Amy Agress - VP and General Counsel ONeil Nalavadi - SVP and CFO Jack S. Abuhoff - President and CEO.

Timothy Clarkson - Van Clemens & Co. Edwin Fowler - JHS Capital Advisors Madhu Kodali - Yaksha Capital.

Good day and welcome to the Innodata Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Amy Agress. Please go ahead, ma'am..

Thank you, Chanelle. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and ONeil Nalavadi, our CFO. We'll hear from O'Neil first, who will provide a detailed review of our results for the second quarter, and then Jack will follow with additional perspective about the business.

We'll then take your questions. First, let me qualify the forward-looking statements that are made during the call.

These statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including without limitation, that contracts may be terminated by clients; projective or committed volumes of work may not materialize; our Innodata Advanced Data Solutions segment, IADS, is a venture with minimal revenues that has incurred losses since inception and has recorded impairment charges for all of its fixed assets, we currently intend to continue to invest in IADS; the primarily at-will nature of our contracts with our Content Services clients and the ability of these clients to reduce, delay or cancel projects; continuing Content Services segment revenue concentration in a limited number of clients; inability to replace projects that are completed, canceled or reduced; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for our services; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies that we may acquire; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

We undertake no obligation to update forward-looking information, and actual results could differ materially. Thank you. I will now turn the call over to O'Neil..

Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial results for the second quarter 2015, which I will review on a sequential quarter over quarter basis. Total revenue in the second quarter was $14.1 million compared to $13.8 million in the previous quarter.

The $300,000 increase was driven by growth in all three segments, partially offset by $130,000 in lower runoff, deferred and one-time revenues attributable to the Bulldog acquisition. There was no significant change in revenues from the top three clients which was in the 42% to 43% range for both quarters.

On a segment basis, Content Services reported $12.4 million revenues this quarter compared to $12.2 million in the previous quarter. This increase was driven by growth in volumes across several engagements, but it still does not include any substantial ramp-up in the large European projects we won last year.

IADS revenues increased to $550,000 this quarter compared to $400,000 in Q1 which was primarily driven by a ramp-up in volume under existing Synodex contracts. Our Media Intelligence business reported $1.15 million in revenues this quarter compared to $1.2 million in Q1.

Revenue growth from new bookings and new customer additions were primarily offset by $130,000 in lower runoff revenues that I referred to earlier. These runoff revenues will completely wind down in the third quarter after which all Bulldog revenues will be attributable to new bookings under our ownership.

Excluding these runoff revenues, the sequential quarter over quarter growth in revenues was 6.5% after absorbing a 3% devaluation of the Canadian dollar. New customers were acquired across all product categories, namely MediaMiser's flagship media monitoring and analysis product as well as Bulldog's Media Pro database and Inside Health Media.

MediaMiser added four new customers this quarter. After netting of contract terminations, we ended the quarter with 112 subscriber customers compared to 110 at the end of the first quarter, and our retention rate exceeded 90%. Let me now review our gross margins.

On a consolidated basis, gross margins in the second quarter were $3.1 million or 22% of revenues compared to $2.7 million or 19% of revenues in Q1. On a segment basis, gross margin in our Content Services business was $3 million in Q2 compared to $2.8 million in the previous quarter.

Higher revenues combined with efficiencies contributed to this growth in gross margins. Our gross margins in the Content business are below our target range of 32% to 35% of revenues.

This is primarily because, due to ramp-up, direct labor costs exceeded revenues by $250,000 on the large European projects we had won in 2014 and another $150,000 we incurred on reengineering certain projects. Together they have diluted our gross margin to revenue ratio by 5 percentage points.

Moving over to other segments, in IADS, higher revenues translated into lower losses of $450,000 this quarter compared to $700,000 in the previous quarter. And in our Media Intelligence business, gross margins were $500,000 or 41% of revenues this quarter compared to $550,000 or 46% of revenues in the previous quarter.

Excluding acquisition related amortization expenses, gross margins in Media Intelligence were 52% in Q2 and 57% in the previous quarter. Also included in the cost of sales is a spend of $100,000 or 10% of current revenues in developing and maintaining an offshore client services team to support future growth.

Our selling, general and administrative expenses were $4.3 million at this quarter compared to $4.1 million in the previous quarter. And as a percentage of revenues, it was consistent at 30% in both quarters.

On a segment basis, SG&A expenses were lower in Content Services by $100,000 primarily due to cost efficiencies and were higher by $100,000 each in the IADS and in the Media Intelligence segments.

