UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the quarterly period ended September 30, | ||
| OR | ||
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________
Commission file number:001-35774
INNODATA INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3475943 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 55 Challenger Road | 07660 | |
| Ridgefield Park, New Jersey | (Zip Code) | |
| (Address of principal executive offices) |
(201) 371-8000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | INOD | NASDAQ |
| Preferred Stock Purchase Right | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company x Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨No x
The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of October 31, 2019November 4, 2020 was 25,527,679.24,742,692.
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 20192020
INDEX
Part I. Financial InformationFINANCIAL INFORMATION
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 13,188 | $ | 10,869 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $800 and $1,000, respectively | 8,297 | 10,626 | ||||||
| Prepaid expenses and other current assets | 4,829 | 5,778 | ||||||
| Total current assets | 26,314 | 27,273 | ||||||
| Property and equipment, net | 7,074 | 6,813 | ||||||
| Right-of-use asset | 7,271 | - | ||||||
| Other assets | 2,075 | 2,436 | ||||||
| Deferred income taxes | 1,759 | 1,204 | ||||||
| Intangibles, net | 5,597 | 6,275 | ||||||
| Goodwill | 2,062 | 2,050 | ||||||
| Total assets | $ | 52,152 | $ | 46,051 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,111 | $ | 1,834 | ||||
| Accrued expenses | 2,983 | 2,903 | ||||||
| Accrued salaries, wages and related benefits | 4,479 | 4,494 | ||||||
| Income and other taxes | 4,215 | 3,532 | ||||||
| Long-term obligations - current portion | 699 | 1,529 | ||||||
| Operating lease liability - current portion | 1,149 | - | ||||||
| Total current liabilities | 15,636 | 14,292 | ||||||
| Deferred income taxes | 528 | 571 | ||||||
| Long-term obligations, net of current portion | 3,086 | 4,062 | ||||||
| Operating lease liability, net of current portion | 6,949 | - | ||||||
| Non-controlling interests | (3,450 | ) | (3,440 | ) | ||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Series preferred stock; 5,000,000 shares authorized, none outstanding | - | - | ||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 27,633,000 shares issued and 25,918,000 outstanding at September 30, 2019; 27,558,000 shares issued and 25,877,000 outstanding at December 31, 2018 | 275 | 275 | ||||||
| Additional paid-in capital | 28,203 | 27,579 | ||||||
| Retained earnings | 5,689 | 7,349 | ||||||
| Accumulated other comprehensive loss | (98 | ) | (15 | ) | ||||
| 34,069 | 35,188 | |||||||
| Less: Treasury stock, 1,715,000 shares at September 30, 2019 and 1,681,000 shares at December 31, 2018 at cost | (4,666 | ) | (4,622 | ) | ||||
| Total stockholders’ equity | 29,403 | 30,566 | ||||||
| Total liabilities and stockholders’ equity | $ | 52,152 | $ | 46,051 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 15,336 | $ | 10,874 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $500 and $750, respectively | 8,843 | 9,723 | ||||||
| Prepaid expenses and other current assets | 4,112 | 3,407 | ||||||
| Total current assets | 28,291 | 24,004 | ||||||
| Property and equipment, net | 6,943 | 6,887 | ||||||
| Right-of-use assets | 6,923 | 7,005 | ||||||
| Other assets | 2,838 | 2,110 | ||||||
| Deferred income taxes | 2,232 | 1,906 | ||||||
| Intangibles, net | 4,702 | 5,477 | ||||||
| Goodwill | 2,069 | 2,108 | ||||||
| Total assets | $ | 53,998 | $ | 49,497 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,765 | $ | 1,419 | ||||
| Accrued expenses and other | 3,612 | 3,340 | ||||||
| Accrued salaries, wages and related benefits | 5,995 | 4,265 | ||||||
| Income and other taxes | 4,949 | 4,183 | ||||||
| Long-term obligations - current portion | 1,958 | 1,440 | ||||||
| Operating lease liability - current portion | 967 | 1,107 | ||||||
| Total current liabilities | 19,246 | 15,754 | ||||||
| Deferred income taxes | 343 | 363 | ||||||
| Long-term obligations, net of current portion | 5,421 | 4,534 | ||||||
| Operating lease liability, net of current portion | 6,691 | 6,731 | ||||||
| Total liabilities | 31,701 | 27,382 | ||||||
| Commitments and contingencies | - | - | ||||||
| Non-controlling interests | (3,392 | ) | (3,417 | ) | ||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Serial preferred stock; 4,998,000 shares authorized, none outstanding | - | - | ||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 27,921,000 shares issued and 24,737,000 outstanding at September 30, 2020; 27,643,000 shares issued and 24,459,000 outstanding at December 31, 2019 | 278 | 275 | ||||||
| Additional paid-in capital | 29,438 | 28,426 | ||||||
| Retained earnings | 3,648 | 4,216 | ||||||
| Accumulated other comprehensive loss | (1,210 | ) | (920 | ) | ||||
| 32,154 | 31,997 | |||||||
| Less: treasury stock, 3,184,000 shares at September 30, 2020 and December 31, 2019 at cost | (6,465 | ) | (6,465 | ) | ||||
| Total stockholders’ equity | 25,689 | 25,532 | ||||||
| Total liabilities and stockholders’ equity | $ | 53,998 | $ | 49,497 | ||||
See notes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements.
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Revenues | $ | 13,846 | $ | 14,049 | $ | 14,553 | $ | 13,846 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct operating costs | 9,019 | 9,237 | 9,784 | 9,019 | ||||||||||||
| Selling and administrative expenses | 4,951 | 3,640 | 4,582 | 4,945 | ||||||||||||
| Interest expense, net | 13 | 10 | 44 | 27 | ||||||||||||
| 13,983 | 12,887 | 14,410 | 13,991 | |||||||||||||
| Income (loss) before provision for income taxes | (137 | ) | 1,162 | 143 | (145 | ) | ||||||||||
| Provision for income taxes | 421 | 469 | (70 | ) | 421 | |||||||||||
| Consolidated income (loss) | (558 | ) | 693 | |||||||||||||
| Consolidated net income (loss) | 213 | (566 | ) | |||||||||||||
| Income (loss) attributable to non-controlling interests | (3 | ) | 5 | 7 | (3 | ) | ||||||||||
| Income (loss) attributable to Innodata Inc. and Subsidiaries | $ | (555 | ) | $ | 688 | |||||||||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 206 | $ | (563 | ) | |||||||||||
| Income (loss) per share attributable to Innodata Inc. and Subsidiaries: | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | 0.03 | |||||||||||
| Basic | $ | 0.01 | $ | (0.02 | ) | |||||||||||
| Diluted | $ | 0.01 | $ | (0.02 | ) | |||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 25,856 | 25,877 | 24,470 | 25,856 | ||||||||||||
| Diluted | 25,856 | 26,093 | 25,260 | 25,856 | ||||||||||||
| Comprehensive income (loss): | ||||||||||||||||
| Consolidated income (loss) | $ | (558 | ) | $ | 693 | |||||||||||
| Pension liability adjustments, net of taxes | (41 | ) | (57 | ) | ||||||||||||
| Consolidated net income (loss) | $ | 213 | $ | (566 | ) | |||||||||||
| Pension liability adjustment, net of taxes | (1 | ) | (41 | ) | ||||||||||||
| Change in fair value of derivatives, net of taxes | - | 103 | 51 | - | ||||||||||||
| Foreign currency translation adjustment | (252 | ) | 114 | |||||||||||||
| Foreign currency translation adjustment, net of taxes | 216 | (252 | ) | |||||||||||||
| Other comprehensive income (loss) | (293 | ) | 160 | 266 | (293 | ) | ||||||||||
| Total comprehensive income (loss) | (851 | ) | 853 | 479 | (859 | ) | ||||||||||
| Comprehensive income (loss) attributed to non-controlling interest | (3 | ) | 5 | |||||||||||||
| Comprehensive income (loss) attributed to non-controlling interests | 7 | (3 | ) | |||||||||||||
| Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries | $ | (848 | ) | $ | 848 | $ | 472 | $ | (856 | ) | ||||||
See notes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements.
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Revenues | $ | 41,179 | $ | 42,439 | $ | 42,946 | $ | 41,179 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct operating costs | 28,154 | 29,060 | 29,209 | 28,154 | ||||||||||||
| Selling and administrative expenses | 14,166 | 11,223 | 13,663 | 14,154 | ||||||||||||
| Goodwill impairment | - | 675 | ||||||||||||||
| Interest expense, net | 36 | 24 | 113 | 97 | ||||||||||||
| 42,356 | 40,982 | 42,985 | 42,405 | |||||||||||||
| Income (loss) before provision for income taxes | (1,177 | ) | 1,457 | |||||||||||||
| Loss before provision for income taxes | (39 | ) | (1,226 | ) | ||||||||||||
| Provision for income taxes | 493 | 1,502 | 504 | 493 | ||||||||||||
| Consolidated net loss | (1,670 | ) | (45 | ) | (543 | ) | (1,719 | ) | ||||||||
| Income (loss) attributable to non-controlling interests | (10 | ) | 1 | 25 | (10 | ) | ||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | $ | (1,660 | ) | $ | (46 | ) | $ | (568 | ) | $ | (1,709 | ) | ||||
| Loss per share attributable to Innodata Inc. and Subsidiaries: | ||||||||||||||||
| Basic and diluted | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.07 | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic and diluted | 25,870 | 25,877 | 24,427 | 25,870 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Consolidated net loss | $ | (1,670 | ) | $ | (45 | ) | $ | (543 | ) | $ | (1,719 | ) | ||||
| Pension liability adjustment, net of taxes | (118 | ) | (174 | ) | 24 | (118 | ) | |||||||||
| Change in fair value of derivatives, net of taxes | - | (489 | ) | (33 | ) | - | ||||||||||
| Foreign currency translation adjustment | 35 | (251 | ) | |||||||||||||
| Foreign currency translation adjustment, net of taxes | (281 | ) | 35 | |||||||||||||
| Other comprehensive loss | (83 | ) | (914 | ) | (290 | ) | (83 | ) | ||||||||
| Total comprehensive loss | (1,753 | ) | (959 | ) | (833 | ) | (1,802 | ) | ||||||||
| Comprehensive income (loss) attributed to non-controlling interest | (10 | ) | 1 | |||||||||||||
| Comprehensive income (loss) attributed to non-controlling interests | 25 | (10 | ) | |||||||||||||
| Comprehensive loss attributable to Innodata Inc. and Subsidiaries | $ | (1,743 | ) | $ | (960 | ) | $ | (858 | ) | $ | (1,792 | ) | ||||
See notes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Consolidated net loss | $ | (1,670 | ) | $ | (45 | ) | ||
| Adjustments to reconcile consolidated net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,248 | 2,558 | ||||||
| Goodwill impairment | - | 675 | ||||||
| Stock-based compensation | 624 | 539 | ||||||
| Deferred income taxes | (607 | ) | 285 | |||||
| Pension cost | 274 | (15 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,509 | 1,053 | ||||||
| Prepaid expenses and other current assets | 752 | (1,960 | ) | |||||
| Other assets | 367 | 656 | ||||||
| Accounts payable and accrued expenses | (208 | ) | (902 | ) | ||||
| Accrued salaries, wages and related benefits | (29 | ) | (757 | ) | ||||
| Income and other taxes | 669 | 1,919 | ||||||
| Net cash provided by operating activities | 4,929 | 4,006 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (1,393 | ) | (1,700 | ) | ||||
| Net cash used in investing activities | (1,393 | ) | (1,700 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of long-term obligations | (881 | ) | (1,792 | ) | ||||
| Purchase of treasury stock | (44 | ) | - | |||||
| Net cash used in financing activities | (925 | ) | (1,792 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (292 | ) | (31 | ) | ||||
| Net increase in cash and cash equivalents | 2,319 | 483 | ||||||
| Cash and cash equivalents, beginning of period | 10,869 | 11,407 | ||||||
| Cash and cash equivalents, end of period | $ | 13,188 | $ | 11,890 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 726 | $ | 426 | ||||
| Cash paid for operating leases | $ | 1,673 | $ | 1,951 | ||||
See notes to condensed consolidated financial statements.
