UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| |
For the quarterly period ended | |
OR | |
| |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________ |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
|
|
(Zip Code) | |
(Address of principal executive offices) |
(
(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 |
The |
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.
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).
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 ☐
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 May 5, 2023 was
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2023
INDEX
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)
| March 31, |
| December 31, | |||
| 2023 |
| 2022 | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Short term investments – other | | | ||||
Accounts receivable, net of allowance for doubtful accounts |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use-asset, net |
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Other assets |
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Deferred income taxes, net |
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Intangibles, net |
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Goodwill |
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Total assets | $ | | $ | | ||
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other |
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Accrued salaries, wages and related benefits |
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Income and other taxes |
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Long-term obligations - current portion |
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Operating lease liability - current portion |
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Total current liabilities |
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Deferred income taxes, net |
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Long-term obligations, net of current portion |
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Operating lease liability, net of current portion |
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Total liabilities |
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Commitments and contingencies |
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Non-controlling interests |
| ( |
| ( | ||
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STOCKHOLDERS’ EQUITY: |
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Serial preferred stock; |
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Common stock, $ |
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Additional paid-in capital |
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Deficit |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
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Less: treasury stock, |
| ( |
| ( | ||
Total stockholders’ equity |
| |
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Total liabilities, non-controlling interests and stockholders’ equity | $ | | $ | | ||
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 | |||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Revenues | $ | | $ | | ||
Operating costs and expenses: |
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Direct operating costs |
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Selling and administrative expenses |
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Interest expense, net |
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Loss before provision for income taxes | ( | ( | ||||
Provision for income taxes | | | ||||
Consolidated net loss |
| ( |
| ( | ||
Income (loss) attributable to non-controlling interests |
| |
| ( | ||
Net loss attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | ( | ||
Loss per share attributable to Innodata Inc. and Subsidiaries: | ||||||
Basic and Diluted | ( | ( | ||||
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Weighted average shares outstanding: | ||||||
Basic and Diluted |
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Comprehensive Loss: |
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Consolidated Net loss | $ | ( | $ | ( | ||
Pension liability adjustment, net of taxes |
| ( |
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Foreign currency translation adjustment |
| |
| ( | ||
Change in fair value of derivatives, net of taxes |
| |
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Other comprehensive income |
| |
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Total Comprehensive loss |
| ( |
| ( | ||
Less: Comprehensive income (loss) attributable to non-controlling interest |
| |
| ( | ||
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | ( | ||
See notes to Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended | |||||
| March 31, | |||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
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|
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Consolidated net loss | $ | ( | $ | ( | ||
Adjustments to reconcile consolidated net loss to net cash |
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provided by operating activities: |
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Depreciation and amortization | | | ||||
Stock-based compensation | | | ||||
Deferred income taxes |
| ( |
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Pension cost | | | ||||
Loss on lease termination | | | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
| | ( | |||
Other assets |
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Accounts payable, accrued expenses and other |
| ( |
| ( | ||
Accrued salaries, wages and related benefits |
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| ( | ||
Income and other taxes |
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Net cash provided by (used in) operating activities |
| |
| ( | ||
Cash flows from investing activities: |
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Capital expenditures |
| ( |
| ( | ||
Purchase of short term investments - others | ( | | ||||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
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Proceeds from stock option exercises | | | ||||
Payment of long-term obligations |
| ( |
| ( | ||
Redemption of non-controlling interest | | | ||||
Net cash provided by (used in) financing activities | | ( | ||||
Effect of exchange rate changes on cash and cash equivalents |
| |
| ( | ||
Net increase (decrease) in cash and cash equivalents |
| |
| ( | ||
Cash and cash equivalents, beginning of period |
| |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
|
| ||||
Vendor financed software licenses acquired | $ | | $ | |||
Non cash redemption of non-controlling interest | $ | | $ | ( | ||
Cash paid for income taxes | $ | | $ | | ||
Cash paid for operating leases | $ | | $ | | ||
Cash paid for interest | $ | | $ | | ||
See notes to Condensed Consolidated Financial Statements.
4
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||||||
Additional | Retained | Other | ||||||||||||||||||||
Common Stock | Paid-in | Earnings | Comprehensive | Treasury Stock | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| (Deficit) |
| Loss |
| Shares | Amount |
| Total | ||||||||
January 1, 2023 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | | ||||||||
Net loss attributable to Innodata Inc. and subsidiaries | - | - | - | ( | - | - | - | ( | ||||||||||||||
Stock-based compensation | - | - | | - | - | - | - | | ||||||||||||||
Stock option exercises | | | | - | - | - | - | | ||||||||||||||
Shares withheld for exercise net settlement | ( | - | - | - | - | - | - | - | ||||||||||||||
Pension liability adjustments, net of taxes | - | - | - | - | ( | - | - | ( | ||||||||||||||
Foreign currency translation adjustment | - | - | - | - | | - | - | | ||||||||||||||
Change in fair value of derivatives, net of taxes | - | - | - | - | | - | - | | ||||||||||||||
March 31, 2023 | | | | ( | ( | ( | ( | | ||||||||||||||
January 1, 2022 | | $ | | $ | | $ | | $ | ( | ( | $ | ( | $ | | ||||||||
Net loss attributable to Innodata Inc. and subsidiaries | - | - | - | ( | - | - | - | ( | ||||||||||||||
Stock-based compensation | - | - | | - | - | - | - | | ||||||||||||||
Stock option exercises | | | | - | - | - | - | | ||||||||||||||
Shares withheld for taxes on restricted shares vesting | ( | - | ( | - | - | - | - | ( | ||||||||||||||
Redemption of non-controlling interest | - | - | ( | - | - | - | - | ( | ||||||||||||||
Pension liability adjustments, net of taxes | - | - | - | - | | - | - | | ||||||||||||||
Foreign currency translation adjustment | - | - | - | - | ( | - | - | ( | ||||||||||||||
Change in fair value of derivatives, net of taxes | - | - | - | - | | - | - | | ||||||||||||||
March 31, 2022 | | | | | ( | ( | ( | | ||||||||||||||
See notes to Condensed Consolidated Financial Statements.
