10-Q 1 inod-20220331x10q.htm 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 March 31, 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 May 6, 2022 was 27,178,638.

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended March 31, 2022

INDEX

    

Part I – Financial Information

    

 

Page No.

Item 1.

Financial Statements

Condensed Consolidated Financial Statements (Unaudited):

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

2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021

3

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

4

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021

5

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

 

Part II – Other Information

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

 

32

1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

    

March 31, 

    

December 31, 

 

2022

 

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

15,427

$

18,902

Accounts receivable, net of allowance for doubtful accounts of $820 and $730, respectively

 

10,904

 

11,379

Prepaid expenses and other current assets

 

3,755

 

3,681

Total current assets

 

30,086

 

33,962

Property and equipment, net

 

2,881

 

2,947

Right-of-use-asset, net

 

4,623

 

5,621

Other assets

 

2,104

 

2,247

Deferred income taxes, net

 

1,870

 

1,950

Intangibles, net

 

11,228

 

10,347

Goodwill

 

2,142

 

2,143

Total assets

$

54,934

$

59,217

LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

1,725

$

1,823

Accrued expenses and other

 

7,232

 

7,564

Accrued salaries, wages and related benefits

 

6,041

 

6,391

Income and other taxes

 

3,407

 

3,213

Long-term obligations - current portion

 

1,229

 

1,279

Operating lease liability - current portion

 

812

 

1,034

Total current liabilities

 

20,446

 

21,304

Deferred income taxes, net

 

17

 

15

Long-term obligations, net of current portion

 

6,134

 

6,217

Operating lease liability, net of current portion

 

4,291

 

5,276

Total liabilities

 

30,888

 

32,812

Commitments and contingencies

 

 

Non-controlling interests

 

(732)

 

(3,522)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

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

 

-

 

-

Common stock, $.01 par value; 75,000,000 shares authorized; 30,363,000 shares issued and 27,179,000 outstanding at March 31, 2022 and 30,347,000 shares issued and 27,163,000 outstanding at December 31, 2021

 

304

 

303

Additional paid-in capital

 

32,767

 

35,121

Retained earnings

 

345

 

3,160

Accumulated other comprehensive loss

 

(2,173)

 

(2,192)

 

31,243

 

36,392

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

 

(6,465)

 

(6,465)

Total stockholders’ equity

 

24,778

 

29,927

Total liabilities, non-controlling interests and stockholders’ equity

$

54,934

$

59,217

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

March 31, 

    

2022

    

2021

Revenues

$

21,192

$

15,967

Operating costs and expenses:

 

 

Direct operating costs

 

13,414

 

10,096

Selling and administrative expenses

 

10,190

 

5,525

Interest expense, net

 

3

 

10

 

23,607

 

15,631

Income (loss) before provision for income taxes

 

(2,415)

 

336

Provision for income taxes

 

475

 

(73)

Consolidated net income (loss)

 

(2,890)

 

409

Income (loss) attributable to non-controlling interests

 

(75)

 

11

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

$

(2,815)

$

398

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

 

 

Basic

$

(0.10)

$

0.02

Diluted

$

(0.10)

$

0.01

Weighted average shares outstanding:

 

  

 

  

Basic

 

27,158

 

25,873

Diluted

27,158

29,452

Comprehensive income (loss):

 

  

 

  

Consolidated net income (loss)

$

(2,890)

$

409

Pension liability adjustment, net of taxes

 

40

 

11

Change in fair value of derivatives, net of taxes

 

5

 

-

Foreign currency translation adjustment

 

(26)

 

(21)

Other comprehensive loss

 

19

 

(10)

Total comprehensive income (loss)

 

(2,871)

 

399

Less: Comprehensive income attributable to non-controlling interest

 

(75)

 

11

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

$

(2,796)

$

388

See notes to Condensed Consolidated Financial Statements.

