10-Q 1 inod-20220630x10q.htm FORM 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

 

For the quarterly period ended June 30, 2022

OR 

 

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

For the transition period from ________________ to ________________ 

Commission file number: 001-35774

INNODATA INC.

(Exact name of registrant as specified in its charter)

Delaware

13-3475943

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

55 Challenger Road

07660

Ridgefield Park, New Jersey

(Zip Code)

(Address of principal executive offices)

(201) 371-8000

(Registrant’s telephone number, including area code)

None

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

INOD

The NASDAQ Stock Market LLC

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No

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

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended June 30, 2022

INDEX

    

Part I – Financial Information

    

 

Page No.

Item 1.

Financial Statements

Condensed Consolidated Financial Statements (Unaudited):

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

2

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

3

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

4

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

5

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

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

Part II – Other Information

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

 

37

1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

    

June 30, 

    

December 31, 

 

2022

 

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

10,481

$

18,902

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

 

10,956

 

11,379

Prepaid expenses and other current assets

 

3,786

 

3,681

Total current assets

 

25,223

 

33,962

Property and equipment, net

 

2,899

 

2,947

Right-of-use-asset, net

 

4,395

 

5,621

Other assets

 

2,005

 

2,247

Deferred income taxes, net

 

1,667

 

1,950

Intangibles, net

 

11,658

 

10,347

Goodwill

 

2,076

 

2,143

Total assets

$

49,923

$

59,217

LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,054

$

1,823

Accrued expenses and other

 

6,205

 

7,564

Accrued salaries, wages and related benefits

 

6,404

 

6,391

Income and other taxes

 

3,387

 

3,213

Long-term obligations - current portion

 

700

 

1,279

Operating lease liability - current portion

 

776

 

1,034

Total current liabilities

 

19,526

 

21,304

Deferred income taxes, net

 

20

 

15

Long-term obligations, net of current portion

 

5,998

 

6,217

Operating lease liability, net of current portion

 

4,087

 

5,276

Total liabilities

 

29,631

 

32,812

Commitments and contingencies

 

 

Non-controlling interests

 

(730)

 

(3,522)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

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

 

-

 

-

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

 

305

 

303

Additional paid-in capital

 

33,946

 

35,121

Retained earnings (deficit)

 

(3,488)

 

3,160

Accumulated other comprehensive loss

 

(3,276)

 

(2,192)

 

27,487

 

36,392

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

 

(6,465)

 

(6,465)

Total stockholders’ equity

 

21,022

 

29,927

Total liabilities, non-controlling interests and stockholders’ equity

$

49,923

$

59,217

See notes to Condensed Consolidated Financial Statements.

2

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

    

Three Months Ended

June 30,

    

2022

    

2021

Revenues

$

19,987

$

17,049

Operating costs and expenses:

 

  

 

  

Direct operating costs

 

12,992

 

10,409

Selling and administrative expenses

 

10,277

 

6,980

Interest expense, net

 

(1)

 

4

 

23,268

 

17,393

Loss from operations

 

(3,281)

 

(344)

Gain from loan forgiveness

 

-

 

580

Income (loss) before provision for income taxes

 

(3,281)

 

236

Provision for income taxes

 

550

 

366

Consolidated net loss

 

(3,831)

 

(130)

Income (loss) attributable to non-controlling interests

 

2

 

(27)

Net loss attributable to Innodata Inc. and Subsidiaries

$

(3,833)

$

(103)

Loss per share attributable to Innodata Inc. and Subsidiaries:

 

  

 

  

Basic and Diluted

$

(0.14)

$

(0.00)

Weighted average shares outstanding:

 

  

 

  

Basic and Diluted

 

27,226

 

26,522

Comprehensive Loss:

 

  

 

  

Consolidated Net loss

$

(3,831)

$

(130)

Pension liability adjustment, net of taxes

 

38

 

11

Change in fair value of derivatives, net of taxes

 

(541)

 

(267)

Foreign currency translation adjustment

 

(600)

 

135

Other comprehensive loss

 

(1,103)

 

(121)

Total Comprehensive loss

 

(4,934)

 

(251)

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

 

2

 

(27)

Comprehensive Loss attributable to Innodata Inc. and Subsidiaries

$

(4,936)

$

(224)

See notes to Condensed Consolidated Financial Statements.