5
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31, 2023 and December 31, 2022, the results of its operations and comprehensive loss for the three months ended March 31, 2023 and 2022, cash flows for the three months ended March 31, 2023 and 2022, and stockholders’ equity for the three months ended March 31, 2023 and 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, 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, 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. 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 is not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.
6
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 is 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.
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
Foreign Currency Translation - The functional currency of the Company’s subsidiaries 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 March 31, 2023 and December 31, 2022 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 $
7
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 their 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.
Derivative Instruments - The Company accounts for derivative transactions in accordance with the FASB’s Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded in Other comprehensive income (loss). When the amounts recorded in Other comprehensive income (loss) are reclassified to earnings, they 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 from to
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.
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.
8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 three months ended March 31, 2023 (in thousands):
| Amount | ||
Balance at December 31, 2022 | $ | | |
Net deferred revenue in the period |
| | |
Revenue recognized |
| ( | |
Currency translations and other adjustments |
| ( | |
Balance at March 31, 2023 | $ | | |
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.
| March 31, |
| December 31, | |||
| 2023 |
| 2022 | |||
Treasury bills | $ | | $ | | ||
Certificates of deposit |
| |
| | ||
Total | $ | | $ | | ||
3. Accounts Receivable
Accounts receivable consists of the following:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Gross Accounts receivable | $ | | $ | | ||
Allowance for doubtful accounts |
| ( |
| ( | ||
Accounts receivable, net | $ | | $ | | ||
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.
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.
9
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Activity in the allowance for the credit losses for the three months ended March 31, 2023 was as follows (in thousands):
| Amount | ||
Balance at January 1, 2023 | $ | | |
Additions charged to expense |
| | |
Write-offs against allowance |
| ( | |
Foreign currency translation adjustment |
| | |
Balance at March 31, 2023 | $ | | |
4. Goodwill and Intangible Assets
The change in the carrying amount of goodwill for the three months ended March 31, 2023 was as follows (in thousands):
Balance as of January 1, 2023 |
| $ | |
Foreign currency translation adjustment |
| | |
Balance as of March 31, 2023 | $ | |
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 using 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 $
10
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information regarding the Company acquired intangible assets and capitalized developed software was as follows (in thousands):
March 31, 2023 | ||||||||||||
Foreign | ||||||||||||
Gross | Currency | Net | ||||||||||
Carrying | Accumulated | Translation | Carrying | |||||||||
| Value |
| Amortization |
| Adjustment |
| Value | |||||
Acquired Intangible Assets | ||||||||||||
Developed technology | $ | | $ | ( | $ | | $ | | ||||
Customer relationships |
| |
| ( |
| - |
| | ||||
Trademarks and tradenames |
| |
| ( |
| - |
| | ||||
Patents |
| |
| ( |
| - |
| | ||||
Media Contact Database | | ( | | | ||||||||
Total Acquired Intangible Assets | $ | | $ | ( | $ | | $ | | ||||
Capitalized Developed Software |
|
|
|
| ||||||||
Capitalized Developed Software | $ | | $ | ( | $ | | $ | | ||||
Capitalized Developed Software - in Progress |
| |
| - |
| ( |
| | ||||
Total Capitalized Developed Software | $ | | $ | ( | $ | - | $ | | ||||
Total | $ | | $ | ( | $ | | $ | | ||||
| December 31, 2022 | |||||||||||
Foreign | ||||||||||||
Gross | Currency | Net | ||||||||||
| Carrying |
| Accumulated |
| Translation | Carrying | ||||||
| Value |
| Amortization |
| Adjustment |
| Value | |||||
Acquired Intangible Assets |
|
|
|
|
|
|
|
| ||||
Developed technology | $ | | $ | ( | $ | ( | $ | | ||||
Customer relationships | | ( | ( | | ||||||||
Trademarks and tradenames | | ( | ( | | ||||||||
Patents |
| |
| ( | | | ||||||
Media Contact Database | | ( | ( | | ||||||||
Total Acquired Intangible Assets | $ | | $ | ( | $ | ( | $ | | ||||
Capitalized Developed Software | ||||||||||||
Capitalized Developed Software | $ | | $ | ( | $ | ( | $ | | ||||
Capitalized Developed Software - in Progress | | - | ( | | ||||||||
Total Capitalized Developed Software | $ | | $ | ( | $ | ( | $ | | ||||
Total | $ | | $ | ( | $ | ( | $ | | ||||
11
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense relating to acquired intangible assets was $
Amortization expense relating to capitalized developed software was $
As of March 31, 2023, estimated future amortization expense for intangible assets was as follows (in thousands):
Year |
| Amortization | |
2023 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
$ | | ||
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 United States, Canadian, German and the 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 three months ended March 31, 2023 and 2022, respectively, are summarized in the table below:
For the Three Months | |||||
Ended March 31, | |||||
|
| 2023 |
| 2022 | |
Federal income tax expense at statutory rate |
| ( | % | ( | % |
Effect of: |
| ||||
Change in valuation allowance |
| | | ||
Tax effects of foreign operations | | | |||
Foreign operations permanent difference - foreign exchange gains and losses | | | |||
Increase in unrecognized tax benefits (ASC 740) | | | |||
Foreign rate differential | | ( | |||
State income tax net of federal benefit | | | |||
Return to provision true up | ( | | |||
Effect of stock based compensation | ( | - | |||
Deemed interest | ( | ( | |||
Other | | ( | |||
Effective tax rate | | % | | % | |
12
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the three months ended March 31, 2023 (in thousands):
|
| Unrecognized | |
| tax benefits | ||
Balance - January 1, 2023 | $ | | |
Increase for current period tax positions |
| | |
Interest accrual |
| | |
Foreign currency remeasurement |
| | |
Balance - March 31, 2023 | $ | | |
The Company expects that unrecognized tax benefits as of March 31, 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
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 $
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.
