UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þAnnual report under section 13 or 15(d) of the securities exchange act of 1934
☑ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202023
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨Transition report under section 13 or 15(d) of the securities exchange act of 1934
Commission file number 001-35774
INNODATA INC.INC.
(Exact name of registrant as specified in its charter)
Delaware | 13-3475943 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
55 Challenger Road | |
Ridgefield Park, New Jersey | 07660 |
(Address of principal executive offices) | (Zip Code) |
| |
(201) 371-8000 | |
| |
Securities registered under Section 12(b) of the Exchange Act:
Securities registered under Section 12(b) of the Exchange Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | | INOD | The NASDAQ Stock Market LLC |
Securities registered under Section 12(g) of the Exchange Act: | None |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨◻No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨◻No þ
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 þNo ¨◻
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 þ No ¨
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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 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 þ | Smaller reporting company ☑ |
Emerging growth company ☐ |
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company þ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨◻
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ ☐No þ
☑
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing price reported on The Nasdaq Stock Market on June 30, 2020)2023) was $29,436,447.
$294,823,074.
The number of outstanding shares of the registrant’s Common Stock, $.01 par value, as of March 8, 2021February 16, 2024 was 25,859,483.28,752,874
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders are incorporated by reference in Items 10,11,12,13 and 14 of Part III of this Form 10-K.
INNODATA INC.
Form 10-K
For the Year Ended December 31, 20202023
TABLE OF CONTENTS
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PART I
Cautionary Note Regarding Forward-Looking Statements
Disclosures in this Annual Report on Form 10-K (this “Report”) contain certain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “predict,” “likely,” “estimate,” “plan,” “potential,” “possible,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.
These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, impacts resulting from the expected or potential effects of the novel coronavirus (“COVID-19”) pandemiccontinuing conflict between Russia and the responses of governments, the general global population, our customers,Ukraine and Hamas’ attack against Israel and the Company thereto;ensuing conflict; investments in large language models; that contracts may be terminated by clients;customers; projected or committed volumes of work may not materialize; continuing reliance on project-basedpipeline opportunities and customer discussions which may not materialize into work in the DDS segment and the primarily at-will natureor expected volumes of such contracts and the ability of these clients to reduce, delay or cancel projects;work; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; continuing DDSreliance on project-based work in the Digital Data Solutions (DDS) segment revenue concentration in a limited numberand the primarily at-will nature of clients;such contracts and the ability of these customers to reduce, delay or cancel projects; potential inability to replace projects that are completed, canceled or reduced; continuing DDS segment revenue concentration in a limited number of customers; our dependency on content providers in our Agility segment; the Company’s ability to achieve revenue and growth targets; difficulty in integrating and deriving synergies from acquisitions, joint ventureventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy, such as our re-design of our solutions and product portfolio in 2019; a continued downturn in or depressed market conditions, whether as a result of the COVID-19 pandemic or otherwise;conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growth in existing competitors; various other competitive and technological factors; the Company’sour use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, client,customer, employee or Company information, or service interruptions; and the risks discussed in Part I, Item 1A. “Risk Factors” included in this Report,, “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of this Report and in our other filings that we may make with the Securities and Exchange Commission (the “SEC”).
Our actual results could differ materially from the results referred to in forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements will occur, and you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof.
We undertake no obligation to update or review any guidance or other forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the federal securities laws.
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Business Overview
Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a globalleading data engineering company. We solve complex data challenges usingOur mission is to help the world’s most prestigious companies deliver the promise of ethical, high-performing artificial intelligence (AI)(“AI”), which we believe will contribute to a safer and human expertise.more prosperous world.
We provide large-scaleInnodata was founded on a simple idea: engineer the highest quality data annotation services and platforms to companies who require high-qualityso organizations across broad industry segments could make smarter decisions. Today, we believe that we’re delivering the highest quality data for training AI and machine learning (ML) algorithms. We also provide AI/ML-based solutions to help companies apply AI/ML to real-world problems relating to analyzing and deriving insights from documents. For industry-specific, document-intensive industry use cases, we provide AI-augmented software-as-a-service (SaaS) platforms and discrete managed services.
Our platforms and services are powered by Goldengate, our proprietary AI/ML platform, as well as other technologies we have developed. In addition, we bring to bear 3,500 + employees spanning nine countries with expertise in data pertaining to many professional fields. Our hybrid approach of using AI/ML in conjunction with human experts enables us to deliver superior data quality with even the most complex and sensitive data.