3

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

Six Months Ended

June 30, 

    

2022

    

2021

Revenues

$

41,179

$

33,016

Operating costs and expenses:

 

 

Direct operating costs

 

26,406

 

20,505

Selling and administrative expenses

 

20,467

 

12,505

Interest expense, net

 

2

 

14

 

46,875

 

33,024

Loss from operations

(5,696)

(8)

Gain from loan forgiveness

-

580

Income (loss) before provision for income taxes

 

(5,696)

 

572

Provision for income taxes

 

1,025

 

293

Consolidated net income (loss)

 

(6,721)

 

279

Loss attributable to non-controlling interests

 

(73)

 

(16)

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

$

(6,648)

$

295

 

 

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

 

 

Basic

$

(0.24)

$

0.01

Diluted

$

(0.24)

$

0.01

Weighted average shares outstanding:

 

 

Basic

 

27,192

 

26,199

Diluted

27,192

29,194

Comprehensive income (loss):

 

 

Consolidated net income (loss)

$

(6,721)

$

279

Pension liability adjustment, net of taxes

 

78

 

22

Foreign currency translation adjustment, net of taxes

 

(626)

 

114

Change in fair value of derivatives, net of taxes

 

(536)

 

(267)

Other comprehensive loss

 

(1,084)

 

(131)

Total Comprehensive income (loss)

 

(7,805)

 

148

Less: Comprehensive loss attributable to non-controlling interests

 

(73)

 

(16)

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

$

(7,732)

$

164

See notes to Condensed Consolidated Financial Statements.

4

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Six Months Ended

 

June 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Consolidated net income (loss)

$

(6,721)

$

279

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

 

 

Depreciation and amortization

1,824

1,370

Gain on loan forgiveness

-

(580)

Stock-based compensation

1,565

614

Deferred income taxes

 

167

 

(61)

Pension cost

303

322

Loss on lease termination

125

-

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

274

 

(140)

Prepaid expenses and other current assets

 

(148)

239

Other assets

 

243

 

168

Accounts payable and accrued expenses

 

(1,647)

 

4,658

Accrued salaries, wages and related benefits

 

(35)

 

-

Income and other taxes

 

178

 

(1,283)

Net cash provided by (used in) operating activities

 

(3,872)

 

5,586

Cash flows from investing activities:

 

 

Capital expenditures

 

(3,638)

 

(1,473)

Net cash used in investing activities

 

(3,638)

 

(1,473)

Cash flows from financing activities:

 

  

 

  

Proceeds from stock option exercises

180

1,750

Withholding taxes on net settlement of stock-based compensation

-

(763)

Payment of long-term obligations

 

(477)

 

(574)

Net cash provided by (used in) financing activities

(297)

413

Effect of exchange rate changes on cash and cash equivalents

 

(614)

 

(40)

Net increase (decrease) in cash and cash equivalents

 

(8,421)

 

4,486

Cash and cash equivalents, beginning of period

 

18,902

 

17,573

Cash and cash equivalents, end of period

$

10,481

$

22,059

Supplemental disclosures of cash flow information:

 

 

Cash paid for income taxes

$

696

$

724

Cash paid for operating leases

$

974

$

860

Cash paid for interest

$

4

$

17

See notes to Condensed Consolidated Financial Statements.

5

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

(In thousands)

Accumulated 

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Treasury Stock

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

    

Shares

Amount

    

Total

January 1, 2022

30,347

$

303

$

35,121

$

3,160

$

(2,192)

3,184

$

(6,465)

$

29,927

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(2,815)

-

-

-

(2,815)

Stock-based compensation

-

-

537

-

-

-

-

537

Stock option exercises

23

1

26

-

-

-

-

27

Shares withheld for exercise settlement and taxes

(7)

-

(53)

-

-

-

-

(53)

Redemption of non-controlling interest

-

-

(2,864)

-

-

-

-

(2,864)

Pension liability adjustments, net of taxes

-

-

-

-

40

-

-

40

Foreign currency translation adjustment

-

-

-

-

(26)

-

-

(26)

Change in fair value of derivatives, net of taxes

-

-

-

-

5

-

-

5

March 31, 2022

30,363

$

304

$

32,767

$

345

$

(2,173)

3,184

$

(6,465)

$

24,778

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(3,833)

-

-

-

(3,833)

Stock-based compensation

-

-

1,028

-

-

-

-

1,028

Stock option exercises

124

1

152

-

-

-

-

153

Redemption of non-controlling interest

-

-

(1)

-

-

-

-

(1)

Pension liability adjustments, net of taxes

-

-

-

-

38

-

-

38

Foreign currency translation adjustment

-

-

-

-

(600)

-

-

(600)

Change in fair value of derivatives, net of taxes

-

-

-

-

(541)

-

-

(541)

June 30, 2022

30,487

$

305

$

33,946

$

(3,488)

$

(3,276)

3,184

$

(6,465)

$

21,022

January 1, 2021

28,984

$

289

$

31,921

$

4,833

$

(938)

3,184

$

(6,465)

$

29,640

Net income attributable to Innodata Inc. and subsidiaries

-

-

-

398

-

-

-

398

Stock-based compensation

-

-

278

-

-

-

-

278

Exercise of stock options

690

4

605

-

-

-

-

609

Shares withheld for exercise settlement and taxes

(193)

1

(764)

-

-

-

-

(763)

Pension liability adjustments, net of taxes

-

-

-

-

11

-

-

11

Foreign currency translation adjustment

-

-

-

-

(21)