13
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Operating Leases
The Company has various lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.
These lease agreements are for terms ranging from to
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 | ||||||
March 31, | ||||||
|
| 2023 |
| 2022 | ||
Rent expense for long-term operating leases | $ | | $ | | ||
Rent expense for short-term leases |
| |
| | ||
Total rent expense | $ | | $ | | ||
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 March 31, 2023 (in thousands):
Year |
| Amount | |
2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 and thereafter |
| | |
Total lease payments |
| | |
Less: Interest |
| ( | |
Net present value of lease liabilities | $ | | |
| |||
Current portion | $ | | |
Long-term portion |
| | |
Total | $ | | |
The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of March 31, 2023 were as follows:
Weighted-average lease term remaining (in months) |
| ||
Weighted-average discount rate |
| | % |
14
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Long-term obligations
Total long-term obligations as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| March 31, |
| December 31, | |||
| 2023 |
| 2022 | |||
Pension obligations - accrued pension liability | $ | | $ | | ||
Settlement agreement |
| - |
| | ||
Microsoft licenses (1) |
| |
| - | ||
| | |||||
Less: Current portion of long-term obligations |
| |
| | ||
Totals | $ | | $ | | ||
(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 $
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 $
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.
15
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 $
9. Stock Options and Restricted Stock Units
A summary of option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 (the “2013 Plan”) and changes during each of the three-month periods ended March 31, 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 |
| | $ | |
|
|
|
| ||
Granted* |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited/Expired |
| ( |
| |
|
|
|
| ||
Outstanding at March 31, 2023 |
| | $ | |
| $ | | |||
|
|
|
| |||||||
Exercisable at March 31, 2023 |
| | $ | | $ | | ||||
|
|
|
| |||||||
Vested and Expected to Vest at March 31, 2023 |
| | $ | |
| $ | | |||
*On January 23, 2023
|
|
| Weighted-Average |
| ||||||
Number of | Weighted - Average | Remaining Contractual | Aggregate | |||||||
Options | Exercise Price | Term (years) | Intrinsic Value | |||||||
Outstanding at January 1, 2022 | | $ | |
|
| |||||
Granted* |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited/Expired |
| ( |
| |
|
|
|
| ||
Outstanding at March 31, 2022 |
| | $ | |
| $ | | |||
Exercisable at March 31, 2022 |
| | $ | |
| $ | | |||
Vested and Expected to Vest at March 31, 2022 |
| | $ | |
| $ | | |||
*Includes
16
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three-month periods ended March 31, 2023 are presented below. There were no outstanding options under the 2021 Plan as of March 31, 2022.
Weighted-Average | ||||||||||
Number of | Weighted - Average | Remaining Contractual | Aggregate | |||||||
| Options |
| Exercise Price |
| Term (years) |
| Intrinsic Value | |||
Outstanding at January 1, 2023 |
| | $ | |
|
|
|
| ||
Granted |
| - |
| - |
|
|
|
| ||
Exercised |
| - |
| - |
|
|
|
| ||
Forfeited/Expired |
| ( |
| |
|
|
|
| ||
Outstanding at March 31, 2023 |
| | $ | |
| $ | | |||
Exercisable at March 31, 2023 |
| | $ | |
| $ | | |||
Vested and Expected to Vest at March 31, 2023 |
| | $ | |
| $ | | |||
During the three months ended March 31, 2023, a total of
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 Three Months Ended March 31, | |||||||
| 2023 |
| 2022 | ||||
Weighted average fair value of options granted | $ | | $ | | |||
Risk-free interest rate | | % | | % | |||
Expected term (years) | | ||||||
Expected volatility factor | | % | | % | |||
Expected dividends | - | - | |||||
There were no outstanding awards of restricted stock under the 2013 Plan or the 2021 Plan (collectively, the “Equity Plans”) during each of the three-month periods ended March 31, 2023 and 2022.
