ThZeal - The Zeal

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2023

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-35774

INNODATA INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3475943
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

55 Challenger Road	07660
Ridgefield Park, New Jersey	(Zip Code)
(Address of principal executive offices)

(201) 371-8000

(Registrant’s telephone number, including area code)

None

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	INOD	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of July 31, 2023 was 28,298,701.

Table of Contents

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended June 30, 2023

INDEX

	Part I – Financial Information
		Page No.
Item 1.	Financial Statements
	Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2023 and 2022	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the six months ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

	Part II – Other Information

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signatures		48

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)


	June 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	13,652	$	9,792
Short term investments – other		14		507
Accounts receivable, net of allowance for doubtful accounts		8,359		9,528
Prepaid expenses and other current assets		3,839		3,858
Total current assets		25,864		23,685
Property and equipment, net		2,430		2,511
Right-of-use-asset, net		3,938		4,309
Other assets		2,229		1,498
Deferred income taxes, net		1,586		1,475
Intangibles, net		13,489		12,526
Goodwill		2,069		2,038
Total assets	$	51,605	$	48,042

LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,718	$	2,630
Accrued expenses and other		5,219		7,250
Accrued salaries, wages and related benefits		6,802		6,136
Income and withholding taxes		4,999		3,230
Long-term obligations - current portion		1,063		877
Operating lease liability - current portion		582		693
Total current liabilities		21,383		20,816
Deferred income taxes, net		17		65
Long-term obligations, net of current portion		6,450		5,079
Operating lease liability, net of current portion		3,828		4,036
Total liabilities		31,678		29,996

Commitments and contingencies
Non-controlling interests		(724)		(727)

STOCKHOLDERS’ EQUITY:
Serial preferred stock; 4,998,000 shares authorized, none outstanding		-		-
Common stock, $.01 par value; 75,000,000 shares authorized; 31,483,000 shares issued and 28,299,000 outstanding at June 30, 2023 and 30,589,000 shares issued and 27,405,000 outstanding at December 31, 2022		315		306
Additional paid-in capital		39,966		35,815
Deficit		(11,706)		(8,775)
Accumulated other comprehensive loss		(1,459)		(2,108)
		27,116		25,238
Less: treasury stock, 3,184,000 shares at June 30, 2023 and December 31, 2022 at cost		(6,465)		(6,465)
Total stockholders’ equity		20,651		18,773
Total liabilities, non-controlling interests and stockholders’ equity	$	51,605	$	48,042

See notes to Condensed Consolidated Financial Statements.

Table of Contents

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended
	June 30,
	2023		2022
Revenues	$	19,655	$	19,987
Operating costs and expenses:
Direct operating costs		12,715		12,992
Selling and administrative expenses		7,574		10,277
Interest income, net		(7)		(1)
		20,282		23,268
Loss before provision for income taxes		(627)		(3,281)
Provision for income taxes		188		550
Consolidated net loss		(815)		(3,831)
Income attributable to non-controlling interests		-		2
Net loss attributable to Innodata Inc. and Subsidiaries	$	(815)	$	(3,833)
Loss per share attributable to Innodata Inc. and Subsidiaries:
Basic and Diluted	$	(0.03)	$	(0.14)

Weighted average shares outstanding:
Basic and Diluted		27,860		27,226

Other Comprehensive Loss:
Consolidated Net loss	$	(815)	$	(3,831)
Pension liability adjustment, net of taxes		(4)		38
Foreign currency translation adjustment		67		(600)
Change in fair value of derivatives, net of taxes		108		(541)
Other comprehensive income (loss)		171		(1,103)
Total Comprehensive loss		(644)		(4,934)
Less: Comprehensive income attributable to non-controlling interest		-		2
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries	$	(644)	$	(4,936)

See notes to Condensed Consolidated Financial Statements.

Table of Contents

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)


	Six Months Ended
	June 30,
	2023		2022
Revenues	$	38,494	$	41,179
Operating costs and expenses:
Direct operating costs		25,589		26,406
Selling and administrative expenses		15,371		20,467
Interest expense, net		56		2
		41,016		46,875
Loss from operations		(2,522)		(5,696)
Provision for income taxes		406		1,025
Consolidated net loss		(2,928)		(6,721)
Income (loss) attributable to non-controlling interests		3		(73)
Net Loss attributable to Innodata Inc. and Subsidiaries	$	(2,931)	$	(6,648)
Loss per share attributable to Innodata Inc. and Subsidiaries:
Basic and Diluted	$	(0.11)	$	(0.24)
Weighted average shares outstanding:
Basic and Diluted		27,661		27,192
Other Comprehensive Loss:
Consolidated Net loss	$	(2,928)	$	(6,721)
Pension liability adjustment, net of taxes		(9)		78
Foreign currency translation adjustment		127		(626)
Change in fair value of derivatives, net of taxes		531		(536)
Other comprehensive income (loss)		649		(1,084)
Total Comprehensive loss		(2,279)		(7,805)
Less: Comprehensive income (loss) attributable to non-controlling interests		3		(73)
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries	$	(2,282)	$	(7,732)

See notes to Condensed Consolidated Financial Statements.

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INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Consolidated net loss	$	(2,928)	$	(6,721)
Adjustments to reconcile consolidated net loss to net cash
provided by operating activities:
Depreciation and amortization		2,242		1,824
Stock-based compensation		1,981		1,565
Deferred income taxes		(142)		167
Pension cost		538		303
Loss on lease termination		-		125
Changes in operating assets and liabilities:
Accounts receivable		1,270		274
Prepaid expenses and other current assets		634		(148)
Other assets		45		243
Accounts payable, accrued expenses and other		(1,856)		(1,647)
Accrued salaries, wages and related benefits		658		(35)
Income and withholding taxes*		1,741		178
Net cash provided by (used in) operating activities		4,183		(3,872)

Cash flows from investing activities:
Capital expenditures		(3,012)		(3,638)
Proceeds from short term investments - other		493		-
Net cash used in investing activities		(2,519)		(3,638)

Cash flows from financing activities:
Proceeds from stock option exercises		2,179		180
Payment of long-term obligations		(192)		(477)
Net cash provided by (used in) financing activities		1,987		(297)

Effect of exchange rate changes on cash and cash equivalents		209		(614)

Net increase (decrease) in cash and cash equivalents		3,860		(8,421)

Cash and cash equivalents, beginning of period		9,792		18,902

Cash and cash equivalents, end of period	$	13,652	$	10,481

Supplemental disclosures of cash flow information:
Vendor financed software licenses acquired	$	1,162	$	-
Cash paid for income taxes	$	380	$	696
Cash paid for operating leases	$	799	$	974
Cash paid for interest	$	132	$	4

* includes withholding tax on stock option exercises of $1.5 million

See notes to Condensed Consolidated Financial Statements.

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INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 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	30,589	$	306	$	35,815	$	(8,775)	$	(2,108)	(3,184)	$	(6,465)	$	18,773
Net loss attributable to Innodata Inc. and subsidiaries	-		-		-		(2,116)		-	-		-		(2,116)
Stock-based compensation	-		-		962		-		-	-		-		962
Stock option exercises	148		1		320		-		-	-		-		321
Shares withheld for exercise net settlement	(3)		-		-		-		-	-		-		-
Pension liability adjustments, net of taxes	-		-		-		-		(5)	-		-		(5)
Foreign currency translation adjustment	-		-		-		-		60	-		-		60
Change in fair value of derivatives, net of taxes	-		-		-		-		423	-		-		423
March 31, 2023	30,734	$	307	$	37,097	$	(10,891)	$	(1,630)	(3,184)	$	(6,465)	$	18,418
Net loss attributable to Innodata Inc. and subsidiaries	-		-		-		(815)		-	-		-		(815)
Stock-based compensation	-		-		1,019		-		-	-		-		1,019
Stock option exercises	749		8		1,850		-		-	-		-		1,858
Pension liability adjustments, net of taxes	-		-		-		-		(4)	-		-		(4)
Foreign currency translation adjustment	-		-		-		-		67	-		-		67
Change in fair value of derivatives, net of taxes	-		-		-		-		108	-		-		108
June 30, 2023	31,483	$	315	$	39,966	$	(11,706)	$	(1,459)	(3,184)	$	(6,465)	$	20,651