-

-

(21)

Change in fair value of derivatives, net of taxes

-

-

-

-

-

-

-

-

March 31, 2021

29,481

$

294

$

32,040

$

5,231

$

(948)

3,184

$

(6,465)

$

30,152

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(103)

-

-

-

(103)

Stock-based compensation

-

-

336

-

-

-

-

336

Exercise of stock options

556

5

1,136

-

-

-

-

1,141

Pension liability adjustments, net of taxes

-

-

-

-

11

-

-

11

Foreign currency translation adjustment

-

-

-

-

135

-

-

135

Change in fair value of derivatives, net of taxes

-

-

-

-

(267)

-

-

(267)

June 30, 2021

30,037

$

299

$

33,512

$

5,128

$

(1,069)

3,184

$

(6,465)

$

31,405

See notes to Condensed Consolidated Financial Statements.

6

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

1.           Summary of Significant Accounting Policies and Estimates

Basis of Presentation - The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the “Company”) as of  June 30, 2022 and December 31, 2021, the results of its operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021, and stockholders’ equity for the three and six months ended June 30, 2022 and 2021. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Certain information and note disclosures normally included in or with financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those in the notes to the consolidated financial statements for the year ended December 31, 2021.

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

Use of Estimates - In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are reasonable, including assumptions made by management about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Actual results could differ from those estimates. Significant estimates include those related to the allowance for doubtful accounts and billing adjustments, useful life of long-lived assets, useful life of intangible assets, impairment of goodwill, valuation of deferred tax assets, valuation of stock-based compensation, pension benefit plan assumptions, litigation accruals and estimated accruals for various tax exposures.

Revenue Recognition – The Company’s revenue is recognized when services are rendered or goods are delivered to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services or goods as per the agreement with the customer. In cases where there are agreements with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the agreement at the agreement’s inception. Performance obligations that are not distinct at agreement inception are combined. For agreements with distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation, if any, and then evaluates how the services are performed for the customer to determine the timing of revenue recognition.

For the Digital Data Solutions (DDS) segment, revenue is recognized primarily based on the quantity delivered or resources utilized in the period in which services are performed and performance conditions are satisfied as per the agreement. Revenue from agreements billed on a time-and-materials basis is recognized as services are performed. Revenue from fixed-fee agreements, which are not significant to overall revenues, is recognized based on the proportional performance method of accounting, as services are performed, or milestones are achieved.

7

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period in which services are performed and performance conditions are satisfied as per the agreement. A portion of the Synodex segment revenue is derived from licensing the Company’s functional software and providing access to the Company’s hosted software platform. Revenue from such services is recognized monthly when all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; access to the service is provided to the end user; and collection is probable.

The Agility segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched media analysis services is recognized when the services are performed, and performance conditions are satisfied. Revenue from the reseller agreements is recognized at the gross amount received for the goods in accordance with the Company functioning as a principal due to the Company meeting the following criteria: the Company acts as the primary obligor in the sales transaction; assumes the credit risk; sets the price; can select suppliers; and is involved in the execution of the services, including after sales service.

Revenue includes reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.

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

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

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

The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and for the Company’s Agility subsidiary in Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are prepared in these respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in the Company’s condensed consolidated financial statements. Income, expenses and cash flows are translated at weighted-average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulated other comprehensive loss in stockholders’ equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

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

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

8

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

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

Income Taxes - Estimated deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is more likely than not that all or some portion of the estimated deferred tax assets will not be realized. While the Company considers future taxable income in assessing the need for the valuation allowance, in the event that the Company anticipates that it will be able to realize the estimated deferred tax assets in the future in excess of its net recorded amount, an adjustment to the provision for deferred tax assets would increase income in the period such determination was made. Similarly, in the event that the Company anticipates that it will not be able to realize the estimated deferred tax assets in the future considering future taxable income, an adjustment to the provision for deferred tax assets would decrease income in the period such determination was made. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue as a liability the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.

In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. and Canadian deferred tax assets will not be realizable. As the expectation of future taxable income resulting from the U.S. and Canadian entities is not probable at this time, the Company maintains a valuation allowance against all the U.S. and Canadian net deferred tax assets.

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

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

Recent Accounting Pronouncements – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements” (“ASU 2016-13”). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation amount that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” which clarifies ASC Topic 326, “Financial Instruments – Credit Losses” and corrects unintended application of the guidance, and in November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments,” which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for certain smaller reporting companies for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, which will be fiscal 2023 for the Company if it continues to be classified as a smaller reporting company, with early adoption permitted. The Company does not expect that the adoption of the new guidance will have a material impact on the Company’s condensed consolidated financial statements.

2.           Goodwill and Intangible Assets

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

Balance as of January 1, 2022

    

$

2,143

Foreign currency translation adjustment

 

(67)

Balance as of June 30, 2022

$

2,076

9

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)