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INNODATA INC - Quarter Report: 2022 June (Form 10-Q)

Table of Contents

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 June 30, 2022

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

The NASDAQ Stock Market LLC

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 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      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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer     Non-accelerated filer     Smaller reporting company     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

The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of August 6, 2022 was 27,302,843.

Table of Contents

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended June 30, 2022

INDEX

    

Part I – Financial Information

    

 

Page No.

Item 1.

Financial Statements

Condensed Consolidated Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2022 and 2021

3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

Part II – Other Information

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

 

37

1

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

    

June 30, 

    

December 31, 

 

2022

 

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

10,481

$

18,902

Accounts receivable, net of allowance for doubtful accounts of $730 for each of these periods

 

10,956

 

11,379

Prepaid expenses and other current assets

 

3,786

 

3,681

Total current assets

 

25,223

 

33,962

Property and equipment, net

 

2,899

 

2,947

Right-of-use-asset, net

 

4,395

 

5,621

Other assets

 

2,005

 

2,247

Deferred income taxes, net

 

1,667

 

1,950

Intangibles, net

 

11,658

 

10,347

Goodwill

 

2,076

 

2,143

Total assets

$

49,923

$

59,217

LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,054

$

1,823

Accrued expenses and other

 

6,205

 

7,564

Accrued salaries, wages and related benefits

 

6,404

 

6,391

Income and other taxes

 

3,387

 

3,213

Long-term obligations - current portion

 

700

 

1,279

Operating lease liability - current portion

 

776

 

1,034

Total current liabilities

 

19,526

 

21,304

Deferred income taxes, net

 

20

 

15

Long-term obligations, net of current portion

 

5,998

 

6,217

Operating lease liability, net of current portion

 

4,087

 

5,276

Total liabilities

 

29,631

 

32,812

Commitments and contingencies

 

 

Non-controlling interests

 

(730)

 

(3,522)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Serial preferred stock; 4,998,000 shares authorized, none outstanding

 

-

 

-

Common stock, $.01 par value; 75,000,000 shares authorized; 30,487,000 shares issued and 27,303,000 outstanding at June 30, 2022 and 30,347,000 shares issued and 27,163,000 outstanding at December 31, 2021

 

305

 

303

Additional paid-in capital

 

33,946

 

35,121

Retained earnings (deficit)

 

(3,488)

 

3,160

Accumulated other comprehensive loss

 

(3,276)

 

(2,192)

 

27,487

 

36,392

Less: treasury stock, 3,184,000 shares at June 30, 2022 and December 31, 2021 at cost

 

(6,465)

 

(6,465)

Total stockholders’ equity

 

21,022

 

29,927

Total liabilities, non-controlling interests and stockholders’ equity

$

49,923

$

59,217

See notes to Condensed Consolidated Financial Statements.

2

Table of Contents

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

    

Three Months Ended

June 30,

    

2022

    

2021

Revenues

$

19,987

$

17,049

Operating costs and expenses:

 

  

 

  

Direct operating costs

 

12,992

 

10,409

Selling and administrative expenses

 

10,277

 

6,980

Interest expense, net

 

(1)

 

4

 

23,268

 

17,393

Loss from operations

 

(3,281)

 

(344)

Gain from loan forgiveness

 

-

 

580

Income (loss) before provision for income taxes

 

(3,281)

 

236

Provision for income taxes

 

550

 

366

Consolidated net loss

 

(3,831)

 

(130)

Income (loss) attributable to non-controlling interests

 

2

 

(27)

Net loss attributable to Innodata Inc. and Subsidiaries

$

(3,833)

$

(103)

Loss per share attributable to Innodata Inc. and Subsidiaries:

 

  

 

  

Basic and Diluted

$

(0.14)

$

(0.00)

Weighted average shares outstanding:

 

  

 

  

Basic and Diluted

 

27,226

 

26,522

Comprehensive Loss:

 

  

 

  

Consolidated Net loss

$

(3,831)

$

(130)

Pension liability adjustment, net of taxes

 

38

 

11

Change in fair value of derivatives, net of taxes

 

(541)

 

(267)

Foreign currency translation adjustment

 

(600)

 

135

Other comprehensive loss

 

(1,103)

 

(121)

Total Comprehensive loss

 

(4,934)

 

(251)

Less: Comprehensive income (loss) attributable to non-controlling interest

 

2

 

(27)

Comprehensive Loss attributable to Innodata Inc. and Subsidiaries

$

(4,936)

$

(224)

See notes to Condensed Consolidated Financial Statements.

3

Table of Contents

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

Six Months Ended

June 30, 

    

2022

    

2021

Revenues

$

41,179

$

33,016

Operating costs and expenses:

 

 

Direct operating costs

 

26,406

 

20,505

Selling and administrative expenses

 

20,467

 

12,505

Interest expense, net

 

2

 

14

 

46,875

 

33,024

Loss from operations

(5,696)

(8)

Gain from loan forgiveness

-

580

Income (loss) before provision for income taxes

 

(5,696)

 

572

Provision for income taxes

 

1,025

 

293

Consolidated net income (loss)

 

(6,721)

 

279

Loss attributable to non-controlling interests

 

(73)

 

(16)

Net income (loss) attributable to Innodata Inc. and Subsidiaries

$

(6,648)

$

295

 

 

Income (loss) per share attributable to Innodata Inc. and Subsidiaries:

 

 

Basic

$

(0.24)

$

0.01

Diluted

$

(0.24)

$

0.01

Weighted average shares outstanding:

 

 

Basic

 

27,192

 

26,199

Diluted

27,192

29,194

Comprehensive income (loss):

 

 

Consolidated net income (loss)

$

(6,721)

$

279

Pension liability adjustment, net of taxes

 

78

 

22

Foreign currency translation adjustment, net of taxes

 

(626)

 

114

Change in fair value of derivatives, net of taxes

 

(536)

 

(267)

Other comprehensive loss

 

(1,084)

 

(131)

Total Comprehensive income (loss)

 

(7,805)

 

148

Less: Comprehensive loss attributable to non-controlling interests

 

(73)

 

(16)

Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries

$

(7,732)

$

164

See notes to Condensed Consolidated Financial Statements.

4

Table of Contents

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Six Months Ended

 

June 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Consolidated net income (loss)

$

(6,721)

$

279

Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:

 

 

Depreciation and amortization

1,824

1,370

Gain on loan forgiveness

-

(580)

Stock-based compensation

1,565

614

Deferred income taxes

 

167

 

(61)

Pension cost

303

322

Loss on lease termination

125

-

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

274

 

(140)

Prepaid expenses and other current assets

 

(148)

239

Other assets

 

243

 

168

Accounts payable and accrued expenses

 

(1,647)

 

4,658

Accrued salaries, wages and related benefits

 

(35)

 

-

Income and other taxes

 

178

 

(1,283)

Net cash provided by (used in) operating activities

 

(3,872)

 

5,586

Cash flows from investing activities:

 

 

Capital expenditures

 

(3,638)

 

(1,473)

Net cash used in investing activities

 

(3,638)

 

(1,473)

Cash flows from financing activities:

 

  

 

  

Proceeds from stock option exercises

180

1,750

Withholding taxes on net settlement of stock-based compensation

-

(763)

Payment of long-term obligations

 

(477)

 

(574)

Net cash provided by (used in) financing activities

(297)

413

Effect of exchange rate changes on cash and cash equivalents

 

(614)

 

(40)

Net increase (decrease) in cash and cash equivalents

 

(8,421)

 

4,486

Cash and cash equivalents, beginning of period

 

18,902

 

17,573

Cash and cash equivalents, end of period

$

10,481

$

22,059

Supplemental disclosures of cash flow information:

 

 

Cash paid for income taxes

$

696

$

724

Cash paid for operating leases

$

974

$

860

Cash paid for interest

$

4

$

17

See notes to Condensed Consolidated Financial Statements.