January 1, 2022	30,347	$	303	$	35,121	$	3,160	$	(2,192)	(3,184)	$	(6,465)	$	29,927
Net loss attributable to Innodata Inc. and subsidiaries	-		-		-		(2,815)		-	-		-		(2,815)
Stock-based compensation	-		-		537		-		-	-		-		537
Stock option exercises	23		1		26		-		-	-		-		27
Shares withheld for taxes on restricted shares vesting	(7)		-		(53)		-		-	-		-		(53)
Redemption of non-controlling interest	-		-		(2,864)		-		-	-		-		(2,864)
Pension liability adjustments, net of taxes	-		-		-		-		40	-		-		40
Foreign currency translation adjustment	-		-		-		-		(26)	-		-		(26)
Change in fair value of derivatives, net of taxes	-		-		-		-		5	-		-		5
March 31, 2022	30,363	$	304	$	32,767	$	345	$	(2,173)	(3,184)	$	(6,465)	$	24,778
Net loss attributable to Innodata Inc. and subsidiaries	-		-		-		(3,833)		-	-		-		(3,833)
Stock-based compensation	-		-		1,028		-		-	-		-		1,028
Stock option exercises	124		1		152		-		-	-		-		153
Redemption of non-controlling interest	-		-		(1)		-		-	-		-		(1)
Pension liability adjustments, net of taxes	-		-		-		-		38	-		-		38
Foreign currency translation adjustment	-		-		-		-		(600)	-		-		(600)
Change in fair value of derivatives, net of taxes	-		-		-		-		(541)	-		-		(541)
June 30, 2022	30,487	$	305	$	33,946	$	(3,488)	$	(3,276)	(3,184)	$	(6,465)	$	21,022

See notes to Condensed Consolidated Financial Statements.

Table of Contents

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 June 30, 2023 and December 31, 2022, the results of its operations and comprehensive loss for the three and six months ended June 30, 2023 and 2022, cash flows for the six months ended June 30, 2023 and 2022, and stockholders’ equity for the three and six months ended June 30, 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.

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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 12 months or less. The Company reviews these prepaid acquisition costs on a periodic basis to determine the need to adjust the carrying values for early-terminated contracts. Included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets are contract acquisition costs amounting to $0.7 million and $0.8 million as of June 30, 2023 and December 31, 2022, respectively. These acquisition costs relate to our Agility segment and are amortized over the term of the subscription agreement which normally has a duration of 12 months or less.

Foreign Currency Translation - The functional currency of the Company’s 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 June 30, 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 $18,000 and ($747,000) for the three months ended June 30, 2023 and 2022, and $327,000 and ($1,166,000) for the six months ended June 30, 2023 and 2022, respectively.

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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 three to ten years. All other research and maintenance costs are expensed as incurred.

Income Taxes - Estimated deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is more likely than not that all or some portion of the estimated deferred tax assets will not be realized. While the Company considers future taxable income in assessing the need for the valuation allowance, in the event that the Company anticipates that it will be able to realize the estimated deferred tax assets in the future in excess of its net recorded amount, an adjustment to the provision for deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company anticipates that it will not be able to realize the estimated deferred tax assets in the future considering future taxable income, an adjustment to the provision for deferred tax assets would decrease income in the period such determination was made.

In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the United States, Canadian and European (principally Germany and the United Kingdom) deferred tax assets will not be realizable. As the expectation of future taxable income cannot be predicted with certainty, the Company maintains a valuation allowance against all the United States, Canadian and European (principally Germany and the United Kingdom) net deferred tax assets. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change.

The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue as a liability the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.

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.

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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 six months ended June 30, 2023 (in thousands):


	Amount
Balance - December 31, 2022	$	4,366
Net deferred revenue in the period		8,059
Revenue recognized		(9,500)
Currency translations and other adjustments		111
Balance - June 30, 2023	$	3,036

New Accounting Pronouncements - There were no new accounting pronouncements during the quarter that were applicable to the Company.

2. Short Term Investments – other

The Short-term investments include investments made by the Company in treasury bills and certificates of deposit which are considered as highly liquid investments having a maturity period of less than one year.


	June 30,		December 31,
	2023		2022
Treasury bills	$	-	$	494
Certificates of deposit		14		13
Total	$	14	$	507

3. Accounts Receivable

Accounts receivable consists of the following:


	June 30,		December 31,
	2023		2022
Gross Accounts receivable	$	9,579	$	10,741
Allowance for doubtful accounts		(1,220)		(1,213)
Accounts receivable, net	$	8,359	$	9,528

As of January 1, 2023, the Company has adopted ASU 2019-04 (Codification Improvements to Topic 326, Financial Instruments—Credit Losses), and based on its assessment there was no impact on the financial statements or other related disclosures. The basis of allowance for doubtful accounts remains similar to the earlier adopted estimation procedure which is further elaborated in the paragraph below.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We maintain an allowance for credit losses for estimated losses resulting from the failure of our customers to make the required payments and provisions for billing adjustments relating to quality issues on delivered services. The allowance for credit losses is based on a review of specifically identified accounts and an overall aging analysis applied to accounts pooled based on similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices, and current economic trends based on our expectations over the expected life of the receivables, generally ninety days or less. Actual credit losses could differ from those estimates.

Activity in the allowance for the credit losses for the three and six months ended June 30, 2023 was as follows (in thousands):


	Amount
Balance - January 1, 2023	$	1,213
Additions charged to expense		180
Write-offs against allowance		(230)
Foreign currency translation adjustment		3
Balance - March 31, 2023	$	1,166
Additions charged to expense		152
Write-offs against allowance		(101)
Foreign currency translation adjustment		3
Balance - June 30, 2023	$	1,220

4. Goodwill and Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2023 was as follows (in thousands):


Balance - January 1, 2023	$	2,038
Foreign currency translation adjustment		31
Balance - June 30, 2023	$	2,069

The fair value measurement of goodwill for the Agility segment was classified within Level 3 of the fair value hierarchy because the Company used the income approach, which utilizes significant inputs that are unobservable in the market and the market multiple approach 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 $2.1 million as of June 30, 2023, and $2.0 million as of December 31, 2022.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2023
					Foreign
	Gross				Currency		Net
	Carrying		Accumulated		Translation		Carrying
	Value		Amortization		Adjustment		Value
Acquired Intangible Assets
Developed technology	$	2,999	$	(2,489)	$	7	$	517
Customer relationships		2,096		(1,557)		8		547
Trademarks and tradenames		852		(747)		2		107
Patents		43		(38)		-		5
Media Contact Database		3,492		(2,445)		17		1,064
Total Acquired Intangible Assets	$	9,482	$	(7,276)	$	34	$	2,240

Capitalized Developed Software
Capitalized Developed Software	$	12,608	$	(5,419)	$	88	$	7,277
Capitalized Developed Software - in Progress		3,979		-		(7)		3,972
Total Capitalized Developed Software	$	16,587	$	(5,419)	$	81	$	11,249

Total	$	26,069	$	(12,695)	$	115	$	13,489


	December 31, 2022
					Foreign
	Gross				Currency		Net
	Carrying		Accumulated		Translation		Carrying
	Value		Amortization		Adjustment		Value
Acquired Intangible Assets
Developed technology	$	3,169	$	(2,468)	$	(43)	$	658
Customer relationships		2,228		(1,560)		(42)		626
Trademarks and tradenames		880		(740)		(8)		132
Patents		45		(38)		1		8
Media Contact Database		3,648		(2,358)		(68)		1,222
Total Acquired Intangible Assets	$	9,970	$	(7,164)	$	(160)	$	2,646

Capitalized Developed Software
Capitalized Developed Software	$	11,845	$	(4,398)	$	(348)	$	7,099
Capitalized Developed Software - in Progress		2,787		-		(6)		2,781
Total Capitalized Developed Software	$	14,632	$	(4,398)	$	(354)	$	9,880

Total	$	24,602	$	(11,562)	$	(514)	$	12,526

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(Unaudited)

Amortization expense relating to acquired intangible assets was $0.2 million for each of the three-month periods ended June 30, 2023 and 2022. Amortization expense relating to acquired intangible assets was $0.4 million and $0.5 million for the six-month periods ended June 30, 2023 and 2022, respectively.