The increase in IADS was primarily attributable to data security certification and compliance costs and the increase in Media Intelligence business was due to commissions on new bookings, seasonal tax filing expenses and the expansion of our marketing and lead generation activities.

Moving down to pre-tax earnings, we incurred a pre-tax loss of $1.2 million this quarter compared to a pre-tax loss of $1.4 million in the previous quarter. In Content Services, higher revenues and lower SG&A expenses resulted in pre-tax earnings of $100,000 this quarter compared to pre-tax losses of $200,000 in the previous quarter.

In the IADS segment, higher revenues helped to lower pre-tax losses to $900,000 this quarter from a $1 million in the previous quarter. Media Intelligence reported pre-tax losses of $400,000 in the current quarter compared to $200,000 in the first quarter.

This is after taking into account $150,000 of acquisition related amortization expenses in both quarters. Included in this SG&A is an investment spend of $50,000 on sales and marketing staff and on an offshore IT team for product enhancements. These investments are being made to drive faster growth in customer acquisitions.

Moving down to taxes, this quarter we successfully resolved two transfer pricing tax disputes in India resulting in a $700,000 reversal of tax accruals for fiscal 2003 and 2005. This was a real test of patience and I would like to acknowledge the determined efforts of Raj and his team for prevailing over these unjust tax claims.

After providing for current period tax accruals and profits earned by operating subsidiaries and reversing the accrual for the prior period, we had a net tax benefit of $250,000 in Q2. Tax expense last quarter was $550,000.

After adjusting for tax benefits and minority interests, net losses were $800,000 this quarter compared to $1.8 million in the previous quarter. Let me now review our adjusted EBITDA and cash flows. In Q2 our adjusted EBITDA loss was $200,000 versus $500,000 in Q1.

Our adjusted EBITDA was the net result of $900,000 EBITDA in Content Services offset by $900,000 EBITDA loss in IADS and a $200,000 EBITDA loss in Media Intelligence. I will now review our balance sheet. We had cash and investments totaling $23.7 million at the end of Q2 compared to $25.4 million at the end of Q1.

Of this, approximately $2.4 million was held in the U.S. and the rest was held overseas by our international subsidiaries. We used $1.6 million of cash this quarter compared to $1.2 million cash generated last quarter. Cash was used primarily to fund our accounts receivable balances and to fund investments for growth.

Our accounts receivable trended higher by $1.5 million to approximately $9.8 million at the end of Q2 compared to $8.3 million at the end of the first quarter. In terms of day sales outstanding, our AR balance averaged at 66 days this quarter compared to 61 days in Q1.

We are continuing to tightly manage our CapEx incurring CapEx of $100,000 in Q2 compared to $200,000 last quarter. Looking ahead, we expect CapEx to be in the range of $300,000 to $400,000 in Q3. I will now turn to our Forex hedging program.

At the end of the second quarter, we had $18 million in outstanding forward contracts to hedge our overseas exposure for both expenses and revenues. In Q2, the U.S. dollar moved in a narrow range against the Philippine peso and it gained 1% against the Indian rupee, 8% against the euro and 3% against the Canadian dollar.

Based on mark to market, this resulted in a $150,000 notional gain on our outstanding hedges. These gains are not recognized and any eventual losses or gains on these contracts will be recognized upon maturity. Let me now review our guidance for Q2. We expect revenues to be in the range of $14.1 million to $14.8 million for Q3.

I beg my pardon, actually it's guidance for Q3. The segment-wise breakdown is, Content Services in the range of $12.4 million to $12.9 million, IADS between $600,000 and $700,000, and Media Intelligence between $1.1 million and $1.2 million.

We estimate our breakeven point excluding any acquisition related amortization expenses and CapEx in IADS at approximately $16 million of revenue per quarter. Thank you, and now I'll pass the call over to Jack who is joining us from Manila..

Thank you, ONeil. Good morning, everyone. Thank you for joining us today. ONeil has just provided a detailed financial review of the quarter and our revenue outlook for Q3. I will now provide the quarter's highlights for each of our reporting segments and along the way I'll provide some context on where we are now and what we're working on.

I'll begin with the Synodex division of IADS. In Synodex, as you may recall, we launched our 3.0 product late in 2014 after lots of iteration and client feedback.

Now with a strong product in hand, our focus in 2015 has been on capturing sufficient new bookings to enable us to sustain the investment we are carrying in our processing operation on operationalizing the deals we book and on positioning the business to continue to grow and turn a meaningful profit.