We developed our capabilities and honed our customer- and quality-centric culture progressively over the last 30 years creating high-quality data for manysome of the world’s most demanding information companies. Approximately fiveinnovative technology companies to use to train the AI models of the future.
AI holds the promise that computers can perceive and understand the world, enabling products and services that would have been previously unimaginable and impossible with traditional coding. AI learns from data, and the highest-performing AI will have learned from the highest-quality data. We believe that we can contribute meaningfully by harnessing our capabilities, honed over 30 years, ago, we formed Innodata Labs,in collecting and annotating data at scale with consistency and high accuracy.
We’re also helping companies deploy and integrate AI into their operations and products and providing innovative AI-enabled industry platforms, helping ensure that our customers’ businesses are prepared for a researchworld in which machines augment human activity in ways previously unimaginable.
Market Opportunities
AI Data Preparation
AI applications are trained with large quantities of data, unlike traditional computer applications that use languages such as Python and Java to tell computers what to do. AI applications learn from the data through a series of regressions. Today’s highest performing AI applications (such as OpenAI’s ChatGPT) would never have been possible to build through traditional programming.
Data science teams at some of the largest technology companies are accelerating development center,of generative AI technologies that produce high quality text, code, and images in response to research, developuser prompts. At their core, they rely upon large language models (LLMs), which are deep neural networks (an artificial intelligence architecture) with billions of parameters and apply machinerequiring massive amounts of training data to encode the essence of human language. They require fine-tuning through supervised learning and emerging AIreinforcement learning from human feedback (RLHF) to our large-scale, human-intensive data operations. render them suitable for specialized tasks and domains, to control hallucinations (the tendency of these models to make up things on the fly), and to minimize the risk that they generate unsafe or biased results.
In 2019, we began packaging the capabilities that emerged from our R&D efforts in order to align with several fast-growing new markets and helpaddition, companies use AI/ML to drive performance benefits and business insights. We anticipate this strategy will enable us to accelerate growth.
Market Opportunities
Data Annotation
Companies across industry verticals are increasingly seeking to develop AI-based applications for an ever-increasing variety of use cases such as self-driving cars, surveillance systems, automated medical diagnostics, digital assistants, and chatbots, content moderation, robotics, fraud detection and contract review. These applications depend upon high-performing AI algorithms in areas such as speech recognition, image recognition, and text recognition.
Unlike traditional computer applications that are programmed in languages like Python and Java to tell computers what to do, AI applications can be created with little to no programming. Instead, AI applications are trained with large quantities of input data and expected output data. Leveraging such data, the AI application learns on its own from the data itself through a series of regressions. Developing high-quality training data is critical for the AI to perform correctly, but often requires technology and skilled human resources that data science teams lack. Moreover, developing high-quality data takes up 80% of the time for most AI and ML projects.1
1Data Preparation & Labeling for AI 2020, Cognilytica Research (Jan. 31, 2020)
We train AI algorithms for social media companies, robotics companies, financial services companies, and many others, working with images, text, video and audio. 4
Data sciences teams seek partners that can perform these data preparation functions for them at large-scale and at high quality, while using automated tools to minimize cost. Moreover, asAs AI projects become more specialized and mission-critical and data preparation is becomingbecomes increasingly complex, requiringdata science teams seek partners with deep domain knowledge and an infrastructure in which data security is assured.
We believe that Innodata is ideally situated to be suchpartner with data science teams.
In 2023, we expanded existing relationships and forged new relationships with several of the world’s large technology companies to support their efforts at building generative AI foundation models. For these companies, we are now providing or are poised to provide a partner.range of scaled data solutions and services. Our scaled data solutions include providing instruction data sets for fine-tuning LLMs to understand prompts, to accept instruction, to converse, to apparently reason, and to perform the myriad of incredible feats that many of us have now experienced. We also provide reinforcement learning and reward modeling, services which are critical to provide the guardrails against toxic, bias and harmful responses, and model evaluation services.
1 Cognilytica Research, Data Engineering, Preparation,For social media companies, robotics companies, financial services companies, and Labelingmany others, we collect or create training data, annotate training data, and train AI algorithms for AI in 2019 (January 31, 2019)working with images, text, video, audio, code and sensor data.