5

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INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

(In thousands)

Accumulated 

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Treasury Stock

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

    

Shares

Amount

    

Total

January 1, 2022

30,347

$

303

$

35,121

$

3,160

$

(2,192)

3,184

$

(6,465)

$

29,927

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(2,815)

-

-

-

(2,815)

Stock-based compensation

-

-

537

-

-

-

-

537

Stock option exercises

23

1

26

-

-

-

-

27

Shares withheld for exercise settlement and taxes

(7)

-

(53)

-

-

-

-

(53)

Redemption of non-controlling interest

-

-

(2,864)

-

-

-

-

(2,864)

Pension liability adjustments, net of taxes

-

-

-

-

40

-

-

40

Foreign currency translation adjustment

-

-

-

-

(26)

-

-

(26)

Change in fair value of derivatives, net of taxes

-

-

-

-

5

-

-

5

March 31, 2022

30,363

$

304

$

32,767

$

345

$

(2,173)

3,184

$

(6,465)

$

24,778

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(3,833)

-

-

-

(3,833)

Stock-based compensation

-

-

1,028

-

-

-

-

1,028

Stock option exercises

124

1

152

-

-

-

-

153

Redemption of non-controlling interest

-

-

(1)

-

-

-

-

(1)

Pension liability adjustments, net of taxes

-

-

-

-

38

-

-

38

Foreign currency translation adjustment

-

-

-

-

(600)

-

-

(600)

Change in fair value of derivatives, net of taxes

-

-

-

-

(541)

-

-

(541)

June 30, 2022

30,487

$

305

$

33,946

$

(3,488)

$

(3,276)

3,184

$

(6,465)

$

21,022

January 1, 2021

28,984

$

289

$

31,921

$

4,833

$

(938)

3,184

$

(6,465)

$

29,640

Net income attributable to Innodata Inc. and subsidiaries

-

-

-

398

-

-

-

398

Stock-based compensation

-

-

278

-

-

-

-

278

Exercise of stock options

690

4

605

-

-

-

-

609

Shares withheld for exercise settlement and taxes

(193)

1

(764)

-

-

-

-

(763)

Pension liability adjustments, net of taxes

-

-

-

-

11

-

-

11

Foreign currency translation adjustment

-

-

-

-

(21)

-

-

(21)

Change in fair value of derivatives, net of taxes

-

-

-

-

-

-

-

-

March 31, 2021

29,481

$

294

$

32,040

$

5,231

$

(948)

3,184

$

(6,465)

$

30,152

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(103)

-

-

-

(103)

Stock-based compensation

-

-

336

-

-

-

-

336

Exercise of stock options

556

5

1,136

-

-

-

-

1,141

Pension liability adjustments, net of taxes

-

-

-

-

11

-

-

11

Foreign currency translation adjustment

-

-

-

-

135

-

-

135

Change in fair value of derivatives, net of taxes

-

-

-

-

(267)

-

-

(267)

June 30, 2021

30,037

$

299

$

33,512

$

5,128

$

(1,069)

3,184

$

(6,465)

$

31,405

See notes to Condensed Consolidated Financial Statements.

6

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

1.           Summary of Significant Accounting Policies and Estimates

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) that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the “Company”) as of  June 30, 2022 and December 31, 2021, the results of its operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021, and stockholders’ equity for the three and six months ended June 30, 2022 and 2021. 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.

Certain information and note disclosures normally included in or 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 Securities and Exchange Commission (the “SEC”) and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those in the notes to the consolidated financial statements for the year ended December 31, 2021.

Principles of Consolidation - The condensed consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and docGenix limited liability company that is majority-owned by the Company. The non-controlling interest in the docGenix limited liability company has call and put options that can be settled in cash or stock. Accordingly, this is presented in temporary equity in accordance with the Financial Accounting Standards Board’s (the “FASB”) non-controlling interest guidance. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates - In preparing the 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 as of 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 and assumptions used in the preparation of the condensed consolidated financial statements are reasonable, including assumptions made by management 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 the 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, pension benefit plan assumptions, litigation accruals and estimated accruals for various tax exposures.

Revenue Recognition – The Company’s revenue is recognized when services are rendered or goods are delivered to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services or goods as per the agreement with the customer. In cases where there are agreements with multiple performance obligations, the Company identifies each performance obligation and evaluates 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. For agreements with distinct performance obligations, 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 performed for the customer to determine the timing of revenue recognition.

For the Digital 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. Revenue from agreements billed on a time-and-materials basis is recognized as services are performed. Revenue from fixed-fee agreements, which are not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.

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Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

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 the Synodex segment revenue is derived from licensing the Company’s functional software and providing access to the 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. Revenue from the reseller agreements is recognized at the gross amount received for the goods in accordance with the Company functioning as a principal due to the Company meeting the following criteria: the Company acts as the primary obligor in the sales transaction; assumes the credit risk; sets the price; can select suppliers; and is involved in the execution of the services, including after sales service.

Revenue includes 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 as a principal versus net revenue as an agent. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is principal or agent in the arrangement. Revenue is recognized on a gross basis if the Company is in the capacity of principal and on a net basis if it falls in the capacity of an agent.

Contract acquisition costs, which are included in prepaid expenses and other current assets, are amortized over the term of a subscription agreement or contract that normally has a duration of 12 months or less. The Company reviews these prepaid acquisition costs on a periodic basis to determine the need to adjust the carrying values for early-terminated contracts.

Foreign Currency Translation - The functional currency of the Company’s locations in the Philippines, India, Sri Lanka, Israel, Hong Kong and Canada (other than the Agility subsidiary) is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees, Israeli shekels and Hong Kong dollars are translated to U.S. dollars at rates which approximate those in effect on the transaction dates. Monetary assets and all liabilities denominated in foreign currencies on June 30, 2022 and December 31, 2021 are translated at the exchange rate in effect as of those dates. Non-monetary assets and stockholders’ equity are translated at the appropriate historical rates.

The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and for the Company’s Agility subsidiary in 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 Company’s 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 accumulated other comprehensive loss in stockholders’ equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

Included in direct operating costs were foreign exchange gains resulting from such transactions of approximately $747,000 and $16,000 for the three months ended June 30, 2022 and 2021 respectively and $1,166,000 and $155,000 for the six months ended June 30, 2022 and 2021 respectively.

Derivative Instruments - The Company accounts for derivative transactions in accordance with the FASB’s Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded in Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) is reclassified to earnings and included as part of Direct operating costs.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

Capitalized Developed Software - The Company incurs development costs related to software it develops for its internal use. Qualifying costs incurred during the application development stage are capitalized. These costs primarily consist of internal labor and third-party development costs and are amortized using the straight-line method over the estimated useful life of the capitalized developed software, which ranges between three and ten years. All other research and maintenance costs are expensed as incurred.

Income Taxes - Estimated deferred taxes are determined based on the difference between the financial statement and tax basis 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 estimated 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 anticipates that it will be able to realize the estimated deferred tax assets in the future in excess of its net recorded amount, an adjustment to the provision for deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company anticipates that it will not be able to realize the estimated deferred tax assets in the future considering future taxable income, an adjustment to the provision for 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. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue as a liability the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.

In assessing the realization 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 U.S. and Canadian entities is not probable at this time, the Company maintains a valuation allowance against all the U.S. and Canadian net deferred tax assets.

The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions in income tax expense in the condensed consolidated statements of operations and comprehensive income (loss).

Deferred Revenue - Deferred revenue represents payments received from customers in advance of providing services and amounts deferred if conditions for revenue recognition have not been met. Included in accrued expenses and other on the accompanying condensed consolidated balance sheets is deferred revenue amounting to $2.3 million and $4.5 million as of June 30, 2022 and December 31, 2021, respectively. The Company expect to recognize substantially all of these performance obligations over the next 12 months.