Amortization expense relating to capitalized developed software was $0.6 million and $0.4 million for the three-month periods ended June 30, 2023 and 2022, respectively. Amortization expense relating to capitalized developed software was $1.2 million and $0.8 million for the six-month periods ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, estimated future amortization expense for intangible assets was as follows (in thousands):


Year	Amortization
2023	$	3,049
2024		4,378
2025		3,451
2026		940
2027		460
Thereafter		1,211
	$	13,489

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 six months ended June 30, 2023 and 2022, respectively, are summarized in the table below:


	For the Six Months
	Ended June 30,
	2023		2022
Federal income tax expense at statutory rate	(21.0)	%	(21.0)	%
Effect of:
Change in valuation allowance	51.3		40.3
Foreign operations permanent difference - foreign exchange gains and losses	4.7		2.1
Tax effects of foreign operations	3.8		1.2
Increase in unrecognized tax benefits (ASC 740)	2.6		1.2
State income tax net of federal benefit	0.4		0.2
Return to provision true up	(0.6)		2.0
Foreign rate differential	(1.5)		(6.3)
Deemed interest	(7.1)		-
Effect of stock based compensation	(22.7)		(1.0)
Other	6.2		(0.7)
Effective tax rate	16.1	%	18.0	%

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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 six months ended June 30, 2023 (in thousands):


	Unrecognized
	tax benefits
Balance - January 1, 2023	$	1,680
Increase for current period tax positions		87
Decrease for prior period tax positions		(68)
Interest accrual		46
Foreign currency remeasurement		7
Balance - June 30, 2023	$	1,752

The Company expects that unrecognized tax benefits as of June 30, 2023, if recognized, would have a material impact on the Company’s effective tax rate.

Tax Assessments

In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. The Company disagrees with the Service Tax Department’s position. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department’s position. The Company is contesting this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between 12.36% and 15%, and this subsidiary may also be liable for interest and penalties. The revenue of the Company’s Indian subsidiary during this period was approximately $57.0 million. In accordance with new rules promulgated by the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on the Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.

In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $121,000 previously granted to the Company’s Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services and not BS Services. The appeal was determined in favor of the Service Tax Department. The Company disagrees with the basis of this decision and is contesting it. The Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently has service tax credits of approximately $0.8 million recorded as a receivable. Based on the Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.

Substantial recovery against the Company in the above referenced 2015 Service Tax Department case could have a material adverse impact on the Company, and unfavorable rulings or recoveries in other tax proceedings could have a material adverse impact on the consolidated operating results of the period (and subsequent periods) in which the rulings or recovery occurs.

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6. Operating Leases

The Company has various lease agreements for its offices and service delivery centers. These lease agreements are for terms ranging from two to eleven years and, in most cases, provide for annual escalations ranging from 1.75% to 10%. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases. Lease agreements with a term of less than one year are treated as short-term leases and are accounted for separately as shown in the table below.

Most of the lease agreements are renewable at the mutual consent of the parties to the contract.

The table below summarizes the amounts recognized in the condensed consolidated financial statements related to operating leases for the periods presented (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Rent expense for long-term operating leases	$	312	$	337	$	621	$	713
Rent expense for short-term operating leases		83		144		178		261
Total rent expense	$	395	$	481	$	799	$	974

The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the condensed consolidated balance sheet as of June 30, 2023 (in thousands):


Year	Amount
2023	$	513
2024		932
2025		956
2026		970
2027		926
2028 and thereafter		1,553
Total lease payments		5,850
Less: Interest		(1,440)
Net present value of lease liabilities	$	4,410

Current portion	$	582
Long-term portion		3,828
Total	$	4,410

The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of June 30, 2023 were as follows:


Weighted-average lease term remaining (in months)	47
Weighted-average discount rate	9.13	%

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7. Long-term obligations

Total long-term obligations as of June 30, 2023 and December 31, 2022 consisted of the following (in thousands):


	June 30,		December 31,
	2023		2022
Pension obligations - accrued pension liability	$	6,431	$	5,906
Settlement agreement		-		50
Microsoft licenses ⁽¹⁾		1,082		-
		7,513		5,956
Less: Current portion of long-term obligations		1,063		877
Totals	$	6,450	$	5,079

⁽¹⁾ In March 2023, the Company renewed a vendor agreement to acquire certain additional software licenses, receive technical support and future software upgrades on software licenses through February 2026. Pursuant to this agreement, the Company is contractually liable to pay approximately $0.4 million annually over the term of the agreement.

8. Commitments and Contingencies

Litigation – In 2008, a judgment was rendered in the Philippines against a Philippine subsidiary of the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the Philippine subsidiary. The potential payment amount aggregates to approximately $5.9 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The potential payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to themselves in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (“USDC”) entered a preliminary injunction that enjoins these former employees from pursuing or seeking recognition or enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and until further order of the USDC. In June 2018, the USDC entered a consent order administratively closing the action subject to return of the action to the active docket upon the written request of Innodata Inc. or the former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction remaining in full force and effect.

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

While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced Philippine action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidated operating results in the period in which the ruling or recovery occurs. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above referenced legal proceedings could change in the future.

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(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 $450,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.

9. Stock Options and Restricted Stock Units

The stock-based compensation expense related to the Company’s Equity Plans (as defined below) was allocated as follows (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Direct operating costs	$	62	$	56	$	126	$	107
Selling and administrative expenses		957		972		1,855		1,458
Total stock-based compensation	$	1,019	$	1,028	$	1,981	$	1,565

Stock Options

2013 Plan

A summary of option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 (the “2013 Plan”) and changes during each of the six-month periods ended June 30, 2023 and 2022 are presented below:


				Weighted - Average
	Number of	Weighted - Average		Remaining Contractual	Aggregate
	Options	Exercise Price		Term (years)	Intrinsic Value
Outstanding at January 1, 2023	6,690,490	$	3.09
Granted*	25,000		3.31
Exercised	(871,884)		2.34
Forfeited/Expired	(75,766)		6.96
Outstanding at June 30, 2023	5,767,840	$	3.16	6.84	$	47,137,674

Exercisable at June 30, 2023	3,600,261	$	1.91	5.73	$	33,897,858

Vested and Expected to Vest at June 30, 2023	5,767,840	$	3.16	6.84	$	47,137,674

*Granted to a non-employee member of the Company’s advisory board.

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(Unaudited)


				Weighted - Average
	Number of	Weighted - Average		Remaining Contractual	Aggregate
	Options	Exercise Price		Term (years)	Intrinsic Value
Outstanding at January 1, 2022	5,536,896	$	2.66
Granted*	1,479,558		5.21
Exercised	(146,705)		1.17
Forfeited/Expired	(36,000)		5.13
Outstanding at June 30, 2022	6,833,749	$	3.24	7.62	$	13,923,020

Exercisable at June 30, 2022	3,578,045	$	1.81	6.40	$	11,195,079

Vested and Expected to Vest at June 30, 2022	6,833,749	$	3.24	7.62	$	13,923,020

*Includes 110,000 stock options granted to a non-employee director of the Company.

2021 Plan

A summary of option activity under the Innodata Inc. 2021 Equity Compensation Plan, as amended and restated effective as of April 11, 2022 (the “2021 Plan”) and changes during each of the six-month periods ended June 30, 2023 and 2022 are presented below.


				Weighted - Average
	Number of	Weighted - Average		Remaining Contractual	Aggregate
	Options	Exercise Price		Term (years)	Intrinsic Value
Outstanding at January 1, 2023	1,027,500	$	3.46
Granted	-		-
Exercised	(25,000)		6.40
Forfeited/Expired	(42,000)		3.41
Outstanding at June 30, 2023	960,500	$	3.38	9.27	$	7,634,060

Exercisable at June 30, 2023	18,750	$	3.39	9.21	$	148,875

Vested and Expected to Vest at June 30, 2023	960,500	$	3.38	9.27	$	7,634,060

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				Weighted - Average
	Number of	Weighted - Average		Remaining Contractual	Aggregate
	Options	Exercise Price		Term (years)	Intrinsic Value
Outstanding at January 1, 2022	-	$	-
Granted*	25,000		6.40
Exercised	-		-
Forfeited/Expired	-		-
Outstanding at June 30, 2022	25,000	$	6.40	5.00	$	-

Exercisable at June 30, 2022	-	$	-

Vested and Expected to Vest at June 30, 2022	25,000	$	6.40	5.00	$	-

*Granted to a non-employee member of the Company’s advisory board.