So far, we've got about $4.9 million of annual contract value booked to date. By annual contract value, we mean the revenue we anticipate recognizing from an engagement within a 12 month period. The total contract value would be this amount multiplied by the initial term of a contract.

Of this $4.9 million booked annual contract value, $1.9 million has been fully operationalized so far. Now when I use the term 'fully operationalized', what I mean is that we have completed all the work that needs to take place before we begin producing work and earning revenue on the deal.

This work typically includes finalizing data and reporting specifications, syncing our systems to our clients' systems and resolving any client-side dependencies such as software or hardware configurations.

In Q3, another $1.3 million of this $4.9 million annual contract value is scheduled to operationalize and then in Q4 the remaining $1.7 million is expected to operationalize. In terms of this last slice, client-side dependencies include finalizing a new report format with one customer and another customer completing some hardware configurations.

We're feeling pretty confident that both will get done within the expected timeframes that we've established with the clients. While we're working on operationalizing these bookings, we're also working on securing additional bookings. We think we need another $4 million or so in additional bookings to achieve a breakeven run rate.

That said, this number will be a bit of a moving target because we continue to refine assumptions regarding levels of new hires we will be onboarding into training programs to accommodate our pipeline. The breakeven point would be lower if we were planning to run steady-state rather than in a growth mode.

To achieve our near term bookings goal and reach beyond it, we have a prioritized pipeline of active prospects that we think have a good chance of closing primarily over the next six months.

This priority pipeline includes three prospective clients whose requirements could be significantly larger than the deals we have done to date, and another 10 prospective clients, two of which are interested in software licensing deals like the one announced last quarter with John Hancock.

In the aggregate, this priority pipeline has a value of approximately $21 million of potentially addressable annual contract value.

With regard to the three prospective clients with potentially large requirements, each of which could exceed $8 million, we have not included their full potential requirements within this priority pipeline but have rather assumed that only a portion of their requirements could be closable within this period.

In other words, we're conservatively assuming that they would start with just a portion of their business. We would then look to book additional portions of their business next year.

Now just to give you a sense of the work that goes into booking a new client, in our last call we talked about how we expected to run a pilot in Q2 for a large mutual insurance company. We successfully completed this pilot and executed a master services agreement with the company.

As part of the approval process to move forward with a production agreement, the company asked us to complete some additional live pilot files that are now being reviewed and tested within its environment. Assuming things go well, we expect to be able to conclude a definitive production agreement with the company by the beginning of September.

Similarly, we completed Phase 2 of a proof of concept with a large insurer to demonstrate how our data could be used in conjunction with its underwriting criteria. This insurer is one of the ones that I just described with potentially very large requirements.

Discussions are continuing with this insurer to plan a timeline and specific approach to incorporating APS.Extract data into its workflow. We're hopeful that we will be able to report additional positive developments on this front over the next several months.

There are a couple of thoughts I would like to share to provide some high-level perspective on Synodex. First, our discussions with both clients and prospects continue to validate the strong need for our data-driven solution in insurance underwriting. Second, we believe that there is a viable addressable market.

We believe that the addressable market opportunity in the U.S. alone for our life underwriting product is approximately $130 million in annual contract value. We base this on an estimate of the number of medical files reviewed by life insurance companies each year that were shared with us by a leading U.S.

provider of medical file retrieval services and which we further validated with data regarding total annual life insurance application count that we sourced from MID based on the number of searches it does per year and from the American Council of Life Insurers which tabulates data from the National Association of Insurance Commissioners.

Now beyond U.S. life underwriting, we believe there is a large potential market in underinsurance areas as well and quite possibly in other geographies. Notably, we saw some new interest during the quarter in the application of our technology to the disability claim segment of the insurance business based on some revised product markers.

These discussions are still in a formative stage with one large insurer but could contribute significantly to growth and market size, if successful, due to the large volumes of claims. Lastly, when we talk about annual contract value, as we have done so far in this discussion, we do so because Synodex revenue is recurring in nature.

The contract we signed with a client may have a term of years, like for example our recently announced contract with John Hancock which has a term of five years, but the total revenue value of the contract is a function of how long you get to keep it which is often much longer than the initial contract term.

In Innodata's Content Services segment, we sign what we regard as recurring revenue contracts with initial terms of typically one to three years, but they tend to endure between five and 10 years and we have several that are over 10 years old and still going strong.

We expect that our Synodex contracts will enjoy a similar and quite likely greater longevity as a result of a relatively greater product differentiation in Synodex compared with our traditional business and the dual entry barriers of significant required client integration and clients' high standards concerning information security.

