in OCI and reclassified to direct operating costs upon settlement - The company's policy is to enter derivative instrument contracts with terms up to 12 months to hedge foreign currency exposures, particularly where revenue and expenses are in different currencies (e.g., Philippines, India, Sri Lanka, Israel)[99][100][101] - The total notional amount for outstanding derivatives designated as hedges was $10.9 million as of June 30, 2023, down from $14.2 million as of December 31, 2022[102] Effect of Foreign Currency Forward Contracts on OCI (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Net gain (loss) recognized in OCI | $2 | $(744) | $244 | $(822) | | Loss reclassified from accumulated OCI into income | $106 | $203 | $287 | $286 | 14. Line of Credit The company entered into a secured revolving line of credit with Wells Fargo Bank for up to $10.0 million, maturing in April 2026. The borrowing base was $2.9 million as of June 30, 2023, and the facility was not utilized during Q2 2023 - On April 4, 2023, the company entered into a secured revolving line of credit with Wells Fargo Bank for up to $10.0 million, maturing on April 4, 2026[105] - The borrowing base for the Revolving Credit Facility was approximately $2.9 million as of June 30, 2023[105] - The company did not utilize the Revolving Credit Facility during the three-month period ended June 30, 2023[105] - The Credit Agreement contains a financial covenant requiring the company to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023[105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including a business overview, analysis of financial performance for the three and six months ended June 30, 2023, liquidity and capital resources, and critical accounting policies Business Overview Innodata is a data engineering company focused on ethical, high-performing AI, offering AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms (Synodex for medical records, Agility PR Solutions for public relations). Its capabilities are built on 30 years of data expertise and R&D in applied AI - Innodata's mission is to help companies deliver ethical, high-performing artificial intelligence (AI)[116] - Core offerings include AI Data Preparation (collecting, creating, annotating training data, training AI algorithms), AI Model Deployment and Integration (developing custom AI models, fine-tuning models, data engineering support), and AI-Enabled Industry Platforms (SaaS and managed services like Synodex for medical records and Agility PR Solutions)[121][122][124][127][128] - The company's operations are classified into three reporting segments: Digital Data Solutions (DDS), Synodex, and Agility[129] Prevailing Economic Conditions and Seasonality The company believes it has sufficient liquidity for the next 12 months. Operating results are subject to quarterly fluctuations due to project changes and seasonal factors, particularly in the fourth quarter due to holidays and in the Synodex segment due to life insurance application volumes. New customer acquisition is a key indicator, with a focus on revenue value over sheer numbers - The company believes existing cash and cash equivalents provide sufficient liquidity for at least the next 12 months[130] - Quarterly operating results fluctuate due to project changes, start-up delays, and inability to replace completed projects. Fourth-quarter margins are typically reduced by higher wages due to Asian holidays[131] - The Synodex segment experiences seasonal fluctuations, with lowest revenue in Q3 and highest in Q4, linked to life insurance applications[132] - In H1 2023, the company added 235 new customers (average 118/quarter), a 26% increase over 2021 but a 6% decrease from 2022, with a strategic emphasis on acquiring customers with higher potential revenue value[133] Non-GAAP Financial Measures The company provides non-GAAP financial measures, Adjusted Gross Profit and Adjusted EBITDA, to offer greater transparency into core operating performance, believing they assist investors in period-to-period comparisons - Non-GAAP financial measures (Adjusted Gross Profit, Adjusted EBITDA) are provided to assist investors in making period-to-period operating result comparisons and offer greater transparency into core operating performance[136][137] - Adjusted Gross Profit is defined as revenues less direct operating costs, adjusted for depreciation and amortization of intangible assets, stock-based compensation, non-recurring severance, and other one-time costs[138] - Adjusted EBITDA is defined as net income (loss) attributable to Innodata Inc. and its subsidiaries before interest expense, income taxes, depreciation and amortization of intangible assets, plus additional adjustments for loss on