Recent Accounting Pronouncements – 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 ASC Topic 326, “Financial Instruments – Credit Losses” 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 the Company if it continues to be classified as a smaller reporting company, with early adoption permitted. The Company does not expect that the adoption of the new guidance will have a material impact on the Company’s condensed consolidated financial statements.

2.           Goodwill and Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2022 was as follows (in thousands):

Balance as of January 1, 2022

    

$

2,143

Foreign currency translation adjustment

 

(67)

Balance as of June 30, 2022

$

2,076

9

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

The fair value measurement of goodwill for the Agility segment 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 and the market multiple approach which utilizes comparable entities to further validate the carrying values. 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.

Information regarding the Company acquired intangible assets and capitalized developed software was as follows (in thousands):

Company Acquired Intangible Assets

Capitalized Developed Software

Capitalized

Trademarks 

Media

Capitalized

Developed

 

Developed

 

Customer

 

and

Contact

Developed

Software - in

    

technology

    

relationships

    

tradenames

    

Patents

    

Database

    

Software

    

Progress

    

Total

Gross carrying amounts:

 

  

 

  

 

  

 

  

 

  

 

  

Balance as of January 1, 2022

$

3,169

$

2,228

$

880

$

45

$

3,648

$

8,576

$

635

$

19,181

Additions

-

-

-

-

-

-

2,770

2,770

Transfers

-

-

-

-

-

1,475

(1,475)

-

Foreign currency translation

 

(76)

 

(34)

 

(17)

 

-

 

(156)

(128)

(9)

 

(420)

Balance as of June 30, 2022

$

3,093

$

2,194

$

863

$

45

$

3,492

$

9,923

$

1,921

$

21,531

Accumulated amortization:

Balance as of January 1, 2022

$

2,158

$

1,377

$

685

$

34

$

2,005

$

2,575

$

-

$

8,834

Amortization expense

158

93

28

2

180

799

-

1,260

Foreign currency translation

(51)

(23)

(11)

(1)

(90)

(45)

-

(221)

Balance as of June 30, 2022

$

2,265

$

1,447

$

702

$

35

$

2,095

$

3,329

$

-

$

9,873

Net carrying values - June 30, 2022

$

828

$

747

$

161

$

10

$

1,397

$

6,594

$

1,921

$

11,658

Amortization expense relating to acquired intangible assets was $0.2 million and $0.5 million for the three and six months ended June 30, 2022.

Amortization expense relating to capitalized developed software was $0.4 million and $0.8 million for the three and six months ended June 30, 2022.

As of June 30, 2022, estimated future amortization expense for intangible assets was as follows (in thousands):

Year

    

Amortization

2022

$

627

2023

$

1,641

2024

$

1,540

2025

$

1,277

2026

$

437

Thereafter

$

6,136

$

11,658

10

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

3.            Income Taxes

Taxes primarily consist of a provision for foreign taxes recorded by the Company’s foreign subsidiaries in accordance with local tax regulations. Effective income tax rates are disproportionate due to the losses incurred by the Company’s U.S. and Canadian subsidiaries and a valuation allowance recorded on deferred taxes of these entities and tax effects of foreign operations, including foreign exchange gains and losses.

The reconciliations of the U.S. statutory rate with the Company’s effective tax rate for the six-month periods ended June 30, 2022 and 2021 are summarized in the table below:

For the Six Months

Ended June 30,

    

2022

    

2021

Federal income tax expense at statutory rate

 

(21.0)

%

21.0

%

Effect of:

 

Change in valuation allowance

40.3

101.1

Foreign operations permanent difference - foreign exchange gains and losses

 

2.1

9.1

Return to provision true up

2.0

3.2

Tax effects of foreign operations

1.2

35.4

Increase (decrease) in unrecognized tax benefits (ASC 740)

1.2

(64.4)

State income tax net of federal benefit

0.2

1.5

Change in tax rates

-

20.6

Withholding tax

-

-

Effect of stock based compensation

(1.0)

(62.1)

Foreign rate differential

(6.3)

(19.6)

Other

(0.7)

5.4

Effective tax rate

18.0

%

51.2

%

The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the six months ended June 30, 2022 (in thousands):

    

Unrecognized

 

tax benefits

Balance - January 1, 2022

$

1,753

Increase for current period tax positions

 

58

Decrease for prior period tax positions

(29)

Interest accrual

 

52

Foreign currency remeasurement

 

(100)

Balance - June 30, 2022

$

1,734

The Company expects that unrecognized tax benefits as of June 30, 2022, if recognized, would have a material impact on the Company’s effective tax rate.

11

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

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. The Company disagrees with the Service Tax Department’s position. 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 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 the Company’s Indian subsidiary during this period was approximately $63.0 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 Company’s assessment in consultation with the Company’s tax 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 from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to the Company’s 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. The Company disagrees with the basis of this decision and is contesting 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 Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.

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

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 $6.8 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 themselves 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.

The Company is also subject to various other legal proceedings and claims that have arisen in the ordinary course of business.

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 consolidated 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 consolidated operating results in the period in which the ruling or recovery occurs. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above referenced legal proceedings could change in the future.

12

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

The Company’s legal accruals related to legal proceedings and claims are based on the 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 accruals are adjusted if necessary. While the Company intends to defend these matters vigorously, adverse outcomes that it estimates could reach approximately $350,000 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 and Restricted Stock Units

A summary of option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 (the “2013 Plan”) and changes during each of the six-month periods ended June 30, 2022 and 2021 are presented below:

 

 

Weighted -

 

Weighted-Average

 

Number of

 

Average Exercise

 

Remaining Contractual

Aggregate

    

Options

    

Price

    

Term (years)

    

Intrinsic Value

Outstanding at January 1, 2021

 

5,906,884

$

1.61

 

  

 

  

Granted

 

360,000

 

6.40

 

  

 

  

Exercised

 

(1,245,182)

 

2.12

 

  

 

  

Forfeited/Expired

 

(20,000)

 

1.38

 

  

 

  

Outstanding at June 30, 2021

 

5,001,702

$

1.83

 

7.60

$

25,837,675

 

 

 

 

Exercisable at June 30, 2021

 

3,425,983

$

1.62

7.12

$

18,426,406

 

 

 

 

Vested and Expected to Vest at June 30, 2021

 

5,001,702

$

1.83

 

7.60

$

25,837,675

    

    

    

Weighted-Average 

    

Number of 

Weighted - Average 

Remaining Contractual 

Aggregate 

Options

Exercise Price

Term (years)

Intrinsic Value

Outstanding at January 1, 2022

5,536,896

$

2.66

  

  

Granted

 

1,479,558

 

5.21

 

  

 

  

Exercised

 

(146,705)

 

1.22

 

  

 

  

Forfeited/Expired

 

(36,000)

 

5.13

 

  

 

  

Outstanding at June 30, 2022

 

6,833,749

$

3.24

 

7.62

$

13,923,020

Exercisable at June 30, 2022

 

3,578,045

$

1.81

 

6.40

$

11,195,079

Vested and Expected to Vest at June 30, 2022

 

6,833,749

$

3.24

 

7.62

$

13,923,020

13

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

A summary of option activity under the Innodata Inc. 2021 Stock Plan and changes during the six-month period ended June 30, 2022 are presented below:

Weighted-Average

Number of

Weighted - Average

Remaining Contractual

Aggregate Intrinsic

Options

Exercise Price

Term (years)

Value

Outstanding at January 1, 2022

 

-

$

-

 

  

 

  

Granted

 

25,000

 

6.40

 

  

 

  

Exercised

 

-

 

-

 

  

 

  

Forfeited/Expired

 

-

 

-

 

  

 

  

Outstanding at June 30, 2022

 

25,000

$

6.40

 

5.00

$

-

Exercisable at June 30, 2022

 

-

$

-

 

  

 

  

Vested and Expected to Vest at June 30, 2022

 

25,000

$

6.40

 

5.00

$

-

During the six months ended June 30, 2022, a total of 146,705 options were exercised at an average price of $1.22.