3

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Three Months Ended

 

March 31, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Consolidated net income (loss)

$

(2,890)

$

409

Adjustments to reconcile consolidated net income (loss) to net cash

 

 

provided by operating activities:

 

 

Depreciation and amortization

873

697

Stock-based compensation

537

278

Deferred income taxes

 

44

 

(45)

Pension cost

11

142

Loss on lease termination

125

-

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

487

 

(448)

Prepaid expenses and other current assets

 

(63)

223

Other assets

 

144

 

52

Accounts payable and accrued expenses

 

(533)

 

956

Accrued salaries, wages and related benefits

 

(407)

 

(789)

Income and other taxes

 

176

 

(718)

Net cash provided by (used in) operating activities

 

(1,496)

 

757

Cash flows from investing activities:

 

 

Capital expenditures

 

(1,939)

 

(503)

Net cash used in investing activities

 

(1,939)

 

(503)

Cash flows from financing activities:

 

  

 

  

Proceeds from exercise of stock options

26

609

Withholding taxes on net settlement of stock-based compensation

-

(764)

Redemption of non-controlling interest

1

-

Payment of long-term obligations

 

(39)

 

(268)

Net cash used in financing activities

(12)

(423)

Effect of exchange rate changes on cash and cash equivalents

 

(28)

 

(108)

Net increase (decrease) in cash and cash equivalents

 

(3,475)

 

(277)

Cash and cash equivalents, beginning of period

 

18,902

 

17,573

Cash and cash equivalents, end of period

$

15,427

$

17,296

Supplemental disclosures of cash flow information:

 

 

Cash paid for income taxes

$

308

$

571

Non cash redemption of non-controlling interest

$

(2,864)

$

-

Cash paid for operating leases

$

493

$

437

Cash paid for interest

$

4

$

11

See notes to Condensed Consolidated Financial Statements.

4

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 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, 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

Stock option exercises

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

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

See notes to Condensed Consolidated Financial Statements.

5

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 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 March 31, 2022 and December 31, 2021, the results of its operations and comprehensive income (loss) for the three months ended March 31, 2022 and 2021, cash flows for the three months ended March 31, 2022 and 2021, and stockholders’ equity for the three months ended March 31, 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 described 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.

6

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 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 March 31, 2022 and December 31, 2021 are translated at the exchange rate in effect as of those dates. Nonmonetary assets and stockholders’ equity are translated at the appropriate historical rates. Included in direct operating costs were foreign exchange gains resulting from such transactions of approximately $419,000 and $140,000 for the three months ended March 31, 2022 and 2021 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 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).

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.

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 cost and are amortized using the straight-line method over the estimated useful life of software, which ranges between three and ten years. All other research and maintenance costs are expensed as incurred.

7

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

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 cannot be predicted with certainty, 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 $3.0 million and $4.5 million as of March 31, 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 three months ended March 31, 2022 was as follows (in thousands):

Balance as of January 1, 2022

    

$

2,143

Foreign currency translation adjustment

 

(1)

Balance as of March 31, 2022

$

2,142

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

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

estimates and assumptions to calculate the fair value of the reporting unit as of the impairment test measurement date. The carrying value of Goodwill was $2.1 million as of March 31, 2022, and December 31, 2021.

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:

 

  

 

  

 

  

 

  

 

  

 

  

Balance as of January 1, 2022

$

3,169

$

2,228

$

880

$

45

$

3,648

$

8,576

$

635

$

19,181

Additions

-

-

-

-

-

-

1,389

1,389

Transfers

-

-

-

-

-

1,265

(1,265)

-

Foreign currency translation

 

24

 

36

 

1

 

1

 

(44)

130

(1)

 

147

Balance as of March 31, 2022

$

3,193

$

2,264

$

881

$

46

$

3,604

$

9,971

$

758

$

20,717

Accumulated amortization:

Balance as of January 1, 2022

$

2,158

$

1,377

$

685

$

34

$

2,005

$

2,575

$

-

$

8,834

Amortization expense

79

47

14

1

91

365

-

597

Foreign currency translation

20

22

1

-

(23)

38

-

58

Balance as of March 31, 2022

$

2,257

$

1,446

$

700

$

35

$

2,073

$

2,978

$

-

$

9,489

Net carrying values - March 31, 2022

$

936

$

818

$

181

$

11

$

1,531

$

6,993

$

758

$

11,228

Amortization expense relating to acquired intangible assets was $0.2 million for the three months ended March 31, 2022.

