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 | |
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| For the quarterly period ended | |
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| OR | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from |
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 November 4, 2022July 31, 2023 was 27,378,234.28,298,701.
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended SeptemberJune 30, 20222023
INDEX
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| | Condensed Consolidated Balance Sheets as of | | 2 |
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| | | 7 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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1
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)
| | | | | | |
|
| September 30, |
| December 31, | ||
|
| 2022 |
| 2021 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 10,729 | | $ | 18,902 |
Accounts receivable, net of allowance for doubtful accounts of $910 and $730 respectively | |
| 9,374 | |
| 11,379 |
Prepaid expenses and other current assets | |
| 3,819 | |
| 3,681 |
Total current assets | |
| 23,922 | |
| 33,962 |
Property and equipment, net | |
| 2,718 | |
| 2,947 |
Right-of-use-asset, net | |
| 4,199 | |
| 5,621 |
Other assets | |
| 1,514 | |
| 2,247 |
Deferred income taxes, net | |
| 1,532 | |
| 1,950 |
Intangibles, net | |
| 11,942 | |
| 10,347 |
Goodwill | |
| 1,982 | |
| 2,143 |
Total assets | | $ | 47,809 | | $ | 59,217 |
| | | | | | |
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 2,952 | | $ | 1,823 |
Accrued expenses and other | |
| 6,738 | |
| 7,564 |
Accrued salaries, wages and related benefits | |
| 6,911 | |
| 6,391 |
Income and other taxes | |
| 2,991 | |
| 3,213 |
Long-term obligations - current portion | |
| 596 | |
| 1,279 |
Operating lease liability - current portion | |
| 742 | |
| 1,034 |
Total current liabilities | |
| 20,930 | |
| 21,304 |
Deferred income taxes, net | |
| 23 | |
| 15 |
Long-term obligations, net of current portion | |
| 5,874 | |
| 6,217 |
Operating lease liability, net of current portion | |
| 3,930 | |
| 5,276 |
Total liabilities | |
| 30,757 | |
| 32,812 |
| | | | | | |
Commitments and contingencies | |
| | |
| |
Non-controlling interests | |
| (729) | |
| (3,522) |
| |
|
| |
|
|
STOCKHOLDERS’ EQUITY: | |
|
| |
|
|
Serial preferred stock; 4,998,000 shares authorized, none outstanding | |
| - | |
| - |
Common stock, $.01 par value; 75,000,000 shares authorized; 30,556,000 shares issued and 27,372,000 outstanding at September 30, 2022 and 30,347,000 shares issued and 27,163,000 outstanding at December 31, 2021 | |
| 306 | |
| 303 |
Additional paid-in capital | |
| 34,846 | |
| 35,121 |
Retained earnings (deficit) | |
| (6,815) | |
| 3,160 |
Accumulated other comprehensive loss | |
| (4,091) | |
| (2,192) |
| |
| 24,246 | |
| 36,392 |
Less: treasury stock, 3,184,000 shares at September 30, 2022 and December 31, 2021 at cost | |
| (6,465) | |
| (6,465) |
Total stockholders’ equity | |
| 17,781 | |
| 29,927 |
Total liabilities, non-controlling interests and stockholders’ equity | | $ | 47,809 | | $ | 59,217 |
| | | | | | |
|
| June 30, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 13,652 | | $ | 9,792 |
Short term investments – other | | | 14 | | | 507 |
Accounts receivable, net of allowance for doubtful accounts | |
| 8,359 | |
| 9,528 |
Prepaid expenses and other current assets | |
| 3,839 | |
| 3,858 |
Total current assets | |
| 25,864 | |
| 23,685 |
Property and equipment, net | |
| 2,430 | |
| 2,511 |
Right-of-use-asset, net | |
| 3,938 | |
| 4,309 |
Other assets | |
| 2,229 | |
| 1,498 |
Deferred income taxes, net | |
| 1,586 | |
| 1,475 |
Intangibles, net | |
| 13,489 | |
| 12,526 |
Goodwill | |
| 2,069 | |
| 2,038 |
Total assets | | $ | 51,605 | | $ | 48,042 |
| | | | | | |
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 2,718 | | $ | 2,630 |
Accrued expenses and other | |
| 5,219 | |
| 7,250 |
Accrued salaries, wages and related benefits | |
| 6,802 | |
| 6,136 |
Income and withholding taxes | |
| 4,999 | |
| 3,230 |
Long-term obligations - current portion | |
| 1,063 | |
| 877 |
Operating lease liability - current portion | |
| 582 | |
| 693 |
Total current liabilities | |
| 21,383 | |
| 20,816 |
Deferred income taxes, net | |
| 17 | |
| 65 |
Long-term obligations, net of current portion | |
| 6,450 | |
| 5,079 |
Operating lease liability, net of current portion | |
| 3,828 | |
| 4,036 |
Total liabilities | |
| 31,678 | |
| 29,996 |
| | | | | | |
Commitments and contingencies | |
| | |
| |
Non-controlling interests | |
| (724) | |
| (727) |
| |
|
| |
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STOCKHOLDERS’ EQUITY: | |
|
| |
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|
Serial preferred stock; 4,998,000 shares authorized, none outstanding | |
| - | |
| - |
Common stock, $.01 par value; 75,000,000 shares authorized; 31,483,000 shares issued and 28,299,000 outstanding at June 30, 2023 and 30,589,000 shares issued and 27,405,000 outstanding at December 31, 2022 | |
| 315 | |
| 306 |
Additional paid-in capital | |
| 39,966 | |
| 35,815 |
Deficit | |
| (11,706) | |
| (8,775) |
Accumulated other comprehensive loss | |
| (1,459) | |
| (2,108) |
| |
| 27,116 | |
| 25,238 |
Less: treasury stock, 3,184,000 shares at June 30, 2023 and December 31, 2022 at cost | |
| (6,465) | |
| (6,465) |
Total stockholders’ equity | |
| 20,651 | |
| 18,773 |
Total liabilities, non-controlling interests and stockholders’ equity | | $ | 51,605 | | $ | 48,042 |
See notes to Condensed Consolidated Financial Statements.
2
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| | | | | | |
|
| Three Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Revenues | | $ | 18,447 | | $ | 17,450 |
Operating costs and expenses: | |
| | |
| |
Direct operating costs | |
| 12,389 | |
| 10,703 |
Selling and administrative expenses | |
| 9,117 | |
| 7,262 |
Interest expense, net | |
| (1) | |
| 4 |
| |
| 21,505 | |
| 17,969 |
Loss from operations | | | (3,058) | | | (519) |
Provision for income taxes | | | 268 | | | 328 |
Consolidated net loss | |
| (3,326) | |
| (847) |
Income (loss) attributable to non-controlling interests | |
| 1 | |
| (47) |
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (3,327) | | $ | (800) |
Loss per share attributable to Innodata Inc. and Subsidiaries: | | | | | | |
Basic and Diluted | | $ | (0.12) | | $ | (0.03) |
| |
| | |
| |
Weighted average shares outstanding: | | | | | | |
Basic and Diluted | |
| 27,331 | |
| 26,971 |
| | | | | | |
Comprehensive Loss: | |
| | |
| |
Consolidated Net loss | | $ | (3,326) | | $ | (847) |
Pension liability adjustment, net of taxes | |
| 35 | |
| 10 |
Foreign currency translation adjustment | |
| (644) | |
| (594) |
Change in fair value of derivatives, net of taxes | |
| (206) | |
| (265) |
Other comprehensive loss | |
| (815) | |
| (849) |
Total Comprehensive loss | |
| (4,141) | |
| (1,696) |
Less: Comprehensive income (loss) attributable to non-controlling interest | |
| 1 | |
| (47) |
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | | $ | (4,142) | | $ | (1,649) |
| | | | | | |
|
| Three Months Ended | ||||
| | June 30, | ||||
|
| 2023 |
| 2022 | ||
Revenues | | $ | 19,655 | | $ | 19,987 |
Operating costs and expenses: | |
| | |
| |
Direct operating costs | |
| 12,715 | |
| 12,992 |
Selling and administrative expenses | |
| 7,574 | |
| 10,277 |
Interest income, net | |
| (7) | |
| (1) |
| |
| 20,282 | |
| 23,268 |
Loss before provision for income taxes | | | (627) | | | (3,281) |
Provision for income taxes | | | 188 | | | 550 |
Consolidated net loss | |
| (815) | |
| (3,831) |
Income attributable to non-controlling interests | |
| - | |
| 2 |
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (815) | | $ | (3,833) |
Loss per share attributable to Innodata Inc. and Subsidiaries: | | | | | | |
Basic and Diluted | | $ | (0.03) | | $ | (0.14) |
| |
| | |
| |
Weighted average shares outstanding: | | | | | | |
Basic and Diluted | |
| 27,860 | |
| 27,226 |
| | | | | | |
Other Comprehensive Loss: | |
| | |
| |
Consolidated Net loss | | $ | (815) | | $ | (3,831) |
Pension liability adjustment, net of taxes | |
| (4) | |
| 38 |
Foreign currency translation adjustment | |
| 67 | |
| (600) |
Change in fair value of derivatives, net of taxes | |
| 108 | |
| (541) |
Other comprehensive income (loss) | |
| 171 | |
| (1,103) |
Total Comprehensive loss | |
| (644) | |
| (4,934) |
Less: Comprehensive income attributable to non-controlling interest | |
| - | |
| 2 |
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | | $ | (644) | | $ | (4,936) |
See notes to Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | |
| | Nine Months Ended | | Six Months Ended | ||||||||
| | September 30, | | June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Revenues | | $ | 59,626 | | $ | 50,466 | | $ | 38,494 | | $ | 41,179 |
Operating costs and expenses: | |
| | |
| | |
| | |
| |
Direct operating costs | |
| 38,795 | |
| 31,208 | |
| 25,589 | |
| 26,406 |
Selling and administrative expenses | |
| 29,584 | |
| 19,767 | |
| 15,371 | |
| 20,467 |
Interest expense, net | |
| 1 | |
| 18 | |
| 56 | |
| 2 |
| |
| 68,380 | |
| 50,993 | |
| 41,016 | |
| 46,875 |
Loss from operations | | | (8,754) | | | (527) | |
| (2,522) | |
| (5,696) |
Gain from loan forgiveness | | | - | | | 580 | ||||||
Income (loss) before provision for income taxes | |
| (8,754) | |
| 53 | ||||||
Provision for income taxes | | | 1,293 | | | 621 | |
| 406 | |
| 1,025 |
Consolidated net loss | |
| (10,047) | |
| (568) | |
| (2,928) | |
| (6,721) |
Loss attributable to non-controlling interests | | | (72) | | | (63) | ||||||
Income (loss) attributable to non-controlling interests | |
| 3 | |
| (73) | ||||||
Net Loss attributable to Innodata Inc. and Subsidiaries | | $ | (9,975) | | $ | (505) | | $ | (2,931) | | $ | (6,648) |
| | | | | | | ||||||
Loss per share attributable to Innodata Inc. and Subsidiaries: | | | | | | | |
|
| |
|
|
Basic and Diluted | | $ | (0.37) | | $ | (0.02) | | $ | (0.11) | | $ | (0.24) |
| |
| | |
| | ||||||
Weighted average shares outstanding: | | | | | | | |
|
| |
|
|
Basic and Diluted | |
| 27,239 | |
| 26,459 | |
| 27,661 | |
| 27,192 |
| | | | | | | ||||||
Comprehensive Loss: | |
| | |
| | ||||||
Other Comprehensive Loss: | |
|
| |
|
| ||||||
Consolidated Net loss | | $ | (10,047) | | $ | (568) | | $ | (2,928) | | $ | (6,721) |
Pension liability adjustment, net of taxes | |
| 113 | |
| 32 | |
| (9) | |
| 78 |
Foreign currency translation adjustment | |
| (1,270) | |
| (480) | |
| 127 | |
| (626) |
Change in fair value of derivatives, net of taxes | |
| (742) | |
| (532) | |
| 531 | |
| (536) |
Other comprehensive loss | |
| (1,899) | |
| (980) | ||||||
Other comprehensive income (loss) | |
| 649 | |
| (1,084) | ||||||
Total Comprehensive loss | |
| (11,946) | |
| (1,548) | |
| (2,279) | |
| (7,805) |
Less: Comprehensive loss attributable to non-controlling interests | |
| (72) | |
| (63) | ||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | |
| 3 | |
| (73) | ||||||
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | | $ | (11,874) | | $ | (1,485) | | $ | (2,282) | | $ | (7,732) |
See notes to Condensed Consolidated Financial Statements.
4
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | | |
|
| Nine Months Ended |
| Six Months Ended | ||||||||
|
| September 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Cash flows from operating activities: |
| |
|
| |
|
| |
|
| |
|
Consolidated net loss | | $ | (10,047) | | $ | (568) | | $ | (2,928) | | $ | (6,721) |
Adjustments to reconcile consolidated net loss to net cash provided by operating activities: | |
| | |
| | ||||||
Adjustments to reconcile consolidated net loss to net cash | |
| | |
| | ||||||
provided by operating activities: | |
| | |
| | ||||||
Depreciation and amortization | | | 2,836 | | | 2,054 | | | 2,242 | | | 1,824 |
Gain on loan forgiveness | | | - | | | (580) | ||||||
Stock-based compensation | | | 2,370 | | | 1,117 | | | 1,981 | | | 1,565 |
Deferred income taxes | |
| 242 | |
| (16) | |
| (142) | |
| 167 |
Pension cost | | | 577 | | | 308 | | | 538 | | | 303 |
Loss on lease termination | | | 125 | | | - | | | - | | | 125 |
Changes in operating assets and liabilities: | |
| | |
| | |
| | |
| |
Accounts receivable | |
| 1,690 | |
| 431 | |
| 1,270 | |
| 274 |
Prepaid expenses and other current assets | |
| (235) | | | 342 | |
| 634 | | | (148) |
Other assets | |
| 734 | |
| 214 | |
| 45 | |
| 243 |
Accounts payable and accrued expenses | |
| (253) | |
| 2,895 | ||||||
Accounts payable, accrued expenses and other | |
| (1,856) | |
| (1,647) | ||||||
Accrued salaries, wages and related benefits | |
| 498 | |
| 976 | |
| 658 | |
| (35) |
Income and other taxes | |
| (197) | |
| (1,531) | ||||||
Income and withholding taxes* | |
| 1,741 | |
| 178 | ||||||
Net cash provided by (used in) operating activities | |
| (1,660) | |
| 5,642 | |
| 4,183 | |
| (3,872) |
| | | | | | | | | | | | |
Cash flows from investing activities: | |
| | |
| | |
| | |
| |
Capital expenditures | |
| (5,253) | |
| (2,919) | |
| (3,012) | |
| (3,638) |
Proceeds from short term investments - other | | | 493 | | | - | ||||||
Net cash used in investing activities | |
| (5,253) | |
| (2,919) | |
| (2,519) | |
| (3,638) |
| | | | | | | | | | | | |
Cash flows from financing activities: | |
|
| |
|
| |
|
| |
|
|
Proceeds from stock option exercises | | | 276 | | | 2,214 | | | 2,179 | | | 180 |
Withholding taxes on net settlement of stock-based compensation | | | - | | | (763) | ||||||
Payment of long-term obligations | |
| (510) | |
| (666) | |
| (192) | |
| (477) |
Net cash provided by (used in) financing activities | | | (234) | | | 785 | | | 1,987 | | | (297) |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| (1,026) | |
| (138) | |
| 209 | |
| (614) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | |
| (8,173) | |
| 3,370 | |
| 3,860 | |
| (8,421) |
| | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | |
| 18,902 | |
| 17,573 | |
| 9,792 | |
| 18,902 |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 10,729 | | $ | 20,943 | | $ | 13,652 | | $ | 10,481 |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | |
| | |
| | |
| | |
| |
Shares withheld for withholding taxes on net settlement for stock-based compensation | | $ | - | | $ | 763 | ||||||
Vendor financed software licenses acquired | | $ | 1,162 | | $ | - | ||||||
Cash paid for income taxes | | $ | 979 | | $ | 201 | | $ | 380 | | $ | 696 |
Cash paid for operating leases | | $ | 1,424 | | $ | 1,312 | | $ | 799 | | $ | 974 |
Cash paid for interest | | $ | 1 | | $ | 18 | | $ | 132 | | $ | 4 |
* includes withholding tax on stock option exercises of $1.5 million
See notes to Condensed Consolidated Financial Statements.