In March 2022, the Company granted restricted stock units (“RSU”) to key executives, pursuant to the Equity Plans. Each RSU has vesting conditions based on both the achievement of performance-based metrics and the continuation of employment over a defined period. The level of performance determines the number of RSUs that performance-vest, and performance vested RSUs must also time-vest in order to be fully vested. Each fully vested RSU represents the right to receive
17
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted stock unit activity under the Equity Plans during each of the three-month periods ended March 31, 2023 and 2022 are presented below:
Number of |
| Weighted-Average | |||
Restricted Stock | Grant Date | ||||
| Units |
| Fair Value | ||
Unvested at January 1, 2023 | | $ | | ||
Granted |
| - |
| - | |
Vested |
| - |
| - | |
Forfeited/Expired |
|
| |||
Unvested at March 31, 2023 |
| | $ | | |
| Number of |
| Weighted-Average | ||
Restricted Stock | Grant Date | ||||
Units | Fair Value | ||||
Unvested at January 1, 2022 |
|
| $ | - | |
Granted* |
| | | ||
Vested |
| - |
| - | |
Forfeited/Expired |
| - |
| - | |
Unvested at March 31, 2022 |
| | $ | | |
*
The compensation cost related to non-vested stock options not yet recognized as of March 31, 2023 totaled approximately $
During the fiscal year ended December 31, 2022,
The compensation cost related to non-vested restricted stock units not yet recognized as of March 31, 2023 totaled approximately $
The stock-based compensation expense related to the Equity Plans were allocated as follows (in thousands):
For the Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Direct operating costs | $ | | $ | | ||
Selling and administrative expenses |
| |
| | ||
Total stock-based compensation | $ | | $ | | ||
18
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Redemption of non-controlling interest
The Condensed Consolidated Balance Sheets for the fiscal period ended December 31, 2022 includes a $
11. 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 March 31, 2023 and 2022, and reclassifications from accumulated other comprehensive loss for the three 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 January 1, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss before reclassifications, net of taxes |
| - |
| |
| |
| | ||||
Total other comprehensive loss before reclassifications, net of taxes |
| ( |
| ( |
| ( |
| ( | ||||
Net amount reclassified to earnings |
| ( |
| |
| - |
| | ||||
Balance at March 31, 2023 | $ | ( | $ | | $ | ( | $ | ( | ||||
|
|
| Foreign Currency |
| ||||||||
Pension Liability | Fair Value of | Translation | Accumulated Other | |||||||||
Adjustment | Derivatives | Adjustment | Comprehensive Loss | |||||||||
Balance at January 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss before reclassifications, net of taxes |
|
| - |
| ( |
| ( |
| ( | |||
Total other comprehensive loss before reclassifications, net of taxes |
|
| ( |
| ( |
| ( |
| ( | |||
Net amount reclassified to earnings |
|
| |
| |
| - |
| | |||
Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Taxes related to each component of other comprehensive loss were not material for each of the three-month periods presented and therefore 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 loss.
19
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Segment reporting and concentrations
The Company’s operations are classified in
The DDS segment provides AI data preparation services, collecting or creating training data, annotating training data, and training AI algorithms for its customers, and AI model deployment and integration. 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.
Revenues from external customers, segment operating profit (loss), and other reportable segment information are as follows (in thousands):
For the Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Revenues: |
|
|
|
| ||
DDS | $ | | $ | | ||
Synodex |
| |
| | ||
Agility |
| |
| | ||
Total Consolidated | $ | | $ | | ||
|
| |||||
Income (loss) before provision for income taxes(1): |
|
| ||||
DDS | $ | ( | $ | | ||
Synodex |
| ( |
| ( | ||
Agility |
| ( |
| ( | ||
Total Consolidated | $ | ( | $ | ( | ||
|
| |||||
Income (loss) before provision for income taxes(2): |
|
| ||||
DDS | $ | ( | $ | | ||
Synodex |
| |
| ( | ||
Agility |
| ( |
| ( | ||
Total Consolidated | $ | ( | $ | ( | ||
20
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| March 31, 2023 |
| December 31, 2022 | |||
Total assets: |
|
|
|
| ||
DDS | $ | | $ | | ||
Synodex |
| |
| | ||
Agility |
| |
| | ||
Total Consolidated | $ | | $ | | ||
| March 31, 2023 |
| December 31, 2022 | |||
Goodwill: |
|
|
|
| ||
Agility | $ | | $ | | ||
Total | $ | | $ | | ||
| (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 March 31, | |||||
2023 | 2022 | |||||
Revenues of DDS Segment from: |
|
|
|
| ||
Synodex |
| $ | | $ | | |
Agility |
| |
| | ||
Totals |
| $ | | $ | | |
Revenues for the period ended March 31, 2023 and 2022 by geographic region (determined based upon customer’s domicile), were as follows (in thousands):
March 31, | ||||||
| 2023 |
| 2022 | |||
United States | $ | | $ | | ||
United Kingdom |
| |
| | ||
The Netherlands |
| |
| | ||
Canada |
| |
| | ||
Others - principally Europe |
| |
| | ||
Totals | $ | | $ | | ||
21
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-lived assets as of March 31, 2023 and December 31, 2022 by geographic region were comprised of (in thousands):
| March 31, |
| December 31, | |||
| 2023 |
| 2022 | |||
United States | $ | | $ | | ||
|
| |||||
Foreign countries: |
|
| ||||
Canada |
| |
| | ||
United Kingdom |
| |
| | ||
Philippines |
| |
| | ||
India |
| |
| | ||
Sri Lanka |
| |
| | ||
Israel |
| |
| | ||
Germany | - | - | ||||
Total foreign |
| |
| | ||
Totals | $ | | $ | | ||
Long-lived assets include the unamortized balance of right-of-use assets amounting to $
As of March 31, 2023, approximately
13. Loss Per Share
For the Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Net Loss attributable to Innodata Inc. and Subsidiaries | $ | | $ | | ||
Weighted average common shares outstanding |
| |
| | ||
Dilutive effect of outstanding options |
| - |
| - | ||
Adjusted for dilutive computation |
| |
| | ||
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.
