UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended | |
OR | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________ |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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(Zip Code) | |
(Address of principal executive offices) |
(
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of August 6, 2022 was
INNODATA INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2022
INDEX
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use-asset, net |
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Other assets |
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Deferred income taxes, net |
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Intangibles, net |
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Goodwill |
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Total assets | $ | | $ | | ||
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other |
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Accrued salaries, wages and related benefits |
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Income and other taxes |
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Long-term obligations - current portion |
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Operating lease liability - current portion |
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Total current liabilities |
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Deferred income taxes, net |
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Long-term obligations, net of current portion |
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Operating lease liability, net of current portion |
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Total liabilities |
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Commitments and contingencies |
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Non-controlling interests |
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STOCKHOLDERS’ EQUITY: |
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Serial preferred stock; |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings (deficit) |
| ( |
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Accumulated other comprehensive loss |
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Less: treasury stock, |
| ( |
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Total stockholders’ equity |
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Total liabilities, non-controlling interests and stockholders’ equity | $ | | $ | | ||
See notes to Condensed Consolidated Financial Statements.
2
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | |||||
June 30, | ||||||
| 2022 |
| 2021 | |||
Revenues | $ | | $ | | ||
Operating costs and expenses: |
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Direct operating costs |
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Selling and administrative expenses |
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Interest expense, net |
| ( |
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Loss from operations |
| ( |
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Gain from loan forgiveness |
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Income (loss) before provision for income taxes |
| ( |
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Provision for income taxes |
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Consolidated net loss |
| ( |
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Income (loss) attributable to non-controlling interests |
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Net loss attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | ( | ||
Loss per share attributable to Innodata Inc. and Subsidiaries: |
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Basic and Diluted | ( | ( | ||||
Weighted average shares outstanding: |
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Basic and Diluted |
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Comprehensive Loss: |
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Consolidated Net loss | $ | ( | $ | ( | ||
Pension liability adjustment, net of taxes |
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Change in fair value of derivatives, net of taxes |
| ( |
| ( | ||
Foreign currency translation adjustment |
| ( |
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Other comprehensive loss |
| ( |
| ( | ||
Total Comprehensive loss |
| ( |
| ( | ||
Less: Comprehensive income (loss) attributable to non-controlling interest |
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| ( | ||
Comprehensive Loss attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | ( | ||
See notes to Condensed Consolidated Financial Statements.
3
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
Revenues | $ | | $ | | ||
Operating costs and expenses: |
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Direct operating costs |
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Selling and administrative expenses |
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Interest expense, net |
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Loss from operations | ( | ( | ||||
Gain from loan forgiveness | - | | ||||
Income (loss) before provision for income taxes |
| ( |
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Provision for income taxes |
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Consolidated net income (loss) |
| ( |
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Loss attributable to non-controlling interests |
| ( |
| ( | ||
Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | | ||
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Income (loss) per share attributable to Innodata Inc. and Subsidiaries: |
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Basic | $ | ( | $ | | ||
Diluted | $ | ( | $ | | ||
Weighted average shares outstanding: |
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Basic |
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Diluted | | | ||||
Comprehensive income (loss): |
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Consolidated net income (loss) | $ | ( | $ | | ||
Pension liability adjustment, net of taxes |
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Foreign currency translation adjustment, net of taxes |
| ( |
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Change in fair value of derivatives, net of taxes |
| ( |
| ( | ||
Other comprehensive loss |
| ( |
| ( | ||
Total Comprehensive income (loss) |
| ( |
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Less: Comprehensive loss attributable to non-controlling interests |
| ( |
| ( | ||
Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | | ||
See notes to Condensed Consolidated Financial Statements.
4
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Six Months Ended | |||||
| June 30, | |||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: |
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Consolidated net income (loss) | $ | ( | $ | | ||
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization | | | ||||
Gain on loan forgiveness | | ( | ||||
Stock-based compensation | | | ||||
Deferred income taxes |
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| ( | ||
Pension cost | | | ||||
Loss on lease termination | | | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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| ( | ||
Prepaid expenses and other current assets |
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Other assets |
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Accounts payable and accrued expenses |
| ( |
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Accrued salaries, wages and related benefits |
| ( |
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Income and other taxes |
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Net cash provided by (used in) operating activities |
| ( |
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Cash flows from investing activities: |
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Capital expenditures |
| ( |
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Net cash used in investing activities |
| ( |
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Cash flows from financing activities: |
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Proceeds from stock option exercises | | | ||||
Withholding taxes on net settlement of stock-based compensation | | ( | ||||
Payment of long-term obligations |
| ( |
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Net cash provided by (used in) financing activities | ( | | ||||
Effect of exchange rate changes on cash and cash equivalents |
| ( |
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Net increase (decrease) in cash and cash equivalents |
| ( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
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Cash paid for income taxes | $ | | $ | | ||
Cash paid for operating leases | $ | | $ | | ||
Cash paid for interest | $ | | $ | | ||
See notes to Condensed Consolidated Financial Statements.
5
INNODATA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury Stock | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Shares | Amount |
| Total | ||||||||
January 1, 2022 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | | | ( | | | | ( | ||||||||||||||
Stock-based compensation | | | | | | | | | ||||||||||||||
Stock option exercises | | | | | | | | | ||||||||||||||
Shares withheld for exercise settlement and taxes | ( | | ( | | | | | ( | ||||||||||||||
Redemption of non-controlling interest | | | ( | | | | | ( | ||||||||||||||
Pension liability adjustments, net of taxes | | | | | | | | | ||||||||||||||
Foreign currency translation adjustment | | | | | ( | | | ( | ||||||||||||||
Change in fair value of derivatives, net of taxes | | | | | | | | | ||||||||||||||
March 31, 2022 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | | | ( | | | | ( | ||||||||||||||
Stock-based compensation | | | | | | | | | ||||||||||||||
Stock option exercises | | | | | | | | | ||||||||||||||
Redemption of non-controlling interest | | | ( | | | | | ( | ||||||||||||||
Pension liability adjustments, net of taxes | | | | | | | | | ||||||||||||||
Foreign currency translation adjustment | | | | | ( | | | ( | ||||||||||||||
Change in fair value of derivatives, net of taxes | | | | | ( | | | ( | ||||||||||||||
June 30, 2022 | | $ | | $ | | $ | ( | $ | ( | | $ | ( | $ | | ||||||||
January 1, 2021 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||
Net income attributable to Innodata Inc. and subsidiaries | | | | | | | | | ||||||||||||||
Stock-based compensation | | | | | | | | | ||||||||||||||
Exercise of stock options | | | | | | | | | ||||||||||||||
Shares withheld for exercise settlement and taxes | ( | | ( | | | | | ( | ||||||||||||||
Pension liability adjustments, net of taxes | | | | | | | | | ||||||||||||||
Foreign currency translation adjustment | | | | | ( | | | ( | ||||||||||||||
Change in fair value of derivatives, net of taxes | | | | | | | | | ||||||||||||||
March 31, 2021 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||
Net loss attributable to Innodata Inc. and subsidiaries | | | | ( | | | | ( | ||||||||||||||
Stock-based compensation | | | | | | | | | ||||||||||||||
Exercise of stock options | | | | | | | | | ||||||||||||||
Pension liability adjustments, net of taxes | | | | | | | | | ||||||||||||||
Foreign currency translation adjustment | | | | | | | | | ||||||||||||||
Change in fair value of derivatives, net of taxes | | | | | ( | | | ( | ||||||||||||||
June 30, 2021 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||
See notes to Condensed Consolidated Financial Statements.