4
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury Stock | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Equity | |||||||||||||||||||||||||
| January 1, 2018 | 27,558 | $ | 275 | $ | 27,275 | $ | 7,345 | $ | 846 | 1,681 | $ | (4,622 | ) | $ | 31,119 | |||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (268 | ) | - | - | - | (268 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 140 | - | - | - | - | 140 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (59 | ) | - | - | (59 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (28 | ) | - | - | (28 | ) | ||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | (531 | ) | - | - | (531 | ) | ||||||||||||||||||||||
| March 31, 2018 | 27,558 | 275 | 27,415 | 7,077 | 228 | 1,681 | (4,622 | ) | 30,373 | |||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (466 | ) | - | - | - | (466 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 131 | - | - | - | - | 131 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (58 | ) | - | - | (58 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (337 | ) | - | - | (337 | ) | ||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | (61 | ) | - | - | (61 | ) | ||||||||||||||||||||||
| June 30, 2018 | 27,558 | 275 | 27,546 | 6,611 | (228 | ) | 1,681 | (4,622 | ) | 29,582 | ||||||||||||||||||||||
| Net income attributable to Innodata Inc. and Subsidiaries | - | - | - | 688 | - | - | - | 688 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 268 | - | - | - | - | 268 | ||||||||||||||||||||||||
| Acquisition of non-controlling interest | - | - | (492 | ) | - | - | - | - | (492 | ) | ||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (57 | ) | - | - | (57 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 114 | - | - | 114 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 103 | - | - | 103 | ||||||||||||||||||||||||
| September 30, 2018 | 27,558 | $ | 275 | $ | 27,322 | $ | 7,299 | $ | (68 | ) | 1,681 | $ | (4,622 | ) | $ | 30,206 | ||||||||||||||||
| January 1, 2019 | 27,558 | $ | 275 | $ | 27,579 | $ | 7,349 | $ | (15 | ) | 1,681 | $ | (4,622 | ) | $ | 30,566 | ||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (452 | ) | - | - | - | (452 | ) | ||||||||||||||||||||||
| Issuance of restricted stock | 75 | - | 5 | - | - | - | - | 5 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 123 | - | - | - | - | 123 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (36 | ) | - | - | (36 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 264 | - | - | 264 | ||||||||||||||||||||||||
| March 31, 2019 | 27,633 | 275 | 27,707 | 6,897 | 213 | 1,681 | (4,622 | ) | 30,470 | |||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (653 | ) | - | - | - | �� | (653 | ) | |||||||||||||||||||||
| Issuance of restricted stock | - | - | 9 | - | - | - | - | 9 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 136 | - | - | - | - | 136 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 23 | - | - | 23 | ||||||||||||||||||||||||
| June 30, 2019 | 27,633 | 275 | 27,852 | 6,244 | 195 | 1,681 | (4,622 | ) | 29,944 | |||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (555 | ) | - | - | - | (555 | ) | ||||||||||||||||||||||
| Issuance of restricted stock | - | - | 9 | - | - | - | - | 9 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 34 | (44 | ) | (44 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 342 | - | - | - | - | 342 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (252 | ) | - | - | (252 | ) | ||||||||||||||||||||||
| September 30, 2019 | 27,633 | $ | 275 | $ | 28,203 | $ | 5,689 | $ | (98 | ) | 1,715 | $ | (4,666 | ) | $ | 29,403 | ||||||||||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Consolidated net loss | $ | (543 | ) | $ | (1,719 | ) | ||
| Adjustments to reconcile consolidated net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,720 | 2,106 | ||||||
| Stock-based compensation | 700 | 624 | ||||||
| Deferred income taxes | (412 | ) | (607 | ) | ||||
| Pension cost | 596 | 274 | ||||||
| Loss on disposal of property and equipment | 33 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 568 | 2,509 | ||||||
| Prepaid expenses and other current assets | (297 | ) | 904 | |||||
| Other assets | (8 | ) | 367 | |||||
| Accounts payable, accrued expenses and other | 814 | (208 | ) | |||||
| Accrued salaries, wages and related benefits | 1,729 | (29 | ) | |||||
| Income and other taxes | 753 | 669 | ||||||
| Net cash provided by operating activities | 5,653 | 4,890 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (1,115 | ) | (1,314 | ) | ||||
| Proceeds from disposal of property and equipment | 39 | - | ||||||
| Net cash used in investing activities | (1,076 | ) | (1,314 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from bank loan | 580 | - | ||||||
| Payment of long-term obligations | (800 | ) | (922 | ) | ||||
| Proceeds from exercise of stock options | 167 | - | ||||||
| Purchase of treasury stock | - | (44 | ) | |||||
| Net cash used in financing activities | (53 | ) | (966 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (62 | ) | (291 | ) | ||||
| Net increase in cash and cash equivalents | 4,462 | 2,319 | ||||||
| Cash and cash equivalents, beginning of period | 10,874 | 10,869 | ||||||
| Cash and cash equivalents, end of period | $ | 15,336 | $ | 13,188 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 209 | $ | 726 | ||||
| Cash paid for operating leases | $ | 1,412 | $ | 1,909 | ||||
| Vendor financed software licenses acquired | $ | 1,079 | $ | - | ||||
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | |||||||||||||||||||||||||
| January 1, 2019 | 27,558 | $ | 275 | $ | 27,579 | $ | 7,349 | $ | (15 | ) | 1,681 | $ | (4,622 | ) | $ | 30,566 | ||||||||||||||||
| Revision adjustments | - | - | - | (237 | ) | - | - | - | (237 | ) | ||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (452 | ) | - | - | - | (452 | ) | ||||||||||||||||||||||
| Stock-based compensation | 75 | - | 128 | - | - | - | - | 128 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (36 | ) | - | - | (36 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 264 | - | - | 264 | ||||||||||||||||||||||||
| March 31, 2019 | 27,633 | 275 | 27,707 | 6,660 | 213 | 1,681 | (4,622 | ) | 30,233 | |||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (694 | ) | - | - | - | (694 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 145 | - | - | - | - | 145 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 23 | - | - | 23 | ||||||||||||||||||||||||
| June 30, 2019 | 27,633 | 275 | 27,852 | 5,966 | 195 | 1,681 | (4,622 | ) | 29,666 | |||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (563 | ) | - | - | - | (563 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 34 | (44 | ) | (44 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 351 | - | - | - | - | 351 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (41 | ) | - | - | (41 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (252 | ) | - | - | (252 | ) | ||||||||||||||||||||||
| September 30, 2019 | 27,633 | $ | 275 | $ | 28,203 | $ | 5,403 | $ | (98 | ) | 1,715 | $ | (4,666 | ) | $ | 29,117 | ||||||||||||||||
| January 1, 2020 | 27,643 | $ | 275 | $ | 28,426 | $ | 4,216 | $ | (920 | ) | 3,184 | $ | (6,465 | ) | $ | 25,532 | ||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (365 | ) | - | - | - | (365 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 170 | - | - | - | - | 170 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | 14 | - | - | 14 | ||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | (718 | ) | - | - | (718 | ) | ||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | (171 | ) | - | - | (171 | ) | ||||||||||||||||||||||
| March 31, 2020 | 27,643 | 275 | 28,596 | 3,851 | (1,795 | ) | 3,184 | (6,465 | ) | 24,462 | ||||||||||||||||||||||
| Net loss attributable to Innodata Inc. and Subsidiaries | - | - | - | (557 | ) | - | - | - | (557 | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | 298 | - | - | - | - | 298 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | 11 | - | - | 11 | ||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 221 | - | - | 221 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 87 | - | - | 87 | ||||||||||||||||||||||||
| June 30, 2020 | 27,643 | 275 | 28,894 | 3,294 | (1,476 | ) | 3,184 | (6,465 | ) | 24,522 | ||||||||||||||||||||||
| Revision adjustments | - | - | - | 148 | - | - | - | 148 | ||||||||||||||||||||||||
| Net income attributable to Innodata Inc. and Subsidiaries | - | - | - | 206 | - | - | - | 206 | ||||||||||||||||||||||||
| Issuance of shares on stock option exercises | 278 | 3 | 312 | - | - | - | - | 315 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 232 | - | - | - | - | 232 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (1 | ) | - | - | (1 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 216 | - | - | 216 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 51 | - | - | 51 | ||||||||||||||||||||||||
| September 30, 2020 | 27,921 | $ | 278 | $ | 29,438 | $ | 3,648 | $ | (1,210 | ) | 3,184 | $ | (6,465 | ) | $ | 25,689 | ||||||||||||||||
See notes to Condensed Consolidated Financial Statements.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
| 1. |
Description of Business - Innodata Inc. (including its subsidiaries, “we”, the “Company”, or “Innodata”) is a global services and technology company. We combine human expertise with advanced deep learning technologies to power leading information products and enterprise AI (artificial intelligence)/digital transformation.
The Company, founded in 1988 and headquartered in northern New Jersey, features a 3,000-strong global delivery and technology team spanning ten offices globally and a research and technology incubator, Innodata Labs, which focuses on applied machine learning and emerging artificial intelligence. The Company is organized and operates in three different operating segments: the Digital Data Solutions (DDS) segment, the Synodex segment, and the Agility segment.
The Company’s core services are (i) data acquisition, transformation, and enrichment at scale; (ii) digital operations management and analytics; and (iii) applications development. We report our core business as the DDS segment.
The Company also has venture businesses that leverage its core capabilities to provide specific industry solutions. The Company’s Synodex venture business delivers a software-as-a-service (SaaS) platform and managed services for digital transformation of medical data. The Company’s Agility PR Solutions (Agility) venture business delivers a SaaS platform and managed service for delivering news, information, and content to targeted journalists and influencers, as well as monitoring and analyzing coverage across traditional and social media sources. Each venture business is reported as a separate segment.
The Company’s DDS segment specializes in combiningartificial neural networks andhuman expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to adigital product. For enterprises, “useable” means that the content can drivedigital process transformationandartificial intelligence (AI). The Company works with all classes of data, including sensitive and protected data.
The Company also develops digital products for business information companies and digital systems which replace legacy systems and processes.
In 2019, the Company continued to execute a strategy we initiated in 2017 focused on technology differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner, more cost-effective operations.
The Company’s Synodex segment designs and develops new capabilities to enable clients in the insurance and healthcare sectors to transform medical records into useable digital data and to apply technologies to the digital data to augment decision support.
The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support services.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The Company’s Synodex segment operates through the Company’s Innodata Synodex, LLC subsidiary. As of September 30, 2019, Innodata Inc. owned 92.5% of Innodata Synodex, LLC.
The Company’s Agility segment provides public relations (PR) tools and related professional services that enable PR and communications professionals to discover influencers, amplify messages, monitor coverage, and measure the impact of campaigns.
Agility’s software-as-a-service (SaaS) tools include:
Agility’s professional services include:
Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility.
Basis of Presentation- The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) which,that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the Company“Company”, “we”, “our” and “us”) as of September 30, 2019,2020, the results of its operations and comprehensive income (loss)loss for the three and nine months ended September 30, 20192020 and 2018,2019, cash flows for the nine months ended September 30, 20192020 and 2018,2019, and stockholders’ equity for the three and nine months ended September 30, 20192020 and 2018.2019. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Certain information and note disclosures normally included in theor with financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018,2019, included in the Company'sCompany’s 2019 Annual Report on Form 10-K. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the consolidated financial statements for the year ended December 31, 2018.2019.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and the Synodex and docGenix limited liability companies that are majority-owned by the Company. The non-controlling interests in the Synodex and docGenix limited liability companies are accounted for in accordance with Financial Accounting Standards Board (FASB) non-controlling interest guidance. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates- In preparing condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Actual results could differ from those estimates. Significant estimates include those related to allowance for doubtful accounts and billing adjustments, useful life of long-lived assets, useful life of intangible assets, impairment of goodwill, valuation of deferred tax assets, valuation of stock-based compensation, litigation accruals and estimated accruals for various tax exposures.
Revenue Recognition– Commencing January 1, 2018, the Company recognizes revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.- The Company’s revenue is recognized when control of the promised services is transferredare rendered or goods are delivered to a customer, in an amount that reflects the consideration that we expectthe Company expects to receive in exchange for those services or goods as per the agreement with the customer. In casecases where there are agreements with multiple performance obligations, we identifythe Company identifies each performance obligation and evaluateevaluates whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. TheFor agreements with distinct performance obligation, the Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation, if any, and then evaluates how the services are transferred toperformed for the customer to determine the timing of revenue recognition.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
For the DDSDigital Data Solutions (DDS) segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of ourthe Synodex segment revenue is derived from licensing our functional software and providing access to ourthe Company’s hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.
The Agility segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenues from the reseller agreements are recognized at the gross amount received for the goods in accordance with our functioning as a principal due to our meeting the following criteria. We actcriteria: the Company acts as the primary obligor in the sales transaction; assumeassumes the credit risk; setsets the price; can select suppliers; and areis involved in the execution of the services, including after sales service.
Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
The Company considers U.S. GAAP criteria for determining whether to report gross revenue gross as a principal versus net revenue as an agent. Factors considered includeThe Company evaluates whether we are the primary obligor, have risks and rewardsit is in control of ownership, and bear the risk that a customer may not pay for the services performed. If therebefore the same are circumstances wheretransferred to the above criteria are not met and therefore, we are not thecustomer to assess whether it is principal in providing services, amounts received from customers are presented net of paymentsor agent in the condensed consolidated statementsarrangement. Revenues are recognized on a gross basis if the Company is in the capacity of operationsprincipal and comprehensive loss.on a net basis if it falls in the capacity of an agent.
Contract acquisition cost,costs, which isare included in prepaid expenses and other current assets, for ourthe Agility segment is amortized over the term of a subscription agreement that normally has a duration of 12 months or less. The Company reviews these costs on a periodic basis to determine the need to adjust the carrying values for pre-terminated contracts.
Foreign Currency- The functional currency of the Company’s production operations located in the Philippines, India, Sri Lanka and Israel is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees orand Israeli shekels are translated to U.S. dollars at rates using the average rates in effect on the transaction dates.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are prepared in these respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in the condensed consolidated financial statements. Income, expenses and cash flows are translated at weighted average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulatedAccumulated other comprehensive loss in stockholders' equity.the condensed consolidated balance sheets. Foreign exchange transaction gains or losses are included in directDirect operating costs in the accompanying condensed consolidated statements of operations and comprehensive loss.income (loss).
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
To the extent that the currencies of the Company’s production facilities located in the Philippines, India, Sri Lanka and Israel fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain client projects. In addition, the Company is exposed to the risk of foreign currency fluctuationfluctuations on the non-U.S. dollar denominated revenues, and on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in local currency.currencies.
Income Taxes- Deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. While the Company considers future taxable income in assessing the need for the valuation allowance, in the event that the Company determines that it would be able to realize the deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company determines that it would not be able to realize the deferred tax assets in the future considering future taxable income, an adjustment to the deferred tax assets would decrease income in the period such determination was made. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. Unremitted earnings of foreign subsidiaries have been included in the condensed consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States.
In assessing the realizationrealizability of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. and Canadian deferred tax assets will not be realizable. As the expectation of future taxable income resulting from the SynodexU.S. and Agility segmentsCanadian operations cannot be predicted with certainty, the Company maintains a valuation allowance against all the U.S. and Canadian deferred tax assets.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions in incomeIncome tax expense in the condensed consolidated statements of operations and comprehensive loss.
Leases -In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as modified (ASU 2016-02), which replaced existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. The Company adopted ASU 2016-02 effective January 1, 2019. Upon adoption, the Company recognized a right-of-use asset and corresponding lease liability. Refer to Note 6, Operating Leases.
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:
Whenever a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b)income (loss).
Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. All of the Company’s leases are classified as operating leases. Operating lease payments are recognized as an operating expense on a straight-line basis over the lease term.
Deferred Revenue - Deferred revenue represents payments received from clients in advance of providing services and amounts deferred if conditions for revenue recognition have not been met. Included in accruedAccrued expenses and other on the accompanyingcondensed consolidated balance sheets includes $1.1 million of deferred revenue as of each of September 30, 2020 and December 31, 2019.
Unbilled Receivable - (classified along-with Accounts receivable): Work performed, and expenses incurred in advance of invoicing are recorded as unbilled receivables. Accounts receivable on the Condensed Consolidated Balance Sheets includes $0.4 million and $0.5 million of unbilled receivables as of September 30, 20192020 and December 31, 2018 is deferred revenue amounting to $1.0 million and $1.1 million,2019, respectively.
11
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
Recent Accounting Pronouncements
In January 2016,December 2019, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10)2019-12, “Income Taxes (Topic 740): RecognitionSimplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and Measurementthe recognition of Financial Assetsdeferred tax liabilities for outside basis differences. The standard also clarifies and Financial Liabilities” (ASU 2016-01), which updates certainsimplifies other aspects of recognition, measurement, presentationthe accounting for income taxes. The standard is effective for fiscal years, and disclosureinterim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We do not expect that the adoption of financial instruments. The Company adopted this standard in the first quarter of 2019, and it did notnew guidance will have a material impact on the Company’s consolidatedour financial statements.
In August 2018, the FASB issued ASUAccounting Standards Update (ASU) No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General:Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), thatwhich makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities; early adoption is permitted. The Company is currently evaluating the early adoption of ASU 2018-14 but does not expect itASU 2018-14 to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements” (ASU 2016-13). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies codification and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments,” which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for us if we continue to be classified as a Smaller Reporting Company, with early adoption permitted. We do not expect that the adoption of the new guidance will have a material impact on our financial statements.
Correction of Immaterial Errors – During the preparation of the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating to the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses from 2017 to December 31, 2019 and an overstatement of expenses for the six months ended June 30, 2020.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020, would be material to such period. Accordingly, the prior period financial statements are being corrected by revising the prior period condensed consolidated financial statements for comparability. For the September 30, 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet included in this Form 10-Q, the corrections are as follows:
| · | Increase in expenses of $8,000 for the three months ended September 30, 2019 and $49,000 for the nine months ended September 30, 2019. There was no impact on the loss per share for the three and nine month periods ended September 30, 2019. |
| · | An increase in December 31, 2019 liabilities of $528,000. |
| · | A decrease in December 31, 2019 retained earnings of $777,000. |
| · | A decrease in December 31, 2019 total assets of $249,000. |
| · | The impact on cash flows for the nine months ended September 30, 2019 was: |
| · | A decrease in cash flows provided by operating activities of $38,000 |
| · | A decrease in cash flows used in investing activities of $79,000 |
| · | An increase in cash flows used in financing activities of $41,000 |
The Company evaluated each year’s/period’s errors under Staff Accounting Bulletins 99 and 108 and concluded that a restatement of year’s/prior periods’ consolidated financial statements is not required. Accordingly, the condensed consolidated financial statements and consolidated financial statements prior periods (March 31, 2020 and June 30, 2020) and year (December 31, 2019) consolidated financial statements will be revised in future Forms 10-Q and Form 10-K to be filed with the Securities and Exchange Commission. The September 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet have been revised in this Form 10-Q.
| 2. | Goodwill and Intangible Assets |
The Company determined that adverse changes in macroeconomic trends as a consequence of the continuing COVID-19 pandemic constituted a triggering event under U.S. GAAP (Accounting Standards Codification (ASC) No. 350, “Intangibles - Goodwill and Other” and ASC No. 360, “Impairment or Disposal of Long-Lived Assets”). The Company completed its impairment analysis procedures as of March 31, 2020 and has updated its impairment analysis on its reporting units as of September 30, 2020. The Company determined that there was no impairment of long-lived assets, tangible or intangible, in any reporting units as of September 30, 2020.
The changes in the carrying amount of goodwill for the nine months ended September 30, 20192020 and 20182019 were as follows (in thousands):
| Balance as of January 1, 2019 | $ | 2,050 | ||
| Foreign currency translation adjustment | 12 | |||
| Balance as of September 30, 2019 | $ | 2,062 | ||
| Balance as of January 1, 2018 | $ | 2,832 | ||
| Foreign currency translation adjustment | (35 | ) | ||
| Goodwill impairment | (675 | ) | ||
| Balance as of September 30, 2018 | $ | 2,122 |
As of September 30, 2018, the Company recorded a full goodwill impairment of $675,000 for its DDS segment.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value. The continued decline in the Company’s stock price was viewed by the Company as a triggering event under ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”, (ASU 2017-04) which required an assessment for possible goodwill impairment as of June 30, 2018. Under the provisions of ASU 2017-04, which the Company opted to early adopt, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The Company performed this assessment as of June 30, 2018 and determined that the fair value of the Agility segment exceeded its carrying value, but the fair value of the DDS segment was below its carrying value. As a result, the Company recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit as of June 30, 2018.