So, assuming a 10 year average life, the $4.9 million of annual contract value we have closed so far would have a lifetime revenue value of $49 million. It is this kind of recurring revenue base that can give a business the lift required to grow.

By contrast, our Content Services business has historically had large one-time project component that has resulted in revenue volatility and has frustrated the growth of the business as project revenue needs to be replenished continually. As we nurture our Synodex near-term high-value pipeline, we're also stirring the pot on additional pipeline.

Some of this could easily sneak into 2015 bookings but much of it will likely be forecasted for 2016.

At the Annual Association of Home Office Underwriters Conference or AHOU held in April, Synodex had 15 prospect meetings and we enjoyed the industry buzz surrounding our APS.Extract solution that was catalyzed by John Hancock's Synodex announcement that came out the first day of the conference.

We're also encouraged to see how the Hancock announcement was picked up by industry magazines and newsletters. Synodex revenue in the quarter was $550,000, up from $330,000 last quarter. We expect revenue to increase to approximately $650,000 in the third quarter with a further increase in the fourth quarter.

At this level, our Synodex related loss should be approximately $600,000 in the third quarter and should trend lower still in the fourth quarter. On the DocGenix product side, we continue to see interest from prospects in our new release of DocGenix Analytics.

We launched marketing efforts around this new release in the quarter, so far resulting in two new customer prospects. In the second half of 2015, we expect to release DocGenix CREO, companion platform for Analytics which will be used by clients to generate new financial documents.

Taken together, DocGenix CREO and DocGenix Analytics address the entire contract lifecycle from document generation to archival and search, all while providing digital data to downstream systems. Our quarterly loss in DocGenix is now approximately $200,000. Successes in these new programs would lessen and eventually eliminate this loss.

I'll now turn to our Content Services segment. First, some really good news. I'm pleased to announce that just yesterday we closed a $4.8 million contract with a new client for the creation of a new digital information product. We expect that this contract will be performed over the next 18 to 24 months.

It is a great new win for us, one that we've worked hard on for quite some time now and that I mentioned in our last call as then tracking well. The client is an early-stage venture-funded company with whom we have formed a solid relationship. I believe that we will have additional opportunities with this client as well.

During the quarter, we saw a continued expansion with some of our existing as well as new customer wins. For example, in terms of new clients, we closed an additional phase of a program to help a European publisher run its business more efficiently and build new digital products funded in part through these cost efficiencies.

In Q3, we are expecting further expansions under this program. In terms of existing clients, we contracted for and successfully completed the initial test phase of what we believe is the potential to be a large ongoing content analysis program. That said, our second quarter Content Services bookings were overall disappointing.

To drive bookings growth in Content Services, we are executing on an essentially three-fold plan. First, we are continuing to build new technologies that are responsive to client demand for high-quality automated digital processing.

Our success in the technology front is to a large extent responsible for enabling us to win the new $4.8 million booking that we have announced today. In addition, in Q2, we closed a contract with a new business unit of a large existing customer based on the capabilities of one of our new transformation and enrichment platforms.

This is a strategic win with significant possible expansion. The second element of our plan to accelerate Content Services bookings is to add to our existing services portfolio new proprietary delivery platforms that we provide to customers on a SaaS basis.

For example and as we mentioned in our last call, we are launching a new proprietary technology delivery platform called Xenon. It's a SaaS-based hosted solution for distributing digital content.

As I mentioned last time, we have begun a strategic relationship with Pearson's Learning Solutions Professional Services Division to jointly market Xenon and our collective services to North American trade and professional associations who are seeking new ways of efficiently monetizing the [investor depositories content] [ph].

We are in late stage discussions with one such professional association and we will be promoting Xenon at the American Society of Association Executives Conference that is taking place in Detroit from August 8 to 12.

This certain major initiative to accelerate bookings in Content Services involves enhancing both how we engage our existing customers and how we engage new potential customers. Presently, we have a single sales organization that is responsible for both of these critical activities.

We believe that by introducing some specialization here, there is scope to improve both how we earn new business with our current customers and how we drive sales with new customers.

As you may recall, we signed letters of intent announced last July with two divisions of a large European information company that inflicted us to provide end to end content creation and management services. The letters of intent contemplated entering into services agreements with initial terms of five years.

We started work on these engagements in the fourth quarter of 2014 and we continued our ramp-up in the first and second quarters.

In the first half of the year, we incurred a direct labor margin loss of approximately $250,000 on this program as we have had to hire and train staff in advance of taking over the work and there were some delays in shifting work to us.