6
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
1. Summary of Significant Accounting Policies and Estimates
Basis of Presentation - The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the “Company”) as of June 30, 2022 and December 31, 2021, the results of its operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021, and stockholders’ equity for the three and six months ended June 30, 2022 and 2021. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Certain information and note disclosures normally included in or with financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those in the notes to the consolidated financial statements for the year ended December 31, 2021.
Principles of Consolidation - The condensed consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and docGenix limited liability company that is majority-owned by the Company. The non-controlling interest in the docGenix limited liability company has call and put options that can be settled in cash or stock. Accordingly, this is presented in temporary equity in accordance with the Financial Accounting Standards Board’s (the “FASB”) non-controlling interest guidance. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates - In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are reasonable, including assumptions made by management about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Actual results could differ from those estimates. Significant estimates include those related to the allowance for doubtful accounts and billing adjustments, useful life of long-lived assets, useful life of intangible assets, impairment of goodwill, valuation of deferred tax assets, valuation of stock-based compensation, pension benefit plan assumptions, litigation accruals and estimated accruals for various tax exposures.
Revenue Recognition – The Company’s revenue is recognized when services are rendered or goods are delivered to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services or goods as per the agreement with the customer. In cases where there are agreements with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. For agreements with distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation, if any, and then evaluates how the services are performed for the customer to determine the timing of revenue recognition.
For the Digital Data Solutions (DDS) segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenue from agreements billed on a time-and-materials basis is recognized as services are performed. Revenue from fixed-fee agreements, which are not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.
7
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of the Synodex segment revenue is derived from licensing the Company’s functional software and providing access to the Company’s hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.
The Agility segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenue from the reseller agreements is recognized at the gross amount received for the goods in accordance with the Company functioning as a principal due to the Company meeting the following criteria: the Company acts as the primary obligor in the sales transaction; assumes the credit risk; sets the price; can select suppliers; and is involved in the execution of the services, including after sales service.
Revenue includes reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
The Company considers U.S. GAAP criteria for determining whether to report gross revenue as a principal versus net revenue as an agent. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is principal or agent in the arrangement. Revenue is recognized on a gross basis if the Company is in the capacity of principal and on a net basis if it falls in the capacity of an agent.
Contract acquisition costs, which are included in prepaid expenses and other current assets, are amortized over the term of a subscription agreement or contract that normally has a duration of
Foreign Currency Translation - The functional currency of the Company’s locations in the Philippines, India, Sri Lanka, Israel, Hong Kong and Canada (other than the Agility subsidiary) is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees, Israeli shekels and Hong Kong dollars are translated to U.S. dollars at rates which approximate those in effect on the transaction dates. Monetary assets and all liabilities denominated in foreign currencies on June 30, 2022 and December 31, 2021 are translated at the exchange rate in effect as of those dates. Non-monetary assets and stockholders’ equity are translated at the appropriate historical rates.
The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and for the Company’s Agility subsidiary in Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are prepared in these respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in the Company’s condensed consolidated financial statements. Income, expenses and cash flows are translated at weighted-average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulated other comprehensive loss in stockholders’ equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
Included in direct operating costs were foreign exchange gains resulting from such transactions of approximately $
Derivative Instruments - The Company accounts for derivative transactions in accordance with the FASB’s Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded in Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) is reclassified to earnings and included as part of Direct operating costs.
8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Capitalized Developed Software - The Company incurs development costs related to software it develops for its internal use. Qualifying costs incurred during the application development stage are capitalized. These costs primarily consist of internal labor and third-party development costs and are amortized using the straight-line method over the estimated useful life of the capitalized developed software, which ranges between and
Income Taxes - Estimated deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is more likely than not that all or some portion of the estimated deferred tax assets will not be realized. While the Company considers future taxable income in assessing the need for the valuation allowance, in the event that the Company anticipates that it will be able to realize the estimated deferred tax assets in the future in excess of its net recorded amount, an adjustment to the provision for deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company anticipates that it will not be able to realize the estimated deferred tax assets in the future considering future taxable income, an adjustment to the provision for deferred tax assets would decrease income in the period such determination was made. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue as a liability the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. and Canadian deferred tax assets will not be realizable. As the expectation of future taxable income resulting from the U.S. and Canadian entities is not probable at this time, the Company maintains a valuation allowance against all the U.S. and Canadian net deferred tax assets.
The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions in income tax expense in the condensed consolidated statements of operations and comprehensive income (loss).
Deferred Revenue - Deferred revenue represents payments received from customers in advance of providing services and amounts deferred if conditions for revenue recognition have not been met. Included in accrued expenses and other on the accompanying condensed consolidated balance sheets is deferred revenue amounting to $
Recent Accounting Pronouncements – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements” (“ASU 2016-13”). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies ASC Topic 326, “Financial Instruments – Credit Losses” and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments,” which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for certain smaller reporting companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for the Company if it continues to be classified as a smaller reporting company, with early adoption permitted. The Company does not expect that the adoption of the new guidance will have a material impact on the Company’s condensed consolidated financial statements.
2. Goodwill and Intangible Assets
The change in the carrying amount of goodwill for the six months ended June 30, 2022 was as follows (in thousands):
Balance as of January 1, 2022 |
| $ | |
Foreign currency translation adjustment |
| ( | |
Balance as of June 30, 2022 | $ | |
9
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
The fair value measurement of goodwill for the Agility segment was classified within Level 3 of the fair value hierarchy because the Company used the income approach, which utilizes significant inputs that are unobservable in the market and the market multiple approach which utilizes comparable entities to further validate the carrying values. The Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit as of the impairment test measurement date.
Information regarding the Company acquired intangible assets and capitalized developed software was as follows (in thousands):
| Company Acquired Intangible Assets | Capitalized Developed Software | ||||||||||||||||||||||
Capitalized | ||||||||||||||||||||||||
Trademarks | Media | Capitalized | Developed | |||||||||||||||||||||
| Developed |
| Customer |
| and | Contact | Developed | Software - in | ||||||||||||||||
| technology |
| relationships |
| tradenames |
| Patents |
| Database |
| Software |
| Progress |
| Total | |||||||||
Gross carrying amounts: |
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Balance as of January 1, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Additions | - | - | - | - | - | - | | | ||||||||||||||||
Transfers | - | - | - | - | - | | ( | - | ||||||||||||||||
Foreign currency translation |
| ( |
| ( |
| ( |
| - |
| ( | ( | ( |
| ( | ||||||||||
Balance as of June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Accumulated amortization: | ||||||||||||||||||||||||
Balance as of January 1, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | - | $ | | ||||||||
Amortization expense | | | | | | | - | | ||||||||||||||||
Foreign currency translation | ( | ( | ( | ( | ( | ( | - | ( | ||||||||||||||||
Balance as of June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | - | $ | | ||||||||
Net carrying values - June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Amortization expense relating to acquired intangible assets was $
Amortization expense relating to capitalized developed software was $
As of June 30, 2022, estimated future amortization expense for intangible assets was as follows (in thousands):
Year |
| Amortization | |
2022 | $ | | |
2023 | $ | | |
2024 | $ | | |
2025 | $ | | |
2026 | $ | | |
Thereafter | $ | | |
$ | | ||
10
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
3. Income Taxes
Taxes primarily consist of a provision for foreign taxes recorded by the Company’s foreign subsidiaries in accordance with local tax regulations. Effective income tax rates are disproportionate due to the losses incurred by the Company’s U.S. and Canadian subsidiaries and a valuation allowance recorded on deferred taxes of these entities and tax effects of foreign operations, including foreign exchange gains and losses.