5
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | ||
| | | | | | | Additional | | | | | Other | | | | | | | | | | | | Additional | | Retained | | Other | | | | | | |||||||||||
| | Common Stock | | Paid-in | | Retained | | Comprehensive | | Treasury Stock | | | | Common Stock | | Paid-in | | Earnings | | Comprehensive | | Treasury Stock | | | ||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Shares | | Amount |
| Total |
| Shares |
| Amount |
| Capital |
| (Deficit) |
| Loss |
| Shares | | Amount |
| Total | ||||||||||||
January 1, 2023 | | 30,589 | | $ | 306 | | $ | 35,815 | | $ | (8,775) | | $ | (2,108) | | (3,184) | | $ | (6,465) | | $ | 18,773 | ||||||||||||||||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (2,116) | | | - | | - | | | - | | | (2,116) | ||||||||||||||||||||||
Stock-based compensation | | - | | | - | | | 962 | | | - | | | - | | - | | | - | | | 962 | ||||||||||||||||||||||
Stock option exercises | | 148 | | | 1 | | | 320 | | | - | | | - | | - | | | - | | | 321 | ||||||||||||||||||||||
Shares withheld for exercise net settlement | | (3) | | | - | | | - | | | - | | | - | | - | | | - | | | - | ||||||||||||||||||||||
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | (5) | | - | | | - | | | (5) | ||||||||||||||||||||||
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | 60 | | - | | | - | | | 60 | ||||||||||||||||||||||
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 423 | | - | | | - | | | 423 | ||||||||||||||||||||||
March 31, 2023 | | 30,734 | | $ | 307 | | $ | 37,097 | | $ | (10,891) | | $ | (1,630) | | (3,184) | | $ | (6,465) | | $ | 18,418 | ||||||||||||||||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (815) | | | - | | - | | | - | | | (815) | ||||||||||||||||||||||
Stock-based compensation | | - | | | - | | | 1,019 | | | - | | | - | | - | | | - | | | 1,019 | ||||||||||||||||||||||
Stock option exercises | | 749 | | | 8 | | | 1,850 | | | - | | | - | | - | | | - | | | 1,858 | ||||||||||||||||||||||
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | (4) | | - | | | - | | | (4) | ||||||||||||||||||||||
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | 67 | | - | | | - | | | 67 | ||||||||||||||||||||||
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 108 | | - | | | - | | | 108 | ||||||||||||||||||||||
June 30, 2023 | | 31,483 | | $ | 315 | | $ | 39,966 | | $ | (11,706) | | $ | (1,459) | | (3,184) | | $ | (6,465) | | $ | 20,651 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
January 1, 2022 | | 30,347 | | $ | 303 | | $ | 35,121 | | $ | 3,160 | | $ | (2,192) | | 3,184 | | $ | (6,465) | | $ | 29,927 | | 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) | | - | | | - | | | - | | | (2,815) | | | - | | - | | | - | | | (2,815) |
Stock-based compensation | | - | | | - | | | 537 | | | - | | | - | | - | | | - | | | 537 | | - | | | - | | | 537 | | | - | | | - | | - | | | - | | | 537 |
Stock option exercises | | 23 | | | 1 | | | 26 | | | - | | | - | | - | | | - | | | 27 | | 23 | | | 1 | | | 26 | | | - | | | - | | - | | | - | | | 27 |
Shares withheld for exercise settlement and taxes | | (7) | | | - | | | (53) | | | - | | | - | | - | | | - | | | (53) | ||||||||||||||||||||||
Shares withheld for taxes on restricted shares vesting | | (7) | | | - | | | (53) | | | - | | | - | | - | | | - | | | (53) | ||||||||||||||||||||||
Redemption of non-controlling interest | | - | | | - | | | (2,864) | | | - | | | - | | - | | | - | | | (2,864) | | - | | | - | | | (2,864) | | | - | | | - | | - | | | - | | | (2,864) |
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | 40 | | - | | | - | | | 40 | | - | | | - | | | - | | | - | | | 40 | | - | | | - | | | 40 |
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | (26) | | - | | | - | | | (26) | | - | | | - | | | - | | | - | | | (26) | | - | | | - | | | (26) |
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 5 | | - | | | - | | | 5 | | - | | | - | | | - | | | - | | | 5 | | - | | | - | | | 5 |
March 31, 2022 | | 30,363 | | $ | 304 | | $ | 32,767 | | $ | 345 | | $ | (2,173) | | 3,184 | | $ | (6,465) | | $ | 24,778 | | 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) | | - | | | - | | | - | | | (3,833) | | | - | | - | | | - | | | (3,833) |
Stock-based compensation | | - | | | - | | | 1,028 | | | - | | | - | | - | | | - | | | 1,028 | | - | | | - | | | 1,028 | | | - | | | - | | - | | | - | | | 1,028 |
Stock option exercises | | 124 | | | 1 | | | 152 | | | - | | | - | | - | | | - | | | 153 | | 124 | | | 1 | | | 152 | | | - | | | - | | - | | | - | | | 153 |
Redemption of non-controlling interest | | - | | | - | | | (1) | | | - | | | - | | - | | | - | | | (1) | | - | | | - | | | (1) | | | - | | | - | | - | | | - | | | (1) |
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | 38 | | - | | | - | | | 38 | | - | | | - | | | - | | | - | | | 38 | | - | | | - | | | 38 |
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | (600) | | - | | | - | | | (600) | | - | | | - | | | - | | | - | | | (600) | | - | | | - | | | (600) |
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | (541) | | - | | | - | | | (541) | | - | | | - | | | - | | | - | | | (541) | | - | | | - | | | (541) |
June 30, 2022 | | 30,487 | | $ | 305 | | $ | 33,946 | | $ | (3,488) | | $ | (3,276) | | 3,184 | | $ | (6,465) | | $ | 21,022 | | 30,487 | | $ | 305 | | $ | 33,946 | | $ | (3,488) | | $ | (3,276) | | (3,184) | | $ | (6,465) | | $ | 21,022 |
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (3,327) | | | - | | - | | | - | | | (3,327) | ||||||||||||||||||||||
Stock-based compensation | | - | | | - | | | 805 | | | - | | | - | | - | | | - | | | 805 | ||||||||||||||||||||||
Stock option exercises | | 69 | | | 1 | | | 95 | | | - | | | - | | - | | | - | | | 96 | ||||||||||||||||||||||
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | 35 | | - | | | - | | | 35 | ||||||||||||||||||||||
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | (644) | | - | | | - | | | (644) | ||||||||||||||||||||||
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | (206) | | - | | | - | | | (206) | ||||||||||||||||||||||
September 30, 2022 | | 30,556 | | | 306 | | | 34,846 | | | (6,815) | | | (4,091) | | 3,184 | | | (6,465) | | | 17,781 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
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) | ||||||||||||||||||||||
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 | ||||||||||||||||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | - | | | - | | | - | | | (800) | | | - | | - | | | - | | | (800) | ||||||||||||||||||||||
Stock-based compensation | | - | | | - | | | 503 | | | - | | | - | | - | | | - | | | 503 | ||||||||||||||||||||||
Exercise of stock options | | 300 | | | 4 | | | 460 | | | - | | | - | | - | | | - | | | 464 | ||||||||||||||||||||||
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | 10 | | - | | | - | | | 10 | ||||||||||||||||||||||
Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | (594) | | - | | | - | | | (594) | ||||||||||||||||||||||
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | (265) | | - | | | - | | | (265) | ||||||||||||||||||||||
September 30, 2021 | | 30,337 | | | 303 | | | 34,475 | | | 4,328 | | | (1,918) | | 3,184 | | | (6,465) | | | 30,723 |
See notes to Condensed Consolidated Financial Statements.
6
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, the results of its operations and comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, cash flows for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, and stockholders’ equity for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021.2022. 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, 2021.2022. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the notes to the consolidated financial statements for the year ended December 31, 2021.2022.
Principles of Consolidation - The condensed consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and docGenix, a 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.reasonable. 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 and intangible assets, 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 areis not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.
7
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 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.
Revenue associated with the services provided in one period and billed in a subsequent period is commonly referred to as unbilled revenues and areis included under Accounts receivable.
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. Included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets are contract acquisition costs amounting to $0.7 million and $0.8 million as of June 30, 2023 and December 31, 2022, respectively. These acquisition costs relate to our Agility segment and are amortized over the term of the subscription agreement which normally has a duration of 12 months or less.
Foreign Currency Translation - The functional currency of the Company’s locationssubsidiaries 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 and Canadian 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 SeptemberJune 30, 20222023 and December 31, 20212022 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. Included in direct operating costs were foreign exchange losses (gains) resulting from such transactions of approximately $18,000 and ($747,000) for the three months ended June 30, 2023 and 2022, and $327,000 and ($1,166,000) for the six months ended June 30, 2023 and 2022, respectively.
8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 thesetheir 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 loss.
Included in direct operating costs were foreign exchange gains resulting from such transactions of approximately $729,000 and $348,000 for the three months ended September 30, 2022 and 2021 respectively and $1,896,000 and $503,000 for the nine months ended September 30, 2022 and 2021 respectively.
8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 loss. Upon settlement of these contracts,income (loss). When the change in the fair valueamounts recorded in Other comprehensive loss isincome (loss) are reclassified to earnings, andthey are included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs.
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 generally ranges betweenfrom three andto 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.
In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the United States, Canadian and European (principally Germany and the United Kingdom) deferred tax assets will not be realizable. As the expectation of future taxable income cannot be predicted with certainty, the Company maintains a valuation allowance against all the United States, Canadian and European (principally Germany and the United Kingdom) net deferred tax assets. 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 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 $2.6 million and $4.5 million as of September 30, 2022 and December 31, 2021, respectively. The Company expects 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.
9
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE(Unaudited)
Deferred Revenue - Deferred revenue represents advance billings made to customers where conditions for revenue recognition have not been met. These amounts are included in accrued expenses and other on the accompanying condensed consolidated balance sheets. We expect to recognize substantially all of these performance obligations over the next 12 months. The table below provides information about contract liabilities (deferred revenue) and the significant changes in the balance for the six months ended June 30, 2023 (in thousands):
| | | |
|
| Amount | |
Balance - December 31, 2022 | | $ | 4,366 |
Net deferred revenue in the period | |
| 8,059 |
Revenue recognized | |
| (9,500) |
Currency translations and other adjustments | |
| 111 |
Balance - June 30, 2023 | | $ | 3,036 |
New Accounting Pronouncements - There were no new accounting pronouncements during the quarter that were applicable to the Company.
2. Short Term Investments – other
The Short-term investments include investments made by the Company in treasury bills and certificates of deposit which are considered as highly liquid investments having a maturity period of less than one year.
| | | | | | |
|
| June 30, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Treasury bills | | $ | - | | $ | 494 |
Certificates of deposit | |
| 14 | |
| 13 |
Total | | $ | 14 | | $ | 507 |
3. Accounts Receivable
Accounts receivable consists of the following:
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2023 | | 2022 | ||
Gross Accounts receivable | | $ | 9,579 | | $ | 10,741 |
Allowance for doubtful accounts | |
| (1,220) | |
| (1,213) |
Accounts receivable, net | | $ | 8,359 | | $ | 9,528 |
As of January 1, 2023, the Company has adopted ASU 2019-04 (Codification Improvements to Topic 326, Financial Instruments—Credit Losses), and based on its assessment there was no impact on the financial statements or other related disclosures. The basis of allowance for doubtful accounts remains similar to the earlier adopted estimation procedure which is further elaborated in the paragraph below.
10
INNODATA INC. AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.We maintain an allowance for credit losses for estimated losses resulting from the failure of our customers to make the required payments and provisions for billing adjustments relating to quality issues on delivered services. The allowance for credit losses is based on a review of specifically identified accounts and an overall aging analysis applied to accounts pooled based on similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices, and current economic trends based on our expectations over the expected life of the receivables, generally ninety days or less. Actual credit losses could differ from those estimates.
Activity in the allowance for the credit losses for the three and six months ended June 30, 2023 was as follows (in thousands):
| | | |
|
| Amount | |
Balance - January 1, 2023 | | $ | 1,213 |
Additions charged to expense | |
| 180 |
Write-offs against allowance | |
| (230) |
Foreign currency translation adjustment | |
| 3 |
Balance - March 31, 2023 | | $ | 1,166 |
Additions charged to expense | | | 152 |
Write-offs against allowance | | | (101) |
Foreign currency translation adjustment | | | 3 |
Balance - June 30, 2023 | | $ | 1,220 |
4. Goodwill and Intangible Assets
Goodwill
As of September 30, 2022, the Company performed its annual goodwill impairment analysis on one of its reporting units, the Agility segment. The Company also tested for impairment intangible assets for the Agility and Synodex segments. The impairment test involves estimating the fair value based on a combination of income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies) using unobservable inputs (Level 3). The income approach uses a discounted cash flow (“DCF”) method that utilizes the present value of cash flows to estimate the segment’s fair value. The future cash flows of the segment were projected based on the Company’s estimates of future revenue, operating income, and other factors such as working capital and capital expenditures. As part of the DCF analysis, the Company projected revenue and operating profits and assumed long-term revenue growth rates in the terminal year. The market approach utilizes multiples of revenues and earnings before interest expense, taxes, depreciation, and amortization (“EBITDA”) to estimate the segment’s fair value. The market multiples used for the segment were based on a group of comparable companies’ market multiples applied to the Company’s revenue. The Company concluded that there is no impairment of goodwill and intangible assets for the Agility and Synodex segments.
The change in the carrying amount of goodwill for the ninesix months ended SeptemberJune 30, 20222023 was as follows (in thousands):
| | | | | | |
Balance as of January 1, 2022 |
| $ | 2,143 | |||
Balance - January 1, 2023 |
| $ | 2,038 | |||
Foreign currency translation adjustment | |
| (161) | |
| 31 |
Balance as of September 30, 2022 | | $ | 1,982 | |||
Balance - June 30, 2023 | | $ | 2,069 |
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 utilizesusing 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. The carrying value of Goodwill was $2.1 million as of June 30, 2023, and $2.0 million as of December 31, 2022.