The Company performed its annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, the Company adhered to the provisions of ASU 2017-04 by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on the Company’s assessment, the Company reached the conclusion that there was no goodwill impairment because the fair value of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the nine months ended September 30, 2019.
| Balance as of January 1, 2019 | $ | 2,050 | ||
| Foreign currency translation adjustment | 12 | |||
| Balance as of September 30, 2019 | $ | 2,062 | ||
| Balance as of January 1, 2020 | $ | 2,108 | ||
| Foreign currency translation adjustment | (39 | ) | ||
| Balance as of September 30, 2020 | $ | 2,069 |
The fair value measurement of goodwill was classified within Level 3 of the fair value hierarchy because the Company used the income approach, which utilizes significant inputs that are unobservable in the market. The Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit as of the impairment test measurement date.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
Information regarding the Company’s acquisition-related intangible assets was as follows (in thousands):
| Trademarks | Media | |||||||||||||||||||||||||||||||||||||||||||||||
| Developed | Customer | and trade | Contact | |||||||||||||||||||||||||||||||||||||||||||||
| technology | relationships | names | Patents | Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 2,999 | $ | 2,081 | $ | 855 | $ | 42 | $ | 3,546 | $ | 9,523 | ||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | 3,108 | $ | 2,177 | $ | 871 | $ | 43 | $ | 3,606 | $ | 9,805 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | 51 | 63 | 4 | 1 | (36 | ) | 83 | (74 | ) | (65 | ) | (11 | ) | (1 | ) | (40 | ) | (191 | ) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 3,050 | $ | 2,144 | $ | 859 | $ | 43 | $ | 3,510 | $ | 9,606 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 3,034 | $ | 2,112 | $ | 860 | $ | 42 | $ | 3,566 | $ | 9,614 | ||||||||||||||||||||||||||||||||||||
| Developed technology | Customer relationships | Trademarks and trade names | Patents | Media Contact Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2018 | $ | 3,204 | $ | 2,264 | $ | 884 | $ | 46 | $ | 3,647 | $ | 10,045 | ||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 2,999 | $ | 2,081 | $ | 855 | $ | 42 | $ | 3,546 | $ | 9,523 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (63 | ) | (53 | ) | (9 | ) | (1 | ) | (42 | ) | (168 | ) | 51 | 63 | 4 | 1 | (36 | ) | 83 | |||||||||||||||||||||||||||||
| Balance as of September 30, 2018 | $ | 3,141 | $ | 2,211 | $ | 875 | $ | 45 | $ | 3,605 | $ | 9,877 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 3,050 | $ | 2,144 | $ | 859 | $ | 43 | $ | 3,510 | $ | 9,606 | ||||||||||||||||||||||||||||||||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
| Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | 1,493 | $ | 983 | $ | 567 | $ | 24 | $ | 1,261 | $ | 4,328 | ||||||||||||
| Amortization expense | 230 | 134 | 41 | 3 | 271 | 679 | ||||||||||||||||||
| Foreign currency translation | (39 | ) | (32 | ) | (5 | ) | - | (19 | ) | (95 | ) | |||||||||||||
| Balance as of September 30, 2020 | $ | 1,684 | $ | 1,085 | $ | 603 | $ | 27 | $ | 1,513 | $ | 4,912 | ||||||||||||
| Developed technology | Customer relationships | Trademarks and trade names | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 1,137 | $ | 766 | $ | 440 | $ | 19 | $ | 886 | $ | 3,248 | ||||||||||||
| Amortization expense | 230 | 133 | 90 | 3 | 269 | 725 | ||||||||||||||||||
| Foreign currency translation | 24 | 24 | 2 | 1 | (15 | ) | 36 | |||||||||||||||||
| Balance as of September 30, 2019 | $ | 1,391 | $ | 923 | $ | 532 | $ | 23 | $ | 1,140 | $ | 4,009 | ||||||||||||
| Developed technology | Customer relationships | Trademarks and trade names | Patents | Media Contact Database | Total | Developed technology | Customer relationships | Trademarks and tradenames | Patents | Media Contact Database | Total | |||||||||||||||||||||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2018 | $ | 902 | $ | 645 | $ | 330 | $ | 15 | $ | 547 | $ | 2,439 | ||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 1,137 | $ | 766 | $ | 440 | $ | 19 | $ | 886 | $ | 3,248 | ||||||||||||||||||||||||||||||||||||
| Amortization expense | 238 | 139 | 91 | 3 | 274 | 745 | 230 | 133 | 90 | 3 | 269 | 725 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (22 | ) | (16 | ) | (3 | ) | 1 | (10 | ) | (50 | ) | 24 | 24 | 2 | 1 | (15 | ) | 36 | ||||||||||||||||||||||||||||||
| Balance as of September 30, 2018 | $ | 1,118 | $ | 768 | $ | 418 | $ | 19 | $ | 811 | $ | 3,134 | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 1,391 | $ | 923 | $ | 532 | $ | 23 | $ | 1,140 | $ | 4,009 | ||||||||||||||||||||||||||||||||||||
Amortization expense relating to acquisition-related intangible assets was $0.2 million for each of the three months ended September 30, 20192020 and 2018.2019. Amortization expense relating to acquisition-related intangible assets was $0.7 million for each of the nine months ended September 30, 20192020 and 2018.2019.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
As of the date hereof, estimated amortization expense for intangible assets after September 30, 20192020 is as follows (in thousands):
| Year | Amortization | |||
| 2019 | $ | 240 | ||
| 2020 | 893 | |||
| 2021 | 893 | |||
| 2022 | 893 | |||
| 2023 | 893 | |||
| Thereafter | 1,785 | |||
| $ | 5,597 | |||
| Year | Amortization | |||
| 2020 | $ | 224 | ||
| 2021 | 895 | |||
| 2022 | 895 | |||
| 2023 | 895 | |||
| 2024 | 797 | |||
| Thereafter | 996 | |||
| $ | 4,702 | |||
| 3. | Income Taxes |
The Company recorded a tax benefit of $0.1 million and a provision for income taxes of $0.4 million and $0.5 million for the three months ended September 30, 20192020 and 2018,2019, respectively; and a tax provision of $0.5 million and $1.5 million for each of the nine months ended September 30, 20192020 and 2018, respectively.2019. Taxes primarily consist of a provision for foreign taxes recorded by the Company’s foreign subsidiaries in accordance with the local tax regulations. Effective income tax rates are disproportionate due to the losses incurred by the Company’s U.S. entities and Canadian subsidiaries, and a valuation allowance recorded on deferred taxes of these entities, anda tax effectseffect of foreign operations, including foreign exchange gains and losses.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)losses and tax impact on uncertain tax position (ASC 740).
The reconciliationreconciliations of the U.S. statutory rate with the Company’s effective tax rate for each of the nine-month periodnine months ended September 30, 2020 and 2019 isare summarized in the table below:
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Federal income tax benefit at statutory rate | (21.0 | )% | (21.0 | )% | ||||
| Effect of: | - | |||||||
| Change in valuation allowance | (660.0 | ) | (15.1 | ) | ||||
| Foreign rate differential | (295.9 | ) | (1.8 | ) | ||||
| Return to provision true up | (14.8 | ) | (0.3 | ) | ||||
| Withholding tax | - | 4.5 | ||||||
| State income tax net of federal benefit | (120.1 | ) | 1.8 | |||||
| Foreign operations permanent difference - foreign exchange gains and losses | 90.3 | (39.3 | ) | |||||
| Increase in unrecognized tax benefits (ASC 740) | 410.5 | 30.8 | ||||||
| Tax effects of foreign operations | 1,610.6 | 84.8 | ||||||
| Effect of share based compensation | 263.7 | - | ||||||
| Others | 29.0 | (4.2 | ) | |||||
| Effective tax rate | 1,292.3 | % | 40.2 | % | ||||
As of September 30, 2019,2020, the Company performed a calculation of the Global Intangible Low-Taxed Income (GILTI) provisions and concluded that it continues to have no impact on account of the net losses of ourcertain foreign subsidiaries.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the nine months ended September 30, 20192020 (in thousands):
| Unrecognized tax benefits | ||||
| Balance - January 1, 2019 | $ | 2,424 | ||
| Increase in tax position | 229 | |||
| Interest accrual | 135 | |||
| Foreign currency remeasurement | (34 | ) | ||
| Balance - September 30, 2019 | $ | 2,754 | ||
| Unrecognized tax benefits | ||||
| 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 had unrecognized tax benefits of approximately $2.8 million and $2.4 million as of September 30, 2019 and December 31, 2018, respectively. The portion of unrecognized tax benefits relating to an increase in tax positions was approximately $0.2 million while the portion of unrecognized tax benefits relating to interest and penalties was approximately $0.1 million for the nine months ended September 30, 2019. Theexpects that unrecognized tax benefits as of September 30, 20192020 and December 31, 2018,2019, if recognized, would have ana material impact on the Company’s effective tax rate.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open periods for U.S. Federal and state taxes from 20152016 through 2018.2019. Various foreign subsidiaries currently have open tax years from 2003 through 2018.2019.
Tax Assessments
In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. ManagementThe Company disagrees with the Service Tax Department’s positionposition. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department’s position. The Company is contesting this order in an appeal to the Customs, Excise and is vigorously contesting these assertions.Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between 12.36% and 15%., and this subsidiary may also be liable for interest and penalties. The revenue of our Indian subsidiary during this period was approximately $66.0 million. In accordance with new rules promulgated by the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case.
In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices of appeal from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services and not BS Services. The appeal was determined in favor of the Service Tax Department. ManagementThe Company disagrees with the basis of this decision and is contesting it vigorously.it. The Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently has service tax credits of approximately $1.0 million recorded as a receivable. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
Substantial recovery against the Company in the above referenced 2015 Service Tax Department case could have a material adverse impact on the Company, and unfavorable rulings or recoveries in other tax proceedings could have a material adverse impact on the consolidated operating results of the period (and subsequent periods) in which the rulings or recovery occurs.
| 4. | Commitments and Contingencies |
COVID-19 Pandemic - The novel coronavirus disease 2019 (“COVID-19”), which the World Health Organization declared as a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, caused federal and regional governments to impose substantial restrictions on the operations of non-essential businesses and contributed to significant declines and volatility in financial markets. The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of COVID-19 on the Company’s performance and financial results.
The situation surrounding the COVID-19 crisis remains fluid and the extent and duration of its impact on the economy remains unclear. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact that the pandemic may have on the Company’s results of operations and financial condition. The potential for a material impact on the Company’s results of operations and financial position increases the longer the virus affects the level of economic activity in the United States and globally.
With the current level of demand for our services, the Company believes it has existing cash and cash equivalents that provide sufficient sources of liquidity to satisfy the Company’s financial needs for the next 12 months from the filing date of this Quarterly Report on Form 10-Q. In the event the Company experiences a significant or prolonged reduction in revenues, the likelihood of which is uncertain, it would seek to manage its liquidity by reducing capital expenditures, deferring investment activities and reducing operating costs, as it would likely have no other source of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
Litigation –- In 2008, a judgment was rendered in the Philippines against a Philippine subsidiary of the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the Philippine subsidiary. The potential payment amount aggregates to approximately $6.2$6.4 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The potential payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to themthemselves in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (USDC) entered a preliminary injunction that enjoins these former employees from pursuing or seeking recognition or enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and until further order of the USDC. In June 2018, the USDC entered a consent order administratively closing the action subject to return of the action to the active docket upon the written request of Innodata Inc. or the former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction remaining in full force and effect.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The Company is also subject to various other legal proceedings and claims which arisethat have arisen in the ordinary course of business.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidatedand results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced Philippine action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidatedfinancial position and operating results of the period in which the ruling or recovery occurs.Company. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidatedand results of operations for the above referenced legal proceedings could change in the future.
The Company’s legal reservesaccruals related to legal proceedings and claims are based on athe Company’s determination of whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external counsel to assess probability and estimates of loss. The reservesaccruals are adjusted if necessary. While the Company intends to vigorously defend against these matters, vigorously, adverse outcomes that it estimates could reach approximately $275,000$300,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.
| 5. | Stock Options |
TheA summary of stock option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 is referred to herein as the “Plan.” The number of shares of common stock of Innodata Inc. that may be delivered, purchased or used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under the Plan after June 7, 2016 is 5,858,892 (the Share Reserve). Shares subject to an option or stock appreciation right granted under the Plan after June 7, 2016 count against the Share Reserve as one share for every share granted, and shares subject to any other type of award granted under the Plan after June 7, 2016 count against the Share Reserve as two shares for every share granted. Any award, or portion of an award, under the Plan or under the Company’s 2009 Stock Plan (as amended and restated (the Prior Plan)) that expires or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or canceled as to any shares without delivery of shares or other consideration will be added back to the Share Reserve as one share for each such share that was subject to an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was subject to an award other than an option or stock appreciation right granted under the Plan or the Prior Plan. If any shares are withheld, tendered or exchanged by a participant in the Plan as full or partial payment to Innodata of the exercise price under an option under the Plan or the Prior Plan or in satisfaction of a participant’s tax withholding obligations with respect to any award under the Plan or the Prior Plan, there will be added back to the Share Reserve one share for each such share that was withheld, tendered or exchanged in respect of an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was withheld, tendered or exchanged in respect of an award other than an option or stock appreciation right granted under the Plan or the Prior Plan.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
A summary of stock option activity under the Plan(Plan), as of September 30, 2019,2020, and changes during the nine months then ended, are presented below:
| Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2019 | 4,982,040 | $ | 2.14 | |||||||||||||
| Granted | 2,112,500 | 1.25 | ||||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited/Expired | (214,237 | ) | 2.46 | |||||||||||||
| Outstanding at September 30, 2019 | 6,880,303 | $ | 1.86 | 7.11 | $ | 591,955 | ||||||||||
| Exercisable at September 30, 2019 | 4,067,655 | $ | 2.31 | 5.53 | $ | 234,016 | ||||||||||
| Vested and Expected to Vest at September 30, 2019 | 6,880,303 | $ | 1.86 | 7.11 | $ | 591,955 | ||||||||||
| Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2020 | 6,833,303 | $ | 1.86 | |||||||||||||
| 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 | 7.07 | $ | 9,704,426 | ||||||||||
| Exercisable at September 30, 2020 | 4,651,624 | $ | 1.93 | 6.15 | $ | 5,420,040 | ||||||||||
| Vested and Expected to Vest at September 30, 2020 | 6,990,667 | $ | 1.70 | 7.07 | $ | 9,704,426 | ||||||||||
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted, and weighted-average assumptions were as follows:
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Weighted-average fair value of options granted | $ | 0.56 | $ | 0.54 | ||||
| Risk-free interest rate | 1.7% - 2.6% | 2.77% | ||||||
| Expected life (years) | 5-6 | 5-6 | ||||||
| Expected volatility factor | 45-46% | 49% | ||||||
| Expected dividends | - | - | ||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Weighted average fair value of options granted | $ | 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 | ||||||
A summary of restricted shares under the Company’s Plan as of September 30, 20192020 are presented below:
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Granted | 75,000 | $ | 1.38 | |||||
| Vested | - | - | ||||||
| Forfeited/Expired | - | - | ||||||
| Unvested at September 30, 2019 | 75,000 | $ | 1.38 | |||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Granted | 75,000 | $ | 1.38 | |||||
| Vested | (25,000 | ) | ||||||
| Forfeited/Expired | - | |||||||
| Unvested at September 30, 2020 | 50,000 | |||||||
The compensation cost related to non-vested stock options and restricted stock awards not yet recognized as of September 30, 20192020 totaled approximately $1.6$1.3 million. The weighted-average period over which these costs will be recognized is 28twenty-four months.
The stock-based compensation expense related to the Company’s various stock awards was allocated as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Direct operating costs | $ | 34 | $ | 62 | $ | 72 | $ | 171 | $ | 40 | $ | 34 | $ | 119 | $ | 72 | ||||||||||||||||
| Selling and administrative expenses | 317 | 206 | 552 | 368 | 192 | 317 | 581 | 552 | ||||||||||||||||||||||||
| Total stock-based compensation | $ | 351 | $ | 268 | $ | 624 | $ | 539 | $ | 232 | $ | 351 | $ | 700 | $ | 624 | ||||||||||||||||
| 6. | Operating Leases |
The Company has various operating lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.