The reconciliations of the U.S. statutory rate with the Company’s effective tax rate for the six-month periods ended June 30, 2022 and 2021 are summarized in the table below:
For the Six Months | |||||
Ended June 30, | |||||
|
| 2022 |
| 2021 | |
Federal income tax expense at statutory rate |
| ( | % | | % |
Effect of: |
| ||||
Change in valuation allowance | | | |||
Foreign operations permanent difference - foreign exchange gains and losses |
| | | ||
Return to provision true up | | | |||
Tax effects of foreign operations | | | |||
Increase (decrease) in unrecognized tax benefits (ASC 740) | | ( | |||
State income tax net of federal benefit | | | |||
Change in tax rates | - | | |||
Withholding tax | - | - | |||
Effect of stock based compensation | ( | ( | |||
Foreign rate differential | ( | ( | |||
Other | ( | | |||
Effective tax rate | | % | | % | |
The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the six months ended June 30, 2022 (in thousands):
|
| Unrecognized | |
| tax benefits | ||
Balance - January 1, 2022 | $ | | |
Increase for current period tax positions |
| | |
Decrease for prior period tax positions | ( | ||
Interest accrual |
| | |
Foreign currency remeasurement |
| ( | |
Balance - June 30, 2022 | $ | | |
The Company expects that unrecognized tax benefits as of June 30, 2022, if recognized, would have a material impact on the Company’s effective tax rate.
11
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Tax Assessments
In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. The Company disagrees with the Service Tax Department’s position. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department’s position. The Company is contesting this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between
In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $
Substantial recovery against the Company in the above referenced 2015 Service Tax Department case could have a material adverse impact on the Company, and unfavorable rulings or recoveries in other tax proceedings could have a material adverse impact on the consolidated operating results of the period (and subsequent periods) in which the rulings or recovery occurs.
4. Commitments and Contingencies
Litigation – In 2008, a judgment was rendered in the Philippines against a Philippine subsidiary of the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the Philippine subsidiary. The potential payment amount aggregates to approximately $
The Company is also subject to various other legal proceedings and claims that have arisen in the ordinary course of business.
While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced Philippine action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidated operating results in the period in which the ruling or recovery occurs. In addition, the Company’s estimate of the potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above referenced legal proceedings could change in the future.
12
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
The Company’s legal accruals related to legal proceedings and claims are based on the Company’s determination of whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external counsel to assess probability and estimates of loss. The accruals are adjusted if necessary. While the Company intends to defend these matters vigorously, adverse outcomes that it estimates could reach approximately $
5. Stock Options and Restricted Stock Units
A summary of option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 (the “2013 Plan”) and changes during each of the six-month periods ended June 30, 2022 and 2021 are presented below:
|
| Weighted - |
| Weighted-Average |
| |||||
Number of |
| Average Exercise |
| Remaining Contractual | Aggregate | |||||
| Options |
| Price |
| Term (years) |
| Intrinsic Value | |||
Outstanding at January 1, 2021 |
| | $ | |
|
|
|
| ||
Granted |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited/Expired |
| ( |
| |
|
|
|
| ||
Outstanding at June 30, 2021 |
| | $ | |
| $ | | |||
|
|
|
| |||||||
Exercisable at June 30, 2021 |
| | $ | | $ | | ||||
|
|
|
| |||||||
Vested and Expected to Vest at June 30, 2021 |
| | $ | |
| $ | | |||
|
|
| Weighted-Average |
| ||||||
Number of | Weighted - Average | Remaining Contractual | Aggregate | |||||||
Options | Exercise Price | Term (years) | Intrinsic Value | |||||||
Outstanding at January 1, 2022 | | $ | |
|
| |||||
Granted |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited/Expired |
| ( |
| |
|
|
|
| ||
Outstanding at June 30, 2022 |
| | $ | |
| $ | | |||
Exercisable at June 30, 2022 |
| | $ | |
| $ | | |||
Vested and Expected to Vest at June 30, 2022 |
| | $ | |
| $ | | |||
13
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
A summary of option activity under the Innodata Inc. 2021 Stock Plan and changes during the six-month period ended June 30, 2022 are presented below:
Weighted-Average | ||||||||||
Number of | Weighted - Average | Remaining Contractual | Aggregate Intrinsic | |||||||
Options | Exercise Price | Term (years) | Value | |||||||
Outstanding at January 1, 2022 |
| - | $ | - |
|
|
|
| ||
Granted |
| |
| |
|
|
|
| ||
Exercised |
| - |
| - |
|
|
|
| ||
Forfeited/Expired |
| - |
| - |
|
|
|
| ||
Outstanding at June 30, 2022 |
| | $ | |
| $ | - | |||
Exercisable at June 30, 2022 |
| - | $ | - |
|
|
|
| ||
Vested and Expected to Vest at June 30, 2022 |
| | $ | |
| $ | - | |||
During the six months ended June 30, 2022, a total of
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted, and weighted-average assumptions were as follows:
For the Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Weighted average fair value of options granted | $ | | $ | | ||
Risk-free interest rate | | | ||||
Expected term (years) | | | ||||
Expected volatility factor | ||||||
Expected dividends | - | - | ||||
A summary of restricted stock units issued under the 2013 Plan and the 2021 Plan (collectively, the “Equity Plans”) is presented below:
In March 2022, the Company granted restricted stock units (“RSU”) to key executives, pursuant to the Equity Plans. Each RSU has vesting conditions based on both the achievement of performance-based metrics and the continuation of employment over a defined period. The level of performance determines the number of RSUs that performance-vest, and performance vested RSUs must also time-vest in order to be fully vested. Each fully-vested RSU represents the right to receive
14
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Restricted stock unit activity during the six months ended June 30, 2022 was as follows:
Number of Restricted |
| Weighted-Average Grant | |||
| Stock Awards |
| Date Fair Value | ||
Unvested at January 1, 2022 | | $ | | ||
Granted |
| - |
| - | |
Vested |
| ( |
| | |
Forfeited/Expired |
| |
| | |
Unvested at June 30, 2022 |
| - | $ | - | |
| Number of |
| Weighted-Average | ||
Restricted Stock | Grant Date | ||||
Units | Fair Value | ||||
Unvested at January 1, 2022 |
| |
| $ | - |
Granted* |
| | | ||
Vested |
| - |
| - | |
Forfeited/Expired |
| - |
| ||
Unvested at June 30, 2022 |
| | $ | | |
*
The compensation cost related to non-vested stock options not yet recognized as of June 30, 2022 totaled approximately $
During the six months ended June 30, 2022,
The compensation cost related to non-vested restricted stock units not yet recognized as of June 30, 2022 totaled approximately $
The stock-based compensation expense related to the Equity Plans were allocated as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Direct operating costs | $ | | $ | | $ | | $ | | ||||
Selling and administrative expenses |
| |
| |
| |
| | ||||
Total stock-based compensation | $ | | $ | | $ | | $ | | ||||
6. Operating Leases
The Company has various lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.