1011
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Intangibles
Information regarding the Company acquired intangible assets and capitalized developed software was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Capitalized Developed | | | | ||||
| | Company Acquired Intangible Assets |
| 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 |
| | - |
| | - |
| | - |
| | - |
| | - |
| | - |
| | 4,244 |
| | 4,244 |
Transfers |
| | - |
| | - |
| | - |
| | - |
| | - |
| | 2,882 |
| | (2,882) |
| | - |
Foreign currency translation |
| | (235) |
| | (162) |
| | (42) |
| | (3) |
| | (284) |
| | (656) |
| | (12) |
| | (1,394) |
Balance as of September 30, 2022 | | $ | 2,934 | | $ | 2,066 | | $ | 838 | | $ | 42 | | $ | 3,364 | | $ | 10,802 | | $ | 1,985 | | $ | 22,031 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated amortization: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Balance as of January 1, 2022 | | $ | 2,158 | | $ | 1,377 | | $ | 685 | | $ | 34 | | $ | 2,005 | | $ | 2,575 | | $ | - | | $ | 8,834 |
Amortization expense | |
| 235 | |
| 139 | |
| 42 | |
| 3 | |
| 267 | |
| 1,286 | |
| - | |
| 1,972 |
Foreign currency translation | |
| (175) | |
| (110) | |
| (30) | |
| (3) | |
| (170) | |
| (229) | |
| - | |
| (717) |
Balance as of September 30, 2022 | | $ | 2,218 | | $ | 1,406 | | $ | 697 | | $ | 34 | | $ | 2,102 | | $ | 3,632 | | $ | - | | $ | 10,089 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net carrying values - September 30, 2022 | | $ | 716 | | $ | 660 | | $ | 141 | | $ | 8 | | $ | 1,262 | | $ | 7,170 | | $ | 1,985 | | $ | 11,942 |
| | | | | | | | | | | | |
| | June 30, 2023 | ||||||||||
| | | | | | | | Foreign | | | | |
| | Gross | | | | | Currency | | Net | |||
| | Carrying | | Accumulated | | Translation | | Carrying | ||||
|
| Value |
| Amortization |
| Adjustment |
| Value | ||||
Acquired Intangible Assets | | | | | | | | | | | | |
Developed technology | | $ | 2,999 | | $ | (2,489) | | $ | 7 | | $ | 517 |
Customer relationships |
| | 2,096 |
| | (1,557) |
| | 8 |
| | 547 |
Trademarks and tradenames |
| | 852 |
| | (747) |
| | 2 |
| | 107 |
Patents |
| | 43 |
| | (38) |
| | - |
| | 5 |
Media Contact Database | | | 3,492 | | | (2,445) | | | 17 | | | 1,064 |
Total Acquired Intangible Assets | | $ | 9,482 | | $ | (7,276) | | $ | 34 | | $ | 2,240 |
| | | | | | | | | | | | |
Capitalized Developed Software | |
| | |
| | |
| | |
| |
Capitalized Developed Software | | $ | 12,608 | | $ | (5,419) | | $ | 88 | | $ | 7,277 |
Capitalized Developed Software - in Progress | |
| 3,979 | |
| - | |
| (7) | |
| 3,972 |
Total Capitalized Developed Software | | $ | 16,587 | | $ | (5,419) | | $ | 81 | | $ | 11,249 |
| | | | | | | | | | | | |
Total | | $ | 26,069 | | $ | (12,695) | | $ | 115 | | $ | 13,489 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2021 | | $ | 3,175 | | $ | 2,228 | | $ | 882 | | $ | 45 | | $ | 3,670 | | $ | 5,507 | | $ | 1,360 | | $ | 16,867 |
Additions | | | - | | | - | | | - | | | - | | | - | | | 376 | | | 2,005 | | | 2,381 |
Transfers | | | - | | | - | | | - | | | - | | | - | | | 2,752 | | | (2,752) | | | - |
Foreign currency translation adjustment | |
| (6) | |
| - | |
| (2) | |
| - | |
| (22) | | | (59) | | | 22 | |
| (67) |
Balance as of December 31, 2021 | | $ | 3,169 | | $ | 2,228 | | $ | 880 | | $ | 45 | | $ | 3,648 | | $ | 8,576 | | $ | 635 | | $ | 19,181 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2021 | | $ | 1,844 | | $ | 1,192 | | $ | 629 | | $ | 29 | | $ | 1,650 | | $ | 1,492 | | $ | - | | $ | 6,836 |
Amortization expense | | | 315 | | | 187 | | | 56 | | | 5 | | | 354 | | | 1,089 | | | - | | | 2,006 |
Foreign currency translation adjustment | | | (1) | | | (2) | | | - | | | - | | | 1 | | | (6) | | | - | | | (8) |
Balance as of December 31, 2021 | | $ | 2,158 | | $ | 1,377 | | $ | 685 | | $ | 34 | | $ | 2,005 | | $ | 2,575 | | $ | - | | $ | 8,834 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net carrying amounts - December 31, 2021 | | $ | 1,011 | | $ | 851 | | $ | 195 | | $ | 11 | | $ | 1,643 | | $ | 6,001 | | $ | 635 | | $ | 10,347 |
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
| | | | | | | | Foreign | | | | |
| | Gross | | | | | Currency | | Net | |||
|
| Carrying |
| Accumulated |
| Translation | | Carrying | ||||
|
| Value |
| Amortization |
| Adjustment |
| Value | ||||
Acquired Intangible Assets |
| |
|
| |
|
| |
|
| |
|
Developed technology | | $ | 3,169 | | $ | (2,468) | | $ | (43) | | $ | 658 |
Customer relationships | | | 2,228 | | | (1,560) | | | (42) | | | 626 |
Trademarks and tradenames | | | 880 | | | (740) | | | (8) | | | 132 |
Patents | |
| 45 | |
| (38) | | | 1 | | | 8 |
Media Contact Database | | | 3,648 | | | (2,358) | | | (68) | | | 1,222 |
Total Acquired Intangible Assets | | $ | 9,970 | | $ | (7,164) | | $ | (160) | | $ | 2,646 |
| | | | | | | | | | | | |
Capitalized Developed Software | | | | | | | | | | | | |
Capitalized Developed Software | | $ | 11,845 | | $ | (4,398) | | $ | (348) | | $ | 7,099 |
Capitalized Developed Software - in Progress | | | 2,787 | | | - | | | (6) | | | 2,781 |
Total Capitalized Developed Software | | $ | 14,632 | | $ | (4,398) | | $ | (354) | | $ | 9,880 |
| | | | | | | | | | | | |
Total | | $ | 24,602 | | $ | (11,562) | | $ | (514) | | $ | 12,526 |
1112
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Amortization expense relating to acquired intangible assets was $0.2 million for each of the three-month periods ended June 30, 2023 and $0.72022. Amortization expense relating to acquired intangible assets was $0.4 million and $0.5 million for the threesix-month periods ended June 30, 2023 and nine months ended September 30, 2022.2022, respectively.
Amortization expense relating to capitalized developed software was $0.5$0.6 million and $1.3$0.4 million for the threethree-month periods ended June 30, 2023 and nine months2022, respectively. Amortization expense relating to capitalized developed software was $1.2 million and $0.8 million for the six-month periods ended SeptemberJune 30, 2022.2023 and 2022, respectively.
As of SeptemberJune 30, 2022,2023, estimated future amortization expense for intangible assets was as follows (in thousands):
| | | | | | |
Year |
| Amortization |
| Amortization | ||
2022 | | $ | 761 | |||
2023 | | $ | 3,579 | | $ | 3,049 |
2024 | | $ | 3,124 | | | 4,378 |
2025 | | $ | 2,217 | | | 3,451 |
2026 | | $ | 818 | | | 940 |
2027 | | | 460 | |||
Thereafter | | $ | 1,443 | | | 1,211 |
| | $ | 11,942 | | $ | 13,489 |
3.5. 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.United States, Canadian, German and Canadianthe United Kingdom 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 nine-month periodssix months ended SeptemberJune 30, 2023 and 2022, and 2021respectively, are summarized in the table below:
| | | | | | | | | | |
| | For the Nine Months | | | For the Six Months | | ||||
| | Ended September 30, | | | Ended June 30, | | ||||
|
| 2022 |
| 2021 | |
| 2023 |
| 2022 | |
Federal income tax expense at statutory rate |
| (21.0) | % | 21.0 | % |
| (21.0) | % | (21.0) | % |
Effect of: |
| | | | |
| | | | |
Change in valuation allowance |
| 43.0 | | 2,468.8 | |
| 51.3 | | 40.3 | |
Foreign operations permanent difference - foreign exchange gains and losses | | 4.7 | | 2.1 | | |||||
Tax effects of foreign operations | | 1.1 | | 79.8 | | | 3.8 | | 1.2 | |
Increase (decrease) in unrecognized tax benefits (ASC 740) | | 1.0 | | (490.0) | | |||||
Increase in unrecognized tax benefits (ASC 740) | | 2.6 | | 1.2 | | |||||
State income tax net of federal benefit | | 0.4 | | 0.2 | | |||||
Return to provision true up | | 0.2 | | 31.6 | | | (0.6) | | 2.0 | |
State income tax net of federal benefit | | 0.2 | | 43.2 | | |||||
Section 162 (m) | | - | | 549.9 | | |||||
Change in tax rates | | - | | 225.0 | | |||||
Foreign rate differential | | (1.5) | | (6.3) | | |||||
Deemed interest | | (7.1) | | - | | |||||
Effect of stock based compensation | | (0.4) | | (1,573.2) | | | (22.7) | | (1.0) | |
Foreign operations permanent difference - foreign exchange gains and losses | | (1.5) | | 271.9 | | |||||
Foreign rate differential | | (5.8) | | (478.8) | | |||||
Withholding tax | | - | | - | | |||||
Other | | (2.0) | | 22.5 | | | 6.2 | | (0.7) | |
Effective tax rate | | 14.8 | % | 1,171.7 | % | | 16.1 | % | 18.0 | % |
1213
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the ninesix months ended SeptemberJune 30, 20222023 (in thousands):
| | | | | | |
|
| Unrecognized |
| Unrecognized | ||
|
| tax benefits |
| tax benefits | ||
Balance - January 1, 2022 | | $ | 1,753 | |||
Balance - January 1, 2023 | | $ | 1,680 | |||
Increase for current period tax positions | |
| 83 | |
| 87 |
Decrease for prior period tax positions | | | (29) | | | (68) |
Interest accrual | |
| 46 | |
| 46 |
Foreign currency remeasurement | |
| (177) | |
| 7 |
Balance - September 30, 2022 | | $ | 1,676 | |||
Balance - June 30, 2023 | | $ | 1,752 |
The Company expects that unrecognized tax benefits as of SeptemberJune 30, 2022,2023, if recognized, would have a material impact on the Company’s effective tax rate.
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 $53.0$57.0 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$121,000 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 $0.9$0.8 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.
1314
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE(Unaudited)
6. Operating Leases
The Company has various lease agreements for its offices and service delivery centers. These lease agreements are for terms ranging from two to eleven years and, in most cases, provide for annual escalations ranging from 1.75% to 10%. 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. Lease agreements with a term of less than one year are treated as short-term leases and are accounted for separately as shown in the table below.
Most of the lease agreements are renewable at the mutual consent of the parties to the contract.
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, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Rent expense for long-term operating leases | | $ | 312 | | $ | 337 | | $ | 621 | | $ | 713 |
Rent expense for short-term operating leases | |
| 83 | |
| 144 | | | 178 | | | 261 |
Total rent expense | | $ | 395 | | $ | 481 | | $ | 799 | | $ | 974 |
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, 2023 (in thousands):
| | | |
Year |
| Amount | |
2023 | | $ | 513 |
2024 | |
| 932 |
2025 | |
| 956 |
2026 | |
| 970 |
2027 | |
| 926 |
2028 and thereafter | |
| 1,553 |
Total lease payments | |
| 5,850 |
Less: Interest | |
| (1,440) |
Net present value of lease liabilities | | $ | 4,410 |
| |
| |
Current portion | | $ | 582 |
Long-term portion | |
| 3,828 |
Total | | $ | 4,410 |
The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of June 30, 2023 were as follows:
| | | |
Weighted-average lease term remaining (in months) | 47 | | |
Weighted-average discount rate | 9.13 | % |
15
INNODATA INC. AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.7.Long-term obligations
Total long-term obligations as of June 30, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | |
|
| June 30, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Pension obligations - accrued pension liability | | $ | 6,431 | | $ | 5,906 |
Settlement agreement | |
| - | |
| 50 |
Microsoft licenses (1) | |
| 1,082 | |
| - |
| | | 7,513 | | | 5,956 |
Less: Current portion of long-term obligations | |
| 1,063 | |
| 877 |
Totals | | $ | 6,450 | | $ | 5,079 |
(1) In March 2023, the Company renewed a vendor agreement to acquire certain additional software licenses, receive technical support and future software upgrades on software licenses through February 2026. Pursuant to this agreement, the Company is contractually liable to pay approximately $0.4 million annually over the term of the agreement.
8. 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$5.9 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.
16
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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$450,000 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.
5.9. Stock Options and Restricted Stock Units
The stock-based compensation expense related to the Company’s Equity Plans (as defined below) was allocated as follows (in thousands):
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Direct operating costs | | $ | 62 | | $ | 56 | | $ | 126 | | $ | 107 |
Selling and administrative expenses | |
| 957 | |
| 972 | |
| 1,855 | |
| 1,458 |
Total stock-based compensation | | $ | 1,019 | | $ | 1,028 | | $ | 1,981 | | $ | 1,565 |
Stock Options
2013 Plan
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 nine-monthsix-month periods ended SeptemberJune 30, 20222023 and 20212022 are presented below:
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Weighted - Average |
| Weighted-Average |
| |
| |
| |
| Weighted - Average |
| | ||||
| | Number of |
| Exercise |
| Remaining Contractual | | Aggregate | | Number of |
| Weighted - Average |
| Remaining Contractual | | Aggregate | ||||
|
| Options |
| Price |
| Term (years) |
| Intrinsic Value |
| Options |
| Exercise Price |
| Term (years) |
| Intrinsic Value | ||||
Outstanding at January 1, 2021 |
| 5,906,884 | | $ | 1.61 |
|
|
| |
| ||||||||||
Granted |
| 750,000 | |
| 6.76 |
|
|
| |
| ||||||||||
Outstanding at January 1, 2023 |
| 6,690,490 | | $ | 3.09 |
|
|
| |
| ||||||||||
Granted* |
| 25,000 | |
| 3.31 |
|
|
| |
| ||||||||||
Exercised |
| (1,546,288) | |
| 2.01 |
|
|
| |
|
| (871,884) | |
| 2.34 |
|
|
| |
|
Forfeited/Expired |
| (20,000) | |
| 1.38 |
|
|
| |
|
| (75,766) | |
| 6.96 |
|
|
| |
|
Outstanding at September 30, 2021 |
| 5,090,596 | | $ | 2.05 |
| 7.49 | | $ | 37,037,015 | ||||||||||
Outstanding at June 30, 2023 |
| 5,767,840 | | $ | 3.16 |
| 6.84 | | $ | 47,137,674 | ||||||||||
|
| | |
| |
| | |
| |
| | |
| |
| | |
| |
Exercisable at September 30, 2021 |
| 3,468,912 | | $ | 1.73 | | 7.03 | | $ | 27,069,483 | ||||||||||
Exercisable at June 30, 2023 |
| 3,600,261 | | $ | 1.91 | | 5.73 | | $ | 33,897,858 | ||||||||||
|
| | |
| |
| | |
| |
| | |
| |
| | |
| |
Vested and Expected to Vest at September 30, 2021 |
| 5,090,596 | | $ | 2.05 |
| 7.49 | | $ | 37,037,015 | ||||||||||
Vested and Expected to Vest at June 30, 2023 |
| 5,767,840 | | $ | 3.16 |
| 6.84 | | $ | 47,137,674 |
*Granted to a non-employee member of the Company’s advisory board.
1417
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE(Unaudited)
| | | | | | | | | | |
|
| |
| | |
| 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) |
| | 1.17 |
|
|
| |
|
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 |
*Includes 110,000 stock options granted to a non-employee director of the Company.
