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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 September 30, 2023

OR 

 

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

For the transition period from                        to                        

Commission file number: 001-35774

INNODATA INC.

(Exact name of registrant as specified in its charter)

Delaware

13-3475943

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

55 Challenger Road

07660

Ridgefield Park, New Jersey

(Zip Code)

(Address of principal executive offices)

(201) 371-8000

(Registrant’s telephone number, including area code)

None

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

INOD

The NASDAQ Stock Market LLC

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

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

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

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

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

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

Yes    No  

The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of October 27, 2023 was 28,709,546.

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended September 30, 2023

INDEX

    

Part I – Financial Information

    

 

Page No.

Item 1.

Financial Statements

Condensed Consolidated Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2023 and 2022

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023 and 2022

4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

 

Part II – Other Information

 

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

Signatures

 

47

1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

    

September 30, 

    

December 31, 

 

2023

 

2022

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

14,812

$

9,792

Short term investments – other

13

507

Accounts receivable, net of allowance for doubtful accounts

 

10,676

 

9,528

Prepaid expenses and other current assets

 

3,826

 

3,858

Total current assets

 

29,327

 

23,685

Property and equipment, net

 

2,373

 

2,511

Right-of-use-asset, net

 

5,177

 

4,309

Other assets

 

2,515

 

1,498

Deferred income taxes, net

 

1,552

 

1,475

Intangibles, net

 

13,449

 

12,526

Goodwill

 

2,032

 

2,038

Total assets

$

56,425

$

48,042

LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,424

$

2,630

Accrued expenses and other

 

8,123

 

7,250

Accrued salaries, wages and related benefits

 

7,154

 

6,136

Income and other taxes

 

3,427

 

3,230

Long-term obligations - current portion

 

1,041

 

877

Operating lease liability - current portion

 

752

 

693

Total current liabilities

 

22,921

 

20,816

Deferred income taxes, net

 

19

 

65

Long-term obligations, net of current portion

 

6,464

 

5,079

Operating lease liability, net of current portion

 

4,873

 

4,036

Total liabilities

 

34,277

 

29,996

Commitments and contingencies

 

 

Non-controlling interests

 

(712)

 

(727)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

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

 

-

 

-

Common stock, $.01 par value; 75,000,000 shares authorized; 31,894,000 shares issued and 28,710,000 outstanding at September 30, 2023 and 30,589,000 shares issued and 27,405,000 outstanding at December 31, 2022

 

319

 

306

Additional paid-in capital

 

41,958

 

35,815

Deficit

 

(11,335)

 

(8,775)

Accumulated other comprehensive loss

 

(1,617)

 

(2,108)

 

29,325

 

25,238

Less: treasury stock, 3,184,000 shares at September 30, 2023 and December 31, 2022 at cost

 

(6,465)

 

(6,465)

Total stockholders’ equity

 

22,860

 

18,773

Total liabilities, non-controlling interests and stockholders’ equity

$

56,425

$

48,042

See notes to Condensed Consolidated Financial Statements.

2

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

    

Three Months Ended

September 30,

    

2023

    

2022

Revenues

$

22,169

$

18,447

Operating costs and expenses:

 

 

Direct operating costs

 

13,945

 

12,389

Selling and administrative expenses

 

7,401

 

9,117

Interest expense (income), net

 

66

 

(1)

 

21,412

 

21,505

Income (loss) before provision for income taxes

757

(3,058)

Provision for income taxes

374

268

Consolidated net income (loss)

 

383

 

(3,326)

Income attributable to non-controlling interests

 

12

 

1

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

$

371

$

(3,327)

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

Basic

$

0.01

$

(0.12)

Diluted

$

0.01

$

(0.12)

 

 

Weighted average shares outstanding:

Basic

 

28,459

 

27,331

Diluted

32,463

27,331

Other Comprehensive income (loss):

 

 

Consolidated net income (loss)

$

383

$

(3,326)

Pension liability adjustment, net of taxes

 

(4)

 

35

Foreign currency translation adjustment

 

24

 

(644)

Change in fair value of derivatives, net of taxes

 

(178)

 

(206)

Other comprehensive loss

 

(158)

 

(815)

Total Comprehensive income (loss)

 

225

 

(4,141)

Less: Comprehensive income attributable to non-controlling interest

 

12

 

1

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

$

213

$

(4,142)

See notes to Condensed Consolidated Financial Statements.