That said, based on our current ramp-up plan, we're expecting our direct labor margin losses to decline in Q3 and for the program to be direct labor margin positive in Q4. At the end of this year, we project being at a run rate of approximately $4 million per year in the program. Since we signed the LOIs, the euro has declined by 20% versus the U.S.

dollar. So this program is now projected to reach approximately $8 million annual revenue run rate by mid-2017 as opposed to the $10 million we originally forecasted assuming constant currency on a go forward basis.

We envision ramp-up to $8 million of this recurring program to continue through 2016 and into 2017 and for the program to continue generating or contributing to gross margins from and after Q4. I'll now turn to our Media Intelligence Solutions business which incorporates our MediaMiser and Bulldog Reporter properties.

The Media Intelligence Solutions team concluded the quarter with total revenues of $1.150 million, slightly ahead of our internal budgets. From our acquisition of MediaMiser one year ago until now, we have grown our Media Intelligence Solutions business by 20% on a constant currency basis.

Based on our current outlook, we think that by the end of this year we will have succeeded at growing it by 40% to 50% on a constant currency basis. In Q2, we booked new contracts in our Media Intelligence Solutions segment valued at approximately $370,000 and added four new customers for MediaMiser's flagship products.

In March, we launched content marketing and lead generation programs designed to accelerate growth. The programs are working very well. We are experiencing month to month increases across key leading indicators including Web traffic page views and unique visitors, inbound sales leads and demo scheduled and performed.

In Q2, as a result of these new content marketing and lead gen programs, we had a record 107 sales leads for MediaMiser's flagship products, which represents a four-fold increase over last year, and 50 scheduled demos, a good number to which were with high-quality Fortune 1000 companies.

Just last week, we had our single largest day ever of inbound leads and leads generated from outbound sales and marketing efforts. We believe that our early successes with the marketing and lead gen programs suggest an opportunity to substantially increase our rate of growth.

I'll now talk just a bit about Bulldog Reporter which we acquired in January as an asset in a bankruptcy proceeding. The Bulldog Reporter's product set includes the Daily Dog which is a PR blog, Media Pro which is a journalist database, Inside Health Media which is a health industry media information product, and our PR industry awards program.

From a strategic perspective, we see Bulldog as a self-funding marketing channel with which we will cultivate a community of PR professionals in the U.S. and through which we will generate leads for higher value MediaMiser monitoring and analysis products.

Since the acquisition, we have been refining Bulldog's products and working to position Bulldog as one of the top media intelligence companies for the PR industry. Our efforts are showing strong signs of success. A recent Forbes.com article listed Bulldog Reporter among the top 10 PR industry blogs.

Similarly, research firm Onalytica just recently listed Bulldog as the 10th most influential brand in the PR industry for 2015. We will track our success with the Bulldog Reporter based on the number of subscribers we have for its products. As of June 2015, more than 55,000 PR professionals subscribed to Bulldog Reporter products.

Our adjusted EBITDA loss in this segment was $200,000 this quarter. We expect that an additional $300,000 of quarterly revenue will enable us to breakeven, which we aim to accomplish my year-end. After that, we expect more than 60% of marginal revenue to flow to the bottom line.

I'll now open the line for questions, after which I'll wrap up with some final comments. Operator, we're now ready for questions..

[Operator Instructions] We'll take our first question from Tim Clarkson with Van Clemens & Co..

Good to see some improvement here on both the top line and the bottom line.

Jack, if you could just explain as simply as you can, again what the value-added on the IADS on the life insurance product and the derivative products, what are the benefits that you're trying to create, make sure clients want to do business with IADS?.

The benefits are significant. First, there is a huge benefit in the time that it takes for an underwriter to underwrite files. The throughput that we're seeing in the programs that we've started is as much as 275% throughput. So it's almost three times more efficient for an underwriter team to use our product than for it not to use our product.

The second great benefit is that they can work faster, the cycle time is better, meaning they can turn around a life application for their producers much more quickly, and a lot of times in life insurance business with compared lives, it's the first company to quote that gets business. The most interesting though benefit is in big data.

Insurance companies go wild for data and up until now the only piece of digital data that they didn't maintain and didn't have access to for automating and for actuarial purposes was the data about medical conditions coming out of the medical files they were reviewing.

So the fact that this is now digital opens up all sorts of opportunities for them to do better actuarial analysis or for them to even create new products, which they are doing. So those are some of the reasons why it's getting the attention that it is in the market right now..

Sure.

How about on the derivative side, what are the benefits that that product provides?.