2021 Plan
A summary of option activity under the Innodata Inc. 2021 Equity Compensation Plan, as amended and restated effective as of April 11, 2022 (the “2021 Plan”) and changes during each of the six-month periods ended June 30, 2023 and 2022 are presented below.
| | | | | | | | | | |
| | | | | | Weighted - Average | | | ||
| | Number of | | Weighted - Average | | Remaining Contractual | | Aggregate | ||
|
| Options |
| Exercise Price |
| Term (years) |
| Intrinsic Value | ||
Outstanding at January 1, 2023 |
| 1,027,500 | | $ | 3.46 |
|
|
| |
|
Granted |
| - | |
| - |
|
|
| |
|
Exercised |
| (25,000) | |
| 6.40 |
|
|
| |
|
Forfeited/Expired |
| (42,000) | |
| 3.41 |
|
|
| |
|
Outstanding at June 30, 2023 |
| 960,500 | | $ | 3.38 |
| 9.27 | | $ | 7,634,060 |
| | | | | | | | | | |
Exercisable at June 30, 2023 |
| 18,750 | | $ | 3.39 |
| 9.21 | | $ | 148,875 |
| | | | | | | | | | |
Vested and Expected to Vest at June 30, 2023 |
| 960,500 | | $ | 3.38 |
| 9.27 | | $ | 7,634,060 |
18
INNODATA INC. AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| Weighted-Average |
| | |
| |
| | |
| Weighted - Average |
| | |
| | Number of | | Weighted - Average | | Remaining Contractual | | Aggregate | | Number of | | Weighted - Average | | Remaining Contractual | | Aggregate | ||||
| | Options | | Exercise Price | | Term (years) | | Intrinsic Value | | Options | | Exercise Price | | Term (years) | | Intrinsic Value | ||||
Outstanding at January 1, 2022 | | 5,536,896 | | $ | 2.66 | |
| |
| |
| - | | $ | - |
|
|
| |
|
Granted* |
| 1,479,558 |
| | 5.21 |
|
|
| |
|
| 25,000 | |
| 6.40 |
|
|
| |
|
Exercised |
| (210,429) |
| | 1.28 |
|
|
| |
|
| - | |
| - |
|
|
| |
|
Forfeited/Expired |
| (261,101) |
| | 6.50 |
|
|
| |
|
| - | |
| - |
|
|
| |
|
Outstanding at September 30, 2022 |
| 6,544,924 | | $ | 3.13 |
| 7.33 | | $ | 6,265,207 | ||||||||||
Outstanding at June 30, 2022 |
| 25,000 | | $ | 6.40 |
| 5.00 | | $ | - | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Exercisable at September 30, 2022 |
| 4,264,408 | | $ | 2.08 |
| 6.40 | | $ | 5,792,971 | ||||||||||
Exercisable at June 30, 2022 |
| - | | $ | - |
|
| |
|
| ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Vested and Expected to Vest at September 30, 2022 |
| 6,544,924 | | $ | 3.13 |
| 7.33 | | $ | 6,265,207 | ||||||||||
Vested and Expected to Vest at June 30, 2022 |
| 25,000 | | $ | 6.40 |
| 5.00 | | $ | - |
*Includes 110,000 stock options granted by the CompanyGranted to a non-employee director of the Company during the nine months ended September 30, 2022. The stock option fully vests on January 1, 2025.
A summary of option activity under the Innodata Inc. 2021 Equity Compensation Plan, as amended and restated effective as of April 11, 2022 (the “2021 Plan”) and changes during the nine-month period ended September 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* |
| 182,000 | |
| 3.67 |
|
|
| |
|
Exercised |
| - | |
| - |
|
|
| |
|
Forfeited/Expired |
| - | |
| - |
|
|
| |
|
Outstanding at September 30, 2022 |
| 182,000 | | $ | 3.67 |
| 9.91 | | $ | - |
| | | | | | | | | | |
Exercisable at September 30, 2022 |
| 6,250 | | $ | 6.40 |
| | |
|
|
| | | | | | | | | | |
Vested and Expected to Vest at September 30, 2022 |
| 182,000 | | $ | 3.67 |
| 9.91 | | $ | - |
*During the nine months ended September 30, 2022, the Company granted 132,000 stock options to non-employee directors of the Company which vest on the first anniversary of the date of grant. In addition, during the nine months ended September 30, 2022 the Company granted 50,000 stock options to non-employee membersmember of the Company’s advisory board in lieu of cash compensation. The stock options vest in 12 monthly installments from the date of grant.board.
During the ninesix months ended SeptemberJune 30, 2022,2023, a total of 210,429896,884 options were exercised at an average price of $1.28.$2.50.
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted, and weighted-average assumptions were as follows:
| | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | For the Six Months Ended June 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | | ||||
Weighted average fair value of options granted | | $ | 3.00 | | $ | 3.56 | | $ | 1.79 | | $ | 3.10 | |
Risk-free interest rate | | 1.94%-3.54% | | | 0.22%-0.82% | | | 3.88 | % | | 1.94%-2.75 | % | |
Expected term (years) | | 3.0-6.42 | | | 3-6 | | | 3.0 | | | 3.0-6.42 | | |
Expected volatility factor | | 62% -79% | | | 58% - 68% | | | 79.95 | % | | 62%-76.48 | % | |
Expected dividends | | - | | | - | | | - | | | - | |
A summaryThe compensation cost related to non-vested stock options not yet recognized as of June 30, 2023 totaled approximately $5.4 million. The weighted-average period over which these costs will be recognized is 20 months.
Restricted Stock Awards
There were no outstanding awards of restricted stock units issued under the 2013 Plan andor the 2021 Plan (collectively, the “Equity Plans”) is presented below:during each of the six-month periods ended June 30, 2023 and 2022.
1519
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
In MarchRestricted Stock Units
Restricted stock unit activity under the Equity Plans during each of the six-month periods ended June 30, 2023 and 2022 are presented below:
| | | | | |
| | Number of |
| Weighted-Average | |
| | Restricted Stock | | Grant Date | |
|
| Units |
| Fair Value | |
Unvested at January 1, 2023 | | 700,000 | | $ | 5.59 |
Granted |
| 28,804 |
| | 8.29 |
Vested |
| - |
| | - |
Forfeited/Expired |
| - |
| | - |
Unvested at June 30, 2023 |
| 728,804 | | $ | 5.70 |
For the Company grantedsix months ended June 30, 2023, a total of 28,804 restricted stock units (“RSU”RSUs”) to key executives, pursuant towere granted under the Equity Plans. Each RSU has vesting conditions based2013 Plan. Vesting of the RSUs is contingent on bothcontinuous employment by the achievementemployee for a 12-month period from the date 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.grant. 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. The stock-based compensation expense is recognized on a straight-line basis over a period of 12 months. The fair value of restricted stock units is based on the closing price of the stock at the time of the grant.
| | | | | |
|
| 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 |
For the six months ended June 30, 2022, 200,000 performance-based RSUs were granted under the 2013 Plan and 500,000 performance-based RSUs were granted under the 2021 plan. The 700,000 performance based RSUs remain outstanding and unvested at June 30, 2023. Vesting of the performance based RSUs is contingent on the achievement of certain financial performance goals and continuation of employment for a defined period. 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.
Restricted stock unit activity during the nine months ended September 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 September 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 September 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 September 30, 2022 totaled approximately $5.9 million. The weighted-average period over which these costs will be recognized is 24 months.
During the nine months ended September 30, 2022, 700,000 performance-based restricted stock units were granted and remain non-vested at September 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 September 30, 2022.
The compensation cost related to non-vested restricted stock units not yet recognized as of SeptemberJune 30, 20222023 totaled approximately $2.8$3.0 million. The weighted-average period over which these costs will be recognized is 2220 months.
The stock-based compensation expense related to the Equity Plans were allocated as follows (in thousands):
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Direct operating costs | | $ | 46 | | $ | 21 | | $ | 154 | | $ | 96 |
Selling and administrative expenses | |
| 759 | |
| 482 | |
| 2,216 | |
| 1,021 |
Total stock-based compensation | | $ | 805 | | $ | 503 | | $ | 2,370 | | $ | 1,117 |
1620
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Subsequent Event
On October 7, 2022, the Company granted 1,143,000 stock options to Company’s executive officers and certain employees. 295,000 stock options were granted pursuant to the 2013 Plan and 848,000 stock options were granted pursuant to the 2021 Plan. The stock options have an exercise price of $3.41, a term of ten years from the date of grant, vest in three equal annual installments from the date of grant and have a grant date fair value of approximately $2.5 million.
6. Operating Leases
The Company has various lease agreements for its offices and service delivery centers. 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%, The Company has determined that the risks and benefits related to these leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.
Lease Agreements with a term of less than one year are treated as short-term leases and accounted for separately as shown in table below.
Most of these lease agreements are renewable at the mutual consent of the parties to the agreement.
The table below summarizes the amounts recognized in the condensed consolidated financial statements related to operating leases and short-term leases for the periods presented (in thousands):
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Rent expense for long-term operating leases | | $ | 314 | | $ | 393 | | $ | 1,027 | | $ | 1,169 |
Rent expense for short-term leases | |
| 136 | |
| 59 | | | 398 | | | 143 |
Total rent expense | | $ | 450 | | $ | 452 | | $ | 1,425 | | $ | 1,312 |
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 September 30, 2022 (in thousands):
| | | |
Year |
| Amount | |
2022 | | $ | 283 |
2023 | |
| 1,030 |
2024 | |
| 825 |
2025 | |
| 837 |
2026 | |
| 847 |
2027 and thereafter | |
| 2,384 |
Total lease payments | |
| 6,206 |
Less: Interest | |
| (1,534) |
Net present value of lease liabilities | | $ | 4,672 |
| |
| |
Current portion | | $ | 742 |
Long-term portion | |
| 3,930 |
Total | | $ | 4,672 |
17
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
The weighted average remaining lease terms and discount rates for all the Company’s operating leases as of September 30, 2022 were as follows:
|
|
|
|
|
|
| |
|
|
|
7. Long-term obligations
Total long-term obligations as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | |
|
| September 30, |
| December 31, | ||
|
| 2022 |
| 2021 | ||
Pension obligations - accrued pension liability | | $ | 6,376 | | $ | 6,839 |
Settlement agreement | |
| 94 | |
| 272 |
Microsoft licenses | |
| - | |
| 385 |
| | | 6,470 | | | 7,496 |
Less: Current portion of long-term obligations | |
| 596 | |
| 1,279 |
Totals | | $ | 5,874 | | $ | 6,217 |
8. Redemption of non-controlling interest
The Condensed Consolidated Balance Sheets for the nine-month period ending September 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, changes in fair value of derivatives, net of taxes, and foreign currency translation adjustment. The components of accumulated other comprehensive loss as of September 30, 2022 and 2021, and reclassifications from accumulated other comprehensive loss for the three and nine 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 July 1, 2022 | | $ | (780) | | $ | (889) | | $ | (1,607) | | $ | (3,276) |
Other comprehensive loss before reclassifications, net of taxes | |
| - | |
| (884) | |
| (644) | |
| (1,528) |
Total other comprehensive loss before reclassifications, net of taxes | |
| (780) | |
| (1,773) | |
| (2,251) | |
| (4,804) |
Net amount reclassified to earnings | |
| 35 | |
| 678 | |
| - | |
| 713 |
Balance at September 30, 2022 | | $ | (745) | | $ | (1,095) | | $ | (2,251) | | $ | (4,091) |
18
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| | | | | | | | | | | | |
|
| | |
| | |
| 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 |
|
| - | |
| (1,707) | |
| (1,270) | |
| (2,977) |
Total other comprehensive loss before reclassifications, net of taxes |
|
| (858) | |
| (2,060) | |
| (2,251) | |
| (5,169) |
Net amount reclassified to earnings |
|
| 113 | |
| 965 | |
| - | |
| 1,078 |
Balance at September 30, 2022 | | $ | (745) | | $ | (1,095) | | $ | (2,251) | | $ | (4,091) |
10. 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, 2023 and 2022, 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 |
| | |
| | |
| Foreign Currency |
| | ||||||
|
| Adjustment |
| Derivatives |
| Translation Adjustment |
| Comprehensive Loss |
| Pension Liability |
| Fair Value of |
| Translation |
| Accumulated Other | ||||||||
| | | | | | | | | | | | |
| Adjustment |
| Derivatives |
| Adjustment |
| Comprehensive Loss | ||||
Balance at July 1, 2021 | | $ | (422) | | $ | (267) | | $ | (380) | | $ | (1,069) | ||||||||||||
Other comprehensive income (loss) before reclassifications, net of taxes | |
| - | |
| (302) | |
| (594) | |
| (896) | ||||||||||||
Total other comprehensive loss before reclassifications, net of taxes | |
| (422) | |
| (569) | |
| (974) | |
| (1,965) | ||||||||||||
Balance at April 1, 2023 | | $ | (91) | | $ | 58 | | $ | (1,597) | | $ | (1,630) | ||||||||||||
Other comprehensive income before reclassifications, net of taxes | |
| - | |
| 2 | |
| 67 | |
| 69 | ||||||||||||
Total other comprehensive income (loss) before reclassifications, net of taxes | |
| (91) | |
| 60 | |
| (1,530) | |
| (1,561) | ||||||||||||
Net amount reclassified to earnings | |
| 10 | |
| 37 | |
| - | |
| 47 | |
| (4) | |
| 106 | |
| - | |
| 102 |
Balance at September 30, 2021 | | $ | (412) | | $ | (532) | | $ | (974) | | $ | (1,918) | ||||||||||||
Balance at June 30, 2023 | | $ | (95) | | $ | 166 | | $ | (1,530) | | $ | (1,459) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Foreign Currency | | | |
| | |
| | |
| Foreign Currency |
| | | ||
| | Pension Liability | | Fair Value of | | Translation | | Accumulated Other |
| Pension Liability |
| Fair Value of |
| Translation |
| Accumulated Other | ||||||||
|
| Adjustment |
| Derivatives |
| Adjustment |
| Comprehensive Loss |
| Adjustment |
| Derivatives |
| Adjustment |
| Comprehensive Loss | ||||||||
Balance at January 1, 2021 | | $ | (444) | | $ | - | | $ | (494) | | $ | (938) | ||||||||||||
Other comprehensive income (loss) before reclassifications, net of taxes | | | - |
| | (536) |
| | (480) |
| | (1,016) | ||||||||||||
Balance at January 1, 2023 | | $ | (86) | | $ | (365) | | $ | (1,657) | | $ | (2,108) | ||||||||||||
Other comprehensive income before reclassifications, net of taxes | |
| - | |
| 244 | |
| 127 | |
| 371 | ||||||||||||
Total other comprehensive loss before reclassifications, net of taxes | | | (444) |
| | (536) |
| | (974) |
| | (1,954) | |
| (86) | |
| (121) | |
| (1,530) | |
| (1,737) |
Net amount reclassified to earnings | | | 32 |
| | 4 |
| | - |
| | 36 | |
| (9) | |
| 287 | |
| - | |
| 278 |
Balance at September 30, 2021 | | $ | (412) | | $ | (532) | | $ | (974) | | $ | (1,918) | ||||||||||||
Balance at June 30, 2023 | | $ | (95) | | $ | 166 | | $ | (1,530) | | $ | (1,459) |
| | | | | | | | | | | | |
|
| | |
| | |
| Foreign Currency |
| | ||
|
| Pension Liability |
| Fair Value of |
| Translation |
| Accumulated Other | ||||
|
| Adjustment |
| Derivatives |
| 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) |
21
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | |
|
| | |
| | |
| 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) |
Taxes related to each component of other comprehensive loss were not material for each of the three and six-month periods presented and therefore are not disclosed separately.
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).loss.
10.11. 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 platformsAI data preparation services, collecting or creating training data, annotating training data, and managed services to companies that require high-quality data for training AI and machine learning (ML) algorithms for its customers, and AI digital transformation solutions to help companies apply AI/ML to real-world problems relating to analyzingmodel deployment and deriving insights from documents. In conjunction with AI digital transformation, the Company oftenintegration. The DDS segment also provides a range of data engineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, 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.
1922
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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.