During the six months ended June 30, 2023, a total of 896,884 options were exercised at an average price of $2.50.

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted, and weighted-average assumptions were as follows:


	For the Six Months Ended June 30,
	2023			2022
Weighted average fair value of options granted	$	1.79		$	3.10
Risk-free interest rate		3.88	%		1.94%-2.75	%
Expected term (years)		3.0			3.0-6.42
Expected volatility factor		79.95	%		62%-76.48	%
Expected dividends		-			-

The compensation cost related to non-vested stock options not yet recognized as of June 30, 2023 totaled approximately $5.4 million. The weighted-average period over which these costs will be recognized is 20 months.

Restricted Stock Awards

There were no outstanding awards of restricted stock under the 2013 Plan or the 2021 Plan (collectively, the “Equity Plans”) during each of the six-month periods ended June 30, 2023 and 2022.

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Restricted Stock Units

Restricted stock unit activity under the Equity Plans during each of the six-month periods ended June 30, 2023 and 2022 are presented below:


	Number of	Weighted-Average
	Restricted Stock	Grant Date
	Units	Fair Value
Unvested at January 1, 2023	700,000	$	5.59
Granted	28,804		8.29
Vested	-		-
Forfeited/Expired	-		-
Unvested at June 30, 2023	728,804	$	5.70

For the six months ended June 30, 2023, a total of 28,804 restricted stock units (“RSUs”) were granted under the 2013 Plan. Vesting of the RSUs is contingent on continuous employment by the employee for a 12-month period from the date of grant. Each fully vested RSU represents the right to receive one share of the Company’s common stock or the fair market value of one share of common stock, at the Company’s discretion, and is classified as an equity award. The stock-based compensation expense is recognized on a straight-line basis over a period of 12 months. The fair value of restricted stock units is based on the closing price of the stock at the time of the grant.


	Number of	Weighted-Average
	Restricted Stock	Grant Date
	Units	Fair Value
Unvested at January 1, 2022	-	$	-
Granted	700,000		5.59
Vested	-		-
Forfeited/Expired	-		-
Unvested at June 30, 2022	700,000	$	5.59

For the six months ended June 30, 2022, 200,000 performance-based RSUs were granted under the 2013 Plan and 500,000 performance-based RSUs were granted under the 2021 plan. The 700,000 performance based RSUs remain outstanding and unvested at June 30, 2023. Vesting of the performance based RSUs is contingent on the achievement of certain financial performance goals and continuation of employment for a defined period. Each RSU vests pursuant to the vesting schedule found in the respective RSU agreement. The fair value of restricted stock units is estimated on the date of grant using the Binomial option pricing model.

The compensation cost related to non-vested restricted stock units not yet recognized as of June 30, 2023 totaled approximately $3.0 million. The weighted-average period over which these costs will be recognized is 20 months.

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10. Comprehensive loss

Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustment and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive loss as of June 30, 2023 and 2022, and reclassifications from accumulated other comprehensive loss for the three and six months then ended, are presented below (in thousands):


					Foreign Currency
	Pension Liability		Fair Value of		Translation		Accumulated Other
	Adjustment		Derivatives		Adjustment		Comprehensive Loss
Balance at April 1, 2023	$	(91)	$	58	$	(1,597)	$	(1,630)
Other comprehensive income before reclassifications, net of taxes		-		2		67		69
Total other comprehensive income (loss) before reclassifications, net of taxes		(91)		60		(1,530)		(1,561)
Net amount reclassified to earnings		(4)		106		-		102
Balance at June 30, 2023	$	(95)	$	166	$	(1,530)	$	(1,459)


					Foreign Currency
	Pension Liability		Fair Value of		Translation		Accumulated Other
	Adjustment		Derivatives		Adjustment		Comprehensive Loss
Balance at January 1, 2023	$	(86)	$	(365)	$	(1,657)	$	(2,108)
Other comprehensive income before reclassifications, net of taxes		-		244		127		371
Total other comprehensive loss before reclassifications, net of taxes		(86)		(121)		(1,530)		(1,737)
Net amount reclassified to earnings		(9)		287		-		278
Balance at June 30, 2023	$	(95)	$	166	$	(1,530)	$	(1,459)


					Foreign Currency
	Pension Liability		Fair Value of		Translation		Accumulated Other
	Adjustment		Derivatives		Adjustment		Comprehensive Loss
Balance at April 1, 2022	$	(818)	$	(348)	$	(1,007)	$	(2,173)
Other comprehensive loss before reclassifications, net of taxes		-		(744)		(600)		(1,344)
Total other comprehensive loss before reclassifications, net of taxes		(818)		(1,092)		(1,607)		(3,517)
Net amount reclassified to earnings		38		203		-		241
Balance at June 30, 2022	$	(780)	$	(889)	$	(1,607)	$	(3,276)

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(Unaudited)


					Foreign Currency
	Pension Liability		Fair Value of		Translation		Accumulated Other
	Adjustment		Derivatives		Adjustment		Comprehensive Loss
Balance at January 1, 2022	$	(858)	$	(353)	$	(981)	$	(2,192)
Other comprehensive loss before reclassifications, net of taxes		-		(822)		(626)		(1,448)
Total other comprehensive loss before reclassifications, net of taxes		(858)		(1,175)		(1,607)		(3,640)
Net amount reclassified to earnings		78		286		-		364
Balance at June 30, 2022	$	(780)	$	(889)	$	(1,607)	$	(3,276)

Taxes related to each component of other comprehensive loss were not material for each of the three and six-month periods presented and therefore are not disclosed separately.

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

11. Segment reporting and concentrations

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

The DDS segment provides AI 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.

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenues:
DDS	$	13,180	$	14,181	$	25,927	$	30,092
Synodex		2,112		1,945		3,976		3,614
Agility		4,363		3,861		8,591		7,473
Total Consolidated	$	19,655	$	19,987	$	38,494	$	41,179

Income (loss) before provision for income taxes⁽¹⁾:
DDS	$	(216)	$	(72)	$	(497)	$	1,381
Synodex		(22)		(831)		(133)		(1,819)
Agility		(389)		(2,378)		(1,892)		(5,258)
Total Consolidated	$	(627)	$	(3,281)	$	(2,522)	$	(5,696)

Income (loss) before provision for income taxes⁽²⁾:
DDS	$	(368)	$	(250)	$	(792)	$	1,046
Synodex		121		(680)		135		(1,540)
Agility		(380)		(2,351)		(1,865)		(5,202)
Total Consolidated	$	(627)	$	(3,281)	$	(2,522)	$	(5,696)


	June 30, 2023		December 31, 2022
Total assets:
DDS	$	29,012	$	25,758
Synodex		3,438		3,270
Agility		19,155		19,014
Total Consolidated	$	51,605	$	48,042


	June 30, 2023		December 31, 2022
Goodwill:
Agility	$	2,069	$	2,038
Total	$	2,069	$	2,038

(1)	Before elimination of any inter-segment profits

(2)	After elimination of any inter-segment profits

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The table below shows intersegment revenues which are eliminated in consolidation (in thousands).


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenues of DDS Segment from:
Synodex	$	488	$	487	$	935	$	943
Agility		31		38		63		72
Totals	$	519	$	525	$	998	$	1,015

Revenues for the three and six-month periods ended June 30, 2023 and 2022 by geographic region (determined based upon customer’s domicile), were as follows (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
United States	$	10,960	$	12,385	$	22,196	$	25,777
United Kingdom		2,898		2,558		5,453		5,640
Canada		2,193		1,439		3,805		2,816
The Netherlands		1,762		1,717		3,485		3,369
Others - principally Europe		1,842		1,888		3,555		3,577
Totals	$	19,655	$	19,987	$	38,494	$	41,179

Long lived assets by geographic region

Long-lived assets as of June 30, 2023 and December 31, 2022 by geographic region were comprised of (in thousands):


	June 30,		December 31,
	2023		2022
United States	$	8,422	$	7,205

Foreign countries:
Canada		7,612		7,675
Philippines		3,550		3,682
United Kingdom		1,136		1,198
India		788		1,195
Sri Lanka		416		426
Israel		2		3
Total foreign		13,504		14,179
Totals	$	21,926	$	21,384

Long-lived assets include the unamortized balance of right-of-use assets amounting to $3.9 million and $4.3 million as of June 30, 2023 and December 31, 2022, respectively.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

One customer in the DDS segment generated approximately 10% of the Company’s total revenues for each of the three-month periods ended June 30, 2023 and 2022. Another customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended June 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended June 30, 2023 and 2022, revenues from non-U.S. customers accounted for 44% and 38%, respectively, of the Company’s total revenues.