We utilize a variety of leading third-party imagetools, proprietary tools and video annotationcustomer tools. For text annotation, we use our proprietary textdata annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary textdata annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. It alsoOur platform encapsulates many of the innovations we have conceived of in the course of our 30-year history of creating high-quality data.
In addition, because collecting real-world data is often impracticable (due to data privacy regulations or rarity of cohorts and outliers), we create high-quality synthetic data that maintains all of the statistical properties of real-world data, using a combination of domain specialists and machine technologies that leverage LLMs.
We are developingpresently working with five of the largest technology companies, and several of the world’s leading brands spanning multiple verticals, to enable, accelerate or enrich the services they deliver to end users around generative AI foundation models and other AI that supports chatbot assistance, facial recognition, social networking, gaming, drones, medical diagnostics and robotics, to name a new version of our text annotation platform for customer use which we anticipate will be a source of competitive differentiation and potential SaaS licensing revenue.few.
The AI data training market is estimated at $1.9to be $2.57 billion this year and is expectedin 2024, projected to grow at a CAGR of 18% to $3.2reach $13.45 billion by 2023,2034,2 essentially proxying the enormous growth expected in AI system spending overall ($18154 billion in 2020, $442023, $300 billion in 2024,2026, a 24%27% CAGR).3 Similarly, the global data annotation tools market was valued at $695 million$1.8 billion in 2019,2022, projected to reach $6.5$25 billion by 2027,2032, which is a CAGR of 33%25%.4
AI/ML Solutions
AI Model Deployment and Integration
We believe that over the next decade, almost all industries will be fundamentally reinvented through the advent of high-performing AI models. We help businesses leverage the latest AI technologies to achieve their goals. We develop custom AI models (where we select the appropriate algorithms, tune hyperparameters, train and validate the models, and update the models as required). We also provide AI/ML solutions to companies that intensively process textual data and seek to obtain the benefits of AI/ML technologies without having to develop AI/ML engineering capabilities in-house. For such companies, we often integrate one or morehelp businesses fine-tune their own custom versions of our pre-trainedproprietary models and third-party foundation models (including LLMs) to address domain-specific and customer-specific use cases.
2Data Labeling Solution and Services Market, FactMR (Nov. 2023)
3Worldwide Artificial Intelligence Systems Spending Guide,IDC (Mar. 2023)
4Data Annotation Tools Market, Global Market Insights, (Apr. 2023)
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The current pace of AI innovation is accelerating. The algorithms and techniques used today will likely be obsolete in the next several years. Therefore, we have built our solutions and platforms in such a way as to enable us to incorporate new open source or proprietary software innovations.
Many of our customers provide products and solutions that require intensive text data processing algorithms as a foundation for an overall solution. Our algorithms are accessible as microservices via application programming interfaces (APIs), enabling easy integration.
In conjunction with AI/ML solutions,and analytics. For these customers, in addition to deploying and integrating AI models, we often provide a range of data engineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, data compliance, and master data management.
For many of our longest-tenured customers, we continuously innovate and deploy models into their workflows and digital operations. We provide these services discretely and in conjunction with business process management (BPM) engagements.
Our customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns our AI/ML solutions provide.
The AI solutions market is expected to grow at a 24% CAGR reaching $44 billion in 2024. and platforms offer.
The document analytics market - a subset of the overall AI solutions market - is also fast-moving and dynamic, expected to grow at a CAGR of 48%48.9% from 2020$2.38 billion in 2023 to 2027, reaching $12$17.4 billion by 2027.2028.5 Meanwhile, overall enterprise AI spend that is projected to reach $53.06$270.06 billion by 2026,2032, up from $7.02 billion in 2022, registering a CAGR of 35.4% from 2019 to 2026.44.1%.6
AI/MLAI-Enabled Industry Platforms
Our AI-enabled industry platforms address specific, niche market requirements that we believe we can fulfill in large partinnovate with our AI/ML technologies. We deploy these industry platforms as software-as-a-service (SaaS) and as managed services. These platforms benefit from our technology infrastructure, our industry-specific knowledge, our strong customer relationships and experience merging technology with the business processes of our customers. To date, we have built an industry platform for medical records data extraction and transformation (which we brand as “Synodex®”) and an industry platform for marketing communications/public relations news distribution and monitoring (which we brand as “Agility PR Solutions”).