These lease agreements are for terms ranging from to
15
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
The table below summarizes the amounts recognized in the condensed consolidated financial statements related to operating leases for the periods presented (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Rent expense for long-term operating leases | $ | | $ | | $ | | $ | | ||||
Rent expense for short-term leases |
| |
| | | | ||||||
Total rent expense | $ | | $ | | $ | | $ | | ||||
The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the condensed consolidated balance sheet as of June 30, 2022 (in thousands):
Year |
| Amount | |
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 and thereafter |
| | |
Total lease payments |
| | |
Less: Interest |
| ( | |
Net present value of lease liabilities | $ | | |
| |||
Current portion | $ | | |
Long-term portion |
| | |
Total | $ | | |
The weighted average remaining lease terms and discount rates for all of the Company’s operating leases as of June 30, 2022 were as follows:
Weighted-average lease term remaining |
| ||
Weighted-average discount rate |
| | % |
7. Long-term obligations
Total long-term obligations as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
Pension obligations - accrued pension liability | $ | | $ | | ||
Settlement agreement |
| |
| | ||
Microsoft licenses |
| - |
| | ||
| | |||||
Less: Current portion of long-term obligations |
| |
| | ||
Totals | $ | | $ | | ||
16
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
8. Redemption of non-controlling interest
The Condensed Consolidated Balance Sheets for the six-month period ending June 30, 2022 includes a $
9. Comprehensive loss
Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustment and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive loss as of June 30, 2022 and 2021, and reclassifications from accumulated other comprehensive loss for the three and six months then ended, are presented below (in thousands):
Pension Liability | Fair Value of | Foreign Currency | Accumulated Other | |||||||||
| Adjustment |
| Derivatives |
| Translation Adjustment |
| Comprehensive Loss | |||||
Balance at April 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss before reclassifications, net of taxes |
| - |
| ( |
| ( |
| ( | ||||
Total other comprehensive loss before reclassifications, net of taxes |
| ( |
| ( |
| ( |
| ( | ||||
Net amount reclassified to earnings |
| |
| |
| - |
| | ||||
Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
|
|
| Foreign Currency |
| ||||||||
Pension Liability | Fair Value of | Translation | Accumulated Other | |||||||||
Adjustment | Derivatives | Adjustment | Comprehensive Loss | |||||||||
Balance at January 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss before reclassifications, net of taxes |
|
| - |
| ( |
| ( |
| ( | |||
Total other comprehensive loss before reclassifications, net of taxes |
|
| ( |
| ( |
| ( |
| ( | |||
Net amount reclassified to earnings |
|
| |
| |
| - |
| | |||
Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Pension Liability | Fair Value of | Foreign Currency | Accumulated Other | |||||||||
| Adjustment |
| Derivatives |
| Translation Adjustment |
| Comprehensive Loss | |||||
Balance at April 1, 2021 | $ | ( | $ | - | $ | ( | $ | ( | ||||
Other comprehensive income (loss) before reclassifications, net of taxes |
| - |
| ( |
| |
| ( | ||||
Total other comprehensive loss before reclassifications, net of taxes |
| ( |
| ( |
| ( |
| ( | ||||
Net amount reclassified to earnings |
| |
| |
| - |
| | ||||
Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
17
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Foreign Currency | ||||||||||||
Pension Liability | Fair Value of | Translation | Accumulated Other | |||||||||
| Adjustment |
| Derivatives |
| Adjustment |
| Comprehensive Loss | |||||
Balance at January 1, 2021 | $ | ( | $ | - | $ | ( | $ | ( | ||||
Other comprehensive income (loss) before reclassifications, net of taxes | - |
| ( |
| |
| ( | |||||
Total other comprehensive loss before reclassifications, net of taxes | ( |
| ( |
| ( |
| ( | |||||
Net amount reclassified to earnings | |
| |
| - |
| | |||||
Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
All reclassifications from accumulated other comprehensive loss had an impact on direct operating costs in the condensed consolidated statements of operations and comprehensive income (loss).
10. Segment reporting and concentrations
The Company’s operations are classified in
The DDS segment provides AI-enabled software platforms and managed services to companies that require high-quality data for training AI and machine learning (ML) algorithms, and AI digital transformation solutions to help companies apply AI/ML to real-world problems relating to analyzing and deriving insights from documents. In conjunction with AI digital transformation, the Company often provides a range of data engineering support services, including data transformation, data curation, data hygiene, data consolidation, data compliance, and master data management.
The Synodex segment provides an industry platform that transforms medical records into useable digital data organized in accordance with its proprietary data models or customer data models.
The Agility segment provides an industry platform that provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.
A significant portion of the Company’s revenue is generated from its locations in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.
18
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Revenues from external customers, segment operating profit (loss), and other reportable segment information are as follows (in thousands):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenues: |
|
|
|
|
|
|
| |||||
DDS | $ | | $ | | $ | | $ | | ||||
Synodex |
| |
| |
| |
| | ||||
Agility |
| |
| |
| |
| | ||||
Total Consolidated | $ | | $ | | $ | | $ | | ||||
|
|
|
| |||||||||
Income (loss) before provision for income taxes(1): |
|
|
|
| ||||||||
DDS | $ | ( | $ | | $ | | $ | | ||||
Synodex |
| ( |
| ( |
| ( |
| ( | ||||
Agility |
| ( |
| ( |
| ( |
| ( | ||||
Total Consolidated | $ | ( | $ | | $ | ( | $ | | ||||
|
|
|
|
|
| |||||||
Income (loss) before provision for income taxes(2): |
|
|
|
|
|
| ||||||
DDS | $ | ( | $ | | $ | | $ | | ||||
Synodex |
| ( |
| ( |
| ( |
| ( | ||||
Agility |
| ( |
| ( |
| ( |
| ( | ||||
Total Consolidated | $ | ( | $ | | $ | ( | $ | | ||||
| June 30, 2022 |
| December 31, 2021 | |||
Total assets: |
|
|
|
| ||
DDS | $ | | $ | | ||
Synodex |
| |
| | ||
Agility |
| |
| | ||
Total Consolidated | $ | | $ | | ||
| June 30, 2022 |
| December 31, 2021 | |||
Goodwill: |
|
|
|
| ||
Agility | $ | | $ | | ||
Total | $ | | $ | | ||
| (1) | Before elimination of any inter-segment profits |
| (2) | After elimination of any inter-segment profits |
19
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Revenues for the period ended June 30, 2022 and 2021 by geographic region (determined based upon customer’s domicile), were as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
United States | $ | | $ | | $ | | $ | | ||||
United Kingdom |
| |
| |
| |
| | ||||
The Netherlands |
| |
| |
| |
| | ||||
Canada |
| |
| |
| |
| | ||||
Others - principally Europe |
| |
| |
| |
| | ||||
Totals | $ | | $ | | $ | | $ | | ||||
Long-lived assets as of June 30, 2022 and December 31, 2021 by geographic region were comprised of (in thousands):
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
United States | $ | | $ | | ||
|
| |||||
Foreign countries: |
|
| ||||
Canada |
| |
| | ||
United Kingdom |
| |
| | ||
Philippines |
| |
| | ||
India |
| |
| | ||
Sri Lanka |
| |
| | ||
Israel |
| |
| - | ||
Germany | - | - | ||||
Total foreign |
| |
| | ||
Totals | $ | | $ | | ||
Long-lived assets include the unamortized balance of right-of-use assets amounting to $
As of June 30, 2022, approximately
20
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
11. Income (Loss) Per Share
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | ( | $ | ( | $ | ( | $ | | ||||
Weighted average common shares outstanding |
| |
| |
| |
| | ||||
Dilutive effect of outstanding options |
| - |
| - |
| - |
| | ||||
Adjusted for dilutive computation |
| |
| |
| |
| | ||||
Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the year. Diluted income (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted-average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two-class” method of computing income (loss) per share is used.