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 Six Months Ended June 30, 

    

2022

    

2021

Weighted average fair value of options granted

$

3.10

$

3.33

Risk-free interest rate

1.94%-2.75%

0.22%-0.82%

Expected term (years)

3.0-6.42

3-6

Expected volatility factor

62% - 76.48%

59.62%

Expected dividends

-

-

A summary of restricted stock units issued under the 2013 Plan and the 2021 Plan (collectively, the “Equity Plans”) is presented below:

In March 2022, the Company granted restricted stock units (“RSU”) to key executives, pursuant to the Equity Plans. Each RSU has vesting conditions based on both the achievement of performance-based metrics and the continuation of employment over a defined period. The level of performance determines the number of RSUs that performance-vest, and performance vested RSUs must also time-vest in order to be fully vested. Each fully-vested RSU represents the right to receive one share of the Company’s common stock or the fair market value of one share of common stock, at the Company’s discretion, and is classified as an equity award. Each RSU vests pursuant to the vesting schedule found in the respective RSU agreement. RSUs are generally subject to graduated vesting schedules and stock-based compensation expense is computed by tranche and recognized on a straight-line basis over the tranches’ applicable vesting period based on the expected achievement level. The fair value of restricted stock units is estimated on the date of grant using the Binomial option pricing model.

14

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

Restricted stock unit activity during the six months ended June 30, 2022 was as follows:

Number of Restricted

 

Weighted-Average Grant

    

Stock Awards

    

Date Fair Value

Unvested at January 1, 2022

25,000

$

1.38

Granted

 

-

 

-

Vested

 

(25,000)

 

1.38

Forfeited/Expired

 

-

 

-

Unvested at June 30, 2022

 

-

$

-

    

Number of

    

Weighted-Average 

 Restricted Stock

Grant Date 

 Units

Fair Value

Unvested at January 1, 2022

 

-

 

$

-

Granted*

 

700,000

5.59

Vested

 

-

 

-

Forfeited/Expired

 

-

 

Unvested at June 30, 2022

 

700,000

$

5.59

* 200,000 RSUs were issued under the 2013 Plan and 500,000 RSUs were issued under the 2021 Plan

The compensation cost related to non-vested stock options not yet recognized as of June 30, 2022 totaled approximately $7.1 million. The weighted-average period over which these costs will be recognized is 27 months.

During the six months ended June 30, 2022, 700,000 performance-based restricted stock units were granted and remain non-vested at June 30, 2022. Vesting of the performance-based restricted stock units is contingent on the achievement of certain financial performance goals and service vesting conditions. There were no restricted stock units granted during the three months ended June 30, 2022.

The compensation cost related to non-vested restricted stock units not yet recognized as of June 30, 2022 totaled approximately $3.0 million. The weighted-average period over which these costs will be recognized is 24 months.

The stock-based compensation expense related to the Equity Plans were allocated as follows (in thousands):

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30,

    

2022

    

2021

    

2022

    

2021

Direct operating costs

$

56

$

37

$

107

$

75

Selling and administrative expenses

 

972

 

299

 

1,458

 

539

Total stock-based compensation

$

1,028

$

336

$

1,565

$

614

6.            Operating Leases

The Company has various 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 for terms ranging from two to eleven 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 to the contract.

15

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

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 Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Rent expense for long-term operating leases

$

337

$

388

$

713

$

776

Rent expense for short-term leases

 

144

 

34

261

84

Total rent expense

$

482

$

422

$

974

$

860

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 sheet as of June 30, 2022 (in thousands):

Year

    

Amount

2022

$

1,160

2023

 

865

2024

 

825

2025

 

840

2026

 

855

2027 and thereafter

 

1,953

Total lease payments

 

6,498

Less: Interest

 

(1,635)

Net present value of lease liabilities

$

4,863

 

Current portion

$

776

Long-term portion

 

4,087

Total

$

4,863

The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of June 30, 2022 were as follows:

Weighted-average lease term remaining

    

48 months

Weighted-average discount rate

 

8.68

%

7.            Long-term obligations

Total long-term obligations as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

    

June 30, 

    

December 31, 

 

2022

 

2021

Pension obligations - accrued pension liability

$

6,547

$

6,839

Settlement agreement

 

151

 

272

Microsoft licenses

 

-

 

385

6,698

7,496

Less: Current portion of long-term obligations

 

700

 

1,279

Totals

$

5,998

$

6,217

16

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

8.           Redemption of non-controlling interest

The Condensed Consolidated Balance Sheets for the six-month period ending June 30, 2022 includes a $2.9 million charge against additional paid-in-capital representing the carrying value of the non-controlling interest in Innodata Synodex, LLC which was redeemed by the Company on March 31, 2022. The Company accounted for the transaction in accordance with ASC Topic 810, “Consolidation,” which discusses the proper accounting treatment of the carrying value for the non-controlling interest. Under the standard, any change in ownership that does not result in a loss of control must be accounted for as an equity transaction.

9.           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 adjustment and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive loss as of June 30, 2022 and 2021, and reclassifications from accumulated other comprehensive loss for the three and six months then ended, are presented below (in thousands):

Pension Liability 

Fair Value of 

Foreign Currency 

Accumulated Other 

    

Adjustment

    

Derivatives

    

Translation Adjustment

    

Comprehensive Loss

Balance at April 1, 2022

$

(818)

$

(348)

$

(1,007)

$

(2,173)

Other comprehensive loss before reclassifications, net of taxes

 

-

 

(744)

 

(600)

 

(1,344)

Total other comprehensive loss before reclassifications, net of taxes

 

(818)

 

(1,092)

 

(1,607)

 

(3,517)

Net amount reclassified to earnings

 

38

 

203

 

-

 

241

Balance at June 30, 2022

$

(780)

$

(889)

$

(1,607)

$

(3,276)

    

    

    

Foreign Currency 

    

Pension Liability

Fair Value of

 Translation

Accumulated Other

 Adjustment

 Derivatives

 Adjustment

Comprehensive Loss

Balance at January 1, 2022

$

(858)

$

(353)

$

(981)

$

(2,192)

Other comprehensive loss before reclassifications, net of taxes

 

 

-

 

(822)

 

(626)

 

(1,448)

Total other comprehensive loss before reclassifications, net of taxes

 

 

(858)

 

(1,175)

 

(1,607)

 

(3,640)

Net amount reclassified to earnings

 

 

78

 

286

 

-

 

364

Balance at June 30, 2022

$

(780)

$

(889)

$

(1,607)

$

(3,276)

Pension Liability 

Fair Value of 

Foreign Currency 

Accumulated Other 

    

Adjustment

    

Derivatives

    

Translation Adjustment

    

Comprehensive Loss

Balance at April 1, 2021

$

(433)

$

-

$

(515)

$

(948)

Other comprehensive income (loss) before reclassifications, net of taxes

 

-

 

(301)

 

135

 

(166)

Total other comprehensive loss before reclassifications, net of taxes

 

(433)

 

(301)

 

(380)

 

(1,114)

Net amount reclassified to earnings

 

11

 

34

 

-

 

45

Balance at June 30, 2021

$

(422)

$

(267)

$

(380)

$

(1,069)

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

Foreign Currency 

Pension Liability

Fair Value of

Translation 

Accumulated Other

    

Adjustment

    

Derivatives

    

Adjustment

    

Comprehensive Loss

Balance at January 1, 2021

$

(444)

$

-

$

(494)

$

(938)

Other comprehensive income (loss) before reclassifications, net of taxes

-

 

(301)

 

114

 

(187)

Total other comprehensive loss before reclassifications, net of taxes

(444)

 

(301)

 

(380)

 

(1,125)

Net amount reclassified to earnings

22

 

34

 

-

 

56

Balance at June 30, 2021

$

(422)

$

(267)

$

(380)

$

(1,069)

All reclassifications from accumulated other comprehensive loss had an impact on direct operating costs in the condensed consolidated statements of operations and comprehensive income (loss).