3

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

Nine Months Ended

September 30, 

    

2023

    

2022

Revenues

$

60,663

$

59,626

Operating costs and expenses:

 

 

Direct operating costs

 

39,534

 

38,795

Selling and administrative expenses

 

22,772

 

29,584

Interest expense, net

 

122

 

1

 

62,428

 

68,380

Loss before provision for income taxes

 

(1,765)

 

(8,754)

Provision for income taxes

 

780

 

1,293

Consolidated net loss

 

(2,545)

 

(10,047)

Income (loss) attributable to non-controlling interests

 

15

 

(72)

Net loss attributable to Innodata Inc. and Subsidiaries

$

(2,560)

$

(9,975)

Loss per share attributable to Innodata Inc. and Subsidiaries:

 

  

 

  

Basic and Diluted

$

(0.09)

$

(0.37)

Weighted average shares outstanding:

 

  

 

  

Basic and Diluted

 

27,930

 

27,239

Other Comprehensive loss:

 

  

 

  

Consolidated net loss

$

(2,545)

$

(10,047)

Pension liability adjustment, net of taxes

 

(13)

 

113

Foreign currency translation adjustment

 

151

 

(1,270)

Change in fair value of derivatives, net of taxes

 

353

 

(742)

Other comprehensive income (loss)

 

491

 

(1,899)

Total Comprehensive loss

 

(2,054)

 

(11,946)

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

 

15

 

(72)

Comprehensive loss attributable to Innodata Inc. and Subsidiaries

$

(2,069)

$

(11,874)

See notes to Condensed Consolidated Financial Statements.

4

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Nine Months Ended

 

September 30, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Consolidated net loss

$

(2,545)

$

(10,047)

Adjustments to reconcile consolidated net loss to net cash

 

 

provided by operating activities:

 

 

Depreciation and amortization

3,479

2,836

Stock-based compensation

2,998

2,370

Deferred income taxes

 

(120)

 

242

Pension cost

791

577

Loss on lease termination

-

125

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(1,198)

 

1,690

Prepaid expenses and other current assets

 

449

(235)

Other assets

 

(243)

 

734

Accounts payable, accrued expenses and other

 

970

 

(253)

Accrued salaries, wages and related benefits

 

1,019

 

498

Income and other taxes

 

189

 

(197)

Net cash provided by (used in) operating activities

 

5,789

 

(1,660)

Cash flows from investing activities:

 

 

Capital expenditures

 

(4,320)

 

(5,253)

Proceeds from short term investments - other

494

-

Net cash used in investing activities

 

(3,826)

 

(5,253)

Cash flows from financing activities:

 

  

 

  

Proceeds from stock option exercises

3,158

276

Payment of long-term obligations

 

(329)

 

(510)

Net cash provided by (used in) financing activities

2,829

(234)

Effect of exchange rate changes on cash and cash equivalents

 

228

 

(1,026)

Net increase (decrease) in cash and cash equivalents

 

5,020

 

(8,173)

Cash and cash equivalents, beginning of period

 

9,792

 

18,902

Cash and cash equivalents, end of period

$

14,812

$

10,729

Supplemental disclosures of cash flow information:

 

 

Vendor financed software licenses acquired

$

1,162

$

-

Cash paid for income taxes

$

501

$

979

Cash paid for operating leases

$

1,186

$

1,425

Cash paid for interest

$

295

$

1

See notes to Condensed Consolidated Financial Statements.

5

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

(In thousands)

Accumulated 

Additional

Retained

Other

Common Stock

Paid-in

Earnings

Comprehensive

Treasury Stock

    

Shares

    

Amount

    

Capital

    

(Deficit)

    

Loss

    

Shares

Amount

    

Total

January 1, 2023

30,589

$

306

$

35,815

$

(8,775)

$

(2,108)

(3,184)

$

(6,465)

$

18,773

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(2,116)

-

-

-

(2,116)

Stock-based compensation

-

-

962

-

-

-

-

962

Stock option exercises

148

1

320

-

-

-

-

321

Shares withheld for exercise net settlement

(3)

-

-

-

-

-

-

-

Pension liability adjustments, net of taxes

-

-

-

-

(5)

-

-

(5)

Foreign currency translation adjustment

-

-

-

-

60

-

-

60

Change in fair value of derivatives, net of taxes

-

-

-

-

423

-

-

423

March 31, 2023

30,734

$

307

$

37,097

$

(10,891)

$

(1,630)

(3,184)

$

(6,465)

$

18,418

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(815)

-

-

-

(815)

Stock-based compensation

-

-

1,019

-

-

-

-

1,019

Stock option exercises

749

8

1,850

-

-

-

-

1,858

Pension liability adjustments, net of taxes

-

-

-

-

(4)

-

-

(4)

Foreign currency translation adjustment

-

-

-

-

67

-

-

67

Change in fair value of derivatives, net of taxes

-

-

-

-

108

-

-

108

June 30, 2023

31,483

$

315

$

39,966

$

(11,706)

$

(1,459)

(3,184)

$

(6,465)

$

20,651

Net income attributable to Innodata Inc. and subsidiaries

-

-

-

371

-

-

-

371

Stock-based compensation

-

-

1,017

-

-

-

-

1,017

Stock option exercises

411

4

975

-

-

-

-

979

Pension liability adjustments, net of taxes

-

-

-

-

(4)

-

-

(4)

Foreign currency translation adjustment

-

-

-

-

24

-

-

24

Change in fair value of derivatives, net of taxes

-

-

-

-

(178)

-

-

(178)

September 30, 2023

31,894

$

319

$

41,958

$

(11,335)