22
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase
14. Derivatives
The Company conducts a large portion of its operations in international markets, which subjects it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company is also subject to wage inflation and other government mandated increases and operating expenses in Asian countries where the Company has the majority of its operations. The Company’s primary inflation and exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.
In addition, although most of the Company’s revenue is denominated in U.S. dollars, a significant portion of total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period 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) are 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 $
The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):
Balance Sheet Location | Fair Value | |||||||
|
| 2023 |
| 2022 | ||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
| ||
Foreign currency forward contracts |
| Prepaid expenses and other current assets | $ | | $ | - | ||
Foreign currency forward contracts |
| Accrued expenses and other | $ | - | $ | | ||
23
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 were as follows (in thousands):
| For the Three Months Ended | |||||
| March 31, | |||||
| 2023 |
| 2022 | |||
Net gain (loss) recognized in OCI(1) | $ | | $ | ( | ||
Net (gain) loss reclassified from accumulated OCI into income(2) | $ | | $ | | ||
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. |
15. Subsequent Event
On April 4, 2023, Innodata Inc. entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, Innodata Synodex, LLC, Innodata docGenix, LLC, and Agility PR Solutions LLC. 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 $
24
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “predict,” “likely,” “estimate,” “plan,” “potential,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.
These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (“COVID-19”) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; 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; changes in external market factors; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growth in existing competitors; various other competitive and technological factors; the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time on 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, the risks discussed in Part I, Item 1A. “Risk Factors”, “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 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.
25
Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a leading data engineering company. Our mission is to help the world’s most prestigious companies deliver the promise of ethical, 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 innovative technology companies to use to train the AI models of the future.
AI holds the promise that computers can perceive and understand 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 also helping companies deploy and integrate AI into their operations and products and providing innovative AI-enabled industry platforms, helping ensure that our customers’ businesses are prepared for a world in which machines augment human activity in ways previously unimaginable.
We developed our capabilities and honed our approaches progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately seven 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.
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 Preparation
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. We utilize a variety of leading third-party image and video annotation tools. For text, we use our proprietary data annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary data annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. The platform encapsulates many of the innovations we conceived 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 Model 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 help businesses fine-tune their own custom versions of our proprietary models and third-party foundation models to address domain-specific and customer-specific use cases.
In addition to deploying and integrating AI 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.
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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 solutions and platforms.
AI-Enabled Industry Platforms
Our AI-enabled industry platforms address specific, niche market requirements we believe we can innovate with 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®”) and an industry platform for public relations (which we 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
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.
Seasonality
Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.
Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.
Trends
We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the three-month period ending March 31, 2023, we added 129 new customers. This is a 39% increase over the 93 new customers we added on average per quarter in 2021 and a 3% increase over the 126 new customers we added on average per quarter in 2022.
For further information, refer to the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.” in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 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 use to evaluate our performance and manage the business. However, the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.
Adjusted 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 months ended March 31, 2023 and 2022 (in thousands).
Three Months Ended March 31, |
| ||||
Consolidated |
| 2023 |
| 2022 |
|
Gross Profit attributable to Innodata Inc. and Subsidiaries |
| 5,965 |
| 7,778 | |
Depreciation and amortization |
| 1,065 |
| 839 | |
Severance** |
| 327 |
| - | |
Stock-based compensation |
| 63 |
| 52 | |
Adjusted Gross Profit |
| 7,420 |
| 8,669 | |
Gross Margin |
| 32 | % | 37 | % |
Adjusted Gross Margin |
| 39 | % | 41 | % |
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Three Months Ended March 31, |
| ||||
DDS Segment |
| 2023 |
| 2022 |
|
Gross Profit attributable to DDS Segment |
| 4,159 |
| 6,554 | |
Depreciation and amortization |
| 200 |
| 190 | |
Severance** |
| 28 |
| - | |
Stock-based compensation |
| 51 |
| 44 | |
Adjusted Gross Profit |
| 4,438 |
| 6,788 | |
Gross Margin |
| 33 | % | 41 | % |
Adjusted Gross Margin |
| 35 | % | 43 | % |
Three Months Ended March 31, |
| ||||
Synodex Segment |
| 2023 |
| 2022 |
|
Gross Profit/(Loss) attributable to Synodex Segment |
| 203 |
| (230) | |
Depreciation and amortization |
| 162 |
| 41 | |
Severance** |
| - |
| - | |
Stock-based compensation |
| - |
| - | |
Adjusted Gross Profit |
| 365 |
| (189) | |
Gross Margin |
| 11 | % | (14) | % |
Adjusted Gross Margin |
| 20 | % | (11) | % |
Three Months Ended March 31, |
| ||||
Agility Segment |
| 2023 |
| 2022 |
|
Gross Profit attributable to Agility Segment |
| 1,603 |
| 1,454 | |
Depreciation and amortization |
| 703 |
| 608 | |
Severance** |
| 299 |
| - | |
Stock-based compensation |
| 12 |
| 8 | |
Adjusted Gross Profit |
| 2,617 |
| 2,070 | |
Gross Margin |
| 38 | % | 40 | % |
Adjusted Gross Margin |
| 62 | % | 57 | % |
**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.
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 months ended March 31, 2023 and 2022 (in thousands).