impairment, stock-based compensation, non-controlling interests, non-recurring severance, and other one-time costs[143] Adjusted Gross Profit and Adjusted Gross Margin Consolidated Adjusted Gross Profit increased slightly for Q2 2023, and Adjusted Gross Margin remained stable for H1 2023. Segment-wise, Synodex showed significant improvement in Adjusted Gross Profit and Margin, while DDS saw a decrease Adjusted Gross Profit and Margin (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Consolidated | | | | | | Adjusted Gross Profit | $8,126 | $7,975 | $15,546 | $16,642 | | Adjusted Gross Margin | 41% | 40% | 40% | 40% | | DDS Segment | | | | | | Adjusted Gross Profit | $4,688 | $5,348 | $9,126 | $12,134 | | Adjusted Gross Margin | 36% | 38% | 35% | 40% | | Synodex Segment | | | | | | Adjusted Gross Profit | $457 | $66 | $822 | $(123) | | Adjusted Gross Margin | 22% | 3% | 21% | (3)% | | Agility Segment | | | | | | Adjusted Gross Profit | $2,981 | $2,561 | $5,598 | $4,631 | | Adjusted Gross Margin | 68% | 66% | 65% | 62% | Adjusted EBITDA Consolidated Adjusted EBITDA significantly improved, turning from a loss in 2022 to a profit in 2023 for both the three and six-month periods. All segments showed improved Adjusted EBITDA, with Synodex and Agility moving from losses to positive or reduced losses Adjusted EBITDA (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Consolidated | | | | | | Adjusted EBITDA (loss) | $1,583 | $(1,303) | $2,413 | $(2,305) | | DDS Segment | | | | | | Adjusted EBITDA | $792 | $602 | $1,524 | $2,496 | | Synodex Segment | | | | | | Adjusted EBITDA (loss) | $342 | $(359) | $582 | $(1,128) | | Agility Segment | | | | | | Adjusted EBITDA (loss) | $449 | $(1,546) | $307 | $(3,673) | Results of Operations This section details the financial performance for the three and six months ended June 30, 2023, compared to the same periods in 2022, analyzing revenues, operating costs, gross profit, selling and administrative expenses, income taxes, net income (loss), and non-GAAP adjusted metrics across the company's segments Three Months Ended June 30, 2023 and 2022 For Q2 2023, total revenues slightly decreased, but net loss significantly improved due to lower operating costs and expenses across all segments, particularly in selling and administrative expenses Revenues Total revenues decreased slightly by 1% for Q2 2023. DDS segment revenues declined by 7%, while Synodex and Agility segments grew by 11% and 13% respectively | Segment | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (in thousands) | Change (%) | | :------ | :--------------------- | :--------------------- | :-------------------- | :--------- | | Total Revenues | $19,655 | $19,987 | $(332) | -1% | | DDS | $13,180 | $14,181 | $(1,001) | -7% | | Synodex | $2,112 | $1,945 | $167 | +11% | | Agility | $4,363 | $3,861 | $502 | +13% | Direct Operating Costs Total direct operating costs decreased by 2% for Q2 2023, primarily due to headcount reductions and cost optimization efforts, despite unfavorable foreign exchange impacts and higher content/depreciation costs - Total direct operating costs decreased by $0.3 million (2%) to $12.7 million in Q2 2023 from $13.0 million in Q2 2022[153] - The decrease was driven by $1.6 million lower labor costs (headcount reductions), partially offset by $0.7 million unfavorable foreign exchange, $0.3 million higher content costs, and $0.2 million higher depreciation/amortization[153] - Direct operating costs as a percentage of total revenues decreased from 65% to 64%[153] - Synodex segment direct operating costs decreased by 18%, improving its percentage of segment revenues from 116% to 86%[155] Gross Profit and Gross Margin Consolidated gross profit slightly decreased, but gross margin remained stable at 35% for Q2 2023. Synodex segment showed a significant increase in gross profit and margin, turning from a loss to a profit | Segment | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | | Total Gross Profit | $6,940 | $7,000 | $(60) | | Total Gross Margin | 35% | 35% | 0% | | DDS Gross Profit | $4,398 | $5,300 | $(902) | | DDS Gross Margin | 33% | 37% | -4% | | Synodex Gross Profit (Loss) | $295 | $(200) | $495 | | Synodex Gross Margin | 14% | (11)% | +25% | | Agility Gross Profit | $2,247 | $1,900 | $347 | | Agility Gross Margin | 52% | 50% | +2% | Selling and Administrative Expenses Total selling and administrative expenses decreased significantly by 26% for Q2 2023, primarily due to cost optimization efforts, including headcount reductions and lower marketing expenses across all segments - Total selling and administrative expenses decreased by $2.7 million (26%) to $7.6 million in Q2 2023 from $10.3 million in Q2 2022[162] - The decrease was driven by $2.0 million