Amortization expense relating to capitalized developed software was $0.4 million for the three months ended March 31, 2022.

As of March 31, 2022, estimated future amortization expense for intangible assets was as follows (in thousands):

Year

    

Amortization

2022

$

2,199

2023

 

2,630

2024

 

2,228

2025

 

1,456

2026

 

812

Thereafter

 

1,903

$

11,228

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

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

subsidiaries and a valuation allowance recorded on deferred taxes of these entities and tax effects of foreign operations, including foreign exchange gains and losses.

The reconciliations of the U.S. statutory rate with the Company’s effective tax rate for the three -month periods ended March 31, 2022 and 2021 are summarized in the table below:

For the Three Months

Ended March 31,

    

2022

    

2021

Federal income tax expense at statutory rate

 

(21.0)

%

21.0

%

Effect of:

 

Change in valuation allowance

35.1

26.7

Tax effects of foreign operations

 

5.9

85.2

Return to provision true up

4.7

0.4

Foreign operations permanent difference - foreign exchange gains and losses

4.4

15.4

Increase (decrease) in unrecognized tax benefits (ASC 740)

1.1

(114.9)

State income tax net of federal benefit

0.2

2.4

Withholding tax

-

0.3

Effect of stock based compensation

-

(61.3)

Foreign rate differential

(8.0)

(5.8)

Other

(2.7)

8.9

Effective tax rate

19.7

%

(21.7)

%

The following table presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the three months ended March 31, 2022 (in thousands):

    

Unrecognized

 

tax benefits

Balance - January 1, 2022

$

1,753

Interest accrual

 

26

Foreign currency remeasurement

 

(28)

Balance - March 31, 2022

$

1,751

The Company expects that unrecognized tax benefits as of March 31, 2022, if recognized, would have a material impact on the Company’s effective tax rate.

Tax Assessments

In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. The Company disagrees with the Service Tax Department’s position. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department's position. The Company is contesting this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between 12.36% and 15%, and this subsidiary may also be liable for interest and penalties. The revenue of the Company’s Indian subsidiary during this period was approximately $63.0 million. In accordance with new rules promulgated by the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on the Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.

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INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

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 $160,000 previously granted to the Company’s Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services and not BS Services. The appeal was determined in favor of the Service Tax Department. The Company disagrees with the basis of this decision and is contesting it. The Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently has service tax credits of approximately $1.0 million recorded as a receivable. Based on the Company’s assessment in consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.

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

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 $6.8 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The potential payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to themselves in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (“USDC”) entered a preliminary injunction that enjoins these former employees from pursuing or seeking recognition or enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and until further order of the USDC. In June 2018, the USDC entered a consent order administratively closing the action subject to return of the action to the active docket upon the written request of Innodata Inc. or the former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction remaining in full force and effect.

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

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

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 $350,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.

11

Table of Contents

INNODATA INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

5.            Stock Options and Restricted Shares

A summary of option activity under the Innodata Inc. 2013 Stock Plan, as amended and restated effective June 7, 2016 (the “2013 Plan”) and changes during each of the three-month periods ended March 31, 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

 

5,906,884

$

1.61

 

  

 

  

Granted

 

360,000

 

6.40

 

  

 

  

Exercised

 

(689,616)

 

2.17

 

  

 

  

Forfeited/Expired

 

(13,333)

 

1.38

 

  

 

  

Outstanding at March 31, 2021

 

5,563,935

$

1.86

 

7.69

$

24,770,815

 

 

 

 

Exercisable at March 31, 2021

 

3,594,434

$

1.68

7.10

$

16,621,389

 

 

 

 

Vested and Expected to Vest at March 31, 2021

 

5,563,935

$

1.86

 

7.69

$

24,770,815

    

    

    

Weighted-Average 

    

Number of 

Weighted - Average 

Remaining Contractual 

Aggregate 

Options

Exercise Price

Term (years)

Intrinsic Value

Outstanding at January 1, 2022

5,536,896

$

2.66

  

  

Granted

 

1,479,558

 

5.21