Options to purchase
Options to purchase
12. Derivatives
The Company conducts a large portion of its operations in international markets, which subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company is also subject to wage inflation and other government mandated increases and operating expenses in Asian countries where the Company has the majority of its operations. The Company’s primary inflation and exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.
In addition, although most of the Company’s revenue is denominated in U.S. dollars, a significant portion of total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period up to 12 months. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded to Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) are reclassified to earnings and included as part of Direct operating costs.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. The total notional amount for outstanding derivatives designated as hedges was $
21
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 (in thousands):
Balance Sheet Location | Fair Value | |||||||
|
| 2022 |
| 2021 | ||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
| ||
Foreign currency forward contracts |
| Accrued expenses | $ | | $ | | ||
The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| For the Three Months Ended | For the Six Months Ended | ||||||||||
| June 30, | June 30, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net gain (loss) recognized in OCI(1) | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net (gain) loss reclassified from accumulated OCI into income(2) | $ | | $ | | $ | | $ | | ||||
Net gain recognized in income(3) | $ | - | $ | - | ||||||||
| (1) | Net change in fair value of the effective portion classified into other comprehensive income (“OCI”) |
| (2) | Effective portion classified within direct operating costs. |
| (3) | There were no ineffective portions for the period presented. |
22
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “predict,” “likely,” “estimate,” “plan,” “potential,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.
These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (“COVID-19”) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; continuing reliance on project-based work in the DDS segment and the primarily at-will nature of such contracts and the ability of these customers to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing DDS segment revenue concentration in a limited number of customers; potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy; a continued downturn in or depressed market conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growth in existing competitors; various other competitive and technological factors; the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
Our actual results could differ materially from the results referred to in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainty around the COVID-19 pandemic and the effects of the global response thereto and the risks discussed in Part I, Item 1A. “Risk Factors,” in “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 24, 2022, and in other filings that we may make with the Securities and Exchange Commission. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements will occur, and you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof.
We undertake no obligation to update or review any guidance or other forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the federal securities laws.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Innodata Inc. and its subsidiaries and should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Report.
Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a global data engineering company. The Company’s mission is to deliver the promise of AI to the world’s most prestigious companies.
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We provide AI-enabled software platforms and managed service to companies that require high-quality data for training AI and machine learning (ML) algorithms. We also provide AI digital transformation solutions and platform to help companies apply AI/ML to real-world problems relating to analyzing and deriving insights from documents. For industry-specific, document-intensive industry business processes, we provide AI-augmented software-as-a-service (SaaS) platforms and discrete managed services.
Our platforms and services are powered by Goldengate, our proprietary AI/ML platform, as well as other technologies we have developed. In addition, we bring to bear more than 4,500 employees spanning eight countries with expertise in data pertaining to many professional fields. Our hybrid approach of using AI/ML in conjunction with human experts enables us to deliver superior data quality with even the most complex and sensitive data.
We developed our capabilities and honed our customer- and quality-centric culture progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately six years ago, we formed Innodata Labs, a research and development center, to research, develop and apply machine learning and emerging AI to our large-scale, human-intensive data operations. In 2019, we began packaging the capabilities that emerged from our R&D efforts in order to align with several fast-growing new markets and help companies use AI/ML to drive performance benefits and business insights. We anticipate this strategy will enable us to accelerate growth.
AI Data Annotation
We train AI algorithms for social media companies, robotics companies, financial services companies, and many others, working with images, text, video and audio. Data sciences teams seek partners that can perform data preparation functions for them at large-scale and at high quality, while using automated tools to minimize cost. Moreover, as AI projects become more specialized and mission-critical, data preparation is becoming increasingly complex, requiring deep domain knowledge and an infrastructure in which data security is assured.
We utilize a variety of leading third-party image and video annotation tools. For text, we use our proprietary text annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary text annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. It also encapsulates many of the innovations we conceived of in the course of our 30-year history of creating high-quality data.
AI Digital Transformation
We also provide AI solutions and platforms to companies that intensively process textual data and seek to obtain the benefits of AI/ML technologies without having to develop AI/ML engineering capabilities in-house. For such companies, we often integrate one or more of our pre-trained text processing algorithms as a foundation for an overall solution. Our algorithms are accessible as microservices via application programming interfaces (APIs), enabling easy integration.
In conjunction with AI digital transformation, we often provide a range of data engineering support services, including data transformation, data curation, data hygiene, data consolidation, data compliance, and master data management.
Our customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns of our AI digital transformation solutions and platforms.
Industry AI Platforms
Our industry platforms address specific, niche market requirements that we believe we can fulfill in large part with our AI/ML technologies. We deploy these industry platforms as software-as-a-service (SaaS) and as managed services. To date, we have built an industry platform for medical records data extraction and transformation (which we brand as “Synodex®”) and an industry platform for public relations (which brands as “Agility PR Solutions”).
Our Synodex industry platform transforms medical records into useable digital data organized in accordance with our proprietary data models or customer data models.
Our Agility industry platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news (print, web, radio and TV) and social media.
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Our operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
Prevailing Economic Conditions and Seasonality
Prevailing Economic Conditions
The novel coronavirus disease 2019, which the World Health Organization declared as a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, caused federal and regional governments to impose substantial restrictions on the operations of non-essential businesses and contributed to significant declines and volatility in financial markets.
While the pandemic presented, and may in the future present, new risks to our business and there have been logistical and other challenges, there was no material adverse impact on our results of operations for the three and six months ended June 30, 2022.
The situation surrounding the COVID-19 crisis remains fluid and the extent and duration of its impact to the economy remains unclear. For this reason, we cannot reasonably estimate with any degree of certainty the future impact that it may have on our results of operations and financial condition. The potential for a material impact on our results of operations and financial position increases the longer COVID-19 affects the level of economic activity in the United States and globally.