2 Cognilytica Research, Data Engineering, Preparation, and Labeling for AI 2020 (January 31, 2020)
3 IDC, Worldwide Artificial Intelligence Systems Spending Guide, September 2019.
4"Data Annotation Tools Market We are in development with an additional AI-enabled industry platform to 2027 - Global Analysis and Forecasts by Type ; Annotation Type ; End-user" (ReportLinker, March 2020).serve financial services institutions.
5 “Document Analytics Market by Product Type (Solution and Services), Deployment Type, Industry Vertical (BFSI, Government, Healthcare, Retail and ecommerce, Manufacturing, Transportation), Organization Size, and Region - Global Forecast to 2027” (Meticulous Research®, December 2020)
6 Allied Market Research, Enterprise Artificial Intelligence (AI) Market Outlook-2026 (2020)
Our Synodex industry platform transforms medical records into useable digital data organized in accordance with our proprietary data models or clientcustomer data models. At the end of 2020,2023, we had 20 clients13 customers utilizing our Synodex platform, including John Hancock Insurance, the insurance operating unit of John Hancock Financial (a division of Manulife) and one of the largest life insurers in the United States.platform. As we further integrate AI into the platform, we aim to address the needs of the healthcare sector, which is increasingly seeking to search, analyze, and interpret vast volumes of patient data, improve clinical documentation and make computer-assisted coding more efficient. The global artificial intelligence (AI) in healthcare market is forecast to reach a market size of $62$148.4 billion by 2027,2029, up from $3$20.9 billion this year,in 2024, with a CAGR of 43.6%48.1%.7
Our Agility industry platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news (print, web, radio and TV) and social media. Agility is now ranked by software review site G2 Crowd as meeting the requirements of customers better than its two largest competitors that have combined revenues of over $1 billion.8 Agility operates in the $4.5$9.2 billion media intelligence solutionsand PR software market.9
5Document Analytics Global Market Report 2024, Research and Markets (Dec. 2023)
6 Enterprise Artificial Intelligence (AI) Market, Precedence Research (Aug. 2023)
7 Artificial Intelligence In Healthcare Market, Markets and Markets Research Private Ltd. (Jan. 2024)
8https://www.agilitypr.com/wp-content/uploads/2024/02/G2-Comparison-Agility-2024.pdf
9 Media Intelligence and PR Software Market Size, Global Research Market, (Jan. 2024)
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The Company’s operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
Competitive Strengths
Our Data Quality
We believe we achieve industry-leading data quality by leveraging our technology, our large staff of human experts, and the culture we have cultivatedbuilt over many years of providing high-quality data to the most demanding customers.
For the past fiveeight years, we have been designing and refining our approach for combining human experts and AI to produce large-scale, highly accurate data. In our approach, AI networks automatically perform much of the required processing and human experts perform processing that the AI cannot perform at a high level of confidence. The human output is fed back into the AI networks, which, as a result, “learn” and become “smarter” over time, achieving progressively greater levels of automation while maintaining the highest levels of quality. (See “Our Technology”, below.)
Our 3,500+4,000+ experts have deep domain knowledge in a wide diversity of data domains. They are selected on the basis of data acumen, analytical ability, and deep domain proficiency. (See “Our Domain Experts”Global Delivery Framework”, below.)
Our culture of quality is critical to achieving and sustaining high data quality. Our culture has been cultivated over our decades of experience performing data-related tasks for leading global companies, including the four largest global information companies with which we have 10-plus year relationships building and maintaining many of their leading data products.
7 Artificial Intelligence In Healthcare Market By Offering (Hardware, Software), By Technology (Machine Learning, Context-Aware Computing, Natural Language Processing, Computer Vision), By End-Use (Hospitals & Healthcare Providers), and Region Forecast To 2027 (Reports and Data, January 2021)
8 https://www.agilitypr.com/wp-content/uploads/2021/03/g2-compare-agility-cision-meltwater-210312.pdf
9 Burton-Taylor, Media Intelligence and public Relations Software/Information Global Share & Segment Sizing 2020 (May 2020)
We maintain independent quality assurance centers that comply with and are certified to the ISO 9001:2008 quality management system standards.