lower labor costs, $0.5 million lower marketing expenses, and $0.2 million lower recruitment and professional fees[162] - As a percentage of total revenues, selling and administrative expenses decreased from 52% to 39%[162] - Synodex S&A expenses decreased by 60%, from 26% to 9% of segment revenues, and Agility S&A expenses decreased by 40%, from 110% to 60% of segment revenues[164][165] Income Taxes Provision for income taxes decreased for Q2 2023, primarily consisting of foreign taxes, with effective rates disproportionate due to losses in certain subsidiaries and valuation allowances - Provision for income taxes was $0.2 million for Q2 2023, down from $0.6 million for Q2 2022[167] - Effective income tax rates are disproportionate due to losses incurred by U.S., Canadian, and European subsidiaries, and a valuation allowance on their deferred taxes[168] Net Income (Loss) Consolidated net loss significantly improved by $3.0 million for Q2 2023, driven by lower operating costs and higher revenues in Synodex and Agility segments - Consolidated net loss was $(0.8) million for Q2 2023, a $3.0 million improvement from $(3.8) million in Q2 2022[169] - Synodex segment net income was $0.1 million for Q2 2023, an $0.8 million change from a $(0.7) million loss in Q2 2022[170] - Agility segment net loss was $(0.3) million for Q2 2023, a $2.2 million change from a $(2.5) million loss in Q2 2022[170] Adjusted Gross Profit and Margin Consolidated Adjusted Gross Profit slightly increased for Q2 2023, and Adjusted Gross Margin improved by 1 percentage point. Synodex segment showed a substantial increase in Adjusted Gross Profit and Margin | Segment | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | :--------- | | Consolidated Adjusted Gross Profit | $8,126 | $7,975 | $151 | +1.9% | | Consolidated Adjusted Gross Margin | 41% | 40% | +1% | | | Synodex Adjusted Gross Profit | $457 | $66 | $391 | +592% | | Synodex Adjusted Gross Margin | 22% | 3% | +19% | | Adjusted EBITDA Consolidated Adjusted EBITDA significantly improved, turning from a loss of $1.3 million in Q2 2022 to a profit of $1.6 million in Q2 2023. All segments showed improved Adjusted EBITDA | Segment | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | | Consolidated Adjusted EBITDA (loss) | $1,583 | $(1,303) | +$2,886 | | DDS Adjusted EBITDA | $792 | $602 | +$190 | | Synodex Adjusted EBITDA (loss) | $342 | $(359) | +$701 | | Agility Adjusted EBITDA (loss) | $449 | $(1,546) | +$1,995 | Six Months Ended June 30, 2023 and 2022 For H1 2023, total revenues decreased by 7%, but the company significantly reduced its net loss by $3.7 million, primarily due to substantial reductions in operating costs and expenses across all segments Revenues Total revenues decreased by 7% for H1 2023. DDS segment revenues declined by 14%, while Synodex and Agility segments grew by 11% and 15% respectively | Segment | H1 2023 (in thousands) | H1 2022 (in thousands) | Change (in thousands) | Change (%) | | :------ | :--------------------- | :--------------------- | :-------------------- | :--------- | | Total Revenues | $38,494 | $41,179 | $(2,685) | -7% | | DDS | $25,927 | $30,092 | $(4,165) | -14% | | Synodex | $3,976 | $3,614 | $362 | +11% | | Agility | $8,591 | $7,473 | $1,118 | +15% | Direct Operating Costs Total direct operating costs decreased by 3% for H1 2023, driven by lower labor costs from headcount reductions and cost optimization, partially offset by unfavorable foreign exchange impacts and higher content/depreciation costs - Total direct operating costs decreased by $0.8 million (3%) to $25.6 million in H1 2023 from $26.4 million in H1 2022[189] - The decrease was driven by $3.4 million lower labor costs (headcount reductions), partially offset by $1.5 million unfavorable foreign exchange, $0.4 million higher depreciation/amortization, and $0.3 million higher content costs[189] - Direct operating costs as a percentage of total revenues increased from 64% to 66%[189] - Synodex segment direct operating costs decreased by 13%, improving its percentage of segment revenues from 111% to 88%[191] Gross Profit and Gross Margin Consolidated gross profit decreased by $1.9 million for H1 2023, and gross margin decreased by 2 percentage points. Synodex segment showed a significant increase in gross profit and margin, turning from a loss to a profit | Segment | H1 2023 (in thousands) | H1 2022 (in thousands) | Change (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | | Total Gross Profit | $12,905 | $14,773 | $(1,868) | | Total Gross Margin | 34% | 36% | -2% | | DDS Gross Profit | $8,557 | $11,824 | $(3,267) | | DDS Gross Margin | 33% | 39% | -6% | | Synodex Gross Profit (Loss) | $498 | $(435) | $933 | | Synodex Gross Margin | 13% | (12)% | +25% | | Agility