It's very similar. It's also a transformation product. It's transforming in a old way of doing things to a new way and the old way there was maintaining legal contracts and things like derivatives contracts as either images in the system or sometimes even as paper.

Now what we're doing is we're transforming that to digital data and what that enables companies to do is to track their portfolios much more closely, track their counterparty exposure, or gain proactively their exposure, and perhaps most importantly, it enables them to meet the regulatory requirements that are being imposed upon them and that are due to be imposed upon them in the latter half of this year.

So a lot of the interest we're seeing is right there that they can with our product provide regulators the transparency that they are required to very efficiently..

What are the size of some of the contracts you're trying to get?.

In which division?.

In the derivative side..

You know they differ. We've just started aggressively marketing that and we're talking to several companies. I think that with Analytics and CREO now in hand, it's a very compelling solution, and the size of the contracts is going to either depend upon how much they want to undertake, what the size of their portfolios is.

We've talked to some banks that have huge portfolios of agreements and I'm hoping that they see this as a compelling solution to moving, modernizing the way they manage those portfolios..

One last question just on e-books, is there anything new going on there?.

There is. We just started producing e-books at scale in Chinese, which is interesting. That's a new capability for us and one that's going well so far. And there is continuing need in that business. I think it's a business that we continue to serve and we'll continue to serve.

We're doing some new things within it too in terms of new content types, but it's a project based business and that's why we feel compelled that we can create the kind of shareholder value that we want to create by driving more the recurring revenue opportunities, like we are with Synodex, like we are with MediaMiser and would potentially be doing with things like Xenon that we've talked about..

Okay, great, thanks. I'm done. Thanks..

[Operator Instructions] We'll take our next question from [Chris] [ph] [indiscernible] with [Sambute Technology Group] [ph]..

I had a couple of quick ones. One of them is, you talked about operational readiness in terms of some of the large contract revenue ramps.

Once those contracts are as you put it operational and ready, does the revenue ramp begin abruptly or is it something that kind of slowly scales up over time?.

Great question, Chris. That's absolutely right that after we operationalize, that's the beginning then of the ramp-up. So we're in production, we're starting to produce files and we're ramping up to the full volume requirements.

The speed with which we do that will be a function of the staff that we're able to allocate to the project, first, and secondly, the speed that the customer is comfortable going at. So it will differ customer by customer and it will differ based on how much we have going on at the time and available resources coming out of training programs..

Okay.

I mean what's your sort of guesstimate as to on average once that they become fully operational to when it hits sort of contracted value on a recurring basis, is it two months, four months, six months, just kind of trying to get a handle on it?.

I think that we probably would be aiming for something like four to five months. Larger programs could take more time than that and smaller ones have been less than that..

Okay. I want to ask one more. Out of curiosity, you talked about foreign exchange impact in one contract specifically which will be reduced because of the weakness in the euro. And I guess my – I'm curious as to why it's such a small company.

Your clients are forcing you to [indiscernible] or you're ending up with a foreign exchange risk of these rather large contracts given that to my knowledge your clients are fairly big financially sophisticated companies, that is why not the contracts basically rated in your base currency and basically offloading that FX issue to them?.

I think maybe I need to put you on the phone with our clients and you can help us negotiate. Seriously though, I think the answer to that is that the customer that we're referring to is looking to and typically does pay its bills in the currency in which it receives its revenues.

So it's a European publisher, they bill people in euros, they're paying their current production capabilities internally in euros, and when they externalize that, when they bring that to us, they are not looking to introduce a new foreign currency exchange rate risk to that equation. They're looking for the benefits that outsourcing provides.

That said, in our negotiations we don't always take 100% of the currency risk and even when we do we have hedging programs in place.

I think the unusual thing about this is that there's been a significant gap in time between the time we entered into the LOIs and the time we started production, in addition to which there was kind of an unprecedented devaluation of the euro. So I hope that answers the question..

Yes, I understand. And because this was a negotiation, it wasn't like you could go up and hedge that because you didn't really have a booking yet..

Exactly, that's right..

Okay.

And I mean when you do have bookings, I mean you apply whatever efforts you can to try to hedge those things based on your anticipated revenue stream?.

We do, and when you're talking about a five-year contract, you're not buying five-year hedges..

Right, I understand..

So it does continue to be exposure there.

Sometimes what you do is you put a collar in place which says, if the currency moves outside a certain range then you can come back to the table and have discussions about it, but a lot of what we do is we're moving work from one part of the globe to another and we're paying our costs in one currency and we're earning revenue in another, and that's just something we need to be comfortable managing..