These lease agreements are forhave remaining lease terms ranging from two to 11ten years and, in most cases, provide for rental escalations ranging from 1.75% to 10%. Most of these agreements are renewable at the mutual consent of the parties in the contract.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The Company adopted Accounting Standards Codification ASU No. 2016-02, “Leases (Topic 842)”, beginning January 1, 2019 and applied the practical expedients consistently for all of its leases. Accordingly, the Company:
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
In addition, the Company elected to retrospectively determine the lease term and assess impairment of the right-of-use asset.
At the date of transition, the Company recognized an operating lease liability and right-of-use asset. The amount of lease liability is equal to the present value of the remaining lease payments as of January 1, 2019, discounted using the incremental borrowing rate of each respective country.
A right-of-use asset is measured as the amount of the lease liability adjusted for the amount of deferred straight-line rent, prepaid rent and lease incentive allowances previously recognized.
The table below summarizes the amounts recognized in the condensed consolidated financial statements related to operating leases for the periods presented (in thousands):
| For the three months ended | For the nine months ended | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||
| September 30, 2019 | September 30, 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Rent expense for long-term operating leases | $ | 453 | $ | 1,360 | $ | 402 | $ | 453 | $ | 1,266 | $ | 1,360 | ||||||||||||
| Rent expense for short-term leases | 66 | 237 | 122 | 143 | 511 | 473 | ||||||||||||||||||
| Total rent expense | $ | 519 | $ | 1,597 | $ | 524 | $ | 596 | $ | 1,777 | $ | 1,833 | ||||||||||||
The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the condensed consolidated balance sheetsheets as of September 30, 20192020 (in thousands).:
| Year | Amount | |||
| 2019 | $ | 461 | ||
| 2020 | 1,736 | |||
| 2021 | 1,331 | |||
| 2022 | 1,249 | |||
| 2023 | 1,047 | |||
| 2024 and thereafter | 5,685 | |||
| Total lease payments | 11,509 | |||
| Less: Interest | (3,411 | ) | ||
| Net present value of lease liabilities | $ | 8,098 | ||
| Current portion | $ | 1,149 | ||
| Long-term portion | 6,949 | |||
| Total | $ | 8,098 | ||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
| Year | Amount | |||
| 2020 | $ | 396 | ||
| 2021 | 1,603 | |||
| 2022 | 1,569 | |||
| 2023 | 1,289 | |||
| 2024 | 1,060 | |||
| 2025 and thereafter | 4,612 | |||
| Total lease payments | 10,529 | |||
| Less: Interest | (2,871 | ) | ||
| Net present value of lease liabilities | $ | 7,658 | ||
| Current portion | $ | 967 | ||
| Long-term portion | 6,691 | |||
| Total | $ | 7,658 | ||
The weighted averageweighted-average remaining lease terms and discount rates for all of our operating leases as of September 30, 20192020 were as follows:
| Weighted-average lease term remaining | |||||
| Weighted-average discount rate | |||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
| 7. | Long-term Obligations |
Total long-term obligations of the Company as of September 30, 20192020 and December 31, 20182019 consisted of the following (in thousands):
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Pension obligations - accrued pension liability | $ | 2,781 | $ | 2,591 | ||||
| Settlement agreement(1) | 748 | 1,010 | ||||||
| Capital lease obligations | 256 | 574 | ||||||
| Microsoft licenses(2) | - | 355 | ||||||
| Deferred lease payments | - | 489 | ||||||
| Lease incentive liability | - | 572 | ||||||
| 3,785 | 5,591 | |||||||
| Less: Current portion of long-term obligations | 699 | 1,529 | ||||||
| Totals | $ | 3,086 | $ | 4,062 | ||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Pension obligations - accrued pension liability | $ | 5,224 | $ | 4,611 | ||||
| Settlement agreement (1) | 572 | 708 | ||||||
| Capital lease obligations | 269 | 655 | ||||||
| Microsoft licenses (2) | 734 | - | ||||||
| Bank loans payable (3) | 580 | - | ||||||
| 7,379 | 5,974 | |||||||
| Less: Current portion of long-term obligations | 1,958 | 1,440 | ||||||
| Totals | $ | 5,421 | $ | 4,534 | ||||
(1) Represents payment to be made pursuant to a settlement agreement entered into in December 2018 between a subsidiary of the Company and 19 former employees of such subsidiary in December of 2018.subsidiary. The balance is payable in monthly installments through March 2023.
(2) In March 2017,April 2020, the Company renewed a vendor agreement to acquire certain additional software licenses and to receive support and subsequent software upgrades on these and other currently owned software licenses through February 2020.2023. Pursuant to this agreement, the Company is obligated to pay approximately $0.4 million annually over the term of the agreement.
(3) On May 4, 2020, we received loan proceeds of $579,700 under the Paycheck Protection Program which was established as part of the Coronavirus Aid, Relief and Economic Security Act. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan, if any, is payable over two years at an interest rate of 1% per year, with a deferral of payments until the date that the Small Business Administration remits the borrower’s loan forgiveness amount to the lender.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
| 8. | Comprehensive Loss |
Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustments, net of taxes, and changes in fair value of derivatives, net of taxes. The components of accumulatedAccumulated other comprehensive loss as of September 30, 2019,2020, and reclassifications out of accumulatedAccumulated other comprehensive loss, for the three and nine months ended September 30, 20192020 and 2018,2019, were as follows (net of tax) (in thousands):
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at July 1, 2019 | $ | 1,374 | $ | - | $ | (1,179 | ) | $ | 195 | |||||||
| Other comprehensive loss before reclassifications, net of taxes | - | - | (252 | ) | (252 | ) | ||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,374 | - | (1,431 | ) | (57 | ) | ||||||||||
| Net amount reclassified to earnings | (41 | ) | - | - | (41 | ) | ||||||||||
| Balance at September 30, 2019 | $ | 1,333 | $ | - | $ | (1,431 | ) | $ | (98 | ) | ||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at July 1, 2020 | $ | (28 | ) | $ | (51 | ) | $ | (1,397 | ) | $ | (1,476 | ) | ||||
| Other comprehensive income before reclassifications, net of taxes | - | 12 | 216 | 228 | ||||||||||||
| Total other comprehensive loss before reclassifications, net of taxes | (28 | ) | (39 | ) | (1,181 | ) | (1,248 | ) | ||||||||
| Net amount reclassified to earnings | (1 | ) | 39 | - | 38 | |||||||||||
| Balance at September 30, 2020 | $ | (29 | ) | $ | - | $ | (1,181 | ) | $ | (1,210 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at July 1, 2018 | $ | 1,074 | $ | (250 | ) | $ | (1,052 | ) | $ | (228 | ) | |||||
| Other comprehensive income (loss) before reclassifications, net of taxes | - | (50 | ) | 114 | 64 | |||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,074 | (300 | ) | (938 | ) | (164 | ) | |||||||||
| Net amount reclassified to earnings | (57 | ) | 153 | - | 96 | |||||||||||
| Balance at September 30, 2018 | $ | 1,017 | $ | (147 | ) | $ | (938 | ) | $ | (68 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at July 1, 2019 | $ | 1,374 | $ | - | $ | (1,179 | ) | $ | 195 | |||||||
| Other comprehensive loss before reclassifications, net of taxes | - | - | (252 | ) | (252 | ) | ||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,374 | - | (1,431 | ) | (57 | ) | ||||||||||
| Net amount reclassified to earnings | (41 | ) | - | - | (41 | ) | ||||||||||
| Balance at September 30, 2019 | $ | 1,333 | $ | - | $ | (1,431 | ) | $ | (98 | ) | ||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at January 1, 2019 | $ | 1,451 | $ | - | $ | (1,466 | ) | $ | (15 | ) | ||||||
| Other comprehensive income before reclassifications, net of taxes | - | - | 35 | 35 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,451 | - | (1,431 | ) | 20 | |||||||||||
| Net amount reclassified to earnings | (118 | ) | - | - | (118 | ) | ||||||||||
| Balance at September 30, 2019 | $ | 1,333 | $ | - | $ | (1,431 | ) | $ | (98 | ) | ||||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at January 1, 2020 | $ | (53 | ) | $ | 33 | $ | (900 | ) | $ | (920 | ) | |||||
| Other comprehensive loss before reclassifications, net of taxes | - | (154 | ) | (281 | ) | (435 | ) | |||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | (53 | ) | (121 | ) | (1,181 | ) | (1,355 | ) | ||||||||
| Net amount reclassified to earnings | 24 | 121 | - | 145 | ||||||||||||
| Balance at September 30, 2020 | $ | (29 | ) | $ | - | $ | (1,181 | ) | $ | (1,210 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at January 1, 2018 | $ | 1,191 | $ | 342 | $ | (687 | ) | $ | 846 | |||||||
| Other comprehensive loss before reclassifications, net of taxes | - | (734 | ) | (251 | ) | (985 | ) | |||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,191 | (392 | ) | (938 | ) | (139 | ) | |||||||||
| Net amount reclassified to earnings | (174 | ) | 245 | - | 71 | |||||||||||
| Balance at September 30, 2018 | $ | 1,017 | $ | (147 | ) | $ | (938 | ) | $ | (68 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance at January 1, 2019 | $ | 1,451 | $ | - | $ | (1,466 | ) | $ | (15 | ) | ||||||
| Other comprehensive income before reclassifications, net of taxes | - | - | 35 | 35 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,451 | - | (1,431 | ) | 20 | |||||||||||
| Net amount reclassified to earnings | (118 | ) | - | - | (118 | ) | ||||||||||
| Balance at September 30, 2019 | $ | 1,333 | $ | - | $ | (1,431 | ) | $ | (98 | ) | ||||||
All reclassifications out of accumulatedAccumulated other comprehensive loss had an impact on directDirect operating costs in the condensed consolidated statements of operations and comprehensive loss.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(Unaudited)
| 9. | Segment Reporting and Concentrations |
The Company’s operations are classified in three reporting segments: DDS,Digital Data Solutions (DDS), Synodex and Agility.
The DDS segment specializesprovides a range of solutions and platforms for solving complex data challenges that companies face when they seek to obtain the benefits of artificial intelligence (AI) systems and analytics platforms. These include data annotation, data transformation, data curation and intelligent automation. The DDS segment also provides a variety of services for clients in combiningdeep neural networksthe information industry that relate to content operations andhuman expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to adigital product. For enterprises, “useable” means that the content can drivedigital process transformationandAI. The Company works with all classes of data, including sensitive and protected data. development.
The Synodex segment enables clients in the insurance and healthcare sectors to transformprovides an intelligent data platform that transforms medical records into useable digital data and to apply technologies to the digitalorganized in accordance with our proprietary data to augment decision support.models or client data models.
The Agility segment provides toolsan intelligent data platform that provides marketing communications and related professional services that enable PRpublic relations professionals with the ability to target and communications professionalsdistribute content to discoverjournalists and social media influencers amplify messages,world-wide and to monitor coverage, and measure the impact of campaigns. Bulldog Reporter, a publisher of PR-relatedanalyze global news channels (print, web, radio and a popular e-newsletter,TV) and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility.social media channels.
A significant portion of the Company’s revenues isare generated from its production facilities in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.
Revenues from external clients and segment operating profit (loss), and other reportable segment information for the periods presented were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues: | ||||||||||||||||
| DDS | $ | 10,124 | $ | 10,756 | $ | 30,353 | $ | 32,059 | ||||||||
| Synodex | 977 | 1,013 | 2,916 | 3,008 | ||||||||||||
| Agility | 2,745 | 2,280 | 7,910 | 7,372 | ||||||||||||
| Total Consolidated | $ | 13,846 | $ | 14,049 | $ | 41,179 | $ | 42,439 | ||||||||
| Income (loss) before provision for income taxes(1): | ||||||||||||||||
| DDS | $ | 376 | $ | 1,731 | $ | 603 | $ | 2,843 | ||||||||
| Synodex | (70 | ) | 91 | (81 | ) | 144 | ||||||||||
| Agility | (443 | ) | (660 | ) | (1,699 | ) | (1,530 | ) | ||||||||
| Total Consolidated | $ | (137 | ) | $ | 1,162 | $ | (1,177 | ) | $ | 1,457 | ||||||
| Income (loss) before provision for income taxes(2): | ||||||||||||||||
| DDS | $ | 309 | $ | 1,673 | $ | 415 | $ | 2,663 | ||||||||
| Synodex | (26 | ) | 132 | 42 | 266 | |||||||||||
| Agility | (420 | ) | (643 | ) | (1,634 | ) | (1,472 | ) | ||||||||
| Total Consolidated | $ | (137 | ) | $ | 1,162 | $ | (1,177 | ) | $ | 1,457 | ||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
| September 30, 2019 | December 31, 2018 | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||
| Total assets: | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| DDS | $ | 29,186 | $ | 22,334 | $ | 10,526 | $ | 10,124 | $ | 30,793 | $ | 30,353 | ||||||||||||
| Synodex | 752 | 787 | 1,197 | 977 | 3,680 | 2,916 | ||||||||||||||||||
| Agility | 22,214 | 22,930 | 2,830 | 2,745 | 8,473 | 7,910 | ||||||||||||||||||
| Total Consolidated | $ | 52,152 | $ | 46,051 | $ | 14,553 | $ | 13,846 | $ | 42,946 | $ | 41,179 | ||||||||||||
| Income (loss) before provision for income taxes(1): | ||||||||||||||||||||||||
| DDS | $ | 4 | $ | 371 | $ | 226 | $ | 579 | ||||||||||||||||
| Synodex | 79 | (70 | ) | 356 | (81 | ) | ||||||||||||||||||
| Agility | 60 | (446 | ) | (621 | ) | (1,724 | ) | |||||||||||||||||
| Total Consolidated | $ | 143 | $ | (145 | ) | $ | (39 | ) | $ | (1,226 | ) | |||||||||||||
| Income (loss) before provision for income taxes(2): | ||||||||||||||||||||||||
| DDS | $ | (64 | ) | $ | 304 | $ | 27 | $ | 391 | |||||||||||||||
| Synodex | 124 | (26 | ) | 487 | 42 | |||||||||||||||||||
| Agility | 83 | (423 | ) | (553 | ) | (1,659 | ) | |||||||||||||||||
| Total Consolidated | $ | 143 | $ | (145 | ) | $ | (39 | ) | $ | (1,226 | ) | |||||||||||||
| September 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
| Goodwill: | ||||||||||||||||
| Total assets: | ||||||||||||||||
| DDS | $ | 27,433 | $ | 23,115 | ||||||||||||
| Synodex | 564 | 675 | ||||||||||||||
| Agility | $ | 2,062 | $ | 2,050 | 26,001 | 25,707 | ||||||||||
| Total Consolidated | $ | 53,998 | $ | 49,497 | ||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||
| Goodwill: | ||||||||
| Agility | $ | 2,069 | $ | 2,108 | ||||
| Total Consolidated | $ | 2,069 | $ | 2,108 | ||||
(1) Before elimination of any inter-segment profits
(2) After elimination of any inter-segment profits
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
The following table summarizes revenues by geographic region (determined and based upon customer’scustomers’ domicile) for the periods presented (in thousands):
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 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 - principally Europe | 1,970 | 2,121 | 5,794 | 5,812 | ||||||||||||
| Totals | $ | 14,553 | $ | 13,846 | $ | 42,946 | $ | 41,179 | ||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| United States | $ | 6,022 | $ | 6,481 | $ | 18,776 | $ | 18,452 | ||||||||
| United Kingdom | 2,394 | 2,403 | 7,120 | 8,387 | ||||||||||||
| The Netherlands | 1,730 | 1,896 | 5,146 | 5,485 | ||||||||||||
| Canada | 1,634 | 1,459 | 4,594 | 4,397 | ||||||||||||
| Other - principally Europe | 2,066 | 1,810 | 5,543 | 5,718 | ||||||||||||
| $ | 13,846 | $ | 14,049 | $ | 41,179 | $ | 42,439 | |||||||||
Long-lived assets of the Company as of September 30, 20192020 and December 31, 2018,2019, respectively, by geographic region, were comprised of the following (in thousands):
| September 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| United States | $ | 4,740 | $ | 4,383 | $ | 4,162 | $ | 4,521 | ||||||||
| Foreign countries: | ||||||||||||||||
| Canada | 8,709 | 7,023 | 8,532 | 8,708 | ||||||||||||
| United Kingdom | 1,840 | 2,045 | 1,699 | 1,907 | ||||||||||||
| Philippines | 5,326 | 900 | 4,688 | 5,135 | ||||||||||||
| India | 634 | 475 | 1,025 | 508 | ||||||||||||
| Sri Lanka | 733 | 280 | 529 | 678 | ||||||||||||
| Israel | 21 | 30 | 1 | 19 | ||||||||||||
| Germany | 1 | 2 | 1 | 1 | ||||||||||||
| Total foreign | 17,264 | 10,755 | 16,475 | 16,956 | ||||||||||||
| $ | 22,004 | $ | 15,138 | |||||||||||||
| Totals | $ | 20,637 | $ | 21,477 | ||||||||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Long-lived assets include the unamortized balance of right-of-use assets amounting to $7.3$6.9 million and $7.0 million as of September 30, 2019.2020 and December 31, 2019, respectively.