Our Domain ExpertsGlobal Delivery Framework
We have over 3,500+4,000 employees with deepand associates across 31 countries. Many of them have data domain expertise in various fields, including law, sciences, health, finance, and technology. Many of themtechnology and hold advanced degrees. They process dataWe also have access to a large population of remote staff and freelancers that we maintain in over 25our databases. Our delivery locations are strategically located to give us access to a diverse talent base spanning multiple time zones and more than 40 languages. Most work from our global operations centers
We have also invested in India, Israel, Germany, Sri Lankabuilding a proprietary resource management platform geared specifically to managing remote staff and the Philippines. For annotating complex or sensitive data, our expert staff provides an attractive alternativefreelancers. Prior to the crowdsourced labor pools utilizedglobal pandemic, our operating model was to almost exclusively use full-time employees working from large production centers. Propelled by many of our competitors typically for mundane tasks. Theythe need to shift to remote working, we are especially well-suited for high-context data, such as legal contract classification, medical images, medical records,presently approximately 75% cloud-based and scientificremote, which has enabled us to lower fixed operating costs and legal literature.
achieve greater scalability.
Our Technology
Over the past foureight years, we have built a technology infrastructure that automates complex data annotation and other data engineering tasks. Our technology infrastructure combines advanced dataflow, deep learning (a branch of AI),orchestration and cognitive processing, and purpose-built applications used by human experts, which we refer to as “workbenches”. This infrastructure enables us to perform data annotation and other data engineering tasks at progressively higher levels of efficiency without compromising quality as it continuously learns from human experts.Our workbenches incorporate data verification and validation algorithms to detect human expert inconsistencies and to catch difficult auto-annotation errors such as LLM hallucinations.
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Our proprietary, state-of-the-art Goldengate platform is our core AI technology stack. Goldengate accepts a wide range of documents –including images, PDFs, and web copy –ingests unstructured data and performs a series of cognitive tasks to extract intelligence and create analytical data that people can use for generating inferences and powering analytical applications. It serves up no-codelow-code AI with transfer learning, built onorchestrating generative languageLLMs and deep learning-based sequence labeling models we have developed over the past fiveeight years of deploying industrial deep neural networks. networks as well as third-party foundation models. It integrates both with our internal systems and customer environments through application programming interfaces (“APIs”).
Goldengate serves as the foundational technology for the AI projects we perform for customers, as well as the AI-under-the-hood that powers our data annotation platform and our industry platforms. One of the main benefits of the platform is that it’s “no-code”it is “low-code”, so it doesn’tdoes not require a large number of data scientists to build models or require a data science platform to orchestrate models and update models. Using Goldengate in combination with our SMEs, we are able to build high-performing, cutting-edge models that address real-world problems. OurIn 2021 journey is towe further AI-enableAI-enabled Synodex, Agility and our data annotation platform using Goldengate; in 2022, we intend to commercializecommercialized it further as both a customer-facing technology and as the engine under other potential industry solutions.
Goldengate functionality can be consumed as domain-specific and task-specific microservices each of which performs a discrete data-related task automatically. Each AI microservice may be invoked by the dataflow via a RESTful API. Many complex data problems can be solved with a combination of these microservices. Capabilities include deep sequence labelling, categorization, segmentation and sequence-to-sequence mapping. For each cognitive task an AI microservice performs, it provides a confidence score. A confidence score at or above an established accuracy threshold means no human expert review is required. A confidence score below an established accuracy threshold means human expert review is required.
When expert review is required, the dataflow automatically routes data to an appropriate human expert. Our human experts use workbenches that enable them to quickly and efficiently review the data and make judgements. The workbenches then retroactively feed back the expert-reviewed work into Goldengate’s deep neural network, enabling it to learn and become smarter. This feature is commonly known as “human-in-the-loop”. It results in continuous, predictable improvement and progressively greater levels of automation.
To support our Agility industry platform, we have built a fully scalable, cloud-based infrastructure that powers a SaaS experience for global clientscustomers on a 24/7 basis. It includes (i) an AI/ML-powered big data media intelligence platform that indexes two billion media items per year, powering media monitoring, media enrichment, and media database APIs; (ii) a full targeting workflow platform that integrates media targeting, content curation, content distribution, integrated newswires, and a newsroom; (iii) a comprehensive database of more than one million global media influencers and journalists; (iv) a media monitoring and analytics engine; and (v) a workflow platform for media database research combining AI and machine learning to streamline research workflows for discovery and maintenance of our database.