Two customers in the DDS segment generated approximately 10.7% and 10.6%, respectively, of the Company’s total revenues for the six months ended June 30, 2023. Another customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 42% and 38% of the Company’s total revenues for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, approximately 49% of the Company’s accounts receivable was due from foreign (principally European) customers and 25% of the Company’s accounts receivable was due from two customers. As of December 31, 2022, approximately 44% of the Company’s accounts receivable was due from foreign (principally European) customers and 45% of the Company’s accounts receivable was due from four customers. No other customer accounted for 10% or more of the accounts receivable as of June 30, 2023 and December 31, 2022.

12. Loss Per Share


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net loss attributable to Innodata Inc. and Subsidiaries	$	815	$	3,833	$	2,931	$	6,648
Weighted average common shares outstanding		27,860		27,226		27,661		27,192
Dilutive effect of outstanding options		-		-		-		-
Adjusted for dilutive computation		27,860		27,226		27,661		27,192

Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the year. Diluted income (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted-average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two-class” method of computing income (loss) per share is used.

Options to purchase 6.7 million shares of common stock for each of the three and six-month periods ended June 30, 2023 and 2022, were outstanding but not included in the computation of diluted loss per share because the effect would have been anti-dilutive.

13. 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.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period of up to 12 months. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded to Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) is 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 $10.9 million and $14.2 million as of June 30, 2023 and December 31, 2022, respectively.

The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 (in thousands):


	Balance Sheet Location	Fair Value
		June 30,		December 31,
		2023		2022
Derivatives designated as hedging instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	$	166	$	-
Foreign currency forward contracts	Accrued expenses and other	$	-	$	365

The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net gain (loss) recognized in OCI⁽¹⁾	$	2	$	(744)	$	244	$	(822)
Net loss reclassified from accumulated OCI into income⁽²⁾	$	106	$	203	$	287	$	286
Net gain recognized in income⁽³⁾	$	-	$	-	$	-	$	-

(1)	Net change in fair value of the effective portion classified into other comprehensive income (“OCI”)

(2)	Effective portion classified within direct operating costs.

(3)	There were no ineffective portions for the period presented.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Line of Credit

On April 4, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other reserves and adjustments. As of June 30, 2023, such borrowing base calculation equaled approximately $2.9 million. The Credit Agreement contains a financial covenant that will require the Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”) plus 2.25%. The Company did not utilize the Revolving Credit Facility during the three-month period ended June 30, 2023 and through the date of filing of this Report.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking 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,” “possible,” “potential,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.

These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (“COVID-19”) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; investments in large language models; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; pipeline opportunities and customer discussions which may not materialize into work or expected volumes of work; continuing reliance on project-based work in the DDS segment and the primarily at-will nature of such contracts and the ability of these customers to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing DDS segment revenue concentration in a limited number of customers; potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; a continued downturn in or depressed market conditions; 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; our use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

Our actual results could differ materially from the results referred to in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, 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.

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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. 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.

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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 one of several indicators of our business momentum, sales and marketing efficiency, and competitive market positioning. During the six-month period ended June 30, 2023, we added 235 new customers, an average of 118 new customers per quarter. This is a 26% increase over the 93 new customers we added on average per quarter in 2021 and a 6% decrease over the 126 new customers we added on average per quarter in 2022. Importantly, in addition to the customer count, we recognize that the size and scale of new customers significantly impacts our growth trajectory. While in the first two quarters of 2023 there was a 6% decrease from the average of 126 new customers per quarter in 2022, it is noteworthy that we are placing emphasis on acquiring customers that align with our strategic goals, leading to a focus on the potential revenue value of new customer engagements over sheer number of new customer engagements.

For further information, refer to the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could 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 and six months ended June 30, 2023 and 2022 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
Consolidated	2023			2022			2023			2022

Gross Profit attributable to Innodata Inc. and Subsidiaries	$	6,940		$	6,995		$	12,905		$	14,773
Depreciation and amortization		1,124			924			2,188			1,762
Severance**		-			-			327			-
Stock-based compensation		62			56			126			107
Adjusted Gross Profit	$	8,126		$	7,975		$	15,546		$	16,642

Gross Margin		35	%		35	%		34	%		36	%
Adjusted Gross Margin		41	%		40	%		40	%		40	%

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	Three Months Ended June 30,						Six Months Ended June 30,
DDS Segment	2023			2022			2023			2022

Gross Profit attributable to DDS Segment	$	4,398		$	5,270		$	8,557		$	11,824
Depreciation and amortization		230			30			429			219
Severance**		-			-			28			-
Stock-based compensation		60			48			112			91
Adjusted Gross Profit	$	4,688		$	5,348		$	9,126		$	12,134

Gross Margin		33	%		37	%		33	%		39	%
Adjusted Gross Margin		36	%		38	%		35	%		40	%


	Three Months Ended June 30,						Six Months Ended June 30,
Synodex Segment	2023			2022			2023			2022

Gross Profit/(Loss) attributable to Synodex Segment	$	295		$	(205)		$	498		$	(435)
Depreciation and amortization		162			271			324			312
Severance**		-			-			-			-
Stock-based compensation		-			-			-			-
Adjusted Gross Profit	$	457		$	66		$	822		$	(123)

Gross Margin		14	%		(11)	%		13	%		(12)	%
Adjusted Gross Margin		22	%		3	%		21	%		(3)	%


	Three Months Ended June 30,						Six Months Ended June 30,
Agility Segment	2023			2022			2023			2022

Gross Profit attributable to Agility Segment	$	2,247		$	1,930		$	3,850		$	3,384
Depreciation and amortization		732			623			1,435			1,231
Severance**		-			-			299			-
Stock-based compensation		2			8			14			16
Adjusted Gross Profit	$	2,981		$	2,561		$	5,598		$	4,631

Gross Margin		52	%		50	%		45	%		45	%
Adjusted Gross Margin		68	%		66	%		65	%		62	%

**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.

Adjusted EBITDA

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

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The following table contains a reconciliation of U.S. GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three and six months ended June 30, 2023 and 2022 (in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
Consolidated	2023		2022		2023		2022
Net loss attributable to Innodata Inc. and Subsidiaries	$	(815)	$	(3,833)	$	(2,931)	$	(6,648)
Provision for income taxes		188		550		406		1,025
Interest expense		40		(1)		132		2
Depreciation and amortization		1,151		951		2,242		1,824
Severance**		-		-		580		-
Stock-based compensation		1,019		1,028		1,981		1,565
Non-controlling interests		-		2		3		(73)
Adjusted EBITDA (loss)	$	1,583	$	(1,303)	$	2,413	$	(2,305)


	Three Months Ended June 30,				Six Months Ended June 30,
DDS Segment	2023		2022		2023		2022
Net income (loss) attributable to DDS Segment	$	(554)	$	(651)	$	(1,195)	$	112
Provision for income taxes		186		399		400		932
Interest expense		38		(1)		130		2
Depreciation and amortization		257		57		483		281
Severance**		-		-		33		-
Stock-based compensation		865		796		1,670		1,168
Non-controlling interests		-		2		3		1
Adjusted EBITDA	$	792	$	602	$	1,524	$	2,496


	Three Months Ended June 30,				Six Months Ended June 30,
Synodex Segment	2023		2022		2023		2022
Net income (loss) attributable to Synodex Segment	$	121	$	(680)	$	135	$	(1,465)
Depreciation and amortization		162		271		324		312
Severance**		-		-		6		-
Stock-based compensation		59		50		117		99
Non-controlling interests		-		-		-		(74)
Adjusted EBITDA (loss)	$	342	$	(359)	$	582	$	(1,128)


	Three Months Ended June 30,				Six Months Ended June 30,
Agility Segment	2023		2022		2023		2022
Net loss attributable to Agility Segment	$	(382)	$	(2,502)	$	(1,871)	$	(5,295)
Provision for income taxes		2		151		6		93
Interest expense		2		-		2		-
Depreciation and amortization		732		623		1,435		1,231
Severance**		-		-		541		-
Stock-based compensation		95		182		194		298
Adjusted EBITDA (loss)	$	449	$	(1,546)	$	307	$	(3,673)

**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.

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Results of Operations

The amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.