Two clients in the DDS segment together generated approximately 23% and 25% of the Company’s total revenues for the three months ended September 30, 20192020 and 29% of the Company’s total revenues for the three months ended September 30, 2018.2019, respectively. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 57%55% and 54%57% of the Company’s total revenues for the three months ended September 30, 20192020 and 2018,2019, respectively.
Two clientsOne client in the DDS segment together generated approximately 26%14% and 16% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, and 30%respectively. Another client in the DDS segment generated 10% of the Company’s total revenues for the nine months ended September 30, 2018.2019. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2019 and 2018, revenues from non-U.S. clients accounted for 54% and 57%, respectively, of the Company’s total revenues.revenues for each of the nine months ended September 30, 2020 and 2019, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
As of September 30, 2019,2020, approximately 59%57% of the Company'sCompany’s accounts receivable was from foreign (principally European) clients and 43%24% of the Company’s accounts receivable was due from threetwo clients. As of December 31, 2018,2019, approximately 57%60% of the Company'sCompany’s accounts receivable was from foreign (principally European) clients and 48%44% of the Company’s accounts receivable was due from three clients.
| 10. | Income |
| Three months ended September 30, | Nine months ended September 30, | (In thousands) | ||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||
| (in thousands) | (in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | (555 | ) | $ | 688 | $ | (1,660 | ) | $ | (46 | ) | $ | 206 | $ | (563 | ) | $ | (568 | ) | $ | (1,709 | ) | ||||||||||
| Weighted average common shares outstanding | 25,856 | 25,877 | 25,870 | 25,877 | 24,470 | 25,856 | 24,427 | 25,870 | ||||||||||||||||||||||||
| Dilutive effect of outstanding options | - | 216 | - | - | 790 | - | - | - | ||||||||||||||||||||||||
| Adjusted for dilutive effects | 25,856 | 26,093 | 25,870 | 25,877 | ||||||||||||||||||||||||||||
| Adjusted for dilutive computation | 25,260 | 25,856 | 24,427 | 25,870 | ||||||||||||||||||||||||||||
Basic net income (loss) per share is computed using the weighted averageweighted-average number of common shares outstanding during the period.year. Diluted income (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two-class”two-class method of computing income (loss) per share is used.
Options to purchase 6.9 million shares and 3.52.3 million shares of common stock for the three months ended September 30, 2019 and 2018, respectively,2020, were outstanding but not included in the computation of diluted income (loss) per share because the exercise price of the options waswere greater than the average market price of the common shares and therefore have not been considered as potential equity shares. Diluted loss per share and Basic loss per share are the effect would have been anti-dilutive.same due to the reported loss for three months ended September 30, 2019. Options to purchase 6.9 million shares and 5.5 million shares of common stock were anti-dilutive for three months ended September 30, 2019.
Diluted loss per share and Basic loss per share are the same due to the reported loss for the nine months ended September 30, 2020 and September 30, 2019. Options to purchase 7.0 million shares and 6.9 million shares of common stock were anti-dilutive for nine months ended September 30, 2020 and September 30, 2019, respectively.
| 11. | Derivatives |
The Company conducts a large portion of its operations in international markets that subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and 2018, respectively, were outstanding but not includedassociated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll costs and operating expenses in the computation of diluted net loss per share because the effect would have been anti-dilutive.Philippines, India, Sri Lanka and Israel.
In October 2019,addition, although most of the Company re-purchased 390,625 sharesCompany’s revenues are denominated in U.S. dollars, a significant portion of its common stockthe total revenues is denominated in a privately negotiated transaction at $1.28 per share, for a total cost of $500,000.
Canadian dollars, Pound Sterling and Euros.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
To manage its exposure to fluctuations in foreign currency exchange rates, the Company enters into foreign currency forward contracts, authorized under Company policies. The Company utilizes non-deliverable forward contracts expiring within six months to reduce its foreign currency risk.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedging transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. There were no notional amounts outstanding as of September 30, 2020.
The effects of foreign currency forward contracts designated as cash flow hedges on the Company’s condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2020 and 2019, respectively, were as follows (in thousands):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net gain (loss) recognized in OCI(1) | $ | 12 | $ | - | $ | (154 | ) | $ | - | |||||||
| Net (gain) loss reclassified from accumulated OCI into income(2) | $ | 39 | $ | - | $ | 121 | $ | - | ||||||||
| Net gain recognized in income(3) | $ | - | $ | - | $ | - | $ | - | ||||||||
(1)Net change in fair value of the effective portion classified into other comprehensive income ("OCI")
(2)Effective portion classified within direct operating costs
(3)There were no ineffective portions for the periods presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Disclosures in this Quarterly Report on Form 10-Q (this Report) contain certain forward-looking statements includingwithin the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The wordsWords such as “project,” “head start,“believe,” "believe," "expect,"“expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” "anticipate," "indicate," "point to," “forecast,“anticipate,” “indicate,” “predict,” “likely,” “goals,” “optimistic,” “foster,” “estimate,” “plan”, “potential”,“plan,” “potential,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.
These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (COVID-19) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; that contracts may be terminated by clients; projected or committed volumes of work may not materialize; continuing reliance on project-based work in the DDS segment and the primarily at-will nature of such contracts with our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing Digital Data SolutionsDDS segment revenue concentration in a limited number of clients; continuing Digital Data Solutions segment reliance on project-based work;potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy; a continued downturn in or depressed market conditions;conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans whichthat give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growinggrowth in existing competitors; various other competitive and technological factors; the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer,client, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. Such risks and uncertainties may be in addition to the risks described in Part I, Item 1A, “Risk Factors;” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the year ended December 31, 2018.
Our actual results could differ materially from the results referred to in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainty around the COVID-19 pandemic and the effects of the global response thereto and the risks discussed in Part I, Item 1A. “Risk Factors” included in this Report,” and in Part I, Item 1A. “Risk Factors,” “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 16, 2020, and in other filings that we may make with the Securities and Exchange Commission. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements contained in this Form 10-Q will occur, and you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof.
We undertake no obligation to update or review any guidance or other forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the federal securities laws.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of Innodata Inc. and its subsidiaries. The current MD&A is provided as a supplement to, and should be read in conjunction with the MD&A and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 and our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Report.
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Correction of Immaterial Errors – During the preparation of the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating to the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses from 2017 to December 31, 2019 and an overstatement of expenses for the six months ended June 30, 2020.
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020, would be material to such period. Accordingly, the prior period financial statements are being corrected by revising the prior period condensed consolidated financial statements for comparability. For the September 30, 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet included in this Form 10-Q, the corrections are as follows:
| · | Increase in expenses of $8,000 for the three months ended September 30, 2019 and $49,000 for the nine months ended September 30, 2019. There was no impact on the loss per share for the three and nine month periods ended September 30, 2019. |
| · | An increase in December 31, 2019 liabilities of $528,000. |
| · | A decrease in December 31, 2019 retained earnings of $777,000. |
| · | A decrease in December 31, 2019 total assets of $249,000. |
| · | The impact on cash flows for the nine months ended September 30, 2019 was: |
| · | A decrease in cash flows provided by operating activities of $38,000 |
| · | A decrease in cash flows used in investing activities of $79,000 |
| · | An increase in cash flows used in financing activities of $41,000 |
The Company evaluated each year’s/period’s errors under Staff Accounting Bulletins 99 and 108 and concluded that a restatement of year’s/prior periods’ consolidated financial statements is not required. Accordingly, the condensed consolidated financial statements and consolidated financial statements prior periods (March 31, 2020 and June 30, 2020) and year (December 31, 2019) consolidated financial statements will be revised in future Forms 10-Q and Form 10-K to be filed with the Securities and Exchange Commission. The September 2019 condensed consolidated financial statements and December 31, 2019 condensed consolidated balance sheet have been revised in this Form 10-Q.
Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a global services and technologydata engineering company. We combine human expertise with deep learning technologies to power leading information productssolve complex data challenges that companies face when they build and enterprisemaintain artificial intelligence (AI)/digital transformation. systems and analytics platforms.
The Company, foundedTo deliver our services and solutions, we use a combination of human expertise and technology. Our 3,600+ employees span 10 countries and are experts in 1988 and headquartered in northern New Jersey, features a 3,000-strong global delivery anddata pertaining to many professional fields. Our core technology team spanning ten offices globally and a research and technology incubator, Innodata Labs, which focuses on appliedharnesses machine learning and emerging artificial intelligence. The Company is organizeddeep learning (branches of AI) to augment human expertise. Our hybrid approach of using AI in conjunction with human experts enables us to deliver superior data quality with even the most complex and operates in three different operating segments: the Digital Data Solutions (DDS) segment, the Synodex segment, and the Agility segment.
Our core services are (i) data acquisition, transformation, and enrichment at scale; (ii) digital operations management and analytics; and (iii) content applications. We report our core business as the DDS segment.
We also have venture businesses that leverage our core capabilities to provide specific industry solutions. In the Synodex segment, our Synodex venture business delivers a software-as-a-service (SaaS) platform and managed services for digital transformation of medical data. In our Agility segment, our Agility venture business delivers a SaaS platform and managed service for delivering news, information, and content to targeted journalists and influencers, as well as monitoring and analyzing coverage across traditional and social media sources.
Our Core Business (Digital Data Solutions (DDS) Segment)
We specialize in combiningdeep neural networks andhuman expertise in multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred to as “content”) useable. For business information companies, “useable” means that the content can be sold via subscription to adigital product. For enterprises, “useable” means that the content can drivedigital process transformationandAI. We work with all classes of data, including sensitive and protected data.
We also develop digital productsprovide AI-augmented software-as-a-service (SaaS) platforms for business information companiescustomers who wish to perform their own data engineering tasks and digital systems which replace legacy systems and processes.
We continued to implement a strategy we initiated in 2017 focused on technology differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner, more cost-effective operations.
Our Approach: Deep Neural Networks and Experts-in-the-loop
Finding the right approach for mixing machines and experts-in-the-loop for each customer requirement is one of our core competencies. On the human side, we have over three thousand staff with deep domain expertise in legal, tax, regulatory, scientific, technical, and health-related content. Many hold advanced degrees. They work from our global operations centers in North and South America, Europe, Israel, India, Sri Lanka and the Philippines. Our operations centers in Asia are ISO 27001 certified. On the technology side, weniche, industry-specific data-intensive use deep learning, a sophisticated machine learning technique which is a branch of artificial intelligence that has enjoyed great success in real-world applications.cases.
In our approach, content is fed first into our deep learning machinesWe provide a range of solutions and platforms for solving complex data challenges that automate much of the work but distinguish between whatcompanies face when they can automatically process and what requires human intervention. Work that requires humans is “pushed” to human experts. Once human experts perform tasks, their output is then fed back to the machines, which, as a result, become “smarter” and achieve over time progressively greater levels of automation. (See “Our Technology and Infrastructure”, below.)
Our Customers
Our customers include leading digital businesses in banking and financial services, technology, and digital retailing and four of the largest information industry companies in the world, spanning financial, legal, healthcare and scientific vertical markets. Our customers often seek to use digital data in combination withobtain the benefits of AI to support their businesses or to digitally transform operations. Our information industry customers sell subscriptions to data products that require enhanced digital data.
Our Servicessystems and analytics platforms.
| (i) | Data |
In orderWe help our clients train AI models by annotating data at scale and at industry-leading levels of quality such as 99.995% accuracy with an error rate that does not exceed 50 per million. The quality of training data is critical for a client’s AI models to use content in an information product or inperform well. We annotate text, images, audio and video data for the most complex AI there are often significant obstacles that must be overcome: the contentmodels, including computer vision, sentiment analysis, entity linking, text categorization, and syntactic parsing/tagging.
Our image and video annotation services and platforms may be containedused to annotate, or label, objects, or people in multiple websites; itimages/video for facial recognition systems and automated object identification systems and in aerial/satellite imagery for autonomous driving/flying applications.
Our text annotation services and platforms may be used to convert raw text data into richly tagged, AI training data. We accommodate a wide range of input formats and taxonomies, and we perform a wide variety of complex tasks including entity annotation, relationship annotation, co-reference annotation, event annotation, multi-label annotation, and document labelling.
We provide image/video data annotation and text annotation as full solutions, in which we provide all required technology, infrastructure and expert resources. We will also provide image/video data annotation platforms and text annotation platforms for our clients to license for internal use.
We provide data annotation for a variety of complex requirements in healthcare, compliance, scientific, financial and legal markets.
| (ii) | Data Transformation |
We provide AI-based data transformation solutions for high-accuracy data identification, aggregation, cleansing, augmentation and extraction. Our solutions utilize highly trained AI models and experts who custom train the models for our clients’ most complex and unique requirements.
Our data transformation platform enables data to be extracted from websites, as well as internal data stores; converted from disparate formats; and it may lackformats including PDF; enriched with the necessary semantics, metadata and metadata to make it product-linking; and classified in accordance with an ontology or AI-ready. We overcome these obstacles by combining advanced technology and human subject matter experts, enabling us to produce highly refined product- and AI-ready content efficiently and at scale.knowledge graph.
Acquiring unstructuredOur data often involves monitoring thousands of sourcestransformation solutions may be consumed via API, so that they can be utilized as infrastructure by clients with ongoing needs for such as websites in real-timeservices. We also provide a platform for new or changing content and then automatically extracting the changed content. One of the challenges with webclients to license for performing analytics on extracted data monitoring and extraction is that the HTML code underlying web pages often changes, causing programs and scripts to break. We overcome this by using enterprise-class tools for content change detection and extraction. These tools use both machine learning-based visual data abstraction combined with traditional programmatic approaches. With visual abstraction, the technology knows what the content “looks like” and recognizes when a data element moves from one spot on a Web page to another.points.
Digital data transformation can refer to a large number of very specific tasks necessary to create well-structured, valid XML, such as text zoning, editing, format tagging, format conversion, extraction, cross-reference capture, and linking.
| (iii) | Data Curation |
DigitalFor clients that need to maintain mission-critical databases of structured data, enrichment often includes structural taggingor fuse separately-created databases into a single, unified, high-quality source of data that can be relied upon for a variety of corporate functions and products (often referred to as well as semantic enrichment such as entity tagginga “golden source” of data), we provide AI-based data curation solutions that include data collection across external and normalization. Data enrichment also includes text categorization - classifying content to systems that organize knowledge such as ontologiesinternal data sources, data hygiene, data consolidation, and knowledge graphs. This kind of enrichment enables powerful information retrieval and discovery and provides hooks for integration and interoperability.data compliance.
Enterprises are increasingly looking to re-invent business processes to take advantage of advancements in AI and machine learning, computing, and storage. Many seek easier ways to train, deploy, and leverage these advanced capabilities. For clients with critical business processes that involve documents, images, text, emails and other unstructured data, we deploy a range of technologies, including AI and robotic process automation (RPA), to eliminate repetitive tasks, automate where possible, speed up operations, and shift internal talent to creative and analytical work.
We provide digital operations management and analyticsintelligent automation for an increasing diversity of complex functions. At present, these include IP rights management, contract management, customer relations, data processing, regulatory reporting, publishing workflow management, publisherclient relationship management, regulatory change management, underwriting, and transactioncontent operations management. Our services draw on a combination of industry and functional expertise from our thousands of global delivery resources, many with advanced degrees, augmented by sophisticated machine learning and robotics process automation (RPA) technology.
Our digital operations management solutions often leverage our core competency in augmenting human expert effort with advanced technology and configuring the technology to continually improve as a result of expert feedback. In this way, we provide high-quality, cost-effective solutions for our customers that become increasingly automated, resulting in further cost and improvements in both productivity and response time.
Many of the operations we manage are mission-critical for our customers (as opposed to back-office) are unique, and have multiple contingencies and potential points of failure. To manage this complexity, we have developed methodologies and best practices around process management and risk mitigation, and we work with clients at a strategic business and technology level.