Gross Profit | $3,850 | $3,384 | $466 | | Agility Gross Margin | 45% | 45% | 0% | Selling and Administrative Expenses Total selling and administrative expenses decreased significantly by 25% for H1 2023, primarily due to cost optimization efforts, including lower labor, recruitment, and marketing expenses across all segments - Total selling and administrative expenses decreased by $5.1 million (25%) to $15.4 million in H1 2023 from $20.5 million in H1 2022[200] - The decrease was driven by $2.9 million lower labor costs, $1.2 million lower recruitment and professional fees, and $1.0 million lower marketing expenses[200] - As a percentage of total revenues, selling and administrative expenses decreased from 50% to 40%[200] - Synodex S&A expenses decreased by 64%, from 31% to 10% of segment revenues, and Agility S&A expenses decreased by 34%, from 115% to 66% of segment revenues[202][203] Income Taxes Provision for income taxes decreased for H1 2023, primarily consisting of foreign taxes, with effective rates disproportionate due to losses in certain subsidiaries and valuation allowances - Provision for income taxes was $0.4 million for H1 2023, down from $1.0 million for H1 2022[204] - Effective income tax rates are disproportionate due to losses incurred by U.S. and Canadian subsidiaries, and a valuation allowance on their deferred taxes[205] Net Income (Loss) Consolidated net loss significantly improved by $3.7 million for H1 2023, driven by lower operating costs and higher revenues in Synodex and Agility segments - Consolidated net loss was $(2.9) million for H1 2023, a $3.7 million improvement from $(6.6) million in H1 2022[206] - DDS segment net loss was $(1.2) million for H1 2023, a $1.3 million change from a $0.1 million net income in H1 2022[207] - Synodex segment net income was $0.1 million for H1 2023, a $1.5 million change from a $(1.4) million loss in H1 2022[208] - Agility segment net loss was $(1.8) million for H1 2023, a $3.5 million change from a $(5.3) million loss in H1 2022[209] Adjusted Gross Profit and Margin Consolidated Adjusted Gross Profit slightly decreased for H1 2023, but Adjusted Gross Margin remained stable at 40%. Synodex segment showed a substantial increase in Adjusted Gross Profit and Margin | Segment | H1 2023 (in thousands) | H1 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | :--------- | | Consolidated Adjusted Gross Profit | $15,546 | $16,642 | $(1,096) | -6.6% | | Consolidated Adjusted Gross Margin | 40% | 40% | 0% | | | DDS Adjusted Gross Profit | $9,126 | $12,134 | $(3,008) | -24.8% | | DDS Adjusted Gross Margin | 35% | 40% | -5% | | | Synodex Adjusted Gross Profit (loss) | $822 | $(123) | $945 | +768% | | Synodex Adjusted Gross Margin | 21% | (3)% | +24% | | | Agility Adjusted Gross Profit | $5,598 | $4,631 | $967 | +20.9% | | Agility Adjusted Gross Margin | 65% | 62% | +3% | | Adjusted EBITDA Consolidated Adjusted EBITDA significantly improved, turning from a loss of $2.3 million in H1 2022 to a profit of $2.4 million in H1 2023. All segments showed improved Adjusted EBITDA | Segment | H1 2023 (in thousands) | H1 2022 (in thousands) | Change (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | | Consolidated Adjusted EBITDA (loss) | $2,413 | $(2,305) | +$4,718 | | DDS Adjusted EBITDA | $1,524 | $2,496 | $(972) | | Synodex Adjusted EBITDA (loss) | $582 | $(1,128) | +$1,710 | | Agility Adjusted EBITDA (loss) | $307 | $(3,673) | +$3,980 | Liquidity and Capital Resources The company's cash and cash equivalents increased, and working capital improved. It believes existing liquidity is sufficient for the next 12 months and has a $10.0 million revolving credit facility, which was unutilized in Q2 2023. Operating activities generated cash, while investing activities used cash for capital expenditures | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $13,652 | $9,792 | | Working capital | $4,481 | $2,869 | - The company believes its existing cash and cash equivalents and internally generated funds will provide sufficient liquidity for at least the next 12 months[223] - Net cash provided by operating activities was $4.2 million for H1 2023, a significant improvement from $3.9 million used in H1 2022[225][226] - Net cash used in investing activities was $2.5 million for H1 2023, primarily for capital expenditures of $3.0 million[227] - Net cash provided by financing activities was $2.0 million for H1 2023, mainly from proceeds of stock option exercises[229][230] - A $10.0 million secured revolving line of credit with Wells Fargo Bank was available but not utilized during Q2 2023[224] Critical Accounting Policies and Estimates The company's financial statements rely on estimates and judgments for various items, including