Three Months Ended June 30, 2023 and 2022

Revenues

Total revenues were $19.7 million and $20.0 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.3 million or approximately 1%.

Revenues from the DDS segment were $13.2 million and $14.2 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $1.0 million or approximately 7%. 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 $2.1 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively, an increase of $0.2 million or approximately 11%. The increase was primarily attributable to higher volume from an existing customer .

Revenues from the Agility segment were $4.4 million and $3.9 million for the three months ended June 30, 2023 and 2022, respectively, an increase of $0.5 million or approximately 13%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

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 $12.7 million and $13.0 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.3 million or 2%. The decrease in direct operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $1.6 million primarily on account of reductions in headcount, offset in part by salary increases; an unfavorable impact of foreign exchange rate fluctuations of $0.7 million; higher content costs of $0.3 million; higher depreciation and amortization of capitalized developed software of $0.2 million and an increase in other direct operating costs of $0.1 million. Direct operating costs as a percentage of total revenues were 64% and 65% for the three months ended June 30, 2023 and 2022, respectively. The decrease 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 $8.8 million and $8.9 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.1 million or 1%. The decrease in direct operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $1.0 million primarily on account of reductions in headcount, offset in part by salary increases; an unfavorable impact of foreign exchange rate fluctuations of $0.7 million, and higher depreciation and amortization of capitalized developed software of $0.2 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 67% and 63% for the three months ended June 30, 2023 and 2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower direct operating costs.

Direct operating costs for the Synodex segment were $1.8 million and $2.2 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.4 million or 18%. The decrease in direct operating costs was primarily due to lower direct labor costs of $0.4 million and a decrease in depreciation and amortization of capitalized developed software of $0.1 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 86% and 116% for the three months ended June 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and lower direct operating costs.

Direct operating costs for the Agility segment were $2.1 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively, an increase of $0.2 million or 11%. The increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase includes higher content related costs of $0.3 million and higher depreciation and amortization of capitalized developed software of $0.1 million, offset in part by a decrease in direct labor costs of $0.2 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 48% and 49% for the three months ended June 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset in part by higher direct operating costs.

Gross Profit and Gross Margin

Gross profit is derived by revenues less direct operating costs, while Gross margin as a percentage is derived by dividing gross profit over revenues.

Gross profit was $6.9 million and $7.0 million for the three months ended June 30, 2023 and 2022, respectively. The $0.1 million decrease in gross profit was due to lower revenues, offset in part by lower direct operating costs. Gross margin was 35% for each of the three-month periods ended June 30, 2023 and 2022.

Gross profit for the DDS segment was $4.4 million and $5.3 million for the three months ended June 30, 2023 and 2022, respectively. The $0.9 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 37% for the three months ended June 30, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.

Gross profit for the Synodex segment was $0.3 million and a loss of $0.2 million for the three months ended June 30, 2023 and 2022, respectively. The $0.5 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 14% and (11%) for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment was primarily due to higher revenues and lower direct operating costs.

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Gross profit for the Agility segment was $2.2 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively. The $0.3 million increase in gross profit for the Agility segment was primarily due to higher revenues, offset in part by higher direct operating costs. Gross margin for the Agility segment was 52% and 50% for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin for the Agility segment was primarily due to higher revenues offset in part by higher direct operating costs.

Selling and Administrative Expenses

Selling and administrative expenses consist of payroll and related costs including commissions, bonuses, and stock-based compensation; marketing, advertising, trade conferences and related expenses; new services research and related software development expenses; software subscriptions; professional and consultant fees; provision for doubtful accounts and other administrative overhead expenses.

Selling and administrative expenses were $7.6 million and $10.3 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $2.7 million or 26%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $2.0 million primarily on account of headcount reduction, offset in part by salary increases; lower marketing related expenses of $0.5 million; lower recruitment and professional fees of $0.2 million, and a favorable impact of foreign exchange rate fluctuations of $0.1 million. These lower selling and administrative expenses were also offset in part by higher provisions for doubtful accounts of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 39% and 52% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower expenditures in all segments, offset in part by lower revenues in the DDS segment.

Selling and administrative expenses for the DDS segment were $4.8 million and $5.5 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.7 million or 13%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $0.7 million primarily on account of headcount reductions and lower commissions; lower recruitment and professional fees of $0.1 million; and lower marketing related expenses of $0.1 million, offset in part by higher provisions for doubtful accounts of $0.1 million and other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 36% and 39% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower selling and administrative expenses, offset in part by lower revenues.

Selling and administrative expenses for the Synodex segment were $0.2 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $0.3 million or 60%. The decrease in selling and administrative expenses was attributable to lower professional fees of $0.3 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 9% and 26% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses, and higher revenues.

Selling and administrative expenses for the Agility segment were $2.6 million and $4.3 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $1.7 million or 40%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $1.2 million primarily on account of headcount reductions; lower marketing related expenses of $0.3 million; a favorable impact of foreign exchange rate fluctuations of $0.1 million; and other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 60% and 110% for the three months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses and higher revenues.

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Income Taxes

We recorded a provision for income taxes of $0.2 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively.

Tax-related charges primarily consisted of a provision for foreign taxes recorded in accordance with local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate primarily due to losses incurred by our U.S. entities, Canadian and European principally (Germany and the United Kingdom) subsidiaries, and a valuation allowance recorded on the deferred taxes of the U.S., Canadian, German and the United Kingdom subsidiaries.

Net Income (Loss)

We incurred a net loss of $0.8 million and $3.8 million during the three months ended June 30, 2023 and 2022, respectively. The $3.0 million change was due to lower operating costs and expenses in all segments and higher revenues in the Synodex and Agility segments.

Net loss for the DDS segment was $0.6 million for each of the three-month periods ended June 30, 2023 and 2022.

Net income for the Synodex segment was $0.1 million and a loss of $0.7 million for the three months ended June 30, 2023 and 2022, respectively. The $0.8 million change was due to lower operating costs and expenses and higher revenues in the current quarter.

Net loss for the Agility segment was $0.3 million and $2.5 million for the three months ended June 30, 2023 and 2022, respectively. The $2.2 million change was due to lower operating costs and expenses and higher revenues in the current quarter.

Adjusted Gross Profit and Margin

Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit and Adjusted Gross Margin to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin” above.

Adjusted gross profit was $8.1 million and $8.0 million for the three months ended June 30, 2023 and 2022, respectively. The $0.1 million increase in adjusted gross profit was due to higher depreciation and amortization. Adjusted gross margin was 41% and 40% for the three months ended June 30, 2023 and 2022, respectively. The increase in adjusted gross margin was due to higher depreciation and amortization.

Adjusted gross profit for the DDS segment was $4.7 million and $5.3 million for the three months ended June 30, 2023 and 2022, respectively. The $0.6 million decrease in adjusted gross profit for the DDS Segment was due to lower gross profit, offset in part by higher depreciation and amortization. Adjusted gross margin for the DDS segment was 36% and 38% for the three months ended June 30, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment was due to lower gross profit, offset in part by higher depreciation and amortization.

Adjusted gross profit for the Synodex segment was $0.5 million compared to $0.1 million for the three months ended June 30, 2023 and 2022, respectively. The $0.4 million increase in adjusted gross profit in the Synodex segment was due to higher gross profit offset in part by lower depreciation and amortization. Adjusted gross margin for the Synodex segment was 22% and 3% for the three months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit offset in part by lower depreciation and amortization.

Adjusted gross profit for the Agility segment was $3.0 million and $2.6 million for the three months ended June 30, 2023 and 2022, respectively. The $0.4 million increase in adjusted gross profit for the Agility segment was due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Agility segment was 68% and 66% for the three months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit and higher depreciation and amortization.