We developbuild and maintain applications used in conjunctionmanage intelligent data platforms that address specific, niche market requirements with product- or AI-ready contentour data engineering technologies. We deploy these platforms as SaaS and as managed data solutions. To date, we create. Our content applications address knowledge representation, search/discovery,have built an intelligent data platform for medical records data transformation (which we brand as “Synodex”) and digital transformation of customer workflows. Our scope of services spans full-stack development, knowledge engineering, and integration support.
Our Technology and Infrastructurefor marketing communications/public relations workflow (which we brand as “Agility”).
Our deep learning technologies are built on frameworks such as TensorFlow and Torch that layer algorithms to create artificial neural networks that continuously learn on the job, constantly improving the quality and accuracy of results.
Our content processing application infrastructure consists of three integrated tiers. The first tier is anorchestration layer featuring a console we use to configure our workflow engines. Each workflow is customized around the content acquisition, transformation, and enrichment tasks required to transform a specific input into a specific output. This is where we oversee and manage AI, setting our accuracy thresholds and quality assurance parameters to decide when cognitive tasks that have been performed by machines are sent for human review.
The second tier of ourSynodex intelligent data processing application infrastructure is amicroservices layer of deep learning networks which perform discrete tasks automatically. Microservices are invoked by workflows via RESTful APIs. Our deep neural networks are trained to understand domain-specific terms and meaning and can be deployed to enforce privacy and maintain customer-proprietary learning. We have built domain-specific and task-specific microservices that perform deep sequence labelling, text categorization, and computer vision. The technology works by observing text patterns using algorithms and assigning labels based on these observed values.
For each cognitive decision, the machines provide a result together with a confidence score. A high confidence score means the machine is confident that it has performed accurately, and the content is ready to be deployed in an information product or for AI. A low confidence score means expert review is required.
Our third layer is human experts-in-the-loop. When an expert review is required, the human experts use tools we refer to as “workbenches” to apply their expertise to a task. The workbenches are integrated with the microservice endpoints in one of two ways. In one deployment, only low-confidence data is sent to workbenches for human review. In an alternative deployment, we send both high-confidence and low-confidence data back to the workbench, displaying the confidence level for each decision taken by the machine. In both of these deployments, human-reviewed work is retroactively fed back into the deep neural network, enabling it to get smarter. The result is continuous, predictable improvement and progressively greater levels of automation.
Our data storage and application hosting platform has been built utilizing an innovative enterprise infrastructure platform enabling robust performance scaling, strong security, high availability, and advanced business continuity. We support a range of strategies to suit our customers’ needs for data security, compliance, scalability and reliability. We can host data and applications in our own data centers at our production facilities or we can utilize third-party cloud services which provide the benefit of “infinite scalability” of hardware resources. When we are processing sensitive information for banks and insurance companies, we utilize U.S.-based, co-located data centers in combination with advanced data encryption (both at rest and in motion to the Advanced Encryption Standard 256 or similar standard) and desktop virtualization technologies, ensuring that data never leaves secured environments in the U.S. We employ a range of security features including monitored firewalls and intrusion detection devices. We can deploy on-premises, as well, and our machine learning microservices can be consumed via API.
We comply with the requirements of the United States Health Insurance Portability and Accountability Act of 1996 as amended (HIPAA) (including by the Health Information Technology for Economic and Clinical Health Data (HITECH)) and the United Kingdom’s Data Protection Act 2018, as applicable. Innodata Inc. is certified to the EU-U.S. Privacy Shield framework, which certification includes Synodex and Agility as covered entities.
Our DDS segment includes our Innodata docGenix, LLC subsidiary (docGenix). As of September 30, 2019, Innodata Inc. owned 94% of docGenix.
Our Venture Businesses
Our venture businesses provide specific industry solutions. We have chosen to invest in these businesses because they leverage one or more of our core capabilities (typically data acquisition/transformation/enrichment at scale, content applications, and global workforce deployment), have attractive business models such as SaaS (software-as-a-service), and expand our addressable market. Each venture business is reported as its own business segment.
Synodex Segment
Synodex enables clients in the insurance and healthcare sectors to transformtransforms medical records into useable digital data organized in accordance with our proprietary data models or client data models. At the end of 2019, we had 20 clients utilizing our Synodex platform, including John Hancock Insurance, the insurance operating unit of John Hancock Financial (a division of Manulife) and to apply technologies to the digital data to augment decision support.
The main focusone of the Synodex business islargest life insurers in the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support services. Synodex has developed and deployed its APS.Extract® product for specific use with life insurance underwriting and claims.United States.
Our Synodex segment operates through our Innodata Synodex, LLC subsidiary. As of September 30, 2019, Innodata Inc. owned 92.5% of Innodata Synodex, LLC. More information about our Synodex segment can be found atwww.synodex.com.
Agility Segment
Agilityintelligent data platform provides toolsmarketing communications and related professional services that enable public relations (PR)professionals with the ability to target and communications professionalsdistribute content to discoverjournalists and social media influencers amplify messages,worldwide and to monitor coverage, and measure the impact of campaigns. Agility has been ranked as the #1 easiest to useanalyze global news channels (print, web, radio and TV) and social media and influencer targeting platform out-performing significantly larger, more established competitors.1 The media intelligence solutions market is highly fragmented, with only a limited number of providers of integrated solutions such as Agility.
Agility’s software-as-a-service (SaaS) tools include:channels.
1 G2 Crowd Inc.,https://www.g2.com/gated_content/tokens/5ca8f8c7-7fd5-41ad-a9c9-1b7d0a47932a
Agility’s professionalIn addition, we provide a variety of services include:
To provide our services, we maintain a big data enginefor clients in the information industry that storesrelate to content operations and indexes media content. We index approximately two billion media items each year.product development.
Bulldog Reporter, a publisher of PR-related newsThe Company’s operations are presently classified and a popular e-newsletter,reported in three reporting segments: DDS, Synodex and the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and communications professionals and agencies, are properties of Agility. More information about our Agility segment can be found atwww.agilitypr.com.
RevenuesInflation, Seasonality and Prevailing Economic Conditions
Revenue RecognitionPrevailing Economic Conditions– Commencing January 1, 2018, we recognize revenue in accordance with Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. Revenue is recognized when control of
The novel coronavirus disease 2019, which the promised services is transferredWorld Health Organization declared as a pandemic on March 11, 2020, continues to a customer, in an amount that reflectsspread throughout the consideration that we expectworld. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, caused federal and regional governments to receive in exchange for those services as per the agreement with the customer. In case there are agreements with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. We allocate the transaction price to each distinct performance obligation proportionately basedimpose substantial restrictions on the estimated standalone selling price for each performance obligation, ifoperations of non-essential businesses and contributed to significant declines and volatility in financial markets. The rapid development and fluidity of this situation precludes any and then evaluate how the services are transferredprediction as to the customer to determine the timingultimate impact of revenue recognition.COVID-19 on our performance and financial results.
For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee agreements, which are not significantPrior to the overall revenues, are recognized based onpandemic being declared, we prepared a Business Continuity Plan (BCP) for our 12 global delivery centers and offices. When COVID-19 was declared to be a pandemic, we triggered our BCP, enabling us to continue operations while safeguarding the proportional performance method of accounting, as services are performed, or milestones are achieved.
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performedhealth and performance conditions are satisfied as per the agreement. A portionwelfare of our Synodex segment revenue is derived from licensing our functional software and providing access to our hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.employees.
The Agility segment derives its revenue primarily from subscription arrangementsWhile the pandemic presented, and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenues from the reseller agreements, which are not significant to the overall revenues, are recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the primary obligormay in the sales transaction; assume the credit risk; set the price; can select suppliers; and are involved in the execution of the services, including after sales service.
Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
We consider U.S. GAAP criteria for determining whetherfuture present, new risks to report revenue gross as a principal versus net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a customer may not pay for the services performed. If there are circumstances where the above criteria are not met and therefore, we are not the principal in providing services, amounts received from customers are presented net of payments in the condensed consolidated statements of operations and comprehensive loss.
Contract acquisition cost for our Agility segment, which is included in prepaid expenses and other current assets, is amortized over the term of a subscription agreement that normally has a duration of 12 months or less. We review these costs on a periodic basis to determine the need to adjust the carrying values for pre-terminated contracts.
Direct Operating Costs
Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, third-party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Valuation of Goodwill and Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible assets are amortized into direct operating costs ratably over their expected related revenue streams over their useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level annually during the third quarter of each fiscal year (as of September 30 of that quarter) or when an event occurs, or circumstances change, that indicates the carrying value may not be recoverable. In 2018, the Company adopted ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”. Under the newly adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”) remained unchanged versus the prior guidance. However, the requirement to complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying value of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying value of goodwill in that reporting unit.
Adjusted EBITDA
In addition to measures of financial performance presented in our consolidated financial statements, we monitor “Adjusted EBITDA” to help us evaluate our ongoing operating performance including our ability to operate the business effectively.
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before income taxes, depreciation and amortization of intangible assets, impairment charges, stock-based compensation, loss attributable to non-controlling interests and interest income (expense).
We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes. In particular, Adjusted EBITDA facilitates period-to-period comparisons of our operating results on a consistent basis by excluding items that are not reflective of our core operations or are not within our control and helps us identify underlying trends in our business. In this regard, we believe it provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making. We also use this measure to establish operational goals for managing our business and evaluating our performance.
Adjusted EBITDA has limitations as an analytical toolthere have been logistical and should not be considered in isolation or as a substitute for results reported under U.S. GAAP. Some of these limitations are:
Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, U.S. GAAP net income (loss).
The following tables reconcile net income (loss) to Adjusted EBITDA (loss) for the periods presented (in thousands):
Consolidated
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | (555 | ) | $ | 688 | $ | (1,660 | ) | $ | (46 | ) | |||||
| Depreciation and amortization | 687 | 833 | 2,248 | 2,558 | ||||||||||||
| Goodwill impairment | - | - | - | 675 | ||||||||||||
| Stock-based compensation | 351 | 268 | 624 | 539 | ||||||||||||
| Provision for income taxes | 421 | 469 | 493 | 1,502 | ||||||||||||
| Interest expense, net | 13 | 10 | 36 | 24 | ||||||||||||
| Non-controlling interests | (3 | ) | 5 | (10 | ) | 1 | ||||||||||
| Adjusted EBITDA - Consolidated | $ | 914 | $ | 2,273 | $ | 1,731 | $ | 5,253 | ||||||||
DDS Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net income (loss) attributable to DDS Segment | $ | (125 | ) | $ | 1,194 | $ | (110 | ) | $ | 1,135 | ||||||
| Depreciation and amortization | 282 | 444 | 1,072 | 1,408 | ||||||||||||
| Goodwill impairment | - | - | - | 675 | ||||||||||||
| Stock-based compensation | 330 | 266 | 574 | 533 | ||||||||||||
| Provision for income taxes | 432 | 481 | 526 | 1,538 | ||||||||||||
| Interest expense, net | 12 | 8 | 33 | 16 | ||||||||||||
| Non-controlling interests | 2 | (2 | ) | (4 | ) | (11 | ) | |||||||||
| Adjusted EBITDA - DDS Segment | $ | 933 | $ | 2,391 | $ | 2,091 | $ | 5,294 | ||||||||
Synodex Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net income (loss) attributable to Synodex Segment | $ | (20 | ) | $ | 125 | $ | 49 | $ | 254 | |||||||
| Stock-based compensation | 6 | - | 12 | - | ||||||||||||
| Non-controlling interests | (5 | ) | 7 | (6 | ) | 12 | ||||||||||
| Adjusted EBITDA (loss) - Synodex Segment | $ | (19 | ) | $ | 132 | $ | 55 | $ | 266 | |||||||
Agility Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Net loss attributable to Agility Segment | $ | (410 | ) | $ | (631 | ) | $ | (1,599 | ) | $ | (1,435 | ) | ||||
| Depreciation and amortization | 405 | 389 | 1,176 | 1,150 | ||||||||||||
| Stock-based compensation | 15 | 2 | 38 | 6 | ||||||||||||
| Provision for income taxes | (11 | ) | (12 | ) | (33 | ) | (36 | ) | ||||||||
| Interest expense, net | 1 | 2 | 3 | 8 | ||||||||||||
| Adjusted EBITDA loss - Agility Segment | $ | - | $ | (250 | ) | $ | (415 | ) | $ | (307 | ) | |||||
Results of Operations
Three Months Ended September 30, 2019 and 2018
Revenues
Total revenues were $13.8 million for the three months ended September 30, 2019 compared to $14.0 million for the three months ended September 30, 2018, a decrease of approximately $0.2 million or 1%.
Revenues from the DDS segment were $10.1 million and $10.8 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of approximately $0.7 million or 6%. The decrease is attributable to lower volume from three clients.
Revenues from the Synodex segment were $1.0 million for each of the three-month periods ended September 30, 2019 and 2018.
Revenues from the Agility segment were $2.7 million and $2.3 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $0.4 million or approximately 17%. The increase is attributable to higher revenues from subscriptions to our Agility media database.
Two clients in the DDS segment together generated approximately 25% of the Company’s total revenues for the three months ended September 30, 2019 and 29% of the Company’s total revenues for the three months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 57% and 54% of the Company’s total revenues for the three months ended September 30, 2019 and 2018, respectively.
36
Direct Operating Costs
Direct operating costs were $9.0 million and $9.2 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $0.2 million or 2%. Direct operating costs as a percentage of total revenues were 65% and 66% for the three months ended September 30, 2019 and 2018, respectively.
Direct operating costs for the DDS segment were approximately $6.5 million and $6.9 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $0.4 million or 6%. The decrease is due to a reduction in direct operating costs of $0.6 million as part of our continuing cost rationalization initiatives, offset in part by foreign exchange transaction losses of $0.2 million. The reduction of $0.6 million is primarily a result of lower compensation related costs of $0.3 million, lower occupancy costs and related depreciation of $0.2 million, and lower other facility related costs of $0.1 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 64% for each of the three-month periods ended September 30, 2019 and 2018.
Direct operating costs for the Synodex segment were $0.8 million for each of the three-month periods ended September 30, 2019 and 2018, net of intersegment profits. Direct operating costs for the Synodex segment as a percentage of revenues were 85% and 80% for the three months ended September 30, 2019 and 2018, respectively. Direct operating costs as a percentage of revenues increased in the third quarter of 2019 primarily due to lower revenue from one client.
Direct operating costs for the Agility segment were $1.7 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively. The $0.2 million increase is primarily a result of expenditures in support of increased revenues. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 63% and 70% for the three-month periods ended September 30, 2019 and 2018, respectively.
Selling and Administrative Expenses
Selling and administrative expenses were $5.0 million for the three months ended September 30, 2019, compared to $3.7 million for the three months ended September 30, 2018, an increase of $1.3 million or approximately 35%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. Innodata has made prescient, early investments in machine learning and artificial intelligence and is now positioned to turn these into new products and services. Selling and administrative expenses as a percentage of total revenues were 36% for the three months ended September 30, 2019 and 26% for the three months ended September 30, 2018.
Selling and administrative expenses for the DDS segment were $3.3 million and $2.2 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $1.1 million or 50%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. The savings realized from our cost rationalization initiatives were channeled into our strategic initiatives. The increase in selling and administrative expenses for the DDS segment were primarily due to higher compensation related costs of $0.9 million and recruitment and professional fees of approximately $0.2 million. As a percentage of DDS revenues, DDS selling and administrative expenses were 33% for the three months ended September 30, 2019 and 20% for the three months ended September 30, 2018. The increase in selling and administrative expenses as a percentage of revenues is due to lower revenues combined with increased selling and administrative expenses.
Selling and administrative expenses for the Synodex segment were $0.2 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively. The increase is attributable to higher professional fees incurred for the period. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 20% for the three months ended September 30, 2019 and 10% for the three months ended September 30, 2018.
Selling and administrative expenses for the Agility segment were $1.5 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively. The increase is primarily due to additional provisions for doubtful accounts and higher marketing costs in support of sales initiatives. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 56% for the three months ended September 30, 2019 and 61% for the three months ended September 30, 2018.
Goodwill Impairment
We performed our annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, we adhered to the provisions of ASU 2017-04, by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on our assessment, we reached the conclusion thatchallenges, there was no goodwill impairment because the fair valuematerial adverse impact on our results of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the three months ended September 30, 2019.
Income Taxes
We recorded a provision for income taxes of $0.4 million and $0.5 millionoperations for the three months ended September 30, 2019quarter and 2018, respectively. The $0.1 million decrease is primarily due to a lower tax provision by our foreign subsidiaries attributable to foreign exchange gains in the three months ended September 30, 2018.