Okay. Very good. Thanks for taking my questions..

We'll take our next question from Ed Fowler with JHS Capital Advisors..

ONeil, could you explain why the current, I think it's $1.5 million in long-term debt, where did that come from and when is the payment due?.

$1.6 million is the deferred payment obligations for MediaMiser acquisition. So that's what it relates to..

When do you have to make that payment?.

There was a payment due in July which was completed and then is in 2017..

Okay.

So your cash level is not as high as it was stated on June 30?.

We have a choice to pay the deferred consideration either using our cash or using our shares..

And have you done that?.

I guess we have done that. For the July payment, the consideration was done through issuance of shares..

So your shares outstanding are greater now?.

The shares outstanding would be greater by approximately 170,000 shares, yes, that's right..

Okay. And, Jack, why is the deal with the German publisher taking so long? I think it was mentioned that they didn't download the information to you quickly or not for whatever.

When do you start seeing that to really work for you and why is it taking so long?.

There were two divisions there that we've talked about. The first division has ramped up faster than the other one. The other one is taking a little bit more time, but as I said, we're seeing that coming up and will continue to come up.

It's still late for – it's probably about three months or so behind the schedule that we had hoped it would be on, but we always said, and so has been in our working assumptions, that it would be a slow ramp-up into 2017.

That said, we will be running the operation once that's completed and that's exactly the kind of recurring revenue base that we're looking to build out in the Company..

Okay, thank you.

Jack, regarding the IADS, is there any of the payments you received, I think you said it was $550,000 so far, is that for work completed or is that upfront payments from these insurance companies?.

The revenue is for work that is completed..

Okay, good. Thank you, Jack..

[Operator Instructions] We'll take our next question from Madhu Kodali with Yaksha Capital..

I have a few questions. The first question is related to the breakeven. I believe I heard it is $16 million per quarter.

Is that cash breakeven to suppose right?.

No, that is breakeven at the pre-tax level, though before amortization expenses of the goodwill and the intangibles. So we have approximately about $600,000 of amortization relating to the acquisition of MediaMiser and Bulldog..

So that naturally would be non-cash expenses?.

No. In addition to that, we have approximately about $4 million of normal depreciation to other amortization expenses like options and other things. So the only differentiation is, it will cover the $4 million of depreciation and option amortization but not the expense pertaining to the acquisitions..

Okay.

So given the current contracts you have in pipeline, when do you see you reaching cash flow breakeven, assuming I mean no new contracts are going to kick-start anytime in the next quarter or two?.

Madhu, there's two ways to look at cash breakeven. Our current adjusted EBITDA loss for the current quarter was approximately $200,000. So another $1 million of revenue would comfortably get us above the adjusted EBITDA.

The second criteria that we look at is the free cash flows, and our normalized CapEx is somewhere in the region of about $2 million to $2.5 million per year. So that's the next important criteria for us. So right now, the adjusted EBITDA breakeven point is another annual revenues of about $1 million..

All right.

So coming to the CapEx, is there any additional large CapEx requirement that you have to incur for those two large contracts, one, the German publisher, and the other $4.8 million, $4.9 million contract at this time or have you already invested into those requirements?.

The normal Content projects, the normal CapEx that we have would take care of those contracts. There's nothing significant other than replacement CapEx that comes in the normal course for desktop and software applications. That said, we may have some CapEx associated with Synodex over the next six months depending on how the ramp-up takes place..

That would require you to add more people for the ramp-up?.

When we talk about CapEx, it is not the [indiscernible] the people. That will go to the operating expense..

I understand, right.

But would you have to hire new people to support these contracts or you have enough capacity at this point?.

We have some spare capacity of people who are – and that's the reason why we have the loss at the gross margin level because we're maintaining capacity in anticipation of the future work, and it will not take care of all the prospects that we have in the pipeline.

The plan is to bring people onboard as we get closer to execution of contracts and operationalizing and getting contracts into live production..

Okay, thank you. One last question on that $4.8 million, $4.9 million contract that Jack talked about, he mentioned 'operationalized' as a keyword for three different stages of execution. For example, $1.9 million operationalized, totally operationalized for the last quarter.

Is that already booked as revenue and what about the cash payment from the customer on those, how does that work?.

Jack, do you want to take that?.

Sure. No, it's not paid upfront. We are paid on deliveries. So we build the files that we deliver and as we invoice those we recognize revenue..

So the question then is, have the $1.9 million operationalized revenue build already or is it yet to be build into Q3?.