Revenues from external customers, segment operating profit (loss), and other reportable segment information are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenues: |
| |
|
| |
| | |
|
| |
|
DDS | | $ | 12,852 | | $ | 13,237 | | $ | 42,944 | | $ | 37,997 |
Synodex | |
| 1,762 | |
| 983 | |
| 5,376 | |
| 2,888 |
Agility | |
| 3,833 | |
| 3,230 | |
| 11,306 | |
| 9,581 |
Total Consolidated | | $ | 18,447 | | $ | 17,450 | | $ | 59,626 | | $ | 50,466 |
| |
| | |
| | |
| | |
| |
Income (loss) before provision for income taxes(1): | |
| | |
| | |
| | |
| |
DDS | | $ | 135 | | $ | 1,544 | | $ | 1,516 | | $ | 3,924 |
Synodex | |
| (977) | |
| (657) | |
| (2,796) | |
| (878) |
Agility | |
| (2,216) | |
| (1,406) | |
| (7,474) | |
| (2,993) |
Total Consolidated | | $ | (3,058) | | $ | (519) | | $ | (8,754) | | $ | 53 |
| |
| | |
| | |
| | |
| |
Income (loss) before provision for income taxes(2): | |
| | |
| | |
| | |
| |
DDS | | $ | (59) | | $ | 1,445 | | $ | 987 | | $ | 3,676 |
Synodex | |
| (778) | |
| (584) | |
| (2,318) | |
| (711) |
Agility | |
| (2,221) | |
| (1,380) | |
| (7,423) | |
| (2,912) |
Total Consolidated | | $ | (3,058) | | $ | (519) | | $ | (8,754) | | $ | 53 |
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Total assets: |
| |
|
| |
|
DDS | | $ | 26,542 | | $ | 38,180 |
Synodex | |
| 3,294 | |
| 1,753 |
Agility | |
| 17,973 | |
| 19,284 |
Total Consolidated | | $ | 47,809 | | $ | 59,217 |
| | | | | | | | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | ||||||||||
Goodwill: |
| |
|
| |
| ||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||
Revenues: |
| |
|
| |
| | |
|
| |
| ||||||
DDS | | $ | 13,180 | | $ | 14,181 | | $ | 25,927 | | $ | 30,092 | ||||||
Synodex | |
| 2,112 | |
| 1,945 | |
| 3,976 | |
| 3,614 | ||||||
Agility | | $ | 1,982 | | $ | 2,143 | |
| 4,363 | |
| 3,861 | |
| 8,591 | |
| 7,473 |
Total | | $ | 1,982 | | $ | 2,143 | ||||||||||||
Total Consolidated | | $ | 19,655 | | $ | 19,987 | | $ | 38,494 | | $ | 41,179 | ||||||
| |
| | |
| | |
| | |
| | ||||||
Income (loss) before provision for income taxes(1): | |
| | |
| | |
| | |
| | ||||||
DDS | | $ | (216) | | $ | (72) | | $ | (497) | | $ | 1,381 | ||||||
Synodex | |
| (22) | |
| (831) | |
| (133) | |
| (1,819) | ||||||
Agility | |
| (389) | |
| (2,378) | |
| (1,892) | |
| (5,258) | ||||||
Total Consolidated | | $ | (627) | | $ | (3,281) | | $ | (2,522) | | $ | (5,696) | ||||||
| |
| | |
| | |
| | |
| | ||||||
Income (loss) before provision for income taxes(2): | |
| | |
| | |
| | |
| | ||||||
DDS | | $ | (368) | | $ | (250) | | $ | (792) | | $ | 1,046 | ||||||
Synodex | |
| 121 | |
| (680) | |
| 135 | |
| (1,540) | ||||||
Agility | |
| (380) | |
| (2,351) | |
| (1,865) | |
| (5,202) | ||||||
Total Consolidated | | $ | (627) | | $ | (3,281) | | $ | (2,522) | | $ | (5,696) |
| | | | | | |
|
| June 30, 2023 |
| December 31, 2022 | ||
Total assets: |
| |
|
| |
|
DDS | | $ | 29,012 | | $ | 25,758 |
Synodex | |
| 3,438 | |
| 3,270 |
Agility | |
| 19,155 | |
| 19,014 |
Total Consolidated | | $ | 51,605 | | $ | 48,042 |
| | | | | | |
|
| June 30, 2023 |
| December 31, 2022 | ||
Goodwill: |
| |
|
| |
|
Agility | | $ | 2,069 | | $ | 2,038 |
Total | | $ | 2,069 | | $ | 2,038 |
(1) | Before elimination of any inter-segment profits |
(2) | After elimination of any inter-segment profits |
The table below shows intersegment revenues which are eliminated in consolidation (in thousands).
| | | | | | | | |
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues of DDS Segment from: |
|
|
|
|
|
|
|
|
Synodex |
| 2,119 |
| 1,113 |
| 6,167 |
| 2,559 |
Agility |
| 425 |
| 411 |
| 1,274 |
| 1,229 |
Totals |
| 2,544 |
| 1,524 |
| 7,441 |
| 3,788 |
2023
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
The table below shows intersegment revenues which are eliminated in consolidation (in thousands).
| | | | | | | | | | | | |
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Revenues of DDS Segment from: |
| |
| |
|
| |
|
| |
|
|
Synodex |
| $ | 488 | | $ | 487 | | $ | 935 | | $ | 943 |
Agility |
| | 31 | |
| 38 | |
| 63 | |
| 72 |
Totals |
| $ | 519 | | $ | 525 | | $ | 998 | | $ | 1,015 |
Revenues for the periodthree and six-month periods ended SeptemberJune 30, 20222023 and 20212022 by geographic region (determined based upon customer’s domicile), were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | For the Three Months Ended | | For the Six Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
United States | | $ | 11,904 | | $ | 9,467 | | $ | 37,843 | | $ | 26,761 | | $ | 10,960 | | $ | 12,385 | | $ | 22,196 | | $ | 25,777 |
United Kingdom | |
| 2,677 | |
| 2,912 | |
| 8,312 | |
| 8,709 | |
| 2,898 | |
| 2,558 | |
| 5,453 | |
| 5,640 |
Canada | |
| 2,193 | |
| 1,439 | |
| 3,805 | |
| 2,816 | ||||||||||||
The Netherlands | |
| 1,734 | |
| 1,750 | |
| 5,105 | |
| 5,012 | |
| 1,762 | |
| 1,717 | |
| 3,485 | |
| 3,369 |
Canada | |
| 579 | |
| 1,469 | |
| 3,234 | |
| 4,556 | ||||||||||||
Others - principally Europe | |
| 1,553 | |
| 1,852 | |
| 5,132 | |
| 5,428 | |
| 1,842 | |
| 1,888 | |
| 3,555 | |
| 3,577 |
Totals | | $ | 18,447 | | $ | 17,450 | | $ | 59,626 | | $ | 50,466 | | $ | 19,655 | | $ | 19,987 | | $ | 38,494 | | $ | 41,179 |
Long lived assets by geographic region
Long-lived assets as of SeptemberJune 30, 20222023 and December 31, 20212022 by geographic region were comprised of (in thousands):
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
United States | | $ | 6,747 | | $ | 4,578 | | $ | 8,422 | | $ | 7,205 |
| |
| | |
| | |
| | |
| |
Foreign countries: | |
| | |
| | |
| | |
| |
Canada | |
| 7,669 | |
| 9,280 | |
| 7,612 | |
| 7,675 |
Philippines | |
| 3,550 | |
| 3,682 | ||||||
United Kingdom | |
| 1,139 | |
| 1,538 | |
| 1,136 | |
| 1,198 |
Philippines | |
| 3,784 | |
| 4,027 | ||||||
India | |
| 1,364 | |
| 1,481 | |
| 788 | |
| 1,195 |
Sri Lanka | |
| 136 | |
| 154 | |
| 416 | |
| 426 |
Israel | |
| 2 | |
| - | |
| 2 | |
| 3 |
Total foreign | |
| 14,094 | |
| 16,480 | |
| 13,504 | |
| 14,179 |
Totals | | $ | 20,841 | | $ | 21,058 | | $ | 21,926 | | $ | 21,384 |
Long-lived assets include the unamortized balance of right-of-use assets amounting to $4.2$3.9 million and $5.6$4.3 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
No customer generated 10% or more of the Company’s total revenues for the three months ended September 30, 2022. One customer in the DDS segment generated approximately 10% of the Company’s total revenues for the three months ended September 30, 2021. Further, revenues from non-U.S. customers accounted for 35% and 46% of the Company’s total revenues for the three months ended September 30, 2022 and 2021, respectively.
One customer in the DDS segment generated approximately 13% and 11% of the Company’s total revenues for the nine months ended September 30, 2022 and 2021, respectively. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 37% and 47% of the Company’s total revenues for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, approximately 47% of the Company’s accounts receivable was from foreign (principally European) customers and 24% of the Company’s accounts receivable was due from two 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 September 30, 2022 and December 31, 2021.
2124
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
One customer in the DDS segment generated approximately 10% of the Company’s total revenues for each of the three-month periods ended June 30, 2023 and 2022. Another customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended June 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended June 30, 2023 and 2022, revenues from non-U.S. customers accounted for 44% and 38%, respectively, of the Company’s total revenues.
Two customers in the DDS segment generated approximately 10.7% and 10.6%, respectively, of the Company’s total revenues for the six months ended June 30, 2023. Another customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 42% and 38% of the Company’s total revenues for the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, approximately 49% of the Company’s accounts receivable was due from foreign (principally European) customers and 25% of the Company’s accounts receivable was due from two customers. As of December 31, 2022, approximately 44% of the Company’s accounts receivable was due from foreign (principally European) customers and 45% of the Company’s accounts receivable was due from four customers. No other customer accounted for 10% or more of the accounts receivable as of June 30, 2023 and December 31, 2022.
11. Income (Loss)12. Loss Per Share
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | For the Three Months Ended | | For the Six Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net Loss attributable to Innodata Inc. and Subsidiaries | | $ | (3,327) | | $ | (800) | | $ | (9,975) | | $ | (505) | ||||||||||||
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | 815 | | $ | 3,833 | | $ | 2,931 | | $ | 6,648 | ||||||||||||
Weighted average common shares outstanding | |
| 27,331 | |
| 26,971 | |
| 27,239 | |
| 26,459 | |
| 27,860 | |
| 27,226 | |
| 27,661 | |
| 27,192 |
Dilutive effect of outstanding options | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - | |
| - |
Adjusted for dilutive computation | |
| 27,331 | |
| 26,971 | |
| 27,239 | |
| 26,459 | |
| 27,860 | |
| 27,226 | |
| 27,661 | |
| 27,192 |
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 4.2 million and 5.16.7 million shares of common stock for each of the three monthsand six-month periods ended SeptemberJune 30, 20222023 and 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 5.7 and 5.1 million shares of common stock for the nine months ended September 30, 2022, and 2021 were outstanding but not included in the computation of diluted loss per share because the effect would have been anti-dilutive.
12. 13.Derivatives
The Company conducts a large portion of its operations in international markets, which subjectsubjects 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.
25
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 of 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) areis reclassified to earnings and included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings 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 $14.4$10.9 million and $14.2 million as of SeptemberJune 30, 2022. The total notional amount for outstanding derivatives designated as hedges was $19.7 million as of2023 and December 31, 2021.
22
Table of Contents2022, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of SeptemberJune 30, 20222023 and December 31, 20212022 (in thousands):
| | | | | | | | | ||||||||
| | | | | | | | | | Balance Sheet Location | | Fair Value | ||||
| | Balance Sheet Location | | Fair Value | | | | June 30, | | December 31, | ||||||
|
| |
| 2022 |
| 2021 |
| |
| 2023 |
| 2022 | ||||
Derivatives designated as hedging instruments: |
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| | | | | | | | | ||||||||
Foreign currency forward contracts |
| Accrued expenses | | $ | 1,095 | | $ | 353 |
| Prepaid expenses and other current assets | | $ | 166 | | $ | - |
Foreign currency forward contracts |
| Accrued expenses and other | | $ | - | | $ | 365 |
The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the Three Months Ended | | For the Nine Months Ended |
| For the Three Months Ended | | For the Six Months Ended | ||||||||||||||||
|
| September 30, | | September 30, |
| June 30, | | June 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net gain (loss) recognized in OCI(1) | | $ | (884) | | $ | (302) | | $ | (1,707) | | $ | (536) | | $ | 2 | | $ | (744) | | $ | 244 | | $ | (822) |
Net (gain) loss reclassified from accumulated OCI into income(2) | | $ | 678 | | $ | 37 | | $ | 965 | | $ | 4 | ||||||||||||
Net loss reclassified from accumulated OCI into income(2) | | $ | 106 | | $ | 203 | | $ | 287 | | $ | 286 | ||||||||||||
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. |
26
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Line of Credit
On April 4, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other reserves and adjustments. As of June 30, 2023, such borrowing base calculation equaled approximately $2.9 million. The Credit Agreement contains a financial covenant that will require the Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”) plus 2.25%. The Company did not utilize the Revolving Credit Facility during the three-month period ended June 30, 2023 and through the date of filing of this Report.
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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 statementswithin 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,“possible,” “supports,“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; investments in large language models; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; pipeline opportunities and customer discussions which may not materialize into work or expected volumes of work; 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; a continued downturn in or depressed market conditions, whether as a result of the COVID-19 pandemic or otherwise;conditions; 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’sour 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,” inFactors”, “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 MarchFebruary 24, 2022,2023 and in our 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.
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Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a globalleading data engineering company. The Company’sOur mission is to help the world’s most prestigious companies deliver the promise of AIethical, high-performing artificial intelligence (“AI”), which we believe will contribute to a safer and more prosperous world.
Innodata was founded on a simple idea: engineer the highest quality data so organizations across broad industry segments could make smarter decisions. Today, we believe we’re delivering the highest quality data for some of the world’s most prestigious companies.innovative technology companies to use to train the AI models of the future.
We provide AI-enabled software platformsAI holds the promise that computers can perceive 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.
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Our platformsunderstand the world, enabling products and services that would have been previously unimaginable and impossible with traditional coding. AI learns from data, and the highest-performing AI will have learned from the highest-quality data. We believe that we can contribute meaningfully by harnessing our capabilities, honed over 30 years, in collecting and annotating data at scale with consistency and high accuracy.
We are powered by Goldengate,also helping companies deploy and integrate AI into their operations and products and providing innovative AI-enabled industry platforms, helping ensure that 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 expertisecustomers’ businesses are prepared for a world in data pertaining to many professional fields. Our hybrid approach of using AI/MLwhich machines augment human activity in conjunction with human experts enables us to deliver superior data quality with even the most complex and sensitive data.ways previously unimaginable.
We developed our capabilities and honed our customer- and quality-centric cultureapproaches progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately sixseven 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.
Our historical core competency in high-quality data, combined with these R&D efforts in applied AI, created the foundation for the evolution of our offerings, which include AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms.
AI Data AnnotationPreparation
We collect or create training data, annotate training data, and 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 textdata annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary textdata annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. It alsoThe platform encapsulates many of the innovations we conceived of in the course of our 30-year history of creating high-quality data.
In addition, because collecting real-world data is often impracticable (due to data privacy regulations or rarity of cohorts and outliers), we create high-quality synthetic data that maintains all of the statistical properties of real-world data, using a combination of domain specialists and machine technologies that leverage large language models (LLMs).
AI Digital TransformationModel Deployment and Integration
We help businesses leverage the latest AI technologies to achieve their goals. We develop custom AI models (where we select the appropriate algorithms, tune hyperparameters, train and validate the models, and update the models as required). 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 morehelp businesses fine-tune their own custom versions of our pre-trained text processing algorithms as aproprietary models and third-party foundation for an overall solution. Our algorithms are accessible as microservices via application programming interfaces (APIs), enabling easy integration.models to address domain-specific and customer-specific use cases.
In conjunction withaddition to deploying and integrating AI digital transformation,models, we often provide a range of data engineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, 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.
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AI-Enabled Industry AI Platforms
Our AI-enabled industry platforms address specific, niche market requirements that we believe we can fulfill in large partinnovate with our AI/ML technologies. We deploy these industry platforms as software-as-a-service (SaaS) and as managed services. These platforms benefit from our technology infrastructure, our industry-specific knowledge, our strong customer relationships and experience merging technology with the business processes of our customers. To date, we have built an industry platform for medical records data extraction and transformation (which we brand as “Synodex®“Synodex®”) and an industry platform for public relations (which brandswe brand as “Agility PR Solutions”). We are in the development with an additional AI-enabled industry platform to serve financial services institutions.
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.
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
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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 nine months ended September 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 utilizing the Revolving Credit Facility, 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.costs.
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 indicatorone of several indicators of our business momentum, sales and marketing efficiency, and competitive market positioning. During the nine months ending Septembersix-month period ended June 30, 2022,2023, we added 235 new customers, an average of 113118 new customers per quarter. This is an 82% increase over the 62 new customers we added on average per quarter in 2020 and a 22%26% increase over the 93 new customers we added on average per quarter in 2021.2021 and a 6% decrease over the 126 new customers we added on average per quarter in 2022. Importantly, in addition to the customer count, we recognize that the size and scale of new customers significantly impacts our growth trajectory. While in the first two quarters of 2023 there was a 6% decrease from the average of 126 new customers per quarter in 2022, it is noteworthy that we are placing emphasis on acquiring customers that align with our strategic goals, leading to a focus on the potential revenue value of new customer engagements over sheer number of new customer engagements.