With the current level of demand for our services, we believe we have existing cash and cash equivalents that provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 months from the date of the filing of this Report (refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information). In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investment activities, and reducing operating costs as we would likely have no other sources of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
Seasonality
Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.
Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.
Trends
We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the six-month period ending June 30, 2022, we added an average of 119 new customers per quarter. This is a 90% increase over the 62 new customers we added on average per quarter in 2020 and a 27 % increase over the 93 new customers we added on average per quarter in 2021.
For further information refer to the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.” in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP (“GAAP”), we provide certain non-GAAP financial information. We believe that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results. In some respects, management believes non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents by making adjustments that management believes are reflective of the ongoing performance of the business.
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We believe that the presentation of this non-GAAP financial information provides investors with greater transparency by providing investors a more complete understanding of our financial performance, competitive position, and prospects for the future, particularly by providing the same information that management and our Board of Directors uses to evaluate our performance and manage the business. However, the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before interest expense, income taxes, depreciation and amortization of intangible assets (which derives EBITDA), plus additional adjustments for loss on impairment of intangibles assets and goodwill, stock-based compensation, income (loss) attributable to non-controlling interests and other one-time costs. We use Adjusted EBITDA to evaluate core results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.
The following table contains a reconciliation of GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three and six months ended June 30, 2022 and 2021 (in thousands).
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Consolidated | 2022 | 2021 | 2022 | 2021 | ||||||||
Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | (3,833) | $ | (103) | $ | (6,648) | $ | 295 | ||||
Provision for income taxes | 550 | 366 |
| 1,025 |
| 293 | ||||||
Interest expense, net | (1) | 4 |
| 2 |
| 14 | ||||||
Gain on loan forgiveness | - | (580) | - | (580) | ||||||||
Depreciation and amortization | 951 | 673 |
| 1,824 |
| 1,370 | ||||||
Stock-based compensation | 1,028 | 335 |
| 1,565 |
| 614 | ||||||
Non-controlling interests | 2 | (27) |
| (73) |
| (16) | ||||||
Adjusted EBITDA / (loss) - Consolidated | $ | (1,303) | $ | 668 | $ | (2,305) | $ | 1,990 | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
DDS Segment | 2022 | 2021 | 2022 | 2021 | ||||||||
Net income (loss) attributable to DDS Segment | $ | (651) | $ | 1,307 | $ | 112 | $ | 1,987 | ||||
Provision for income taxes | 399 | 342 |
| 932 |
| 246 | ||||||
Interest expense, net | (1) | 4 |
| 2 |
| 13 | ||||||
Gain on loan forgiveness | - | (580) | - | (580) | ||||||||
Depreciation and amortization | 57 | 159 |
| 281 |
| 319 | ||||||
Stock-based compensation | 796 | 242 |
| 1,168 |
| 459 | ||||||
Non-controlling interests | 2 | (2) |
| 1 |
| (3) | ||||||
Adjusted EBITDA - DDS Segment | $ | 602 | $ | 1,472 | $ | 2,496 | $ | 2,441 | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Synodex Segment | 2022 | 2021 | 2022 | 2021 | ||||||||
Net loss attributable to Synodex Segment | $ | (680) | $ | (254) | $ | (1,465) | $ | (113) | ||||
Depreciation and amortization | $ | 271 | 2 | $ | 312 | $ | 2 | |||||
Stock-based compensation | 50 | 7 |
| 99 |
| 14 | ||||||
Non-controlling interests | - | (25) |
| (74) |
| (13) | ||||||
Adjusted EBITDA (loss) - Synodex Segment | $ | (359) | $ | (270) | $ | (1,128) | $ | (110) | ||||
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Agility Segment | 2022 | 2021 | 2022 | 2021 | ||||||||
Net loss attributable to Agility Segment | $ | (2,502) | $ | (1,156) | $ | (5,295) | $ | (1,579) | ||||
Provision for income taxes | 151 | 24 |
| 93 |
| 47 | ||||||
Interest expense, net | - | - |
| - |
| 1 | ||||||
Depreciation and amortization | 623 | 512 |
| 1,231 |
| 1,049 | ||||||
Stock-based compensation | 182 | 86 |
| 298 |
| 141 | ||||||
Adjusted EBITDA (loss) - Agility Segment | $ | (1,546) | $ | (534) | $ | (3,673) | $ | (341) | ||||
Results of Operations
Amounts in the MD&A below are after elimination of any inter-segment profit and have been rounded. All percentages have been calculated using rounded amounts.
Three Months Ended June 30, 2022 and 2021
Revenues
Total revenues were $20.0 million and $17.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $3.0 million or approximately 17%.
Revenues from the DDS segment were $14.2 million and $13.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.2 million or approximately 9%. The increase was primarily attributable to higher volume from an existing customer.
Revenues from the Synodex segment were $1.9 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.0 million or approximately 111%. The increase was primarily attributable to higher volume from two existing customers.
Revenues from the Agility segment were $3.9 million and $3.1 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.8 million or approximately 26%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
One customer in the DDS segment generated approximately 13% of the Company’s total revenues for the three months ended June 30, 2022. A second customer in the DDS segment generated approximately 10% and 11% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively. A third customer in the DDS segment generated approximately 11% of the Company’s total revenues for the three months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 47% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively.
Direct Operating Costs
Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our customers.
Direct operating costs were $13.0 million and $10.4 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $2.6 million or 25%. The cost increase primarily supported our growth initiatives across all business segments. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $2.6 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.5 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.5 million. Direct operating costs as a percentage of total revenues were 65% and 61% for the three-month periods ended June 30, 2022 and 2021. The increase in direct operating costs as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.
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Direct operating costs for the DDS segment were approximately $8.9 million and $7.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.1 million or 14%. The cost increase primarily supported our growth initiatives. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $1.6 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.5 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 63% and 60% for the three months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was primarily attributable to an increase in direct operating costs offset in part by an increase in revenues.
Direct operating costs for the Synodex segment were $2.2 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.4 million or 175%. The cost increase primarily supported our growth initiatives combined with the timing of new technology roll-out. The increase in Direct operating costs was primarily due to an increase in direct labor costs primarily on account of higher headcount and salary increases of $1.1 million and an increase in depreciation and amortization of capitalized developed software of $0.3 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 116% and 89% for the three months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was due to an increase in direct operating costs offset in part by an increase in revenues.
Direct operating costs for the Agility segment were $1.9 million and $1.8 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.1 million or 6%. The cost increase was primarily due to amortization of capitalized developed software of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 49% and 58% for the three months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset in part by an increase in direct operating costs.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative payroll and related costs including commissions, bonuses, and stock-based compensation, marketing costs, new services research and related software development, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $10.3 million and $7.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $3.3 million or 47%. The cost increase primarily supported our growth initiatives across all business segments. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment and professional fees of $2.5 million, marketing related activities of $0.5 million, and a $0.3 million increase in other selling and administrative costs. Selling and administrative expenses as a percentage of total revenues were 52% and 41% for the three months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.