It's yet to be built. But the way to think about the $1.9 million is, that's a portion of the $4.9 million that we've booked. So what I want to do is give you a sense of where are we with those bookings, how are they going to turn into revenue. So the first step to turning them into revenue is operationalizing them.

So you start your ramp-up, you start providing the service to your client, the client starts paying you that portion. So that's what a little bit less than half. In the quarter, we've started our ramp-up of it. The $1.9 million is a booking number, it's not revenue and it's not an invoice number..

But, Jack, you have already incurred the cost related to that $1.9 million, correct?.

No. I think the way to think about it, again the $4.9 million and – the $1.9 million is a portion of the $4.9 million, so the way to think about that is backlog. It's the value of contracts that you've won up until now. So the contracts are in the bank but you haven't started producing the work, you haven't started invoicing them yet.

When they are operational, then you begin sending invoices out and you begin recognizing revenue under that backlog..

Okay.

So the breakdown you gave, the $1.9 million, $1.3 million and $1.7 million over the period of last quarter and the next two quarters, can we think that they are lagged by a quarter in terms of booking and collection?.

So again those are annualized numbers. So that's the question of an annual contract value, those are annualized numbers, and the way to think about that is, roughly a four to five month ramp-up..

Wonderful. Thanks Jack..

We'll take a follow-up question from Ed Fowler with JHS Capital Advisors..

At the Annual Meeting, you mentioned you were going to meet with the CEO of John Hancock. That would be some Annual Meeting was on June 6 I think and you said a couple of weeks.

Has that happened and any color to add on that meeting?.

Yes, we had the meeting with the John Hancock people. I think it actually turned out to be a Senior Vice President, not the CEO, but the meeting went very well. Hancock partnership is something we're very excited about. As I said, there is a lot of industry buzz that's helped create and we see opportunities to continue to grow that relationship.

So it's all good..

And you have a contract with them now?.

We do. In fact it's a contract under which they are going to be utilizing our technology. And I mentioned in our last call, we build our technology primarily with a view that we would be using it to provide a service.

Hancock came, they spent a lot of time in the lab environment at our New Jersey office test-driving the system and they decided they want to license it to use internally. So we're building a customized version for them that should go live in the next couple of months and it's a great relationship for us.

They actually announced – they did a press release about their relationship with Synodex just last April. If you look at their Web-site, you can come up with that press release..

Synodex appears to be very positive as you move forward, so that's good.

One other thing, you mentioned a new Content client and I think you said it was a venture capital firm?.

No, it's a venture-funded firm, so it's an early stage firm but it's an information provider. They are building new kind of cutting-edge next-generation products in professional information..

So it has nothing to do with e-books?.

Has nothing to do with e-books, no..

Okay.

So that should move fairly quickly, should it?.

We know exactly how it should roll out. It has a delivery schedule associated with it and a performance period that should be 18 months. So we're saying 18 to 24 months should be the period of time over which we recognize the $4.8 million of revenue..

Okay. Thanks Jack..

[Operator Instructions] It appears there are no further questions. At this time, I would like to turn the conference over to Mr. Abuhoff for any additional or closing remarks..

Thank you, operator. I guess I'll just do a real quick recap. In Synodex, as I said, we've got about $4.9 million of annual contract value booked to date. By the end of the year we should have that all operationalized, meaning ramping up.

We're working to achieve our near term bookings goals which focus very much in getting the business to run rate breakeven, and from there positioning the business for growth and earnings.

Toward that end, we're laser focused on our priority pipeline that has a value of $21 million or so of potentially addressable annual contract value and include some of the largest players in life market. And then on the Content side, as we said, just yesterday we closed a $4.8 million contract with a new client.

It's a great win for us, a real exciting new company and we're thrilled to be working with them. In our Media Intelligence group, the team is abuzz with how well the new content marketing and lead gen programs are working.

So you put that together with the scale that we've now achieved by building new offshore teams to work together with the Ottawa teams, and then put that together with the 60% contribution margin on incremental growth, and it could make for quite a ride, quite a ride up.

So we're ending at 50% growth this year and we've got the ambition to ramp that growth rate even higher going forward. So I guess that's my quick recap. Thank you everyone for joining us on today's call and for your continued support and interest, and look forward to talking to you next time..

Today's conference is available for replay by dialing 1-719-457-0820 or 888-203-1112 with the passcode of 7598892. Again, the numbers are 719-457-0820 or 888-203-1112 with the passcode of 7598892. That concludes today's conference. You may now disconnect..