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 unfavorablynegatively 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, 2021.2022.
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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.
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 usesuse 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,
26
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 Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as revenues less direct operating costs attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP plus, depreciation and amortization of intangible assets, stock-based compensation, non-recurring severance and other one-time costs.
We define Adjusted Gross Margin by dividing Adjusted Gross Profit over total U.S. GAAP revenues.
We use Adjusted Gross Profit and Adjusted Gross Margin to evaluate 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 Gross Profit and Gross Margin in accordance with the U.S. GAAP attributable to Innodata Inc. and its subsidiaries to Adjusted Gross Profit and Adjusted Gross Margin for the three and six months ended June 30, 2023 and 2022 (in thousands).
| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | | ||||||||
Consolidated | | 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||
| | | | | | | | | | | | | |
Gross Profit attributable to Innodata Inc. and Subsidiaries | | $ | 6,940 |
| $ | 6,995 | | $ | 12,905 | | $ | 14,773 | |
Depreciation and amortization | |
| 1,124 |
| | 924 | | | 2,188 | | | 1,762 | |
Severance** | |
| - |
| | - | | | 327 | | | - | |
Stock-based compensation | |
| 62 |
| | 56 | | | 126 | | | 107 | |
Adjusted Gross Profit | | $ | 8,126 |
| $ | 7,975 | | $ | 15,546 | | $ | 16,642 | |
| | | | | | | | | | | | | |
Gross Margin | |
| 35 | % | | 35 | % | | 34 | % | | 36 | % |
Adjusted Gross Margin | | | 41 | % | | 40 | % | | 40 | % | | 40 | % |
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| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | | ||||||||
DDS Segment | | 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||
| | | | | | | | | | | | | |
Gross Profit attributable to DDS Segment | | $ | 4,398 |
| $ | 5,270 | | $ | 8,557 | | $ | 11,824 | |
Depreciation and amortization | |
| 230 |
| | 30 | | | 429 | | | 219 | |
Severance** | |
| - |
| | - | | | 28 | | | - | |
Stock-based compensation | |
| 60 |
| | 48 | | | 112 | | | 91 | |
Adjusted Gross Profit | | $ | 4,688 |
| $ | 5,348 | | $ | 9,126 | | $ | 12,134 | |
| | | | | | | | | | | | | |
Gross Margin | |
| 33 | % | | 37 | % | | 33 | % | | 39 | % |
Adjusted Gross Margin | | | 36 | % | | 38 | % | | 35 | % | | 40 | % |
| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | | ||||||||
Synodex Segment | | 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||
| | | | | | | | | | | | | |
Gross Profit/(Loss) attributable to Synodex Segment | | $ | 295 |
| $ | (205) | | $ | 498 | | $ | (435) | |
Depreciation and amortization | |
| 162 |
| | 271 | | | 324 | | | 312 | |
Severance** | |
| - |
| | - | | | - | | | - | |
Stock-based compensation | |
| - |
| | - | | | - | | | - | |
Adjusted Gross Profit | | $ | 457 |
| $ | 66 | | $ | 822 | | $ | (123) | |
| | | | | | | | | | | | | |
Gross Margin | |
| 14 | % | | (11) | % | | 13 | % | | (12) | % |
Adjusted Gross Margin | | | 22 | % | | 3 | % | | 21 | % | | (3) | % |
| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | | ||||||||
Agility Segment | | 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||
| | | | | | | | | | | | | |
Gross Profit attributable to Agility Segment | | $ | 2,247 |
| $ | 1,930 | | $ | 3,850 | | $ | 3,384 | |
Depreciation and amortization | |
| 732 |
| | 623 | | | 1,435 | | | 1,231 | |
Severance** | |
| - |
| | - | | | 299 | | | - | |
Stock-based compensation | |
| 2 |
| | 8 | | | 14 | | | 16 | |
Adjusted Gross Profit | | $ | 2,981 |
| $ | 2,561 | | $ | 5,598 | | $ | 4,631 | |
| | | | | | | | | | | | | |
Gross Margin | |
| 52 | % | | 50 | % | | 45 | % | | 45 | % |
Adjusted Gross Margin | | | 68 | % | | 66 | % | | 65 | % | | 62 | % |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
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 intangible assets and goodwill, stock-based compensation, income (loss) attributable to non-controlling interests, non-recurring severance, 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.
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The following table contains a reconciliation of U.S. GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
Consolidated |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (3,327) | | $ | (800) | | $ | (9,975) | | $ | (505) | | $ | (815) | | $ | (3,833) | | $ | (2,931) | | $ | (6,648) |
Provision for income taxes | | | 268 | | | 328 | |
| 1,293 | |
| 621 | | | 188 | | | 550 | |
| 406 | |
| 1,025 |
Interest expense, net | | | (1) | | | 4 | |
| 1 | |
| 18 | ||||||||||||
Gain on loan forgiveness | | | - | | | - | | | - | | | (580) | ||||||||||||
Interest expense | | | 40 | | | (1) | |
| 132 | |
| 2 | ||||||||||||
Depreciation and amortization | | | 1,011 | | | 684 | |
| 2,836 | |
| 2,054 | | | 1,151 | | | 951 | |
| 2,242 | |
| 1,824 |
Severance** | | | - | | | - | | | 580 | | | - | ||||||||||||
Stock-based compensation | | | 805 | | | 503 | |
| 2,370 | |
| 1,117 | | | 1,019 | | | 1,028 | |
| 1,981 | |
| 1,565 |
Non-controlling interests | | | 1 | | | (47) | |
| (72) | |
| (63) | | | - | | | 2 | |
| 3 | |
| (73) |
Adjusted EBITDA / (loss) - Consolidated | | $ | (1,243) | | $ | 672 | | $ | (3,547) | | $ | 2,662 | ||||||||||||
Adjusted EBITDA (loss) | | $ | 1,583 | | $ | (1,303) | | $ | 2,413 | | $ | (2,305) |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
DDS Segment | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net income (loss) attributable to DDS Segment | | $ | (324) | | $ | 1,092 | | $ | (211) | | $ | 3,078 | | $ | (554) | | $ | (651) | | $ | (1,195) | | $ | 112 |
Provision for income taxes | | | 265 | | | 353 | | | 1,196 | | | 599 | | | 186 | | | 399 | | | 400 | | | 932 |
Interest expense, net | | | (1) | | | 4 | |
| 1 | |
| 17 | ||||||||||||
Gain on loan forgiveness | | | - | | | - | | | - | | | (580) | ||||||||||||
Interest expense | | | 38 | | | (1) | |
| 130 | |
| 2 | ||||||||||||
Depreciation and amortization | | | 201 | | | 139 | | | 483 | | | 459 | | | 257 | | | 57 | | | 483 | | | 281 |
Severance** | | | - | | | - | | | 33 | | | - | ||||||||||||
Stock-based compensation | | | 761 | | | 404 | | | 1,929 | | | 863 | | | 865 | | | 796 | | | 1,670 | | | 1,168 |
Non-controlling interests | | | 1 | | | 1 | | | 2 | | | (2) | | | - | | | 2 | | | 3 | | | 1 |
Adjusted EBITDA - DDS Segment | | $ | 903 | | $ | 1,993 | | $ | 3,400 | | $ | 4,434 | ||||||||||||
Adjusted EBITDA | | $ | 792 | | $ | 602 | | $ | 1,524 | | $ | 2,496 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||||||
Synodex Segment | | 2022 |
| 2021 |
| 2022 |
| 2021 | | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net loss attributable to Synodex Segment | | $ | (779) | | $ | (537) | | $ | (2,244) | | $ | (650) | ||||||||||||
Net income (loss) attributable to Synodex Segment | | $ | 121 | | $ | (680) | | $ | 135 | | $ | (1,465) | ||||||||||||
Depreciation and amortization | | $ | 171 | |
| 19 | | $ | 483 | | $ | 21 | | | 162 | |
| 271 | | | 324 | | | 312 |
Severance** | | | - | | | - | | | 6 | | | - | ||||||||||||
Stock-based compensation | |
| 30 | |
| 24 | |
| 129 | |
| 38 | |
| 59 | |
| 50 | |
| 117 | |
| 99 |
Non-controlling interests | |
| - | |
| (48) | |
| (74) | |
| (61) | |
| - | |
| - | |
| - | |
| (74) |
Adjusted EBITDA (loss) - Synodex Segment | | $ | (578) | | $ | (542) | | $ | (1,706) | | $ | (652) | ||||||||||||
Adjusted EBITDA (loss) | | $ | 342 | | $ | (359) | | $ | 582 | | $ | (1,128) |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
Agility Segment | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net loss attributable to Agility Segment | | $ | (2,224) | | $ | (1,355) | | $ | (7,520) | | $ | (2,933) | | $ | (382) | | $ | (2,502) | | $ | (1,871) | | $ | (5,295) |
Provision for income taxes | | | 3 | | | (25) | |
| 97 | |
| 22 | | | 2 | | | 151 | |
| 6 | |
| 93 |
Interest expense, net | | | - | | | - | |
| - | |
| 1 | ||||||||||||
Interest expense | | | 2 | | | - | |
| 2 | |
| - | ||||||||||||
Depreciation and amortization | | | 639 | | | 526 | |
| 1,870 | |
| 1,574 | | | 732 | | | 623 | |
| 1,435 | |
| 1,231 |
Severance** | | | - | | | - | | | 541 | | | - | ||||||||||||
Stock-based compensation | | | 14 | | | 75 | |
| 312 | |
| 216 | | | 95 | | | 182 | |
| 194 | |
| 298 |
Adjusted EBITDA (loss) - Agility Segment | | $ | (1,568) | | $ | (779) | | $ | (5,241) | | $ | (1,120) | ||||||||||||
Adjusted EBITDA (loss) | | $ | 449 | | $ | (1,546) | | $ | 307 | | $ | (3,673) |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
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Results of Operations
AmountsThe 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 SeptemberJune 30, 20222023 and 20212022
Revenues
Total revenues were $18.4$19.7 million and $17.5$20.0 million for the three months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $0.9$0.3 million or approximately 6%1%.
Revenues from the DDS segment were $12.8$13.2 million and $13.3$14.2 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, a decrease of $0.5$1.0 million or approximately 4%7%. The decrease was primarily attributable to lower volume from two existing customers.one customer offset in part by an increase in volume from another customer .
Revenues from the Synodex segment were $1.8$2.1 million and $1.0$1.9 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, an increase of $0.8$0.2 million or approximately 80%11%. The increase was primarily attributable to higher volume from twoan existing customers.customer .
Revenues from the Agility segment were $3.8$4.4 million and $3.2$3.9 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, an increase of $0.6$0.5 million or approximately 19%13%. The increase was primarilyprincipally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
No customer generated 10% or more of the Company’s total revenues for the three months ended September 30, 2022. One customer in the DDS segment generated approximately 10% of the Company’s total revenues for each of the three monthsthree-month periods ended SeptemberJune 30, 2021. Further, revenues from non-U.S. customers accounted for 35%2023 and 46%2022. Another customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended SeptemberJune 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended June 30, 2023 and 2022, revenues from non-U.S. customers accounted for 44% and 2021, respectively.38%, respectively, of the Company’s total revenues.
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 $12.4$12.7 million and $10.7$13.0 million for the three months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $1.7$0.3 million or 16%2%. The cost increase primarily supported our growth initiatives across all business segments. The increasedecrease in Directdirect operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes an increase inlower direct and indirect labor related costs amounting to $1.6 million primarily on account of higherreductions in headcount, andoffset in part by salary increasesincreases; an unfavorable impact of $1.0 million, an increase in cloud services,foreign exchange rate fluctuations of $0.7 million; higher content costs andof $0.3 million; higher depreciation and amortization of capitalized developed software of $0.5$0.2 million and severance costs of $0.4 million, partially offset by a $0.2 million decreasean increase in other direct operating costs.costs of $0.1 million. Direct operating costs as a percentage of total revenues were 67%64% and 61%65% for the three-month periodsthree months ended SeptemberJune 30, 2023 and 2022, and 2021.respectively. The increasedecrease in direct operating costscost as a percentage of total revenues was primarily attributabledue to higher expenditureslower revenues in all segments,the DDS segment, offset in part by increased revenueslower direct operating costs in the DDS and Synodex and Agility segments.
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Direct operating costs for the DDS segment were approximately $8.0$8.8 million and $7.7$8.9 million for the three months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $0.3$0.1 million or 4%1%. The cost increase primarily supported our growth initiatives. The increasedecrease in Directdirect operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $1.0 million primarily on account of reductions in headcount, offset in part by salary increases; an increase in severance costsunfavorable impact of $0.4foreign exchange rate fluctuations of $0.7 million, an increase in cloud services, content costs, and higher depreciation and amortization of capitalized developed software of $0.1 million, an increase in direct and indirect labor related of $0.1 million, offset in part by a $0.1 million reduction due the impact of foreign exchange rates fluctuations and a decrease in other direct operating costs of $0.2 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 63%67% and 58%63% for the three-month periodsthree months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to an increaselower revenues, offset in part by lower direct operating costs and a decrease in revenues.costs.
Direct operating costs for the Synodex segment were $2.2$1.8 million and $1.2$2.2 million for the three months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $1.0$0.4 million or 83%18%. The cost increase primarily supported our growth initiatives combined with the timing of new technology roll-out. The increasedecrease in Directdirect operating costs was primarily due to an increase inlower direct labor costs
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primarily on account of higher headcount and salary increases of $0.8$0.4 million and an increasea decrease in depreciation and amortization of capitalized developed software of $0.2$0.1 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 122%86% and 120%116% for the three-month periodsthree months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The increasedecrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and lower direct operating costs offset in part by an increase in revenues.costs.
Direct operating costs for the Agility segment were $2.2$2.1 million and $1.8$1.9 million for the three months ended SeptemberJune 30, 2023 and 2022, respectively, an increase of $0.2 million or 11%. The increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase includes higher content related costs of $0.3 million and 2021,higher depreciation and amortization of capitalized developed software of $0.1 million, offset in part by a decrease in direct labor costs of $0.2 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 48% and 49% for the three months ended June 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset in part by higher direct operating costs.
Gross Profit and Gross Margin
Gross profit is derived by revenues less direct operating costs, while Gross margin as a percentage is derived by dividing gross profit over revenues.
Gross profit was $6.9 million and $7.0 million for the three months ended June 30, 2023 and 2022, respectively. The $0.1 million decrease in gross profit was due to lower revenues, offset in part by lower direct operating costs. Gross margin was 35% for each of the three-month periods ended June 30, 2023 and 2022.
Gross profit for the DDS segment was $4.4 million and $5.3 million for the three months ended June 30, 2023 and 2022, respectively. The $0.9 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 37% for the three months ended June 30, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.
Gross profit for the Synodex segment was $0.3 million and a loss of $0.2 million for the three months ended June 30, 2023 and 2022, respectively. The $0.5 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 14% and (11%) for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment was primarily due to higher revenues and lower direct operating costs.
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Gross profit for the Agility segment was $2.2 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively. The $0.3 million increase in gross profit for the Agility segment was primarily due to higher revenues, offset in part by higher direct operating costs. Gross margin for the Agility segment was 52% and 50% for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin for the Agility segment was primarily due to higher revenues offset in part by higher direct operating costs.
Selling and Administrative Expenses
Selling and administrative expenses consist of payroll and related costs including commissions, bonuses, and stock-based compensation; marketing, advertising, trade conferences and related expenses; new services research and related software development expenses; software subscriptions; professional and consultant fees; provision for doubtful accounts and other administrative overhead expenses.
Selling and administrative expenses were $7.6 million and $10.3 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $2.7 million or 26%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $2.0 million primarily on account of headcount reduction, offset in part by salary increases; lower marketing related expenses of $0.5 million; lower recruitment and professional fees of $0.2 million, and a favorable impact of foreign exchange rate fluctuations of $0.1 million. These lower selling and administrative expenses were also offset in part by higher provisions for doubtful accounts of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 39% and 52% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower expenditures in all segments, offset in part by lower revenues in the DDS segment.