revenue recognition, allowances, asset valuations, deferred taxes, stock-based compensation, litigation, and derivatives. These estimates are subject to inherent uncertainty, and actual results may differ materially - The preparation of condensed consolidated financial statements requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenues, and expenses[231] - Significant estimates include those related to revenue recognition, allowance for doubtful accounts, useful life of long-lived and intangible assets, impairment of goodwill, valuation of deferred tax assets, stock-based compensation, litigation accruals, pension benefits, and valuation of derivative instruments[231] - Estimates are based on historical and anticipated results, trends, and assumptions, but actual results could differ significantly and have a material adverse effect[231] Off-Balance Sheet Arrangements The company reported no off-balance sheet arrangements - The company has no off-balance sheet arrangements[233] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for smaller reporting companies - This item is not applicable for smaller reporting companies[234] Item 4. Controls and Procedures The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023. No material changes in internal control over financial reporting occurred during the six months ended June 30, 2023 - The company's disclosure controls and procedures were effective as of June 30, 2023, based on an evaluation by management, including the principal executive officer and principal financial officer[236] - There have been no material changes in the company's internal control over financial reporting during the six months ended June 30, 2023[237] Part II – Other Information Item 1. Legal Proceedings This section refers to Note 8 of the financial statements for detailed information on legal proceedings, which includes a significant Philippine litigation case - Information regarding legal proceedings is incorporated by reference from Note 8, Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements[238] Item 1A. Risk Factors The company operates in highly competitive markets, with significant investments in new AI capabilities that may not yield expected returns. International operations expose the company to various risks, including economic factors, tax demands, and currency fluctuations. The revolving credit facility's variable interest rate and restrictive covenants also pose risks - The markets for the company's services, platforms, and solutions are highly competitive, with few barriers to entry and competition from in-house personnel[240] - Significant investments in new AI capabilities, such as large language models, increase costs and may reduce profitability if expected revenues or profit margins are not achieved[241] - International operations in countries like the Philippines, India, Sri Lanka, Canada, the UK, Israel, and Germany expose the company to risks including adverse economic factors, discretionary tax demands, staffing difficulties, trade restrictions, currency controls, data privacy laws, AI regulation, labor disputes, and limitations on repatriation of earnings[242][252] - Debt under the Revolving Credit Facility has a variable interest rate based on SOFR, which may increase borrowing costs, and the facility contains restrictive covenants (e.g., fixed charge coverage ratio of 1.10 to 1.00 by December 31, 2023) that could impair business operations or lead to default[246][247] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or repurchases of equity securities during the three months ended June 30, 2023 - No unregistered sales of equity securities or repurchases of equity securities occurred during the three months ended June 30, 2023[248] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[249] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures were reported[250] Item 5. Other Information The company reported no other information - No other information was reported[251] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including credit agreements, security agreements, guaranties, and certifications - Exhibits include the Credit Agreement, Security Agreement, and Guaranty dated April 4, 2023, with Wells Fargo Bank[254] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed/furnished[254][255] - The financial statements are formatted in Extensible Business Reporting Language (XBRL)[254] Signatures The report is signed by Jack S. Abuhoff, Chief Executive Officer and President, and Marissa B. Espineli, Interim Chief Financial Officer, on August 10, 2023 - The report was signed on August 10, 2023, by Jack S. Abuhoff, Chief Executive Officer and President, and Marissa B. Espineli, Interim Chief Financial Officer[258]