10.           Segment reporting and concentrations

The Company’s operations are classified in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.

The DDS segment provides AI-enabled software platforms and managed services to companies that require high-quality data for training AI and machine learning (ML) algorithms, and AI digital transformation solutions to help companies apply AI/ML to real-world problems relating to analyzing and deriving insights from documents. In conjunction with AI digital transformation, the Company often provides a range of data engineering support services, including data transformation, data curation, data hygiene, data consolidation, data compliance, and master data management.

The Synodex segment provides an industry platform that transforms medical records into useable digital data organized in accordance with its proprietary data models or customer data models.

The Agility segment provides an industry platform that provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.

A significant portion of the Company’s revenue is generated from its locations in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

Revenues from external customers, segment operating profit (loss), and other reportable segment information are as follows (in thousands):

For the Three Months Ended June 30, 

For the Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Revenues:

 

  

 

  

  

 

  

DDS

$

14,181

$

12,997

$

30,092

$

24,760

Synodex

 

1,945

 

886

 

3,614

 

1,905

Agility

 

3,861

 

3,166

 

7,473

 

6,351

Total Consolidated

$

19,987

$

17,049

$

41,179

$

33,016

 

 

 

 

Income (loss) before provision for income taxes(1):

 

 

 

 

DDS

$

(72)

$

1,726

$

1,381

$

2,379

Synodex

 

(831)

 

(329)

 

(1,819)

 

(221)

Agility

 

(2,378)

 

(1,161)

 

(5,258)

 

(1,586)

Total Consolidated

$

(3,281)

$

236

$

(5,696)

$

572

 

 

 

  

 

  

Income (loss) before provision for income taxes(2):

 

 

 

  

 

  

DDS

$

(250)

$

1,646

$

1,046

$

2,230

Synodex

 

(680)

 

(278)

 

(1,540)

 

(126)

Agility

 

(2,351)

 

(1,132)

 

(5,202)

 

(1,532)

Total Consolidated

$

(3,281)

$

236

$

(5,696)

$

572

    

June 30, 2022

    

December 31, 2021

Total assets:

 

  

 

  

DDS

$

29,723

$

40,100

Synodex

 

2,702

 

1,753

Agility

 

17,498

 

17,364

Total Consolidated

$

49,923

$

59,217

    

June 30, 2022

    

December 31, 2021

Goodwill:

 

  

 

  

Agility

$

2,076

$

2,143

Total

$

2,076

$

2,143

(1)Before elimination of any inter-segment profits
(2)After elimination of any inter-segment profits

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

Revenues for the period ended June 30, 2022 and 2021 by geographic region (determined based upon customer’s domicile), were as follows (in thousands):

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

United States

$

12,385

$

9,074

$

25,777

$

17,294

United Kingdom

 

2,558

 

2,995

 

5,640

 

5,797

The Netherlands

 

1,717

 

1,608

 

3,369

 

3,262

Canada

 

1,439

 

1,492

 

2,816

 

3,087

Others - principally Europe

 

1,888

 

1,880

 

3,577

 

3,576

Totals

$

19,987

$

17,049

$

41,179

$

33,016

Long-lived assets as of June 30, 2022 and December 31, 2021 by geographic region were comprised of (in thousands):

    

June 30, 

    

December 31, 

 

2022

 

2021

United States

$

6,042

$

4,578

 

 

Foreign countries:

 

 

Canada

 

8,156

 

9,280

United Kingdom

 

1,292

 

1,538

Philippines

 

3,858

 

4,027

India

 

1,522

 

1,481

Sri Lanka

 

156

 

154

Israel

 

2

 

-

Germany

-

-

Total foreign

 

14,986

 

16,480

Totals

$

21,028

$

21,058

Long-lived assets include the unamortized balance of right-of-use assets amounting to $4.4 million and $5.6 million as of June 30, 2022 and December 31, 2021, respectively.

One customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended June 30, 2022. A second customer in the DDS segment generated approximately 10% and 11% of the Company’s total revenues for the three months ended June 30, 2022 and June 30, 2021, respectively. A third customer in the DDS segment generated approximately 11% of the Company’s total revenues for the three months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 47% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively.

One customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. Two other customers in the DDS segment generated approximately 22% of the Company’s total revenues for the six months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 48% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, approximately 33% of the Company’s accounts receivable was from foreign (principally European) customers and 44% of the Company’s accounts receivable was due from three customers. As of December 31, 2021, approximately 37% of the Company’s accounts receivable was from foreign (principally European) customers and 19% of the Company’s accounts receivable was due from one customer. No other customer accounted for 10% or more of the accounts receivable as of June 30, 2022 and December 31, 2021.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

11.          Income (Loss) Per Share

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Net income (loss) attributable to Innodata Inc. and Subsidiaries

$

(3,833)

$

(103)

$

(6,648)

$

295

Weighted average common shares outstanding

 

27,226

 

26,522

 

27,192

 

26,199

Dilutive effect of outstanding options

 

-

 

-

 

-

 

2,995

Adjusted for dilutive computation

 

27,226

 

26,522

 

27,192

 

29,194

Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the 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” method of computing income (loss) per share is used.

Options to purchase 6.9 million and 5.0 million shares of common stock for the three months ended June 30, 2022 and June 30, 2021 were outstanding but not included in the computation of diluted loss per share because the effect would have been anti-dilutive.

Options to purchase 6.9 million shares of common stock for the six months ended June 30, 2022 were outstanding but not included in the computation of diluted loss per share because the effect would have been anti-dilutive. All options outstanding for the six months ended June 30, 2021 were included in the computation of diluted income per share.

12.          Derivatives

The Company conducts a large portion of its operations in international markets, which subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company is also subject to wage inflation and other government mandated increases and operating expenses in Asian countries where the Company has the majority of its operations. The Company’s primary inflation and exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.

In addition, although most of the Company’s revenue is denominated in U.S. dollars, a significant portion of total revenues is denominated in Canadian dollars, Pound Sterling and Euros.

The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period up to 12 months. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded to Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) are reclassified to earnings and included as part of Direct operating costs.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge 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. The total notional amount for outstanding derivatives designated as hedges was $19.9 million as of June 30, 2022. The total notional amount for outstanding derivatives designated as hedges was $19.7 million as of December 31, 2021.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 (in thousands):

Balance Sheet Location

Fair Value

    

    

2022

    

2021

Derivatives designated as hedging instruments:

 

  

 

  

 

  

Foreign currency forward contracts

 

Accrued expenses

$

889

$

353

The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):

 

For the Three Months Ended

For the Six Months Ended

 

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Net gain (loss) recognized in OCI(1)

$

(744)

$

(301)

$

(822)

$

(301)

Net (gain) loss reclassified from accumulated OCI into income(2)

$

203

$

34

$

286

$

34

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 period presented.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking statements within the meaning of Section 21E of the Securities 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. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “predict,” “likely,” “estimate,” “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; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; that contracts may be terminated by customers; 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 and the ability of these customers to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing DDS segment revenue concentration in a limited number of customers; 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, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growth 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, 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.

Our actual results could differ materially from the results referred to in 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,” in “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 24, 2022, 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 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 and should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Report.