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| Three Months Ended March 31, | |||||
Consolidated |
| 2023 |
| 2022 | ||
Net loss attributable to Innodata Inc. and Subsidiaries | $ | (2,116) | $ | (2,815) | ||
Provision for income taxes | 218 | 475 | ||||
Interest expense, net | 63 | 3 | ||||
Depreciation and amortization | 1,091 | 873 | ||||
Severance** | 580 | - | ||||
Stock-based compensation | 962 | 537 | ||||
Non-controlling interests | 3 | (75) | ||||
Adjusted EBITDA / (loss) | $ | 801 | $ | (1,002) | ||
| Three Months Ended March 31, | |||||
DDS Segment | 2023 |
| 2022 | |||
Net income (loss) attributable to DDS Segment | $ | (641) | $ | 763 | ||
Provision for income taxes | 215 | 533 | ||||
Interest expense, net | 62 | 3 | ||||
Depreciation and amortization | 225 | 224 | ||||
Severance** | 33 | - | ||||
Stock-based compensation | 806 | 371 | ||||
Non-controlling interests | 3 | - | ||||
Adjusted EBITDA | $ | 703 | $ | 1,894 | ||
| Three Months Ended March 31, | |||||
Synodex Segment | 2023 |
| 2022 | |||
Net income (loss) attributable to Synodex Segment | $ | 14 | $ | (785) | ||
Depreciation and amortization | 162 |
| 41 | |||
Severance** | 6 | - | ||||
Stock-based compensation |
| 58 |
| 49 | ||
Non-controlling interests |
| - |
| (75) | ||
Adjusted EBITDA / (loss) | $ | 240 | $ | (770) | ||
| Three Months Ended March 31, | |||||
Agility Segment | 2023 |
| 2022 | |||
Net loss attributable to Agility Segment | $ | (1,489) | $ | (2,793) | ||
Provision for income taxes | 3 | (58) | ||||
Interest expense, net | 1 | - | ||||
Depreciation and amortization | 704 | 608 | ||||
Severance** | 541 | - | ||||
Stock-based compensation | 98 | 117 | ||||
Adjusted EBITDA (loss) | $ | (142) | $ | (2,126) | ||
**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
The amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.
Three Months Ended March 31, 2023 and 2022
Revenues
Total revenues were $18.8 million and $21.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or approximately 11%.
Revenues from the DDS segment were $12.7 million and $15.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, a decrease of $3.2 million or approximately 20%. The decrease was primarily attributable to lower volume from one customer offset in part by an increase in volume from another customer.
Revenues from the Synodex segment were $1.9 million and $1.7 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.2 million or approximately 12%. The increase was primarily attributable to higher volume from existing customers.
Revenues from the Agility segment were $4.2 million and $3.6 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.6 million or approximately 17%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
One customer in the DDS segment generated approximately 11% and another customer in the DDS segment generated 11% of the Company’s total revenues for the three months ended March 31, 2023. Another customer in the DDS segment generated approximately 21% of the Company’s total revenues for the three months ended March 31, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended March 31, 2023 and 2022, revenues from non-U.S. customers accounted for 39% and 37% 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 $12.9 million and $13.4 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.5 million or 4%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.8 million primarily on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, higher depreciation and amortization of capitalized developed software of $0.1 million and an increase in other direct operating costs of $0.4 million. Direct operating costs as a percentage of total revenues were 69% and 63% for the three-month periods ended March 31, 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.
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Direct operating costs for the DDS segment were approximately $8.6 million and $9.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.7 million or 8%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.9 million primarily, on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, an increase in other direct operating costs of $0.4 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 68% and 58% for the three months ended March 31, 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 $1.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.2 million or 11%. The cost decrease was primarily due to lower direct labor costs of $0.3 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 89% and 112% for the three months ended March 31, 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 a decrease in direct operating costs.
Direct operating costs for the Agility segment were $2.6 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $0.4 million or 18%. The cost increase was primarily due to higher revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The cost increase was primarily due to an increase in direct labor costs of $0.4 million including severance higher depreciation and amortization of capitalized developed software of $0.1 million, offset in part by a decrease in other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 62% and 61% for the three months ended March 31, 2023 and 2022, respectively. The increase in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to an increase in direct operating costs, offset in part by increased revenues from subscriptions to our Agility AI-enabled platform and newswire products.
Gross Profit and Gross Margin
Gross profit is derived by revenues less direct operating costs, while Gross margin in percentage is derived by dividing gross profit over revenues.
Gross profit was $6.0 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022. The $1.8 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 32% and 37% for the three months ended March 31, 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.