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Adjusted EBITDA

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

Adjusted EBITDA was $1.6 million and a loss of $1.3 million for the three months ended June 30, 2023 and 2022, respectively. The $2.9 million change in Adjusted EBITDA was due to a lower net loss and higher depreciation and amortization, offset in part by a lower tax provision.

Adjusted EBITDA for the DDS segment was $0.8 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively. The $0.2 million change in Adjusted EBITDA in the DDS Segment was due to a lower net loss, higher depreciation and amortization, and stock-based compensation, offset in part by a lower tax provision.

Adjusted EBITDA for the Synodex segment was $0.3 million and a loss of $0.4 million for the three months ended June 30, 2023 and 2022, respectively. The $0.7 million change in Adjusted EBITDA in the Synodex segment was due to a lower net loss offset in part by lower depreciation and amortization.

Adjusted EBITDA for the Agility segment was $0.4 million and a loss of $1.5 million for the three months ended June 30, 2023 and 2022, respectively. The $1.9 million change in Adjusted EBITDA in the Agility segment was due to a lower net loss and higher depreciation and amortization, offset in part by lower tax provision and stock-based compensation.

Six Months Ended June 30, 2023 and 2022

Revenues

Total revenues were $38.5 million and $41.2 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $2.7 million or approximately 7%.

Revenues from the DDS segment were $25.9 million and $30.1 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $4.2 million or approximately 14%. The decrease was primarily attributable to lower volume from an existing customer offset in part by higher volume from another existing customer.

Revenues from the Synodex segment were $4.0 million and $3.6 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $0.4 million or approximately 11%. The increase was primarily attributable to higher volume from an existing customer.

Revenues from the Agility segment were $8.6 million and $7.5 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $1.1 million or approximately 15%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

Direct Operating Costs

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Direct operating costs were $25.6 million and $26.4 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.8 million or 3%. The decrease in direct operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $3.4 million primarily on account of reductions in headcount, offset in part by salary increases and non-recurring severance; an unfavorable impact of foreign exchange rate fluctuations of $1.5 million; higher depreciation and amortization of capitalized developed software of $0.4 million; higher content related cost of $0.3 million, and an increase in other direct operating costs of $0.4 million. Direct operating costs as a percentage of total revenues were 66% and 64% for the six months ended June 30, 2023 and 2022, respectively. The increase in direct operating cost as a percentage of total revenues was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.

Direct operating costs for the DDS segment were approximately $17.4 million and $18.3 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.9 million or 5%. The decrease in direct operating costs was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct and indirect labor related costs amounting to $2.8 million primarily on account of reductions in headcount, offset in part by salary increases; an unfavorable impact of foreign exchange rate fluctuations of $1.5 million; higher depreciation and amortization of capitalized developed software of $0.2 million; and an increase in other direct operating costs of $0.2 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 67% and 61% for the six months ended June 30, 2023 and 2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower direct operating costs.

Direct operating costs for the Synodex segment were $3.5 million and $4.0 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.5 million or 13%. The decrease in direct operating costs was primarily due to lower direct labor costs of $0.6 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 88% and 111% for the six months ended June 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and lower direct operating costs.

Direct operating costs for the Agility segment were $4.7 million and $4.1 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $0.6 million or 15%. The increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase includes non-recurring severance of $0.3 million; higher content related costs of $0.3 million; higher depreciation and amortization of capitalized developed software of $0.2 million, offset in part by a decrease in direct labor costs of $0.1 million and other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 55% for each of the six-month periods ended June 30, 2023 and 2022.

Gross Profit and Gross Margin

Gross profit is derived by revenues less direct operating costs, while Gross margin as a percentage is derived by dividing gross profit over revenues.

Gross profit was $12.9 million and $14.8 million for the six months ended June 30, 2023 and 2022, respectively. The $1.9 million decrease in gross profit was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs. Gross margin was 34% and 36% for the six months ended June 30, 2023 and 2022, respectively. The decrease in gross margin was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.

Gross profit for the DDS segment was $8.6 million and $11.8 million for the six months ended June 30, 2023 and 2022, respectively. The $3.2 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 39% for the six months ended June 30, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.

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Gross profit for the Synodex segment was $0.5 million and a loss of $0.4 million for the six months ended June 30, 2023 and 2022, respectively. The $0.9 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 13% and (12%) for the six months ended June 30, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment was primarily due to higher revenues and lower direct operating costs.

Gross profit for the Agility segment was $3.9 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively. The $0.5 million increase in 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 45% for each of the six-month periods ended June 30, 2023 and 2022.

Selling and Administrative Expenses

Selling and administrative expenses were $15.4 million and $20.5 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $5.1 million or 25%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $2.9 million primarily on account of headcount reduction, offset in part by salary increases; lower recruitment and professional fees of $1.2 million; lower marketing related expenses of $1.0 million; lease termination expense of $0.2 million; and a favorable impact of foreign exchange rate fluctuations of $0.1 million. These lower selling and administrative expenses were offset in part by higher provisions for doubtful accounts of $0.3 million. Selling and administrative expenses as a percentage of total revenues were 40% and 50% for the six months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower expenditures in all segments, offset in part by lower revenues in the DDS segment.

Selling and administrative expenses for the DDS segment were $9.3 million and $10.8 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $1.5 million or 14%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $0.8 million primarily on account of headcount reductions and lower commissions; lower recruitment and professional fees of $0.6 million; and lower marketing related expenses of $0.2 million, offset in part by higher provisions for doubtful accounts of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues was 36% for each of the six-month periods ended June 30, 2023 and 2022.

Selling and administrative expenses for the Synodex segment were $0.4 million and $1.1 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $0.7 million or 64%. The decrease in selling and administrative expenses was primarily attributable to lower professional fees of $0.6 million and lower payroll-related costs of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 10% and 31% for the six months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses and higher revenues.

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Selling and administrative expenses for the Agility segment were $5.7 million and $8.6 million for the six months ended June 30, 2023 and 2022, respectively, a decrease of $2.9 million or 34%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $1.9 million primarily on account of headcount reductions; lower marketing related expenses of $0.9 million; lease termination expense of $0.2 million; and other selling and administrative expenses of $0.1 million. These lower selling and administrative expenses were 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 66% and 115% for the six months ended June 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses and higher revenues.

Income Taxes

We recorded a provision for income taxes of $0.4 million for the six months ended June 30, 2023, as compared to $1.0 million for the six months ended June 30, 2022.

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

Net Income (Loss)

We incurred a net loss of $2.9 million and $6.6 million during the six months ended June 30, 2023 and 2022, respectively. The $3.7 million change was a result of lower operating costs and expenses in all segments in the current six-month period offset in part by higher revenues in the Synodex and Agility segments.

Net loss for the DDS segment was $1.2 million and a net income of $0.1 million for the six months ended June 30, 2023 and 2022, respectively. The change of $1.3 million was primarily attributable to lower revenues in the current six-month period offset in part by lower operating costs and expenses.

Net income for the Synodex segment was $0.1 million and a loss of $1.4 million for the six months ended June 30, 2023 and 2022, respectively. The $1.5 million change was due to lower operating costs and expenses and higher revenues in the current six-month period.

Net loss for the Agility segment was $1.8 million and $5.3 million for the six months ended June 30, 2023 and 2022, respectively. The $3.5 million change was due to lower operating costs and expenses and higher revenues in the current six-month period.

Adjusted Gross Profit and Margin

Adjusted gross profit was $15.5 million and $16.6 million for the six months ended June 30, 2023 and 2022, respectively. The $1.1 million decrease in adjusted gross profit was due to a lower gross profit, offset in part by higher depreciation and amortization, and non-recurring severance. Adjusted gross margin was 40% for each of the six-month periods ended June 30, 2023 and 2022.

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Adjusted gross profit for the DDS segment was $9.1 million and $12.1 million for the six months ended June 30, 2023 and 2022, respectively. The $3.0 million decrease in adjusted gross profit for the DDS Segment was due to lower gross profit, offset in part by higher depreciation and amortization. Adjusted gross margin for the DDS segment was 35% and 40% for the six months ended June 30, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment was due to lower gross profit, offset in part by higher depreciation and amortization .

Adjusted gross profit for the Synodex segment was $0.8 million and a loss of $0.1 million for the six months ended June 30, 2023 and 2022, respectively. The $0.9 million increase in adjusted gross profit in the Synodex segment was due to higher gross profit. Adjusted gross margin for the Synodex segment was 21% and (3%) for the six months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit.