Business Overview

Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a global data engineering company. The Company’s mission is to deliver the promise of AI to the world’s most prestigious companies.

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Table of Contents

We provide AI-enabled software platforms and managed service to companies that require high-quality data for training AI and machine learning (ML) algorithms. We also provide AI digital transformation solutions and platform to help companies apply AI/ML to real-world problems relating to analyzing and deriving insights from documents. For industry-specific, document-intensive industry business processes, we provide AI-augmented software-as-a-service (SaaS) platforms and discrete managed services.

Our platforms and services are powered by Goldengate, our proprietary AI/ML platform, as well as other technologies we have developed. In addition, we bring to bear more than 4,500 employees spanning eight countries with expertise in data pertaining to many professional fields. Our hybrid approach of using AI/ML in conjunction with human experts enables us to deliver superior data quality with even the most complex and sensitive data.

We developed our capabilities and honed our customer- and quality-centric culture progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately six years ago, we formed Innodata Labs, a research and development center, to research, develop and apply machine learning and emerging AI to our large-scale, human-intensive data operations. In 2019, we began packaging the capabilities that emerged from our R&D efforts in order to align with several fast-growing new markets and help companies use AI/ML to drive performance benefits and business insights. We anticipate this strategy will enable us to accelerate growth.

AI Data Annotation

We train AI algorithms for social media companies, robotics companies, financial services companies, and many others, working with images, text, video and audio. Data sciences teams seek partners that can perform data preparation functions for them at large-scale and at high quality, while using automated tools to minimize cost. Moreover, as AI projects become more specialized and mission-critical, data preparation is becoming increasingly complex, requiring deep domain knowledge and an infrastructure in which data security is assured.

We utilize a variety of leading third-party image and video annotation tools. For text, we use our proprietary text annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary text annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. It also encapsulates many of the innovations we conceived of in the course of our 30-year history of creating high-quality data.

AI Digital Transformation

We also provide AI solutions and platforms to companies that intensively process textual data and seek to obtain the benefits of AI/ML technologies without having to develop AI/ML engineering capabilities in-house. For such companies, we often integrate one or more of our pre-trained text processing algorithms as a foundation for an overall solution. Our algorithms are accessible as microservices via application programming interfaces (APIs), enabling easy integration.

In conjunction with AI digital transformation, we often provide a range of data engineering support services, including data transformation, data curation, data hygiene, data consolidation, data compliance, and master data management.

Our customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns of our AI digital transformation solutions and platforms.

Industry AI Platforms

Our industry platforms address specific, niche market requirements that we believe we can fulfill in large part with our AI/ML technologies. We deploy these industry platforms as software-as-a-service (SaaS) and as managed services. To date, we have built an industry platform for medical records data extraction and transformation (which we brand as “Synodex®”) and an industry platform for public relations (which brands as “Agility PR Solutions”).

Our Synodex industry platform transforms medical records into useable digital data organized in accordance with our proprietary data models or customer data models.

Our Agility industry platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news (print, web, radio and TV) and social media.

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Our operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.

Prevailing Economic Conditions and Seasonality

Prevailing Economic Conditions

The novel coronavirus disease 2019, 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.

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 results of operations for the three and six months ended June 30, 2022.

The situation surrounding the 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 that it may have on our results of operations and financial condition. The potential for a material impact on our results of operations and financial position increases the longer COVID-19 affects the level of economic activity in the United States and globally.

With the current level of demand for our services, we believe we have existing cash and cash equivalents that provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 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 other sources of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.

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.

Trends

We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the six-month period ending June 30, 2022, we added an average of 119 new customers per quarter. This is a 90% increase over the 62 new customers we added on average per quarter in 2020 and a 27 % increase over the 93 new customers we added on average per quarter in 2021.

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, 2021.

Non-GAAP Financial Measures

In addition to the financial information prepared in conformity with U.S. GAAP (“GAAP”), we provide certain non-GAAP financial information. We believe that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results. In some respects, management believes non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents by making adjustments that management believes are reflective of the ongoing performance of the business.

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Table of Contents

We believe that the presentation of this non-GAAP financial information provides investors with greater transparency by providing investors a more complete understanding of our financial performance, competitive position, and prospects for the future, particularly by providing the same information that management and our Board of Directors uses to evaluate our performance and manage the business. However, the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before interest expense, income taxes, depreciation and amortization of intangible assets (which derives EBITDA), plus additional adjustments for loss on impairment of intangibles assets and goodwill, stock-based compensation, income (loss) attributable to non-controlling interests and other one-time costs. We use Adjusted EBITDA to evaluate core results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.

The following table contains a reconciliation of GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three and six months ended June 30, 2022 and 2021 (in thousands).

    

Three Months Ended June 30,

Six Months Ended June 30,

Consolidated

2022

2021

2022

2021

Net income (loss) attributable to Innodata Inc. and Subsidiaries

$

(3,833)

$

(103)

$

(6,648)

$

295

Provision for income taxes

550

366

 

1,025

 

293

Interest expense, net

(1)

4

 

2

 

14

Gain on loan forgiveness

-

(580)

-

(580)

Depreciation and amortization

951

673

 

1,824

 

1,370

Stock-based compensation

1,028

335

 

1,565

 

614

Non-controlling interests

2

(27)

 

(73)

 

(16)

Adjusted EBITDA / (loss) - Consolidated

$

(1,303)

$

668

$

(2,305)

$

1,990

    

Three Months Ended June 30,

Six Months Ended June 30,

DDS Segment

2022

2021

2022

2021

Net income (loss) attributable to DDS Segment

$

(651)

$

1,307

$

112

$

1,987

Provision for income taxes

399

342

 

932

 

246

Interest expense, net

(1)

4

 

2

 

13

Gain on loan forgiveness

-

(580)

-

(580)

Depreciation and amortization

57

159

 

281

 

319

Stock-based compensation

796

242

 

1,168

 

459

Non-controlling interests

2

(2)

 

1

 

(3)

Adjusted EBITDA - DDS Segment

$

602

$

1,472

$

2,496

$

2,441

    

Three Months Ended June 30,

Six Months Ended June 30,

Synodex Segment

2022

2021

2022

2021

Net loss attributable to Synodex Segment

$

(680)

$

(254)

$

(1,465)

$

(113)

Depreciation and amortization

$

271

2

$

312

$

2

Stock-based compensation

50

7

 

99

 

14

Non-controlling interests

-

(25)

 

(74)

 

(13)

Adjusted EBITDA (loss) - Synodex Segment

$

(359)

$

(270)

$

(1,128)

$

(110)

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Three Months Ended June 30,

Six Months Ended June 30,

Agility Segment

2022

2021

2022

2021

Net loss attributable to Agility Segment

$

(2,502)

$

(1,156)

$

(5,295)

$

(1,579)

Provision for income taxes

151

24

 

93

 

47

Interest expense, net

-

-

 

-

 

1

Depreciation and amortization

623

512

 

1,231

 

1,049

Stock-based compensation

182

86

 

298

 

141

Adjusted EBITDA (loss) - Agility Segment

$

(1,546)

$

(534)

$

(3,673)

$

(341)

Results of Operations

Amounts in the MD&A below are after elimination of any inter-segment profit and have been rounded. All percentages have been calculated using rounded amounts.

Three Months Ended June 30, 2022 and 2021

Revenues

Total revenues were $20.0 million and $17.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $3.0 million or approximately 17%.

Revenues from the DDS segment were $14.2 million and $13.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.2 million or approximately 9%. The increase was primarily attributable to higher volume from an existing customer.

Revenues from the Synodex segment were $1.9 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.0 million or approximately 111%. The increase was primarily attributable to higher volume from two existing customers.