$

(1,617)

(3,184)

$

(6,465)

$

22,860

January 1, 2022

30,347

$

303

$

35,121

$

3,160

$

(2,192)

(3,184)

$

(6,465)

$

29,927

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(2,815)

-

-

-

(2,815)

Stock-based compensation

-

-

537

-

-

-

-

537

Stock option exercises

23

1

26

-

-

-

-

27

Shares withheld for taxes on restricted shares vesting

(7)

-

(53)

-

-

-

-

(53)

Redemption of non-controlling interest

-

-

(2,864)

-

-

-

-

(2,864)

Pension liability adjustments, net of taxes

-

-

-

-

40

-

-

40

Foreign currency translation adjustment

-

-

-

-

(26)

-

-

(26)

Change in fair value of derivatives, net of taxes

-

-

-

-

5

-

-

5

March 31, 2022

30,363

$

304

$

32,767

$

345

$

(2,173)

(3,184)

$

(6,465)

$

24,778

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(3,833)

-

-

-

(3,833)

Stock-based compensation

-

-

1,028

-

-

-

-

1,028

Stock option exercises

124

1

152

-

-

-

-

153

Redemption of non-controlling interest

-

-

(1)

-

-

-

-

(1)

Pension liability adjustments, net of taxes

-

-

-

-

38

-

-

38

Foreign currency translation adjustment

-

-

-

-

(600)

-

-

(600)

Change in fair value of derivatives, net of taxes

-

-

-

-

(541)

-

-

(541)

June 30, 2022

30,487

$

305

$

33,946

$

(3,488)

$

(3,276)

(3,184)

$

(6,465)

$

21,022

Net loss attributable to Innodata Inc. and subsidiaries

-

-

-

(3,327)

-

-

-

(3,327)

Stock-based compensation

-

-

805

-

-

-

-

805

Stock option exercises

69

1

95

-

-

-

-

96

Pension liability adjustments, net of taxes

-

-

-

-

35

-

-

35

Foreign currency translation adjustment

-

-

-

-

(644)

-

-

(644)

Change in fair value of derivatives, net of taxes

-

-

-

-

(206)

-

-

(206)

September 30, 2022

30,556

$

306

$

34,846

$

(6,815)

$

(4,091)

(3,184)

$

(6,465)

$

17,781

See notes to Condensed Consolidated Financial Statements.

6

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Summary of Significant Accounting Policies and Estimates

Basis of Presentation - The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position of Innodata Inc. (including its subsidiaries, the “Company”) as of September 30, 2023 and December 31, 2022, the results of its operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022, cash flows for the nine months ended September 30, 2023 and 2022, and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Certain information and note disclosures normally included in or with financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the notes to the consolidated financial statements for the year ended December 31, 2022.

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

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

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

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

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.

7

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Revenue associated with the services provided in one period and billed in a subsequent period is commonly referred to as unbilled revenues and is included under Accounts receivable.

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

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

Foreign Currency Translation - The functional currency of the Company’s subsidiaries in the Philippines, India, Sri Lanka, Israel, Hong Kong, and Canada (other than the Agility subsidiary) is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees, Israeli shekels, and Hong Kong and Canadian dollars are translated to U.S. dollars at rates which approximate those in effect on the transaction dates. Monetary assets and all liabilities denominated in foreign currencies on September 30, 2023 and December 31, 2022 are translated at the exchange rate in effect as of those dates. Non-monetary assets and stockholders’ equity are translated at the appropriate historical rates. Included in direct operating costs were foreign exchange losses (gains) resulting from such transactions of approximately $(0.1) million and $(0.7) million for the three months ended September 30, 2023 and 2022, and $0.3 million and $(1.9) million for the nine months ended September 30, 2023 and 2022, respectively.

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

Derivative Instruments - The Company accounts for derivative transactions in accordance with the FASB’s Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded in Other comprehensive income (loss). When the amounts recorded in Other comprehensive income (loss) are reclassified to earnings, they are included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs.

8

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 generally ranges from three to ten years. All other research and maintenance costs are expensed as incurred.

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

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

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

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

Deferred Revenue - Deferred revenue represents advance billings made to customers where conditions for revenue recognition have not been met. These amounts are included in accrued expenses and other on the accompanying condensed consolidated balance sheets. We expect to recognize substantially all of these performance obligations over the next 12 months. The table below provides information about contract liabilities (deferred revenue) and the significant changes in the balance for the nine months ended September 30, 2023 (in thousands):

    

Amount

Balance - December 31, 2022

$

4,366

Net deferred revenue in the period

 

11,558

Revenue recognized

 

(10,831)

Currency translations and other adjustments

 

(25)

Balance - September 30, 2023

$

5,068

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

2.Short Term Investments – other

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

    

September 30,

    

December 31,

    

2023

    

2022

Treasury bills

$

-

$

494

Certificates of deposit

 

13

 

13

Total

$

13

$

507

9

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.Accounts Receivable

Accounts receivable consists of the following:

    

September 30,