Selling and administrative expenses for the DDS segment were $5.5 million and $4.2 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.3 million or 31%. The cost increase primarily supported our growth initiatives. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment fees of $0.7 million, marketing related activities of $0.2 million, professional fees of $0.1 million and an increase in other selling and administrative expenses of $0.3 million. Selling, and administrative expenses for the DDS segment as a percentage of DDS revenues were 39% and 32% for the three-month periods ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures offset in part by increased revenues.
Selling and administrative expenses for the Synodex segment were $0.5 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.2 million or 67%. The cost increase was primarily attributable to payroll related costs and recruitment fees for new hires and other professional fees of $0.2 million to support our growth initiatives. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 26% and 33% for the three months ended June 30, 2022 and 2021, respectively. The decrease in selling and administrative expenses as a percentage of segment revenues was primarily attributable to higher revenues offset in part by higher expenditures.
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Selling and administrative expenses for the Agility segment were $4.3 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.8 million or 72%. The cost increase primarily supported our growth initiatives. The selling and administrative costs increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives of $1.5 million, marketing related activity costs and other net increases of $0.3 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 110 % and 81% for the three months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily due to higher expenditures, offset in part by an increase in revenues.
Income Taxes
We recorded a provision for income taxes of $0.6 million for the three months ended June 30, 2022, as compared to $0.4 million for the three months ended June 30, 2021.
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries, and a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses.
Net Income (Loss)
We incurred a net loss of $3.8 million during the three months ended June 30, 2022, compared to a net loss of $0.1 million during the three months ended June 30, 2021. The $3.7 million change was a result of higher Direct operating and Selling and administrative costs in all segments in the current quarter, offset in part by higher revenues in all segments.
Net loss for the DDS segment was $0.6 million for the three months ended June 30, 2022, compared to a net income of $1.3 million for the three months ended June 30, 2021. The $1.9 million change was primarily attributable to an increase in Direct operating and Selling and administrative costs, offset in part by an increase in revenues in the current quarter.
Net loss for the Synodex segment was $0.7 million for the three months ended June 30, 2022, compared to a net loss of $0.2 million for the three months ended June 30, 2021. The $0.5 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current quarter.
Net loss for the Agility segment was $2.5 million for the three months ended June 30, 2022, compared to net loss of $1.2 million for the three months ended June 30, 2021. The $1.3 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current quarter.
Adjusted EBITDA
Adjusted EBITDA for the three months ended June 30, 2022 was a loss of $1.3 million compared to an income of $0.7 million for the three months ended June 30, 2021. The $2.0 million change in Adjusted EBITDA was due to a higher net loss reduced in part by higher provisions for income taxes, stock-based compensation and depreciation and amortization.
Adjusted EBITDA for the DDS segment was $0.6 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively. The $0.9 million change in Adjusted EBITDA was due to lower net income for the DDS segment, offset in part by higher stock-based compensation.
Adjusted EBITDA for the Synodex segment was a loss of $0.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. The $0.1 million change was due to a higher net loss for the Synodex segment, offset in part by higher stock-based compensation, depreciation and amortization.
Adjusted EBITDA for the Agility segment was a loss of $1.5 million and $0.5 million for the three months ended June 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDA was due to a higher net loss for the Agility segment.
Six Months Ended June 30, 2022 and 2021
Revenues
Total revenues were $41.2 million and $33.0 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $8.2 million or approximately 25%.
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Revenues from the DDS segment were $30.1 million and $24.8 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $5.3 million or approximately 21%. The increase was primarily attributable to higher volume from an existing customer.
Revenues from the Synodex segment were $3.6 million and $1.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.7 million or approximately 89%. The increase was primarily attributable to higher volume from two customers.
Revenues from the Agility segment were $7.5 million and $6.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.2 million or approximately 19%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.
One customer in the DDS segment generated approximately 17% of the Company’s total revenues for the six months ended June 30, 2022. Two other customers in the DDS segment generated approximately 22% of the Company’s total revenues for the six months ended June 30, 2021. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 38% and 48% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively.
Direct Operating Costs
Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our customers.
Direct operating costs were $26.4 million and $20.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $5.9 million or 29%. The cost increase primarily supported our growth initiatives across all business segments. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $5.5 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.5 million and other direct operating costs of $0.6 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs as a percentage of total revenues were 64% and 62% for the six-month periods ended June 30, 2022 and 2021. The increase in direct operating costs as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.
Direct operating costs for the DDS segment were approximately $18.3 million and $15.4 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $2.9 million or 19%. The cost increase primarily supported our growth initiatives. The increase in Direct operating costs includes direct and indirect labor related costs primarily on account of higher headcount and salary increases of $3.2 million; and an increase in cloud services, occupancy, depreciation and amortization of capitalized developed software of $0.4 million. These cost increases were offset in part by the favorable impact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 61% and 62% for the six months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily attributable to increased revenues, offset in part by an increase in direct operating costs.
Direct operating costs for the Synodex segment was $4.0 million and $1.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $2.5 million or 167%. The cost increase primarily supported our growth initiatives combined with the timing of new technology roll-out. The increase in Direct operating costs was primarily due to an increase in direct labor costs on account of higher headcount and salary increases of $2.2 million and an increase in depreciation and amortization of capitalized developed software of $0.3 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 111% and 79% for the six months ended June 30, 2022 and 2021, respectively. The increase in direct operating costs as a percentage of segment revenues was due to an increase in direct operating costs offset in part by an increase in revenues.
Direct operating costs for the Agility segment were $4.1 million and $3.6 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $0.5 million or 14%. The cost increase was primarily due to higher labor related costs of $0.2 million, amortization of capitalized developed software of $0.2 million and other net increases of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 55% and 57% for the six months ended June 30, 2022 and 2021, respectively. The decrease in direct operating costs as a percentage of segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products offset by an increase in direct operating costs.
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Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative payroll and related costs including commissions, bonuses, and stock-based compensation, marketing costs, new services research and related software development, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.
Selling and administrative expenses were $20.5 million and $12.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $8.0 million or 64%. The cost increase primarily supported our growth initiatives across all business segments. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment and professional fees of $6.0 million, marketing related activities of $1.3 million, and a $0.7 million increase in other selling and administrative costs. Selling and administrative expenses as a percentage of total revenues were 50% and 38% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures in all segments, offset in part by increased revenues in all segments.
Selling and administrative expenses for the DDS segment were $10.8 million and $7.7 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $3.1 million or 40%. The cost increase primarily supported our growth initiatives. The selling and administrative cost increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives, bonuses, and recruitment fees of $1.3 million, marketing related activities of $0.6 million, professional fees of $0.5 million and an increase in other selling and administrative expenses of $0.7 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues were 36% and 31% for the six-month periods ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher expenditures offset in part by increased revenues.
Selling and administrative expenses for the Synodex segment were $1.1 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $0.6 million or 120%. The cost increase was primarily attributable to payroll related costs and recruitment fees for new hires and other professional fees of $0.6 million to support our growth initiatives. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 31% and 26% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily attributable to higher expenditures offset in part by higher revenues.
Selling and administrative expenses for the Agility segment were $8.6 million and $4.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $4.3 million or 100%. The cost increase primarily supported our growth initiatives. The selling and administrative costs increase includes payroll related costs for new hires, stock-based compensation, commissions, incentives of $3.3 million, marketing related activity costs and other net increases of $1.0 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 115% and 68% for the six months ended June 30, 2022 and 2021, respectively. The increase in selling and administrative expenses as a percentage of segment revenues was primarily due to higher expenditures, offset in part by an increase in revenues.