Revenues from the Agility segment were $3.9 million and $3.1 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.8 million or approximately 26%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

One customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended June 30, 2022. A second customer in the DDS segment generated approximately 10% and 11% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively. A third customer in the DDS segment generated approximately 11% of the Company’s total revenues for the three months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 47% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively.

Direct Operating Costs

Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, 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 customers.

Direct operating costs were $13.0 million and $10.4 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $2.6 million or 25%. The cost increase primarily supported our growth initiatives across all business segments. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $2.6 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.5 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.5 million. Direct operating costs as a percentage of total revenues were 65% and 61% for the three-month periods ended June 30, 2022 and 2021. The increase in direct operating costs as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.

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Direct operating costs for the DDS segment were approximately $8.9 million and $7.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.1 million or 14%. The cost increase primarily supported our growth initiatives. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $1.6 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.5 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 63% and 60% for the three months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was primarily attributable to an increase in direct operating costs offset in part by an increase in revenues.

Direct operating costs for the Synodex segment were $2.2 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.4 million or 175%. The cost increase primarily supported our growth initiatives combined with the timing of new technology roll-out. The increase in Direct operating costs was primarily due to an increase in direct labor costs primarily on account of higher headcount and salary increases of $1.1 million and an increase in depreciation and amortization of capitalized developed software of $0.3 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 116% and 89% for the three months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was due to an increase in direct operating costs offset in part by an increase in revenues.

Direct operating costs for the Agility segment were $1.9 million and $1.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.1 million or 6%. The cost increase was primarily due to amortization of capitalized developed software of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 49% and 58% for the three months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset in part by an increase in direct operating costs.

Selling and Administrative Expenses

Selling and administrative expenses consist of management and administrative payroll and related costs including commissions, bonuses, and stock-based compensation, marketing costs, new services research and related software development, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.

Selling and administrative expenses were $10.3 million and $7.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $3.3 million or 47%. The cost increase primarily supported our growth initiatives across all business segments. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment and professional fees of $2.5 million, marketing related activities of $0.5 million, and a $0.3 million increase in other selling and administrative costs. Selling and administrative expenses as a percentage of total revenues were 52% and 41% for the three months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.

Selling and administrative expenses for the DDS segment were $5.5 million and $4.2 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.3 million or 31%. The cost increase primarily supported our growth initiatives. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment fees of $0.7 million, marketing related activities of $0.2 million, professional fees of $0.1 million and an increase in other selling and administrative expenses of $0.3 million. Selling, and administrative expenses for the DDS segment as a percentage of DDS revenues were 39% and 32% for the three-month periods ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures offset in part by increased revenues.

Selling and administrative expenses for the Synodex segment were $0.5 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.2 million or 67%. The cost increase was primarily attributable to payroll related costs and recruitment fees for new hires and other professional fees of $0.2 million to support our growth initiatives. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 26% and 33% for the three months ended June 30, 2022 and 2021, respectively. The decrease in selling and administrative expenses as a percentage of segment revenues was primarily attributable to higher revenues offset in part by higher expenditures.

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Selling and administrative expenses for the Agility segment were $4.3 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.8 million or 72%. The cost increase primarily supported our growth initiatives. The selling and administrative costs increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives of $1.5 million, marketing related activity costs and other net increases of $0.3 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 110 % and 81% for the three months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily due to higher expenditures, offset in part by an increase in revenues.

Income Taxes

We recorded a provision for income taxes of $0.6 million for the three months ended June 30, 2022, as compared to $0.4 million for the three months ended June 30, 2021.

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 Income (Loss)

We incurred a net loss of $3.8 million during the three months ended June 30, 2022, compared to a net loss of $0.1 million during the three months ended June 30, 2021. The $3.7 million change was a result of higher Direct operating and Selling and administrative costs in all segments in the current quarter, offset in part by higher revenues in all segments.

Net loss for the DDS segment was $0.6 million for the three months ended June 30, 2022, compared to a net income of $1.3 million for the three months ended June 30, 2021. The $1.9 million change was primarily attributable to an increase in Direct operating and Selling and administrative costs, offset in part by an increase in revenues in the current quarter.

Net loss for the Synodex segment was $0.7 million for the three months ended June 30, 2022, compared to a net loss of $0.2 million for the three months ended June 30, 2021. The $0.5 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current quarter.

Net loss for the Agility segment was $2.5 million for the three months ended June 30, 2022, compared to net loss of $1.2 million for the three months ended June 30, 2021. The $1.3 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current quarter.

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2022 was a loss of $1.3 million compared to an income of $0.7 million for the three months ended June 30, 2021. The $2.0 million change in Adjusted EBITDA was due to a higher net loss reduced in part by higher provisions for income taxes, stock-based compensation and depreciation and amortization.

Adjusted EBITDA for the DDS segment was $0.6 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively. The $0.9 million change in Adjusted EBITDA was due to lower net income for the DDS segment, offset in part by higher stock-based compensation.

Adjusted EBITDA for the Synodex segment was a loss of $0.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. The $0.1 million change was due to a higher net loss for the Synodex segment, offset in part by higher stock-based compensation, depreciation and amortization.

Adjusted EBITDA for the Agility segment was a loss of $1.5 million and $0.5 million for the three months ended June 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDA was due to a higher net loss for the Agility segment.

Six Months Ended June 30, 2022 and 2021

Revenues

Total revenues were $41.2 million and $33.0 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $8.2 million or approximately 25%.

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Revenues from the DDS segment were $30.1 million and $24.8 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $5.3 million or approximately 21%. The increase was primarily attributable to higher volume from an existing customer.

Revenues from the Synodex segment were $3.6 million and $1.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.7 million or approximately 89%. The increase was primarily attributable to higher volume from two customers.

Revenues from the Agility segment were $7.5 million and $6.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.2 million or approximately 19%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

One customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. Two other customers in the DDS segment generated approximately 22% of the Company’s total revenues for the six months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 48% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively.

Direct Operating Costs

Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, 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 customers.

Direct operating costs were $26.4 million and $20.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $5.9 million or 29%. The cost increase primarily supported our growth initiatives across all business segments. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $5.5 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.5 million and other direct operating costs of $0.6 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs as a percentage of total revenues were 64% and 62% for the six-month periods ended June 30, 2022 and 2021. The increase in direct operating costs as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.

Direct operating costs for the DDS segment were approximately $18.3 million and $15.4 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $2.9 million or 19%. The cost increase primarily supported our growth initiatives. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $3.2 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.4 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 61% and 62% for the six months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily attributable to increased revenues, offset in part by an increase in direct operating costs.

Direct operating costs for the Synodex segment was $4.0 million and $1.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $2.5 million or 167%. The cost increase primarily supported our growth initiatives combined with the timing of new technology roll-out. The increase in Direct operating costs was primarily due to an increase in direct labor costs on account of higher headcount and salary increases of $2.2 million and an increase in depreciation and amortization of capitalized developed software of $0.3 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 111% and 79% for the six months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was due to an increase in direct operating costs offset in part by an increase in revenues.

Direct operating costs for the Agility segment were $4.1 million and $3.6 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $0.5 million or 14%. The cost increase was primarily due to higher labor related costs of $0.2 million, amortization of capitalized developed software of $0.2 million and other net increases of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 55% and 57% for the six months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset by an increase in direct operating costs.

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Selling and Administrative Expenses

Selling and administrative expenses consist of management and administrative payroll and related costs including commissions, bonuses, and stock-based compensation, marketing costs, new services research and related software development, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.

Selling and administrative expenses were $20.5 million and $12.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $8.0 million or 64%. The cost increase primarily supported our growth initiatives across all business segments. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment and professional fees of $6.0 million, marketing related activities of $1.3 million, and a $0.7 million increase in other selling and administrative costs. Selling and administrative expenses as a percentage of total revenues were 50% and 38% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.