Selling and administrative expenses for the DDS segment were $4.8 million and $5.5 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.7 million or 13%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $0.7 million primarily on account of headcount reductions and lower commissions; lower recruitment and professional fees of $0.1 million; and lower marketing related expenses of $0.1 million, offset in part by higher provisions for doubtful accounts of $0.1 million and other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 36% and 39% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower selling and administrative expenses, offset in part by lower revenues.
Selling and administrative expenses for the Synodex segment were $0.2 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.3 million or 60%. The decrease in selling and administrative expenses was attributable to lower professional fees of $0.3 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 9% and 26% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses, and higher revenues.
Selling and administrative expenses for the Agility segment were $2.6 million and $4.3 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $1.7 million or 40%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $1.2 million primarily on account of headcount reductions; lower marketing related expenses of $0.3 million; a favorable impact of foreign exchange rate fluctuations of $0.1 million; and other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 60% and 110% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses and higher revenues.
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Income Taxes
We recorded a provision for income taxes of $0.2 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively.
Tax-related charges primarily consisted of a provision for foreign taxes recorded in accordance with local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate primarily due to losses incurred by our U.S. entities, Canadian and European principally (Germany and the United Kingdom) subsidiaries, and a valuation allowance recorded on the deferred taxes of the U.S., Canadian, German and the United Kingdom subsidiaries.
Net Income (Loss)
We incurred a net loss of $0.8 million and $3.8 million during the three months ended June 30, 2023 and 2022, respectively. The $3.0 million change was due to lower operating costs and expenses in all segments and higher revenues in the Synodex and Agility segments.
Net loss for the DDS segment was $0.6 million for each of the three-month periods ended June 30, 2023 and 2022.
Net income for the Synodex segment was $0.1 million and a loss of $0.7 million for the three months ended June 30, 2023 and 2022, respectively. The $0.8 million change was due to lower operating costs and expenses and higher revenues in the current quarter.
Net loss for the Agility segment was $0.3 million and $2.5 million for the three months ended June 30, 2023 and 2022, respectively. The $2.2 million change was due to lower operating costs and expenses and higher revenues in the current quarter.
Adjusted Gross Profit and Margin
Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit and Adjusted Gross Margin to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin” above.
Adjusted gross profit was $8.1 million and $8.0 million for the three months ended June 30, 2023 and 2022, respectively. The $0.1 million increase in adjusted gross profit was due to higher depreciation and amortization. Adjusted gross margin was 41% and 40% for the three months ended June 30, 2023 and 2022, respectively. The increase in adjusted gross margin was due to higher depreciation and amortization.
Adjusted gross profit for the DDS segment was $4.7 million and $5.3 million for the three months ended June 30, 2023 and 2022, respectively. The $0.6 million decrease in adjusted gross profit for the DDS Segment was due to lower gross profit, offset in part by higher depreciation and amortization. Adjusted gross margin for the DDS segment was 36% and 38% for the three months ended June 30, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment was due to lower gross profit, offset in part by higher depreciation and amortization.
Adjusted gross profit for the Synodex segment was $0.5 million compared to $0.1 million for the three months ended June 30, 2023 and 2022, respectively. The $0.4 million increase in adjusted gross profit in the Synodex segment was due to higher gross profit offset in part by lower depreciation and amortization. Adjusted gross margin for the Synodex segment was 22% and 3% for the three months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit offset in part by lower depreciation and amortization.
Adjusted gross profit for the Agility segment was $3.0 million and $2.6 million for the three months ended June 30, 2023 and 2022, respectively. The $0.4 million increase in adjusted gross profit for the Agility segment was due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Agility segment was 68% and 66% for the three months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit and higher depreciation and amortization.
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Adjusted EBITDA
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.
Adjusted EBITDA was $1.6 million and a loss of $1.3 million for the three months ended June 30, 2023 and 2022, respectively. The $2.9 million change in Adjusted EBITDA was due to a lower net loss and higher depreciation and amortization, offset in part by a lower tax provision.
Adjusted EBITDA for the DDS segment was $0.8 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively. The $0.2 million change in Adjusted EBITDA in the DDS Segment was due to a lower net loss, higher depreciation and amortization, and stock-based compensation, offset in part by a lower tax provision.
Adjusted EBITDA for the Synodex segment was $0.3 million and a loss of $0.4 million for the three months ended June 30, 2023 and 2022, respectively. The $0.7 million change in Adjusted EBITDA in the Synodex segment was due to a lower net loss offset in part by lower depreciation and amortization.
Adjusted EBITDA for the Agility segment was $0.4 million and a loss of $1.5 million for the three months ended June 30, 2023 and 2022, respectively. The $1.9 million change in Adjusted EBITDA in the Agility segment was due to a lower net loss and higher depreciation and amortization, offset in part by lower tax provision and stock-based compensation.
Six Months Ended June 30, 2023 and 2022
Revenues
Total revenues were $38.5 million and $41.2 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $2.7 million or approximately 7%.
Revenues from the DDS segment were $25.9 million and $30.1 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $4.2 million or approximately 14%. The decrease was primarily attributable to lower volume from an existing customer offset in part by higher volume from another existing customer.
Revenues from the Synodex segment were $4.0 million and $3.6 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $0.4 million or 22%approximately 11%. The cost increase was primarily attributable to higher volume from an existing customer.
Revenues from the Agility segment were $8.6 million and $7.5 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $1.1 million or approximately 15%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
Two customers in the DDS segment generated approximately 10.7% and 10.6%, respectively, of the Company’s total revenues for the six months ended June 30, 2023. Another customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 42% and 38% of the Company’s total revenues for the six months ended June 30, 2023 and 2022, 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.
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Direct operating costs were $25.6 million and $26.4 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.8 million or 3%. The decrease in direct operating costs was primarily due to higher amortization of capitalized developed softwarelower revenues and content costs of $0.2 million, an increase incost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $3.4 million primarily on account of higherreductions in headcount, andoffset in part by salary increases of $0.1 million and non-recurring severance; an unfavorable impact of foreign exchange rate fluctuations of $1.5 million; higher depreciation and amortization of capitalized developed software of $0.4 million; higher content related cost of $0.3 million, and an increase in other direct operating costs of $0.4 million. Direct operating costs as a percentage of total revenues were 66% and 64% for the six months ended June 30, 2023 and 2022, respectively. The increase in direct operating cost as a percentage of total revenues was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.
Direct operating costs for the DDS segment were approximately $17.4 million and $18.3 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.9 million or 5%. The decrease in direct operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $2.8 million primarily on account of reductions in headcount, offset in part by salary increases; an unfavorable impact of foreign exchange rate fluctuations of $1.5 million; higher depreciation and amortization of capitalized developed software of $0.2 million; and an increase in other direct operating costs of $0.2 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 67% and 61% for the six months ended June 30, 2023 and 2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower direct operating costs.
Direct operating costs for the Synodex segment were $3.5 million and $4.0 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.5 million or 13%. The decrease in direct operating costs was primarily due to lower direct labor costs of $0.6 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 88% and 111% for the six months ended June 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and lower direct operating costs.
Direct operating costs for the Agility segment were $4.7 million and $4.1 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $0.6 million or 15%. The increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase includes non-recurring severance of $0.3 million; higher content related costs of $0.3 million; higher depreciation and amortization of capitalized developed software of $0.2 million, offset in part by a decrease in direct labor costs of $0.1 million and other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 58%55% for each of the six-month periods ended June 30, 2023 and 56%2022.
Gross Profit and Gross Margin
Gross profit is derived by revenues less direct operating costs, while Gross margin as a percentage is derived by dividing gross profit over revenues.
Gross profit was $12.9 million and $14.8 million for the three-month periodssix months ended SeptemberJune 30, 2023 and 2022, respectively. The $1.9 million decrease in gross profit was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs. Gross margin was 34% and 2021,36% for the six months ended June 30, 2023 and 2022, respectively. The decrease in gross margin was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.
Gross profit for the DDS segment was $8.6 million and $11.8 million for the six months ended June 30, 2023 and 2022, respectively. The $3.2 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 39% for the six months ended June 30, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.
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Gross profit for the Synodex segment was $0.5 million and a loss of $0.4 million for the six months ended June 30, 2023 and 2022, respectively. The $0.9 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 13% and (12%) for the six months ended June 30, 2023 and 2022, respectively. The increase in direct operating costs as a percentage ofgross margin for the Synodex segment revenues was primarily due to anhigher revenues and lower direct operating costs.
Gross profit for the Agility segment was $3.9 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively. The $0.5 million increase in direct operating costsgross profit for the Agility segment was primarily due to higher revenues, offset in part by increased revenues from subscriptions to ourhigher direct operating costs. Gross margin for the Agility AI-enabled platformsegment was 45% for each of the six-month periods ended June 30, 2023 and newswire products.2022.
Selling and Administrative Expenses
Selling and administrative expenses consist of sales, marketing, product research and development and administrative payroll and related costs including commissions, bonuses, and stock-based compensation,compensation; marketing, costs,advertising, trade conferences and related expenses; new services research and related software development third-partyexpenses; software advertising, trade conferences,subscriptions; professional fees and consultant costs,fees; provision for doubtful accounts and other administrative overhead costs.expenses.
Selling and administrative expenses were $9.1$15.4 million and $7.3$20.5 million for the threesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $1.8$5.1 million or 25%. The cost increase primarily supported our growth initiatives across all business segments. Thedecrease in selling and administrative expenses was primarily due to the cost increaseoptimization efforts aimed at improving operational efficiency. The decrease includes payrolllower labor and related costs for new hires, stock-based compensation, commissions, incentives, bonuses, andexpenses of $2.9 million primarily on account of headcount reduction, offset in part by salary increases; lower recruitment and professional fees of $1.2 million; lower marketing related expenses of $1.0 million, marketing activity related costmillion; lease termination expense of $0.3 million, severance costs of $0.3 million$0.2 million; and an unfavorablea favorable impact of foreign exchange rate fluctuations of $0.2$0.1 million. These lower selling and administrative expenses were offset in part by higher provisions for doubtful accounts of $0.3 million. Selling and administrative expenses as a percentage of total revenues were 49%40% and 42%50% for the three-month periodssix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The increasedecrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to higherlower expenditures in all segments, offset in part by increasedlower revenues in the Agility and Synodex segments.DDS segment.
Selling and administrative expenses for the DDS segment were $4.8$9.3 million and $4.1$10.8 million for the threesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $0.7$1.5 million or 17%14%. The cost increase primarily supported our growth initiatives. Thedecrease in selling and administrative expenses was primarily due to the cost increaseoptimization efforts aimed at improving operational efficiency. The decrease includes payrolllower labor and related costs for new hires, stock-based compensation, commissions, incentives, bonuses,expenses of $0.8 million primarily on account of headcount reductions and lower commissions; lower recruitment fees of $0.4 million, an increase inand professional fees of $0.6 million; and lower marketing related expenses of $0.2 million, and marketing activity related costsoffset in part by higher provisions for doubtful accounts of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues were 38% and 31%was 36% for each of the three-monthsix-month periods ended SeptemberJune 30, 20222023 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures and decreased revenues.2022.
Selling and administrative expenses for the Synodex segment were $0.4 million and $0.3$1.1 million for the threesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $0.1$0.7 million or 33%64%. The cost increasedecrease in selling and administrative expenses was primarily attributable to payroll related costs and recruitmentlower professional fees for new hires $0.1of $0.6 million and marketing activity relatedlower payroll-related costs of $0.1 million to support our growth initiatives. These costs were offset in part by a decrease in professional fees of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 22%10% and 30%31% for the three-month periodssix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses and higher revenues offset in part by higher expenditures.revenues.
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Selling and administrative expenses for the Agility segment were $3.9$5.7 million and $2.9$8.6 million for the threesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively, an increasea decrease of $1.0$2.9 million or 34%. The cost increase primarily supported our growth initiatives. Thedecrease in selling and administrative costs increaseexpenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes payrolllower labor and related costs for new hires, stock-based compensation, commissions, incentivesexpenses of $0.5$1.9 million severance costsprimarily on account of $0.3 million, an unfavorable impactheadcount reductions; lower marketing related expenses of foreign exchange rate fluctuations$0.9 million; lease termination expense of $0.2 million, an increase in marketing activity related costsmillion; and other selling and administrative expenses of $0.1 million,million. These lower selling and administrative expenses were offset in part by a decrease in professional feeshigher provision for doubtful accounts of $0.1$0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 103%66% and 91%115% for the three-month periodssix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The increasedecrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses and higher expenditures, offset in part by an increase in revenues.
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Income Taxes
We recorded a provision for income taxes of $0.3$0.4 million for the threesix months ended SeptemberJune 30, 2022 and 2021.2023, as compared to $1.0 million for the six months ended June 30, 2022.
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 $3.3$2.9 million and $6.6 million during the threesix months ended SeptemberJune 30, 2023 and 2022, compared to a net loss of $0.8 million during the three months ended September 30, 2021.respectively. The $2.5$3.7 million change was a result of higher Directlower operating costs and Selling and administrative expenses in all segments in the current quarter,six-month period offset in part by higher revenues in the Synodex and Agility segments and a favorable impact of foreign currency exchange rates.segments.
Net loss for the DDS segment was $0.3$1.2 million for the three months ended September 30, 2022, compared toand a net income of $1.2$0.1 million for the threesix months ended SeptemberJune 30, 2021.2023 and 2022, respectively. The change of $1.3 million was primarily attributable to lower revenues in the current six-month period offset in part by lower operating costs and expenses.
Net income for the Synodex segment was $0.1 million and a loss of $1.4 million for the six months ended June 30, 2023 and 2022, respectively. The $1.5 million change was primarily attributabledue to a decrease in revenues and an increase in Directlower operating costs and Sellingexpenses and administrative expenses in the current quarter.
Net loss for the Synodex segment was $0.8 million for the three months ended September 30, 2022, compared to a net loss of $0.5 million for the three months ended September 30, 2021. The $0.3 million change was due to higher Direct operating costs and Selling and administrative expenses, offset in part by higher revenues in the current quarter.six-month period.
Net loss for the Agility segment was $2.2$1.8 million and $5.3 million for the threesix months ended SeptemberJune 30, 2023 and 2022, compared to net loss of $1.5 million for the three months ended September 30, 2021.respectively. The $0.7$3.5 million change was due to higher Directlower operating costs and Sellingexpenses and administrative expenses, offset in part by higher revenues in the current quarter and a favorable impact of foreign currency exchange rates.six-month period.
Adjusted EBITDAGross Profit and Margin
Adjusted EBITDA forGross Profit and Adjusted Gross Margin are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit and Adjusted Gross Margin to the three months ended September 30, 2022most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin” above.
Adjusted gross profit was a loss of $1.2$15.5 million compared to an income of $0.7and $16.6 million for the threesix months ended SeptemberJune 30, 2021.2023 and 2022, respectively. The $1.9$1.1 million changedecrease in Adjusted EBITDAadjusted gross profit was due to a higher net loss reduced in part by higher stock-based compensation and depreciation and amortization.
Adjusted EBITDA for the DDS segment was $0.9 million and $2.0 million for the three months ended September 30, 2022 and 2021, respectively. The $1.1 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 $0.6 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively. The $0.1 million change was due to a higher net loss for the Synodex segment,gross profit, offset in part by higher depreciation and amortization.
amortization, and non-recurring severance. Adjusted EBITDAgross margin was 40% for each of the Agility segment was a loss of $1.6 millionsix-month periods ended June 30, 2023 and $0.8 million for the three months ended September 30, 2022 and 2021, respectively. The $0.8 million change in Adjusted EBITDA was due to a higher net loss for the Agility segment, offset in part by higher depreciation and amortization.
Nine Months Ended September 30, 2022 and 2021
Revenues
Total revenues were $59.6 million and $50.5 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $9.1 million or approximately 18%.
Revenues from the DDS segment were $42.9 million and $38.0 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $4.9 million or approximately 13%. The increase was primarily attributable to higher volume from an existing customer.2022.
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Revenues from the Synodex segment were $5.4 million and $2.9 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $2.5 million or approximately 86%. The increase was primarily attributable to higher volume from two existing customers.