Gain on PPP Loan forgiveness
On May 4, 2020, the Company received loan proceeds of $579,700 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended. On May 21, 2021, the Company’s loan forgiveness application was approved for 100% of the amount loaned to the Company by the Small Business Administration (“SBA”).
Income Taxes
We recorded a provision for income taxes of $1.0 million for the six months ended June 30, 2022, as compared to $0.3 million for the six months ended June 30, 2021.
Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries, and a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses.
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Net Income (Loss)
We incurred a net loss of $6.6 million during the six months ended June 30, 2022, compared to a net income of $0.3 million during the six months ended June 30, 2021. The $ 6.9 million change was a result of higher Direct operating and Selling and administrative costs in all segments in the current six-month period, offset in part by higher revenues in all segments.
Net income for the DDS segment was $0.1 million for the six months ended June 30, 2022, compared to a net income of $2.0 million for the six months ended June 30, 2021. The change of $1.9 million was primarily attributable to an increase in Direct operating and Selling and administrative costs, offset in part by an increase in revenues in the current six-month period.
Net loss for the Synodex segment was $1.4 million for the six months ended June 30, 2022, compared to a net loss of $0.1 million for the six months ended June 30, 2021. The $1.3 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current six-month period.
Net loss for the Agility segment was $5.3 million for the six months ended June 30, 2022, compared to net loss of $1.6 million for the six months ended June 30, 2021. The $3.7 million change was due to higher Direct operating and Selling and administrative costs, offset in part by higher revenues in the current six-month period.
Adjusted EBITDA
Adjusted EBITDA for the six months ended June 30, 2022 was a loss of $2.3 million compared to an income of $ 2.0 million for the six months ended June 30, 2021. The $4.3 million change in Adjusted EBITDA was due to a higher net loss reduced in part by higher provisions for income taxes, stock-based compensation, depreciation and amortization.
Adjusted EBITDA for the DDS segment was $2.5 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively. The $0.1 million change in Adjusted EBITDA was due to higher stock-based compensation and a higher provision for income taxes, offset in part by lower net income in the DDS segment.
Adjusted EBITDA for the Synodex segment was a loss $1.1 million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively. The $1.0 million change in Adjusted EBITDA was due to a higher net loss in the Synodex segment.
Adjusted EBITDA for the Agility segment was a loss of $3.7 million and $ 0.3 million for the six months ended June 30, 2022 and 2021, respectively. The $3.4 million change in Adjusted EBITDA was due to a higher net loss in the Agility segment.
Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted EBITDA” above.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, were as follows:
| June 30, |
| December 31, | |||
2022 | 2021 | |||||
Cash and cash equivalents | $ | 10,481 | $ | 18,902 | ||
Working capital |
| 5,697 |
| 12,658 | ||
At June 30, 2022, we had cash and cash equivalents of $10.5 million, of which $7.1 million was held by our foreign subsidiaries, and $3.4 million was held in the United States. Despite our ability under existing tax law to repatriate funds from overseas after paying the toll charge, it is our intent as of June 30, 2022, to indefinitely reinvest the overseas funds in our foreign subsidiaries on account of the withholding tax that we would have to incur on the actual remittances.
We have used, and plan to use, our cash and cash equivalents for (i) capital investments; (ii) the expansion of our operations; (iii) technology innovation; (iv) hiring of sales personnel; (v) product management and strategic marketing; (vi) general corporate purposes, including working capital; and (vii) possible business acquisitions. We had working capital of approximately $5.7 million and $12.7 million as of June 30, 2022 and December 31, 2021, respectively. The decrease in working capital was due to a decrease in cash used to fund our growth initiatives.
We did not have any material commitments for capital expenditures as of June 30, 2022.
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We believe that our existing cash and cash equivalents and internally generated funds will provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 months from the date of this Report. However, we have no bank facilities or lines of credit. A decrease in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.
Cash Flows
Net Cash Used in Operating Activities
Cash used in our operating activities for the six months ended June 30, 2022 was $3.9 million primarily on account of the following factors: our net loss for the period of $6.7 million; a source of $ 4.0 million from non-cash expenses consisting of depreciation and amortization of $1.8 million, stock-based compensation of $1.6 million, pension cost of $0.3 million, a $0.2 million reduction in deferred tax provisions and a loss of $0.1 million from the termination of one of our operating lease contracts. Net changes from working capital accounts further utilized an additional $1.2 million in working capital, mainly from a decrease in accounts payable and accrued expenses of $1.6 million, offset in part by a decrease in accounts receivable of $0.3 million and a net reduction in other working capital accounts of $0.1 million. Refer to the condensed consolidated statements of cash flows for further details.
Cash provided by our operating activities for the six months ended June 30, 2021 was $5.6 million primarily on account of the following factors: our net income for the period of $0.3 million; a source of $1.7 million from non-cash expenses consisting of depreciation and amortization of $1.4 million, stock-based compensation of $0.6 million and pension cost of $0.3 million, offset in part by a gain on loan forgiveness of $0.6 million. Net changes from working capital accounts further contributed an additional source of $3.6 million. Refer to the condensed consolidated statements of cash flows for further details.
Net Cash Used in Investing Activities
For the six months ended June 30, 2022 and 2021, cash used in our investing activities was $3.6 million and $1.5 million, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software
During the next 12 months, it is anticipated that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate to $7.5 million, a portion of which we may finance.
Net Cash Used in Financing Activities
Cash used in financing activities for the six months ended June 30, 2022 was $0.3 million primarily for payments of long-term obligations of $0.5 million, reduced in part by proceeds from stock option exercises of $0.2 million.
Cash provided by financing activities for the six months ended June 30, 2021 was $0.4 million primarily from proceeds of stock option exercises of $1.8 million reduced in part by cash paid for withholding taxes on net settlement exercises of $0.8 million and payments for long-term obligations of $0.6 million.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of Agility, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our condensed consolidated results of operations and financial position.
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The significant accounting policies used in preparing our condensed consolidated financial statements contained in this Report are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted, and we believe those critical accounting policies affect our more significant estimates and judgments in the preparation of our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of June 30, 2022. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated by reference herein.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities or repurchases of equity securities during the three months ended June 30, 2022.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. |
| Description |
10.1 | ||
31.1* | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | ||
32.2** | ||
101 | The following materials from Innodata Inc.’s Quarterly Report on Form 10-Q for the three months ended June 30, 2022, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021; (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021; (v) Notes to Condensed Consolidated Financial Statements (unaudited). | |
104 | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* | Filed herewith. |
** | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INNODATA INC.
Date: | August 12, 2022 | /s/ Jack S. Abuhoff | |
Jack S. Abuhoff | |||
Chief Executive Officer and President | |||
Date: | August 12, 2022 | /s/ Marissa B. Espineli | |
Marissa B. Espineli | |||
Interim Chief Financial Officer | |||
(Principal Financial Officer and Principal Accounting Officer) | |||
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