Selling and administrative expenses for the DDS segment were $10.8 million and $7.7 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $3.1 million or 40%. The cost increase primarily supported our growth initiatives. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment fees of $1.3 million, marketing related activities of $0.6 million, professional fees of $0.5 million and an increase in other selling and administrative expenses of $0.7 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues were 36% and 31% for the six-month periods ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures offset in part by increased revenues.

Selling and administrative expenses for the Synodex segment were $1.1 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $0.6 million or 120%. The cost increase was primarily attributable to payroll related costs and recruitment fees for new hires and other professional fees of $0.6 million to support our growth initiatives. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 31% and 26% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily attributable to higher expenditures offset in part by higher revenues.

Selling and administrative expenses for the Agility segment were $8.6 million and $4.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $4.3 million or 100%. The cost increase primarily supported our growth initiatives. The selling and administrative costs increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives of $3.3 million, marketing related activity costs and other net increases of $1.0 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 115% and 68% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily due to higher expenditures, offset in part by an increase in revenues.

Gain on PPP Loan forgiveness

On May 4, 2020, the Company 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 of 2020, as amended. On May 21, 2021, the Company’s loan forgiveness application was approved for 100% of the amount loaned to the Company by the Small Business Administration (“SBA”).

Income Taxes

We recorded a provision for income taxes of $1.0 million for the six months ended June 30, 2022, as compared to $0.3 million for the six months ended June 30, 2021.

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.

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Net Income (Loss)

We incurred a net loss of $6.6 million during the six months ended June 30, 2022, compared to a net income of $0.3 million during the six months ended June 30, 2021. The $ 6.9 million change was a result of higher Direct operating and Selling and administrative costs in all segments in the current six-month period, offset in part by higher revenues in all segments.

Net income for the DDS segment was $0.1 million for the six months ended June 30, 2022, compared to a net income of $2.0 million for the six months ended June 30, 2021. The change of $1.9 million was primarily attributable to an increase in Direct operating and Selling and administrative costs, offset in part by an increase in revenues in the current six-month period.

Net loss for the Synodex segment was $1.4 million for the six months ended June 30, 2022, compared to a net loss of $0.1 million for the six months ended June 30, 2021. The $1.3 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current six-month period.

Net loss for the Agility segment was $5.3 million for the six months ended June 30, 2022, compared to net loss of $1.6 million for the six months ended June 30, 2021. The $3.7 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current six-month period.

Adjusted EBITDA

Adjusted EBITDA for the six months ended June 30, 2022 was a loss of $2.3 million compared to an income of $ 2.0 million for the six months ended June 30, 2021. The $4.3 million change in Adjusted EBITDA was due to a higher net loss reduced in part by higher provisions for income taxes, stock-based compensation, depreciation and amortization.

Adjusted EBITDA for the DDS segment was $2.5 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively. The $0.1 million change in Adjusted EBITDA was due to higher stock-based compensation and a higher provision for income taxes, offset in part by lower net income in the DDS segment.

Adjusted EBITDA for the Synodex segment was a loss $1.1 million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDA was due to a higher net loss in the Synodex segment.

Adjusted EBITDA for the Agility segment was a loss of $3.7 million and $ 0.3 million for the six months ended June 30, 2022 and 2021, respectively. The $3.4 million change in Adjusted EBITDA was due to a higher net loss in the Agility segment.

Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted EBITDA” above.

Liquidity and Capital Resources

Selected measures of liquidity and capital resources, expressed in thousands, were as follows:

    

June 30,

    

December 31,

2022

2021

Cash and cash equivalents

$

10,481

$

18,902

Working capital

 

5,697

 

12,658

At June 30, 2022, we had cash and cash equivalents of $10.5 million, of which $7.1 million was held by our foreign subsidiaries, and $3.4 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 June 30, 2022, to indefinitely reinvest the overseas funds in our foreign subsidiaries on account of the withholding tax that we would have to incur on the actual remittances.

We have used, and plan to use, our cash and cash equivalents for (i) capital investments; (ii) the expansion of our operations; (iii) technology innovation; (iv) hiring of sales personnel; (v) product management and strategic marketing; (vi) general corporate purposes, including working capital; and (vii) possible business acquisitions. We had working capital of approximately $5.7 million and $12.7 million as of June 30, 2022 and December 31, 2021, respectively. The decrease in working capital was due to a decrease in cash used to fund our growth initiatives.

We did not have any material commitments for capital expenditures as of June 30, 2022.

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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 at least the next 12 months from the date of this Report. However, we have no bank facilities or lines of credit. A decrease in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.

Cash Flows

Net Cash Used in Operating Activities

Cash used in our operating activities for the six months ended June 30, 2022 was $3.9 million primarily on account of the following factors: our net loss for the period of $6.7 million; a source of $ 4.0 million from non-cash expenses consisting of depreciation and amortization of $1.8 million, stock-based compensation of $1.6 million, pension cost of $0.3 million, a $0.2 million reduction in deferred tax provisions and a loss of $0.1 million from the termination of one of our operating lease contracts. Net changes from working capital accounts further utilized an additional $1.2 million in working capital, mainly from a decrease in accounts payable and accrued expenses of $1.6 million, offset in part by a decrease in accounts receivable of $0.3 million and a net reduction in other working capital accounts of $0.1 million. Refer to the condensed consolidated statements of cash flows for further details.

Cash provided by our operating activities for the six months ended June 30, 2021 was $5.6 million primarily on account of the following factors: our net income for the period of $0.3 million; a source of $1.7 million from non-cash expenses consisting of depreciation and amortization of $1.4 million, stock-based compensation of $0.6 million and pension cost of $0.3 million, offset in part by a gain on loan forgiveness of $0.6 million. Net changes from working capital accounts further contributed an additional source of $3.6 million. Refer to the condensed consolidated statements of cash flows for further details.

Net Cash Used in Investing Activities

For the six months ended June 30, 2022 and 2021, cash used in our investing activities was $3.6 million and $1.5 million, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software

During the next 12 months, it is anticipated that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate to $7.5 million, a portion of which we may finance.

Net Cash Used in Financing Activities

Cash used in financing activities for the six months ended June 30, 2022 was $0.3 million primarily for payments of long-term obligations of $0.5 million, reduced in part by proceeds from stock option exercises of $0.2 million.

Cash provided by financing activities for the six months ended June 30, 2021 was $0.4 million primarily from proceeds of stock option exercises of $1.8 million reduced in part by cash paid for withholding taxes on net settlement exercises of $0.8 million and payments for long-term obligations of $0.6 million.

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 U.S. GAAP. The preparation of the 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 condensed consolidated results of operations and financial position.

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The significant accounting policies used in preparing our condensed consolidated financial statements contained in this Report are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted, and we believe those critical accounting policies affect our more significant estimates and judgments in the preparation of our condensed consolidated 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 (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’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 June 30, 2022. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.

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 six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

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PART II.       OTHER INFORMATION

Item 1.  Legal Proceedings

See Note 4, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated by reference herein.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 June 30, 2022.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits

Exhibit No.

    

Description

10.1

Innodata Inc. 2021 Equity Compensation Plan, amended and restated effective as of April 11, 2022 (incorporated herein by reference to Annex A to the Company’s Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 26, 2022).

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.

101

The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the three months ended June 30, 2022, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021; (v) Notes to Condensed Consolidated Financial Statements (unaudited).

104

Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

*

Filed herewith.

**

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

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Table of Contents

SIGNATURES

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:

August 12, 2022

/s/ Jack S. Abuhoff                                       

Jack S. Abuhoff

Chief Executive Officer and President

Date:

August 12, 2022

/s/ Marissa B. Espineli                                 

Marissa B. Espineli

Interim Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

37