Gross profit for the DDS segment was $4.2 million for the three months ended March 31, 2023 compared to $6.6 million for the three months ended March 31, 2022. The $2.4 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 41% for the three months ended March 31, 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 $0.2 million for the three months ended March 31, 2023 compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.4 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 11% and (14%) for the three months ended March 31, 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 $1.6 million for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022. The $0.1 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 38% and 40% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin for the Agility segment was primarily due to higher direct operating costs, offset in part by higher revenues.
Selling and Administrative Expenses
Selling and administrative expenses consist of sales, marketing, new services research and related software development, administrative payroll and related costs including commissions, bonuses, stock-based compensation, marketing costs, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $7.8 million and $10.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or 24%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.9 million, primarily on account of headcount reduction, offset in part by salary increases and severance; lower recruitment and professional fees of $1.0 million, marketing expenses of $0.5 million and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also offset in part by higher provisions for doubtful accounts of $0.2 million. Selling and administrative expenses as a percentage of total revenues were 41% and 48% for the three months ended March 31, 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 $4.5 million and $5.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.8 million or 15%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower administrative and selling labor and related expenses of $0.1 million, primarily on account of headcount reductions; lower recruitment and professional fees of $0.5 million, and a decrease in other selling and administrative expenses of $0.2 million, primarily from lower marketing expenses and lower provision for doubtful accounts. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 35% and 33% for each of the three-month periods ended March 31, 2023 and 2022, respectively. The increase in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower selling and administrative expenses.
Selling and administrative expenses for the Synodex segment were $0.2 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.4 million or 67%. The decrease in selling and administrative expenses was primarily attributable to lower professional fees of $0.3 million and lower payroll-related costs of $0.2 million; offset by an increase in other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 11% and 35% for the three months ended March 31, 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, offset in part by higher revenues.
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Selling and administrative expenses for the Agility segment were $3.1 million and $4.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $1.2 million or 28%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.6 million, primarily on account of headcount reduction and severance; lower recruitment and professional fees of $0.2 million, marketing expenses of $0.4 million, and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also offset in part by a higher provision for doubtful accounts of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 74% and 119% for the three months ended March 31, 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, offset in part by an increase in revenues.
Income Taxes
We recorded a provision for income taxes of $0.2 million and $0.5 million for the three months ended March 31, 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 Loss
We incurred a net loss of $2.1 million and $2.8 million during the three months ended March 31, 2023 and 2022, respectively. The $0.7 million change was a result of lower operating costs in all segments in the current quarter, offset in part by higher revenues in the Synodex and Agility segments.
Net loss for the DDS segment was $0.6 million for the three months ended March 31, 2023, compared to a net income of $0.8 million for the three months ended March 31, 2022. The $1.4 million change was primarily attributable to lower revenues in the current quarter offset in part by lower operating costs and lower tax provision.
The Synodex segment was breakeven for the three months ended March 31, 2023, compared to a net loss of $0.8 million for the three months ended March 31, 2022. The $0.8 million change was due to lower operating costs, offset in part by higher revenues in the current quarter.
Net loss for the Agility segment was $1.5 million for the three months ended March 31, 2023, compared to a net loss of $2.8 million for the three months ended March 31, 2022. The $1.3 million change was due to higher revenues, lower selling and administrative costs, offset in part by higher direct operating costs in the current quarter.
Adjusted Gross Profit
Adjusted gross profit for the three months ended March 31, 2023 was $7.4 million compared to $8.7 million for the three months ended March 31, 2022. The $1.3 million decrease in adjusted gross profit is due to a lower gross profit, offset in part by higher depreciation and amortization, and non- recurring severance. Adjusted gross margin was 39% and 41% for the three months ended March 31, 2023 and 2022, respectively. The decrease in adjusted gross margin was due to a lower gross profit, offset in part by higher depreciation and amortization, and non-recurring severance.
Adjusted gross profit for the DDS segment was $4.4 million and $6.8 million for the three months ended March 31, 2023 and 2022, respectively. The $2.4 million decrease in adjusted gross profit for the DDS Segment is due to lower gross profit, offset in part by higher non-recurring severance. Adjusted gross margin for the DDS segment was 35% and 43% for the three months ended March 31, 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 non-recurring severance.
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Adjusted gross profit for the Synodex segment for the three months ended March 31, 2023 was $0.4 million compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.6 million increase in adjusted gross profit in the Synodex segment is due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Synodex segment was 20% and (11%) for the three months ended March 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit and higher depreciation and amortization.
Adjusted gross profit for the Agility segment was $2.6 million and $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $0.5 million increase in adjusted gross profit for the Agility segment is due to higher gross profit, higher non-recurring severance, and depreciation and amortization. Adjusted gross margin for the Agility segment was 62% and 57% for the three months ended March 31, 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 for the three months ended March 31, 2023 was $0.8 million compared to a loss of $1.0 million for the three months ended March 31, 2022. The $1.8 million increase in Adjusted EBITDA was due to a lower net loss, higher stock-based compensation, and higher depreciation and amortization and non-recurring severance, offset in part by a lower tax provision.
Adjusted EBITDA for the DDS segment was $0.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively. The $1.2 million decrease in Adjusted EBITDA in the DDS Segment is due to a higher net loss and lower tax provision, offset in part by higher stock-based compensation and higher non-recurring severance.