Adjusted gross profit for the Agility segment was $5.6 million and $4.6 million for the six months ended June 30, 2023 and 2022, respectively. The $1.0 million increase in adjusted gross profit for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization. Adjusted gross margin for the Agility segment was 65% and 62% for the six months ended June 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization.

Adjusted EBITDA

Adjusted EBITDA was $2.4 million and a loss of $2.3 million for the six months ended June 30, 2023 and 2022, respectively. The $4.7 million change in Adjusted EBITDA was due to a lower net loss, higher stock-based compensation, depreciation and amortization, non-recurring severance and interest expense, offset in part by lower provisions for income taxes.

Adjusted EBITDA for the DDS segment was $1.5 million and $2.5 million for the six months ended June 30, 2023 and 2022, respectively. The $1.0 million change in Adjusted EBITDA was due to a lower net income and tax provision in the DDS segment, offset in part by higher stock-based compensation, depreciation and amortization and interest expense.

Adjusted EBITDA for the Synodex segment was $0.6 million and a loss of $1.1 million for the six months ended June 30, 2023 and 2022, respectively. The $1.7 million change in Adjusted EBITDA was due to a lower net loss in the Synodex segment and non-controlling interest.

Adjusted EBITDA for the Agility segment was $0.3 million and a loss of $3.7 million for the six months ended June 30, 2023 and 2022, respectively. The $4.0 million change in Adjusted EBITDA was due to a lower net loss in the Agility segment, higher depreciation and amortization and non-recurring severance offset in part by lower stock-based compensation and tax provision.

Liquidity and Capital Resources

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


	June 30,		December 31,
	2023		2022
Cash and cash equivalents	$	13,652	$	9,792
Short term investments - other		14		507
Working capital		4,481		2,869

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On June 30, 2023, we had cash and cash equivalents of $13.7 million, of which $2.3 million was held by our foreign subsidiaries, and $11.4 million was 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 June 30, 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.

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 June 30, 2023, we had working capital of approximately $4.5 million, as compared to working capital of approximately $2.9 million as of December 31, 2022. The increase in working capital is due to proceeds received for stock option exercises and a reduction due to payment for severance accruals and other operating expenses during the six months ended June 30, 2023.

We did not have any material commitments for capital expenditures as of June 30, 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, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other reserves and adjustments. As of June 30, 2023, such borrowing base calculation equaled approximately $2.9 million. The Credit Agreement contains a financial covenant that will require the Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”) plus 2.25%. We did not utilize the Revolving Credit Facility during the three-month period ended June 30, 2023 and through the date of filing of this Report.

Cash Flows

Net Cash Provided by (Used in) Operating Activities

Cash provided by our operating activities for the six months ended June 30, 2023 was $4.2 million resulting from our net loss of $2.9 million, adjusted for non-cash expenses of $4.6 million and an increase in working capital of $2.5 million. Refer to the condensed consolidated statements of cash flows for further details.

Cash used by our operating activities for the six months ended June 30, 2022 was $3.9 million resulting from our net loss of $6.7 million, adjusted for non-cash expenses of $4.0 million and a decrease in working capital of $1.2 million. Refer to the condensed consolidated statements of cash flows for further details.

Net Cash Used in Investing Activities

For the six months ended June 30, 2023 and 2022, the net cash used in our investing activities was $2.5 million and $3.6 million, respectively. The total capital expenditures for the six months ended June 30, 2023 were $3.0 million, offset by proceeds from maturity of short-term investments of $0.5 million. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed 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 $6.5 million, a portion of which we may finance.

Net Cash Provided by (Used in) Financing Activities

Cash provided by financing activities for the six months ended June 30, 2023 was $2.0 million primarily from proceeds of stock option exercises of $2.2 million, offset in part by payment of long-term obligations of $0.2 million.

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

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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 June 30, 2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of June 30, 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 six months ended June 30, 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 factors in our Annual Report on Form 10-K entitled, “We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.”, “Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.” and “We have no bank facilities or line of credit.”

We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.

The markets for our services, platforms and solutions are highly competitive. Some of our competitors have longer operating histories, significantly greater financial, human, technical and other resources and greater name recognition than we do. There are relatively few barriers preventing companies from entering the markets in which we operate. As a result, new market entrants also pose a threat to our business. We also compete with in-house personnel at current and prospective customers who may attempt to duplicate our offerings using their own personnel.

We have made and continue to make significant investments towards building-out new capabilities to pursue growth, including, for example, our investments in large language models. These investments increase our costs, and if these new capabilities do not yield the revenues or profit margins we expect, and we are unable to grow our business and revenue proportionately, our profitability may be reduced, or we may incur losses. If we are not able to compete effectively in the markets we serve or if we are not able to successfully develop new services, platforms and solutions, our revenues and results of operations could be adversely affected.

The international nature of our operations subjects us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.

We do business on an international level, with a major portion of our operations carried on in the Philippines, India, Sri Lanka, Canada, the United Kingdom, Israel and Germany, while our headquarters are in the U.S., and our customers are primarily located in North America and Europe. While we do not depend on significant revenues from sources internal to the Asian countries in which we operate, we are nevertheless subject to certain adverse economic factors relating to overseas economies generally, including inflation, external debt, a negative balance of trade and underemployment. In certain of the countries in which we operate, tax authorities have exercised, and may continue to exercise, significant discretionary and arbitrary powers to make tax demands or decline to refund payments that may be due to us as per tax returns. Other risks associated with our international operations and business activities include:

difficulties in staffing international projects and managing international operations, including overcoming logistical and communications challenges;

local competition, particularly in the Philippines, India and Sri Lanka;

imposition of public sector controls;

trade and tariff restrictions;

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price or exchange controls;

currency control regulations;

foreign tax consequences;

data privacy laws and regulations;

evolving regulation of artificial intelligence;

intellectual property laws and enforcement practices;

labor disputes and related litigation and liability;

limitations on repatriation of earnings; and

changing laws and regulations, occasionally with retroactive effect.

One or more of these factors could adversely affect our business, financial condition and results of operations.

Debt under our Revolving Credit Facility has a variable rate of interest that is based on SOFR which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future.

Debt outstanding under our Revolving Credit Facility has a variable rate of interest that is based on the secured overnight financing rate (“SOFR”) which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future. The future performance of SOFR cannot be predicted based on historical performance and the future level of SOFR may have little or no relation to historical levels of SOFR. Any patterns in market variable behaviors, such as correlations, may change in the future. Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR.

Our Revolving Credit Facility contains restrictive covenants that may impair our ability to conduct business.

Our Revolving Credit Facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. For example, the Revolving Credit Facility contains a financial covenant that requires us, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. As a result of these covenants and restrictions, we may be limited in how we conduct our business, and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our Revolving Credit Facility and may impair our ability to conduct business. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, there are no assurances that we will be able to obtain waivers from the lender and/or amend the covenants.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities or repurchases of equity securities during the three months ended June 30, 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		Credit Agreement, dated as of April 4, 2023, by and among Innodata Inc., Innodata Synodex, LLC, Innodata Docgenix, LLC, and Agility PR Solutions LLC as borrowers, and Wells Fargo Bank, National Association, as lender (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 5, 2023).

10.2		Security Agreement, dated as of April 4, 2023, by and among Innodata Inc., Innodata Synodex, LLC, Innodata Docgenix, LLC, and Agility PR Solutions LLC as grantors, and Wells Fargo Bank, National Association, as secured party (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on April 5, 2023).

10.3		Guaranty, dated as of April 4, 2023, by and among Innodata Inc., Innodata Synodex, LLC, Innodata Docgenix, LLC, and Agility PR Solutions LLC as guarantors, and Wells Fargo Bank, National Association, as lender (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on April 5, 2023).

31.1*		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the three months ended June 30, 2023, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022; (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2023 and 2022 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited); (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 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:	August 10, 2023	/s/ Jack S. Abuhoff
		Jack S. Abuhoff
		Chief Executive Officer and President


Date:	August 10, 2023	/s/ Marissa B. Espineli
		Marissa B. Espineli
		Interim Chief Financial Officer
		(Principal Financial Officer and
		Principal Accounting Officer)