Revenues from the Agility segment were $11.3 million and $9.6 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $1.7 million or approximately 18%. 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% and 11% of the Company’s total revenues for the nine months ended September 30, 2022 and 2021, respectively. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 37% and 47% of the Company’s total revenues for the nine months ended September 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 $38.8 million and $31.2 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $7.6 million or 24%. 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 $6.2 million; an increase in cloud services, occupancy, content costs, depreciation and amortization of capitalized developed software of $1.2 million; severance cost of $0.4 million, and an increase in other direct operating costs of $0.5 million; offset in part by a $0.7 million reduction due the impact of foreign exchange rates fluctuations. Direct operating costs as a percentage of total revenues were 65% and 62% for the nine-month periods ended September 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 $26.3 million and $23.1 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3.2 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 $3.1 million; severance cost of $0.4 million and an increase in cloud services, occupancy, and depreciation and amortization of capitalized developed software of $0.2 million, and an increase in other direct operating costs of $0.4 million; offset in part by $0.9 million due the impact of foreign exchange rates fluctuations. Direct operating costs for the DDS segment as percentage of DDS segment revenues was 61% for each of the nine-month periods ended September 30, 2022 and 2021, respectively. There was no change in direct operating costs as a percentage of segment revenues as the increase in direct operating costs was offset by an increase in revenues.
Direct operating costs for the Synodex segment was $6.2 million and $2.7 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3.5 million or 130%. 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 $2.9 million and an increase in depreciation and amortization of capitalized developed software of $0.6 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 115% and 93% for the nine-month periods ended September 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 $6.3 million and $5.4 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $0.9 million or 17%. The cost increase was primarily due to higher amortization of capitalized developed software and content costs of $0.4 million higher labor related costs of $0.2 million, an unfavorable impact of foreign exchange rate fluctuations of $0.2 million and an increase in other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues was 56% for each of the nine-month periods ended September 30, 2022 and 2021, respectively. There was no change in direct operating costs as percentage of segment revenues as the increase in direct operating costs were offset by an increase in revenues.
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Selling and Administrative Expenses
Selling and administrative expenses consist of sales, marketing, product research and development 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 $29.6 million and $19.8 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $9.8 million or 49%. 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, and bonuses of $5.7 million, marketing activity related costs of $2.3 million, recruitment and professional fees of $1.1 million, severance costs of $0.3 million, an unfavorable impact of foreign exchange rate fluctuations of $0.2 million and a $0.2 million increase in other selling and administrative costs. Selling and administrative expenses as a percentage of total revenues were 50% and 39% for the nine-month periods ended September 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 $15.6 million and $11.8 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3.8 million or 32%. 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, and bonuses of $2.1 million, marketing activity related costs of $1.0 million, recruitment and professional fees of $0.7 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues were 36% and 31% for the nine-month periods ended September 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 $1.5 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $0.6 million or 67%. The cost increase was primarily attributable to payroll related costs and recruitment fees for new hires and other professional fees of $0.6 million to support our growth initiatives. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 28% and 31% for the nine-month periods ended September 30, 2022 and 2021, respectively. The decrease in selling and administrative expenses as a percentage of segment revenues was primarily attributable to lower expenditures offset in part by higher revenues.
Selling and administrative expenses for the Agility segment were $12.5 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $5.4 million or 76%. 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 $3.6 million, marketing activity related costs of $1.3 million, severance costs of $0.3 million, an unfavorable impact of foreign exchange rate fluctuations of $0.2 million and a $0.2 million increase in other selling and administrative costs; partly offset by decreases in recruitment and professional fees of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 111% and 74% for the nine-month periods ended September 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 $1.3 million for the nine months ended September 30, 2022, as compared to $0.6 million for the nine months ended September 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 $10.0 million and $0.5 million during the nine months ended September 30, 2022 and 2021. The $9.5 million change was a result of higher Direct operating and Selling and administrative costs in all segments in the current nine-month period, offset in part by higher revenues in all segments and a favorable impact of foreign currency exchange rates.
Net lossAdjusted gross profit for the DDS segment was $0.2$9.1 million and $12.1 million for the ninesix months ended SeptemberJune 30, 2023 and 2022, compared to a net income of $3.1respectively. The $3.0 million for the nine months ended September 30, 2021. The change of $3.3 million was primarily attributable to an increasedecrease in Direct operating costs and Selling and administrative expenses, offset in part by an increase in revenues in the current nine-month period and a favorable impact of foreign currency exchange rates.
Net loss for the Synodex segment was $2.2 million for the nine months ended September 30, 2022, compared to a net loss of $0.7 million for the nine months ended September 30, 2021. The $1.5 million change was due to higher Direct operating costs and Selling and administrative expenses, offset in part by higher revenues in the current nine-month period.
Net loss for the Agility segment was $7.6 million for the nine months ended September 30, 2022, compared to net loss of $2.9 million for the nine months ended September 30, 2021. The $4.7 million change was due to higher Direct operating costs and Selling and administrative expenses, offset in part by higher revenues in the current nine-month period and a favorable impact of foreign currency exchange rates.
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2022 was a loss of $3.5 million compared to an income of $2.6 million for the nine months ended September 30, 2021. The $6.1 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 EBITDAadjusted gross profit for the DDS segment was $3.4 million and $4.4 million for the nine months ended September 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDASegment was due to lower net income in the DDS segment, offset in part by higher stock-based compensation and provision for income taxes.
Adjusted EBITDA for the Synodex segment was a loss $1.7 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDA was due to a higher net loss in the Synodex segment,gross profit, offset in part by higher depreciation and amortization.
Adjusted EBITDAgross margin for the AgilityDDS segment was a loss of $5.2 million35% and $1.1 million40% for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The $4.1 million changedecrease in Adjusted EBITDAthe adjusted gross margin for the DDS segment was due to a higher net loss in the Agility segment,lower gross profit, offset in part by higher depreciation and amortization.amortization .
Adjusted gross profit for the Synodex segment was $0.8 million and a loss of $0.1 million for the six months ended June 30, 2023 and 2022, respectively. The $0.9 million increase in adjusted gross profit in the Synodex segment was due to higher gross profit. Adjusted gross margin for the Synodex segment was 21% and (3%) for the six months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit.
Adjusted gross profit for the Agility segment was $5.6 million and $4.6 million for the six months ended June 30, 2023 and 2022, respectively. The $1.0 million increase in adjusted gross profit for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization. Adjusted gross margin for the Agility segment was 65% and 62% for the six months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization.
Adjusted EBITDA
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.
Adjusted EBITDA was $2.4 million and a loss of $2.3 million for the six months ended June 30, 2023 and 2022, respectively. The $4.7 million change in Adjusted EBITDA was due to a lower net loss, higher stock-based compensation, depreciation and amortization, non-recurring severance and interest expense, offset in part by lower provisions for income taxes.
Adjusted EBITDA for the DDS segment was $1.5 million and $2.5 million for the six months ended June 30, 2023 and 2022, respectively. The $1.0 million change in Adjusted EBITDA was due to a lower net income and tax provision in the DDS segment, offset in part by higher stock-based compensation, depreciation and amortization and interest expense.
Adjusted EBITDA for the Synodex segment was $0.6 million and a loss of $1.1 million for the six months ended June 30, 2023 and 2022, respectively. The $1.7 million change in Adjusted EBITDA was due to a lower net loss in the Synodex segment and non-controlling interest.
Adjusted EBITDA for the Agility segment was $0.3 million and a loss of $3.7 million for the six months ended June 30, 2023 and 2022, respectively. The $4.0 million change in Adjusted EBITDA was due to a lower net loss in the Agility segment, higher depreciation and amortization and non-recurring severance offset in part by lower stock-based compensation and tax provision.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Cash and cash equivalents | | $ | 10,729 | | $ | 18,902 | | $ | 13,652 | | $ | 9,792 |
Short term investments - other | | | 14 | | | 507 | ||||||
Working capital | |
| 2,992 | |
| 12,658 | |
| 4,481 | |
| 2,869 |
At September42
On June 30, 2022,2023, we had cash and cash equivalents of $10.7$13.7 million, of which $4.9$2.3 million was held by our foreign subsidiaries, and $5.8$11.4 million was held in the United States. Despite our ability under existingthe passage of the new tax law tounder which we may repatriate funds from overseas after paying the toll charge, it is our intent, as of SeptemberJune 30, 2022,2023, to indefinitely reinvest the overseas funds in our foreign subsidiaries on account ofdue to 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)(v) general corporate purposes, including working capital; and (vii)(vi) possible business acquisitions. WeAs of June 30, 2023, we had working capital of approximately $3.0$4.5 million, and
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$12.7approximately $2.9 million as of September 30, 2022 and December 31, 2021, respectively.2022. The decreaseincrease in working capital wasis due to proceeds received for stock option exercises and a decrease in cash usedreduction due to fund our growth initiatives.payment for severance accruals and other operating expenses during the six months ended June 30, 2023.
We did not have any material commitments for capital expenditures as of SeptemberJune 30, 2022.2023.
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,
On April 4, 2023, we have no bank facilities or linesentered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. The Credit Agreement provides for a secured revolving line of credit. A decreasecredit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in our cashaccordance with the terms of the Credit Agreement and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materiallyon the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and adversely affectcertain other reserves and adjustments. As of June 30, 2023, such borrowing base calculation equaled approximately $2.9 million. The Credit Agreement contains a financial covenant that will require the Company.Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”) plus 2.25%. We did not utilize the Revolving Credit Facility during the three-month period ended June 30, 2023 and through the date of filing of this Report.
Cash Flows
Net Cash Used inProvided by (Used in) Operating Activities
Cash used in our operating activities for the nine months ended September 30, 2022 was $1.7 million primarily on account of the following factors: our net loss for the period of $10.0 million; a source of $6.1 million from non-cash expenses consisting of depreciation and amortization of $2.8 million, stock-based compensation of $2.4 million, pension cost of $0.6 million, deferred tax provisions of $0.2 million and a loss of $0.1 million from the termination of one of our operating lease contracts. Net changes from working capital accounts contributed an additional $2.2 million in working capital, mainly from a decrease in accounts receivable of $1.7 million, a decrease in other assets of $0.7 million offset in part by a $0.2 million net decrease in other working capital accounts. Refer to the condensed consolidated statements of cash flows for further details.
Cash provided by our operating activities for the ninesix months ended SeptemberJune 30, 20212023 was $5.6$4.2 million primarily on account of the following factors:resulting from our net loss for the period of $0.6 million; a source of $2.9 million, fromadjusted for non-cash expenses consisting of depreciation and amortization of $2.1 million, stock-based compensation of $1.1$4.6 million and pension cost of $0.3 million, offsetan increase in part by a gain on loan forgiveness of $0.6 million. Net changes from working capital accounts further contributed an additional source of $3.3$2.5 million. Refer to the condensed consolidated statements of cash flows for further details.
Cash used by our operating activities for the six months ended June 30, 2022 was $3.9 million resulting from our net loss of $6.7 million, adjusted for non-cash expenses of $4.0 million and a decrease in working capital of $1.2 million. Refer to the condensed consolidated statements of cash flows for further details.
Net Cash Used in Investing Activities
For the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021,the net cash used in our investing activities was $5.3$2.5 million and $3.6 million, respectively. The total capital expenditures for the six months ended June 30, 2023 were $3.0 million, respectively.offset by proceeds from maturity of short-term investments of $0.5 million. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed softwaresoftware.
During the next 12 months, it is anticipated that capital expenditures for capitalized developed software and ongoing technology, equipment and infrastructure upgrades will approximate to $6.4$6.5 million, a portion of which we may finance.
Net Cash Used inProvided by (Used in) Financing Activities
Cash provided by financing activities for the six months ended June 30, 2023 was $2.0 million primarily from proceeds of stock option exercises of $2.2 million, offset in part by payment of long-term obligations of $0.2 million.
Cash used in financing activities for the ninesix months ended SeptemberJune 30, 2022 was $0.2$0.3 million primarily for payments of long-term obligations of $0.5 million, reducedoffset in part by proceeds from stock option exercises of $0.3$0.2 million.
Cash provided by financing activities for the nine months ended September 30, 2021 was $0.8 million from proceeds from stock option exercises43
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
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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.
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.
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 SeptemberJune 30, 2022.2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of SeptemberJune 30, 2022,2023, 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 ninesix months ended SeptemberJune 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reportingreporting.
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PART II.OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4,8, 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 inFor information regarding Risk Factors, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022, as supplemented by the following additional risk factors, which shall be deemed to replace, in its entirety, the risk factors in our Annual Report on Form 10-K entitled, “We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.”, “Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.” and “We have no bank facilities or line of credit.”
We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.
The markets for our services, platforms and solutions are highly competitive. Some of our competitors have longer operating histories, significantly greater financial, human, technical and other resources and greater name recognition than we do. There are relatively few barriers preventing companies from entering the markets in which we operate. As a result, new market entrants also pose a threat to our business. We also compete with in-house personnel at current and prospective customers who may attempt to duplicate our offerings using their own personnel.
We have made and continue to make significant investments towards building-out new capabilities to pursue growth, including, for example, our investments in large language models. These investments increase our costs, and if these new capabilities do not yield the revenues or profit margins we expect, and we are unable to grow our business and revenue proportionately, our profitability may be reduced, or we may incur losses. If we are not able to compete effectively in the markets we serve or if we are not able to successfully develop new services, platforms and solutions, our revenues and results of operations could be adversely affected.
The international nature of our operations subjects us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.
We do business on an international level, with a major portion of our operations carried on in the Philippines, India, Sri Lanka, Canada, the United Kingdom, Israel and Germany, while our headquarters are in the U.S., and our customers are primarily located in North America and Europe. While we do not depend on significant revenues from sources internal to the Asian countries in which we operate, we are nevertheless subject to certain adverse economic factors relating to overseas economies generally, including inflation, external debt, a negative balance of trade and underemployment. In certain of the countries in which we operate, tax authorities have exercised, and may continue to exercise, significant discretionary and arbitrary powers to make tax demands or decline to refund payments that may be due to us as per tax returns. Other risks associated with our international operations and business activities include:
· | difficulties in staffing international projects and managing international operations, including overcoming logistical and communications challenges; |
· | local competition, particularly in the Philippines, India and Sri Lanka; |
· | imposition of public sector controls; |
· | trade and tariff restrictions; |
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· | price or exchange controls; |
· | currency control regulations; |
· | foreign tax consequences; |
· | data privacy laws and regulations; |
· | evolving regulation of artificial intelligence; |
· | intellectual property laws and enforcement practices; |
· | labor disputes and related litigation and liability; |
· | limitations on repatriation of earnings; and |
· | changing laws and regulations, occasionally with retroactive effect. |
One or more of these factors could adversely affect our business, financial condition and results of operations.
Debt under our Revolving Credit Facility has a variable rate of interest that is based on SOFR which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future.
Debt outstanding under our Revolving Credit Facility has a variable rate of interest that is based on the secured overnight financing rate (“SOFR”) which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future. The future performance of SOFR cannot be predicted based on historical performance and the future level of SOFR may have little or no relation to historical levels of SOFR. Any patterns in market variable behaviors, such as correlations, may change in the future. Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR.
Our Revolving Credit Facility contains restrictive covenants that may impair our ability to conduct business.
Our Revolving Credit Facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. For example, the Revolving Credit Facility contains a financial covenant that requires us, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. As a result of these covenants and restrictions, we may be limited in how we conduct our business, and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our Revolving Credit Facility and may impair our ability to conduct business. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, there are no assurances that we will be able to obtain waivers from the lender and/or amend the covenants.
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 SeptemberJune 30, 2022.2023.
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 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
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* | | |
| | |
32.2* | | |
| | |
101 | | The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the three months ended |
| | |
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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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: |
| /s/ Jack S. Abuhoff |
|
| Jack S. Abuhoff | |||
| Chief Executive Officer and President | |||
| | |||
| | |||
| Date: |
| /s/ Marissa B. Espineli |
|
| Marissa B. Espineli | |||
| Interim Chief Financial Officer | |||
| (Principal Financial Officer and | |||
| Principal Accounting Officer) |
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