Adjusted EBITDA for the Synodex segment for the three months ended March 31, 2023 was $0.2 million compared to a loss of $0.8 million for the three months ended March 31, 2022. The $1.0 million increase in Adjusted EBITDA in the Synodex segment is due to a lower net loss and higher depreciation and amortization.
Adjusted EBITDA for the Agility segment was a loss of $0.1 million and loss of $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $2.0 million increase in Adjusted EBITDA in the Agility segment is due to a lower net loss and higher depreciation and amortization and non-recurring severance.
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin, and Adjusted EBITDA” above.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Cash and cash equivalents | $ | 10,330 | $ | 9,792 | ||
Short term investments - other | 512 | 507 | ||||
Working capital |
| 2,323 |
| 2,869 | ||
On March 31, 2023, we had cash and cash equivalents of $10.3 million and short-term investments of $0.5 million, of which $3.1 million was held by our foreign subsidiaries, and $7.2 million was held in the United States. The short-term investments of $0.5 million were held in the United States. Despite the passage of the new tax law under which we may repatriate funds from overseas after paying the toll charge, it is our intent, as of March 31, 2023, to indefinitely reinvest the overseas funds in our foreign subsidiaries due to the withholding tax that we would have to incur on the actual remittances.
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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) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of March 31, 2023, we had working capital of approximately $2.3 million, as compared to working capital of approximately $2.9 million as of December 31, 2022. The decrease in working capital is due to additional accruals for severance costs and payroll related taxes offset in part by decrease in accounts receivable, accounts payable and accrued expenses during the three months ended March 31, 2023.
We did not have any material commitments for capital expenditures as of March 31, 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. On April 4, 2023, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, Innodata Synodex, LLC, Innodata docGenix, LLC, and Agility PR Solutions LLC. 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 the date of entry into the Credit Agreement, such borrowing base calculation equaled approximately $3.3 million. Reference is made to Note 15, “Subsequent Events” in the condensed consolidated financial statements of this Report, which is incorporated by reference herein. Any material decreases in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.
Cash Flows
Net Cash Provided by (Used in) Operating Activities
Cash provided by our operating activities for the three months ended March 31, 2023 was $1.8 million primarily on account of the following factors: our net loss for the period of $2.1 million; a source of $2.3 million from non-cash expenses consisting of depreciation and amortization of $1.1 million, stock-based compensation of $1.0 million, pension costs of $0.3 million; partially offset by a decrease in deferred taxes of $0.1 million. Net changes from working capital accounts further sourced an additional $1.6 million in working capital, mainly from a decrease in accounts receivable of $1.1 million, a decrease in prepaid expenses and other current assets of $0.2 million; an increase in accrued salaries, wages and related benefits of $0.6 million and an increase in income and other taxes of $0.3 million; offset in part by a decrease in accounts payable, accrued expenses and other of $0.6 million. Refer to the condensed consolidated statements of cash flows for further details.
Cash used in our operating activities for the three months ended March 31, 2022 was $1.5 million primarily on account of the following factors: our net loss for the period of $2.9 million; a source of $1.6 million from non-cash expenses consisting of depreciation and amortization of $0.9 million, stock-based compensation of $0.5 million, a loss of $0.1 million on termination of one of our operating lease contracts and $0.1 million due to other non-cash transactions. Net changes from working capital accounts further utilized an additional $0.2 million in working capital, mainly from an increase in accounts payable and accrued expenses of $0.5 million and an increase in accrued salaries, wages and related benefits of $0.4 million; offset in part by a decrease in accounts receivable of $0.5 million and a net reduction in other working capital accounts of $0.2 million. Refer to the condensed consolidated statements of cash flows for further details.
Net Cash Used in Investing Activities
For the three months ended March 31, 2023 and 2022, cash used in our investing activities was $1.7 million and $1.9 million, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software.
During the next 12 months, it is anticipated that capital expenditures for capitalized developed software and ongoing technology, equipment and infrastructure upgrades will approximate to $6.5 million, a portion of which we may finance.
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Net Cash Provided by (Used in) Financing Activities
Cash provided by financing activities for the three months ended March 31, 2023 was primarily from proceeds of stock option exercises of $0.3 million.
Cash used in financing activities for the three months ended March 31, 2022 was primarily for payments of long-term obligations of $39,000, offset in part by proceeds from stock option exercises of $26,000 and redemption of non-controlling interest of $1,000.
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, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our condensed consolidated results of operations and financial position.
The significant accounting policies used in preparing our condensed consolidated financial statements contained in this Report are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted, and we believe those critical accounting policies affect our more significant estimates and judgments in the preparation of our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of March 31, 2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of March 31, 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 three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 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
For 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, 2022, as supplemented by the following additional risk factors, which shall be deemed to replace, in its entirety, the risk factor in our Annual Report on Form 10-K entitled, “We have no bank facilities or line of credit.”
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 March 31, 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 March 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited); (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 and (v) Notes to Condensed Consolidated Financial Statements (unaudited). | |
104 | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* | Filed herewith. |
** | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
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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: | May 11, 2023 | /s/ Jack S. Abuhoff | ||
Jack S. Abuhoff | ||||
Chief Executive Officer and President | ||||
Date: | May 11, 2023 | /s/ Marissa B. Espineli | ||
Marissa B. Espineli | ||||
Interim Chief Financial Officer | ||||
(Principal Financial Officer and | ||||
Principal Accounting Officer) | ||||
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