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries and a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses.
Net Loss
We incurred a net loss of $0.6 million during the three months ended September 30, 2019, compared to a net income of $0.7 million during the three months ended September 30, 2018.
Net loss for the DDS segment was $0.1 million for the three months ended September 30, 2019, compared to net income of $1.2 million for the three months ended September 30, 2018, net of intersegment profits. The decrease in net income of $1.3 million is attributable to lower revenues of $0.6 million and higher operating expenses of $0.7 million in the period.
The Synodex segment was breakeven for the three months ended September 30, 2019, compared to a net income of $0.1 million for the three months ended September 30, 2018, net of intersegment profits. The decrease is due to revenue timing from one client.
Net loss for the Agility segment was $0.5 million for the three months ended September 30, 2019, compared to $0.6 million for the three months ended September 30, 2018, net of intersegment profits. The decrease in net loss is due to higher revenues offset by an increase in operating costs.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2019 was $0.9 million, compared to $2.3 million for the three months ended September 30, 2018.
Adjusted EBITDA for the DDS segment was $0.9 million for the three months ended September 30, 2019, compared to $2.4 million for the three months ended September 30, 2018, a decrease of $1.5 million or 64%. The decrease is primarily attributable to the $1.3 million lower income and $0.2 million lower depreciation and amortization in the three months ended September 30, 2019.
Adjusted EBITDA for the Synodex segment was breakeven for the three months ended September 30, 2019, compared to $0.1 million for the three months ended September 30, 2018, a decrease of $0.1 million. The decrease is due to revenue timing from one client.
Adjusted EBITDA for the Agility segment was breakeven for the three months ended September 30, 2019, compared to a loss of $0.2 million for the three months ended September 30, 2018. The improvement is a result of a lower loss incurred for the period.
Nine Months Ended September 30, 2019 and 2018
Revenues
Total revenues were $41.2 million for the nine months ended September 30, 2019 compared to $42.4 million for the nine months ended September 30, 2018, a decrease of $1.2 million or 3%.
Revenues from the DDS segment were $30.4 million and $32 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of approximately $1.6 million or 5%. The decrease in revenues is primarily attributable to lower volume from one client.
Revenues from the Synodex segment were $2.9 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $0.1 million or 3%. This decrease is primarily due to lower volume from one client.
Revenues from the Agility segment were $7.9 million and $7.4 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $0.5 million or approximately 7%. The increase is attributable to higher revenues from subscriptions to our Agility media database.
Two clients in the DDS segment together generated approximately 26% of the Company’s total revenues for the nine months ended September 30, 2019 and 30% of the Company’s total revenues for the nine months ended September 30, 2018. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2019 and 2018, revenues from non-U.S. clients accounted for 54% and 57%, respectively, of the Company’s total revenues.
Direct Operating Costs
Direct operating costs were $28.2 million and $29.1 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $0.9 million or 3%. Direct operating costs as a percentage of total revenues were 68% and 69% for the nine months ended September 30, 2019 and 2018, respectively.
Direct operating costs for the DDS segment were approximately $20.8 million and $22.1 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $1.3 million or 6%. The decrease is due to a reduction in direct operating costs of $2.4 million as part of our continuing cost rationalization initiatives offset in part by foreign exchange transaction losses of $0.7 million and a one-time charge of $0.4 million for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affects companies generally. The reduction of $2.4 million is primarily a result of lower compensation related costs of $1.2 million, lower occupancy costs and related depreciation of $0.7 million, and lower other facility related costs of $0.5 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 68% and 69% for the nine months ended September 30, 2019 and 2018, respectively.
Direct operating costs for the Synodex segment were $2.4 million for the nine months ended September 30, 2019 and $2.3 million for the nine months ended September 30, 2018, net of intersegment profits. The increase is due to the cost of hardware and software upgrades expensed during the year. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 83% and 77% for the nine months ended September 30, 2019 and 2018, respectively. The increase in direct operating costs as a percentage of revenues in the nine months ended September 30, 2019 is primarily due to lower revenue from one client combined with the higher cost of hardware and software upgrades, expensed during the year.
Direct operating costs for the Agility segment were $5.0 million and $4.7 million for the nine months ended September 30, 2019 and 2018, respectively. The $0.3 million increase is primarily a result of expenditures in support of increased revenues. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 63% and 64% for the nine months ended September 30, 2019 and 2018, respectively. The increase is due to higher content related costs.
Selling and Administrative Expenses
Selling and administrative expenses were $14.2 million for the nine months ended September 30, 2019, compared to $11.2 million for the nine months ended September 30, 2018, an increase of $3.0 million or 27%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. Selling and administrative expenses as a percentage of total revenues increased to 34% for the nine months ended September 30, 2019 from 26% for the nine months ended September 30, 2018.
Selling and administrative expenses for the DDS segment were $9.2 million and $6.6 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $2.6 million or 39%. This increase is a result of investments in strategic initiatives designed to expand our addressable market. The savings realized from our cost rationalization initiatives were channeled into our strategic initiatives. The increase in selling and administrative expenses for the DDS segment were primarily due to higher compensation related costs of $1.8 million, recruitment and professional fees of $0.6 million, and other selling and marketing costs of $0.2 million. As a percentage of DDS revenues, DDS selling and administrative expenses were 30% and 21% for the nine months ended September 30, 2019 and 2018, respectively. The increase in selling and administrative expenses as a percentage of revenues is due to lower revenues combined with increased selling and administrative expenses.
Selling and administrative expenses for the Synodex segment were $0.5 million for each of the nine-month periods ended September 30, 2019 and 2018. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 17% for each of the nine-month periods ended September 30, 2019 and 2018.
Selling and administrative expenses for the Agility segment were $4.5 million and $4.2 million for the nine months ended September 30, 2019 and 2018, respectively. The $0.3 million increase is primarily due to compensation related expenses, additional provisions for doubtful accounts and higher marketing costs in support of sales initiatives. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 57% and 55% for the nine months ended September 30, 2019 and 2018, respectively.
Goodwill Impairment
We performed our annual goodwill assessment for the Agility segment as of September 30, 2019. In performing the assessment, we adhered to the provisions of ASU 2017-04, by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on our assessment, we reached the conclusion that there was no goodwill impairment because the fair value of the Agility segment’s goodwill exceeded its carrying value. Therefore, there was no goodwill impairment recorded during the nine months ended September 30, 2019.2020.
The Company performed an assessment assituation surrounding the COVID-19 crisis remains fluid and the extent and duration of June 30, 2018 and determined that the fair value of the Agility segment exceeded its carrying value, but the fair value of the DDS segment was below its carrying value. As a result, the Company recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit during the nine months ended September 30, 2018.
Income Taxes
We recorded a provision for income taxes of $0.5 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively. The $1.0 million decrease is primarily due to a higher tax provision by our foreign subsidiaries attributable to foreign exchange gains in the nine months ended September 30, 2018.
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate dueimpact to the losses incurred by our U.S. entity and our Canadian subsidiaries and a valuation allowance recorded on deferred taxes on these entities. Someeconomy remains unclear. For this reason, we cannot reasonably estimate with any degree of our foreign subsidiaries are subject to tax holidays or preferential tax rates, which reduce our overall effective tax rate when compared tocertainty the U.S. statutory tax rate.
The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the nine-month period ended September 30, 2019 is summarized in the table below:
As of September 30, 2019, we performed a calculation of the GILTI provisions and concludedfuture impact that it continues tomay have noon our results of operations and financial condition. The potential for a material impact on accountour results of operations and financial position increases the net losseslonger the virus affects the level of our foreign subsidiaries.
Despite access to overseas earnings and the resulting toll charge, we intend to indefinitely reinvest foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding taxes that we would have to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to approximately $18.5 million at September 30, 2019. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on the deferred tax assets of our Canadian subsidiaries. Our Canadian subsidiaries also have research and development expenditures available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes.
The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open periods for U.S. Federal and state taxes from 2016 through 2019. Various foreign subsidiaries currently have open tax years from 2003 through 2018. Refer to Item 1, Note 3 for more information about Tax Assessments.
Net Loss
We incurred a net loss of $1.7 million for the nine months ended September 30, 2019, compared to a net loss of $46,000 for the nine months ended September 30, 2018.
The net loss for the DDS segment was $0.1 million for the nine months ended September 30, 2019, compared to a net income of $1.1 million for the nine months ended September 30, 2018, net of intersegment profits. Net loss for the nine months ended September 30, 2019 includes a one-time charge of $400,000 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affects companies generally. The decrease in net income of $1.2 million is attributable to lower revenues of $1.6 million, higher operating expenses of $1.3 million, a decrease in tax provisions of $1.0 million, and a decrease in goodwill impairment of $0.7 million.
The Synodex segment was breakeven for the nine months ended September 30, 2019, compared to a net income of $250,000 for the nine months ended September 30, 2018, net of intersegment profits. The decrease is due to revenue timing from one client.
The net loss for the Agility segment was $1.6 million for the nine months ended September 30, 2019, compared to a net loss of $1.4 million for the nine months ended September 30, 2018. The $0.2 million increase in net loss is primarily a result of expenditures in support of increased revenues.
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2019 was $1.7 million, compared to Adjusted EBITDA of $5.3 million for the nine months ended September 30, 2018.
Adjusted EBITDA for the DDS segment was $2.0 million for the nine months ended September 30, 2019, compared to $5.3 million for the nine months ended September 30, 2018, a decrease of $3.3 million or 62%. The decrease is primarily attributable to a $1.1 million higher tax provision by our foreign subsidiaries due to foreign exchange gains and $0.7 million of goodwill impairment in the nine months ended September 30, 2018.
Adjusted EBITDA for the Synodex segment was $0.1 million for the nine months ended September 30, 2019, compared to $0.3 million for the nine months ended September 30, 2018. The decrease is due to revenue timing from one client.
Adjusted EBITDA for the Agility segment was a loss of $0.4 million for the nine months ended September 30, 2019, compared to a loss of $0.3 million for the nine months ended September 30, 2018. The increase is a result of a higher net loss incurred for the period.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, are as follows:
| September 30, 2019 | December 31, 2018 | |||||||
| Cash and cash equivalents | $ | 13,188 | $ | 10,869 | ||||
| Working capital | 10,678 | 12,981 | ||||||
At September 30, 2019, we had cash and cash equivalents of $13.2 million, of which $5.9 million was held by our foreign subsidiaries, and the $7.3 million balance was heldeconomic activity in the United States. Based on our calculations, as a result of the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earningsStates and profits, we will not have any liability for taxes with respect to repatriated foreign earnings under Internal Revenue Service Regulation 956 until our cumulative exposure for unrepatriated foreign earnings reaches a threshold of $25.8 million. Although we do not currently intend to repatriate amounts held by foreign subsidiaries, we could if needed repatriate these amounts less up to 21% in withholding taxes of foreign jurisdictions.globally.
WeWith the current level of demand for our services, we believe we have used, and plan to use, our cash and cash equivalents for (i) investments in the Agility segment; (ii) the expansion of our other operations; (iii) technology innovations; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of September 30, 2019, we had working capital of approximately $10.7 million, as compared to working capital of approximately $13.0 million as of December 31, 2018.
We did not have any material commitments for capital expenditures as of September 30, 2019. In October 2019, we re-purchased 390,625 shares of our common stock in a privately negotiated transaction at $1.28 per share, for a total cost of $500,000.
We believe that our existing cash and cash equivalents and internally generated funds willthat provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months. However,months from the date of the filing of this Report (refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information). In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investment activities, and reducing operating costs as we would likely have no debt facilities or linesother sources of credit, and reductionsliquidity to support ongoing operations in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise would materially and adversely affecta manner that is not significantly detrimental to the Company.business.
Cash FlowsWe determined that adverse changes in macroeconomic trends as a consequence of the continuing COVID-19 pandemic constituted a triggering event under U.S. GAAP (Accounting Standards Codification No. 350, “Intangibles-Goodwill and Other” and Accounting Standards Codification No. 360, “Impairment or Disposal of Long-Lived Assets”). We completed our impairment analysis procedures as of March 31, 2020 and have updated our impairment analysis on our reporting units as of September 30, 2020. We have determined that there was no impairment of long-lived assets, tangible nor intangible, in any reporting units as of September 30, 2020.
Net Cash Provided by Operating ActivitiesInflation
Cash provided by our operating activities for the nine months ended September 30, 2019 was $4.9 million primarily on account of the $2.5 million decrease in our accounts receivable, a $0.8 million decrease in prepaid and other current assets, a $0.7 million decrease in in income and other taxes and a $0.1 million increase in other working capital. This favorable result was reduced by our net loss of $1.7 million in the period. The reduction in accounts receivable is a result of improvements in our collections during the period. Refer to the condensed consolidated statements of cash flows for further details.
Our days’ sales outstanding (DSO) were 62 days for the nine months ended September 30, 2019 and 66 days for the year ended December 31, 2018. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the “accounts receivable turnover.” Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressed in number of days.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2019, cash used in our investing activities was $1.4 million. These expenditures principally consisted of purchases of technology equipment including servers, network infrastructure and workstations.
During the next 12 months, we anticipate that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate $2.0 million to $2.3 million. The source of funds for the anticipated capital expenditures will be cash generated from our operations.
Net Cash Used in Financing Activities
For the nine months ended September 30, 2019, cash used in financing activities was for payments of long-term obligations of $0.9 million and repurchasing of 34,150 shares of our common stock at a cost of approximately $44,000 at a volume-weighted average price of $1.29 per share. The repurchase was made under the 2019 authorization approved by the Board of Directors.
Inflation, Seasonality and Prevailing Economic Conditions
Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higherhigh inflation in wage rates in the countries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients.
Seasonality
Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.
Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.
For further information refer to the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.” in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations
Amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.
Three Months Ended September 30, 2020 and 2019
Revenues
Total revenues were $14.6 million for the three months ended September 30, 2020, compared to $13.8 million for the three months ended September 30, 2019, an increase of approximately $0.8 million or 6%. The increase was primarily attributable to increased volumes in all segments.
Revenues from the DDS segment were $10.6 million for the three months ended September 30, 2020, compared to $10.1 million for the three months ended September 30, 2019, an increase of approximately $0.5 million or 5%. The increase was primarily attributable to revenues generated from new clients.
Revenues from the Synodex segment were $1.2 million for the three months ended September 30, 2020, compared to $1.0 million for the three months ended September 30, 2019, an increase of approximately $0.2 million or 20%. The increase was primarily attributed to higher volumes from one existing client.
Revenues from the Agility segment were $2.8 million for the three months ended September 30, 2020, compared to $2.7 million for the three months ended September 30, 2019, an increase of $0.1 million or approximately 4%. The increase was principally attributable to an increase in the number of subscriptions to our Agility intelligent data platform and newswire products.
Two clients in the DDS segment generated approximately 23% and 25% of the Company’s total revenues for the three months ended September 30, 2020 and September 30, 2019, respectively. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 55% and 57% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively.
Direct Operating Costs
Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.
Direct operating costs were $9.8 million and $9.0 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $0.8 million. This increase was primarily due to increases in labor related costs of $0.9 million and technology related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.3 million. The increase was offset in part by reductions in occupancy and related costs of $0.3 million and other operating costs of $0.1 million due to COVID-19. Direct operating costs as a percentage of total revenues were 67% and 65% for the three months ended September 30, 2020 and 2019, respectively. The increase in Direct operating costs as a percentage of total revenues was primarily attributable to increased Direct operating costs in the DDS segment.
Direct operating costs for the DDS segment were approximately $7.4 million and $6.5 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $0.9 million. This increase was primarily due to an increase in labor related costs of $0.8 million, an unfavorable foreign exchange remeasurement effect of $0.1 million, and technology related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.3 million. The increase was offset in part by reductions in occupancy and related costs of $0.3 million. Direct operating costs as percentage of segment revenues were 70% and 64% for the three months ended September 30, 2020 and 2019, respectively. The increase in Direct operating costs as a percentage of segment revenues was primarily attributable to the higher Direct operating costs.
Direct operating costs for the Synodex segment were $0.9 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 75% and 80% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues was primarily due to higher revenues.
Direct operating costs for the Agility segment were $1.5 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 54% and 63% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues was primarily due to higher revenues from subscriptions to our Agility intelligent data platform and newswire products.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs (including commissions, new services research and related software development), third-party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $4.6 million and $5.0 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $0.4 million. This decrease was attributable to lower labor related costs of $0.2 million, lower operating costs of $0.1 million and a lower provision for doubtful accounts of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 32% and 36% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues in all segments.
Selling and administrative expenses for the DDS segment were $3.3 million for each of the three months ended September 30, 2020 and 2019. As a percentage of DDS revenues, DDS selling and administrative expenses were 31% and 33% for the three months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Synodex segment were $0.2 million for each of the three-month periods ended September 30, 2020 and 2019. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 17% and 20% for the three months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Agility segment were $1.1 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $0.4 million. This decrease was primarily due to a reduction in labor related costs of $0.1 million; a provision for doubtful accounts of $0.1 million and net decreases in other selling and administrative expenses of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 39% and 56% for the three months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of segment revenues was primarily due to higher revenue from subscriptions to our Agility intelligent data platform and newswire products.
Income Taxes
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries, a valuation allowance recorded on deferred taxes on these entities, and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax position (ASC 740).
We recorded a tax benefit of $0.1 million for the three months ended September 30, 2020 and a provision for income taxes of $0.4 million for the three months ended September 30, 2019. The decrease is primarily due to a lower tax provision for our foreign subsidiaries in the three months ended September 30, 2020.
Net Income (Loss)
Net income was $0.2 million during the three months ended September 30, 2020, compared to a net loss of $0.6 million during the three months ended September 30, 2019. The improvement of $0.8 million was a result of $0.3 million pre-tax income and $0.5 million tax benefit in the current quarter.
Net loss for the DDS segment was $0.1 million for each of the three months ended September 30, 2020 and September 30, 2019. The pre-tax net loss of $0.5 million was offset by a $0.5 million tax benefit in the current quarter.
Net income for the Synodex segment was $0.1 million for the three months ended September 30, 2020 compared to breakeven for the three months ended September 30, 2019, an increase of $0.1 million. The increase was primarily attributable to the higher revenues in the current quarter.
Net income for the Agility segment was $0.2 million for the three months ended September 30, 2020, compared to a net loss of $0.5 million for the three months ended September 30, 2019. The improvement of $0.6 million was due to higher revenues and lower operating costs in the current quarter.
Nine Months Ended September 30, 2020 and 2019
Revenues
Total revenues were $42.9 million for the nine months ended September 30, 2020, compared to $41.2 million for the nine months ended September 30, 2019, an increase of $1.7 million or 4%. The increase was attributable to increased revenues across all segments.
Revenues from the DDS segment were $30.7 million and $30.4 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of approximately $0.3 million or 1%. The increase in revenues was primarily attributable to revenue generated from new clients.
Revenues from the Synodex segment were $3.7 million and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.8 million or 28%. The increase was primarily attributable to higher volumes from one existing client.
Revenues from the Agility segment were $8.5 million and $7.9 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.6 million or 8%. The increase was attributable to an increase in the number of subscriptions to our Agility database.
One client in the DDS segment generated approximately 14% and 16% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively. Another client in the DDS segment generated 10% of the Company’s total revenues for the nine months ended September 30, 2019. No other client accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. clients accounted for 54% of the Company’s total revenues for each of the nine months ended September 30, 2020 and 2019, respectively.
Direct Operating Costs
Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.
Direct operating costs were $29.2 million and $28.2 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $1.0 million. This increase was primarily due to an increase in labor related costs of $1.6 million, unfavorable foreign exchange remeasurement effect of $0.1 million, and technology-related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.8 million. The increase was offset in part by reductions in occupancy and related costs of $0.8 million, content acquisition costs of $0.2 million, and other operating costs of $0.1 million, and by a one-time charge of $0.4 million in the second quarter of 2019 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affected companies generally. Direct operating costs as a percentage of total revenues were 68% for each of the nine months ended September 30, 2020 and 2019.
Direct operating costs for the DDS segment were approximately $21.7 million and $20.8 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.9 million. This increase was primarily due to an increase in payroll-related costs of $1.4 million, unfavorable foreign exchange remeasurement of $0.1 million, and technology-related expenditures in connection with our BCP in response to the COVID-19 pandemic of $0.8 million. The increase was offset in part by reductions in occupancy and related costs of $0.8 million and decreases in other operating costs of $0.1 million due to COVID-19 and by a one-time charge of $0.4 million in the second quarter of 2019 for an assessment of retroactive foreign social security contributions as a result of a decision by the Supreme Court of India that affected companies generally. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 71% and 68% for the nine months ended September 30, 2020 and 2019, respectively. The increase in Direct operating costs as a percentage of segment revenues was primarily attributable to the higher Direct operating costs.
Direct operating costs for the Synodex segment were $2.6 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.2 million. The increase was principally due to labor costs associated with the increase in revenues. Direct operating costs for the Synodex segment as a percentage of segment revenues were 70% and 83% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues during the quarter was primarily due to higher revenue.
Direct operating costs for the Agility segment were $4.9 million and $5.0 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $0.1 million. This decrease was primarily due to reduction in content acquisition costs. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 58% and 63% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in Direct operating costs as a percentage of segment revenues during the quarter was primarily due to higher revenue from subscriptions to our Agility intelligent data platform and newswire products.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, third-party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $13.8 million for the nine months ended September 30, 2020, compared to $14.2 million for the nine months ended September 30, 2019, a decrease of $0.4 million. This decrease was primarily due to lower labor related costs during the period. Selling and administrative expenses as a percentage of total revenues were 32% and 34% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of total revenues was primarily attributable to increased revenues and lower Selling and administrative expenses in the current quarter.
Selling and administrative expenses for the DDS segment were $9.3 million for nine months ended September 30, 2020 and $9.2 million for the nine months ended September 30, 2019. The increase of $0.1 million was primarily due to higher labor related costs. As a percentage of DDS revenues, DDS selling and administrative expenses were 30% for the each of the nine months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Synodex segment were $0.6 million and $0.5 million the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.1 million. The increase is primarily due to labor related costs. Selling and administrative expenses for the Synodex segment as a percentage of segment revenues were 16% and 17% for the nine months ended September 30, 2020 and 2019, respectively.
Selling and administrative expenses for the Agility segment were $3.9 million and $4.5 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease of $0.6 million was primarily due to lower labor related costs. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 46% and 57% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in Selling and administrative expenses as a percentage of segment revenues was primarily due to a combination of higher revenues and lower Selling and administrative expenses in the current nine-month period.
Income Taxes
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries, a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses and tax impact on uncertain tax position (ASC 740).
We recorded a provision for income taxes of $0.5 million for each of the nine months ended September 30, 2020 and 2019.
Net Loss
We incurred a net loss of $0.6 million during the nine months ended September 30, 2020, compared to a net loss of $1.7 million during the nine months ended September 30, 2019. The improvement in net loss was primarily a result of higher revenue that outpaced operating costs in the Synodex and Agility segments in the current nine-month period.
Net loss for the DDS segment was $0.8 million for the nine months ended September 30, 2020, compared to a net loss of $0.1 million for the nine months ended September 30, 2019. The higher net loss of $0.7 million was primarily attributable to higher operating costs of $1.0 million offset in part by an increase in revenues of $0.3 million in the current nine-month period.
Net income for the Synodex segment was $0.5 million for the nine months ended September 30, 2020, compared to breakeven for the nine months ended September 30, 2019, an increase of $0.5 million. The improvement in net income was due to higher revenues in the current nine-month period.
Net loss for the Agility segment was $0.3 million for the nine months ended September 30, 2020, compared to $1.6 million for the nine months ended September 30, 2019. The improvement in net loss was due to higher revenues and lower operating costs in the current nine-month period.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| Cash and cash equivalents | $ | 15,336 | $ | 10,874 | ||||
| Working capital | 9,045 | 8,250 | ||||||
On September 30, 2020, we had cash and cash equivalents of $15.3 million, of which $7.5 million was held by our foreign subsidiaries, and $7.8 million was held in the United States. Despite our ability under existing tax law to repatriate funds from overseas after paying the toll charge, it is our intent as of September 30, 2020, to permanently reinvest the overseas funds in our foreign subsidiaries on account of the withholding tax that we would have to incur on the actual remittances and the working capital need of foreign subsidiaries.
We have used, and plan to use, our cash and cash equivalents for (i) investments in the Agility segment; (ii) the expansion of our other operations; (iii) technology innovation; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of September 30, 2020, we had working capital of approximately $ 9.0 million, as compared to working capital of approximately $8.3 million as of December 31, 2019.
We believe that our existing cash and cash equivalents and internally generated funds will provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months from the date of issuance of these financial statements. However, we have no bank facilities or lines of credit. Reductions in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.
On May 4, 2020, we received loan proceeds of $579,700 under the Paycheck Protection Program (PPP), which was established as part of the Coronavirus Aid, Relief and Economic Security Act. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan is payable over two years at an interest rate of 1% per year, with a deferral of payments until the date that the Small Business Administration remits the borrower’s loan forgiveness amount to the lender.
Cash Flows
Net Cash Provided by Operating Activities
Cash provided by our operating activities for the nine months ended September 30, 2020 was $5.7 million primarily on account of the following factors: our net loss for the period of $0.5 million; a source of $2.6 million from non-cash expenses consisting of depreciation and amortization of $1.7 million, stock-based compensation of $0.7 million and pension cost of $0.6 million, which factors were offset in part by an increase in deferred tax provisions of $0.4 million; net changes from working capital accounts that contributed an additional source of $3.6 million brought about by an increase in accrued salaries, wages and other related benefits of $1.7 million, an increase in accounts payable, accrued expenses and other of $0.8 million, a $0.6 million decrease in accounts receivable, and a net increase of $0.5 million in other working capital items. Refer to the condensed consolidated statements of cash flows for further details.
Cash provided by our operating activities for the nine months ended September 30, 2019 was $4.9 million primarily on account of the $2.5 million decrease in our accounts receivable, a $0.9 million decrease in prepaid and other current assets, a $0.7 million increase in income and other taxes and a $0.1 million increase in other working capital items. This favorable result was reduced by our net loss of $1.7 million in the period. The reduction in accounts receivable was a result of improvements in our collections during the period. Refer to the condensed consolidated statements of cash flows for further details.
Our days’ sales outstanding (DSO) were 59 days for the nine months ended September 30, 2020 and 66 days for the year ended December 31, 2019. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the “accounts receivable turnover”. Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressed in number of days.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2020, cash used in our investing activities was $1.1 million. These expenditures principally consisted of purchases to augment our network infrastructure in relation to our BCP initiatives in response to the ongoing COVID-19 pandemic.
For the nine months ended September 30, 2019, cash used in our investing activities was $1.3 million. These expenditures principally consisted of purchases of technology equipment including servers, network infrastructure and workstations.
During the next 12 months, we anticipate that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate $2.0 million to $2.3 million, respectively.
The source of funds for the anticipated capital expenditures will be cash generated from our operations.
Net Cash Provided by and Used in Financing Activities
Cash provided by financing activities was from the proceeds of the PPP Loan received amounting to $0.6 million and proceeds from stock option exercises of $0.2 million. Cash used in financing activities was for payments of long-term obligations of $0.8 million and $0.9 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.U.S. GAAP. The preparation of thesethe condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of Agility, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our consolidated results of operations and financial position. We believe the following critical accounting policies affect our more significant estimates and judgments in the preparation of our condensed consolidated financial statements.
The significant accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted.
Recent Accounting Pronouncements
In January 2016,December 2019, the FinancialFASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognitionfor Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and Measurementthe recognition of Financial Assetsdeferred tax liabilities for outside basis differences. The standard also clarifies and Financial Liabilities” (ASU 2016-01), which updates certainsimplifies other aspects of recognition, measurement, presentationthe accounting for income taxes. The standard is effective for fiscal years, and disclosureinterim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We do not expect that the adoption of financial instruments. The Company adopted this standard in the first quarter of 2019, and it did notnew guidance will have a materialsignificant impact on the Company’s consolidatedour financial statements.
In August 2018, the FASB issued ASU(ASU) No. 2018-14, “Compensation-Retirement Benefits-Defined Benefits Plans-General:Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (ASU 2018-14), thatwhich makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities; early adoption is permitted. We are currently evaluating the early adoption ofThe Company does not expect ASU 2018-14 but do not expect it to have a material impact toon the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements” (ASU 2016-13). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies codification and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments,” which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for certain Smaller Reporting Companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for us if we continue to be classified as a Smaller Reporting Company, with early adoption permitted. We do not expect that the adoption of the new guidance will have a material impact on our financial statements.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)(Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of September 30 2019.2020. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2019,2020, our disclosure controls and procedures were not effective. This was due to the lack of appropriate review procedures related to evaluation and proper accounting for lease contracts consistent with capital lease accounting under U.S. GAAP.
The Company determined that it did not maintain effective controls to ensure that leasing transactions were properly accounted for in accordance with U.S. GAAP, which constitutes a material weakness in internal control over financial reporting. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial information will not be prevented or detected on a timely basis.
To address these deficiencies, we will remediate our control procedures to reduce the likelihood of these errors recurring. We will implement additional quarterly control procedures to review any changes in events affecting our leasing transactions to ensure proper accounting under U.S. GAAP.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Reference is made to the disclosure under “Legal Proceedings” in Part I, Item 33. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
There were no material changes from the risk factors previously disclosed inFor information regarding Risk Factors, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019, as supplemented by the following additional risk factor, and the information regarding forward-looking statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Report.
The effects of the COVID-19 pandemic could materially adversely affect our results of operations and financial condition
The novel coronavirus disease 2019 (“COVID-19”), which the World Health Organization declared a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, and contributed to significant declines and volatility in financial markets. In response to COVID-19, countries and local governments have imposed restrictions on the operations of non-essential businesses and services, imposed travel restrictions and implemented societal lockdowns. Additionally, companies are taking precautions, such as requiring employees to work remotely and temporarily closing businesses. All of these factors have had, and are likely to continue to have, a severe adverse effect on global economic conditions, underemployment and unemployment, consumer spending and reductions in non-essential spending by governments and private companies, as well as uncertainty in financial markets. We have experienced limited operational disruptions and declines in customer demand for services to date; however, depending upon the extent and duration of the COVID-19 pandemic, we may experience a material adverse effect on our results of operations and financial condition as a result of the effects of COVID-19.
In response to the declaration of the COVID-19 pandemic we triggered our Business Continuity Plan for our 12 global delivery centers and offices, enabling us to continue operations while safeguarding the health and welfare of our employees. While the pandemic presented, and may in the future present, new risks to our business and there have been logistical and other challenges, there was no material adverse impact on our financial condition or results of operations for the quarter ended September 30, 2020. In addition, the COVID-19 pandemic could have a material adverse effect on our results of operations and financial condition by, among others, customers with at-will contracts, particularly in our DDS segment, reducing, delaying or cancelling orders; reduced spending by customers on third-party service providers as part of cost-rationalization efforts or otherwise; or customers determining to bring services in-house and/or customers delaying or postponing data engineering needs. Additionally, the effects of COVID-19 could exacerbate any other risks or uncertainties to which we are subject. Lastly, should we experience material adverse effects on our results of operations or financial condition, we may not be able to access additional sources of liquidity at rates that are acceptable to us, if at all.
The situation surrounding COVID-19 crisis remains fluid and the extent and duration of its impact to the economy remains unclear. For this reason, we cannot reasonably estimate with any degree of certainty the future impact to our results of operations and financial condition. The potential for a material impact on our results of operations and financial condition increases the longer the virus affects the level of economic activity in the United States and globally. In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investment activities, and reducing operating costs as we would likely have no other source of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities or repurchases of equity securities during the three months ended September 30, 2018.2020.
We purchased 34,150 shares of our common stock, for a total cost of approximately $44,054, during the three months ended September 30, 2019, as shown in the table below:
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum | ||||||||||||
| August 1-31, 2019 | 34,150 | $ | 1.29 | 34,150 | $ | 1,955,947 | ||||||||||
In July 2019, our Board of Directors authorized the repurchase of up to $2.0 million of its issued and outstanding common stock in open market or privately negotiated transactions. There is no expiration date associated with the program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
4840
| 31.1** | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2** | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1*** | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2*** | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
| ** | Filed herewith. |
** In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
| *** | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INNODATA INC.
| Date:November | /s/ Jack Abuhoff | ||
| Jack Abuhoff | |||
| Chief Executive Officer and President | |||
| Date:November | /s/ | ||
| Mark A. Spelker | |||
| Chief Financial Officer and Principal Accounting Officer | |||