In January 2023, we released a module within our Agility product called PR CoPilot™ that augments the work communications professionals do to generate press releases and media outreach. It leverages proprietary Innodata technology and OpenAI’s GPT large language models. We believe PR CoPilot is the first AI writing assistant built natively into a fully-integrated PR platform.
To support our Synodex intelligent automationindustry platform, we have built technologies for transforming imaged medical records and HL7/FHIR electronic health records (EHR) systems into digital data conforming to proprietary insurance medical data dictionaries that span diseases and impairments, diagnostic tests, and pharmacology and support industry standard codes such as ICD-10 as well as rules engines for processing, analyzing and displaying the digital data.
Our Infrastructure
Our infrastructure supports a range of strategies to suit our clients’customers’ requirements for data security, compliance, scalability and reliability. Our user endpoints are secured with cloud-managed security solutions consisting of firewall, IDS/IPS, vulnerability scanning and patch management engines. We host data and applications in our own data centers at our operations centers, in our clients’customers’ data centers, and on third-party cloud services including Amazon Web Services (“AWS”), Microsoft Azure (“Azure”), Oracle Cloud Infrastructure (“OCI”), and Google Cloud Platform (“GCP”) that provide the benefit of “infinite scalability” of hardwareinformation technology resources. Our data operations are linked by multiple redundant network connections. Our Wide Area Network – along with our Local Area Networks, Storage Area Networks, Network Attached Storage and data centers – are configured with industry standard redundancy, often with more than one backup to establish 24x7 availability. In 2020,2023, our Wide Area Network had 99.96%99.98% uptime excluding scheduled maintenance. We encrypt all sensitive information, both at rest and in transit, to the Advanced Encryption Standard (AES) 256 or similar standard, and we employ a range of security features, including industry-leading managed firewalls and intrusion detection and prevention services. (See “Information Security”, below.)
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Our BreathBreadth of Capabilities
We are able to address clientscustomers at their highest point of need. For example, we may provide data annotation for a data sciences team at a bank that is building an AI application to manage complex loan agreements. For another banking clientcustomer with the same requirement but without aaccess to sophisticated data sciences team,support, we might provide a full AI/ML solution built on our proprietary Goldengate AI platform that extracts key data points from the loan agreements and outputs normalized digital data via an API to the bank’s existing application. For still another banking clientcustomer that also lacked suchlacks an application to analyze and manage the data, we might provide a data analytics platform.
Data science teams that utilize our data annotation services also often have other related needs that include data transformation, data curation, data hygiene, data consolidation, data compliance, and master data management. Unlike many of our data annotation competitors – that are essentially staffing companies – as a full-service data engineering company we are able to address these attendant requirements.
Our Legacy
We developed our capabilities and honed our approaches progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately eight years ago, we formed Innodata Labs, a research and development center, to research, develop and apply machine learning and emerging AI to our large-scale, human-intensive data operations. In 2019, we began packaging the capabilities that emerged from our R&D efforts in order to align with several fast-growing new markets and help companies use AI/ML to drive performance benefits and business insights.
Our historical core competency in high-quality data, combined with these R&D efforts in applied AI, created the foundation for the evolution of our offerings, which include AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms.
Our Outcomes OrientationCulture
We have developed a strong customer-centriccustomer- and quality-centric culture over 30 years serving many of the world’s most successful companies that trust us with their data needs. We believe in communicating honestly, transparently and a setbroadly. We are optimistic in the promise of values designed around achieving promisedtechnology to augmenting human initiative and talent. We embrace diversity (and began doing so long before it was in vogue). We prize empathy and respect in our relationships with customers and colleagues alike while at the same time honing direct communication that best promotes optimal business outcomes for our clients. This includes proactive communication, innovation, transparency,customers. We believe our culture helps us best serve our customers and empathy.helps us attract and retain top people.
Growth Strategy
We believe thatwe are living in a unique time – that AI will soon become the “brains” of our computers, our robots and our cars; and that AI will be adopted by thousands of enterprises to deliver services and products that would have been impossible with traditional coding.
In AI, the software writes itself by learning from large amounts of data. Nowhere does the phrase “garbage in, garbage out” apply better. A data-centric approach for collection and annotation of consistent, high-quality data will separate the winners from the losers.
Our strategyfor growth is to leverage our 30+ year experience creating high quality data. We intend to align to and serve large, dynamic and rapidly growing markets related to the creation and commercialization of increasingly sophisticated AI and deployment of AI/MLAI in businesses. Our solutions and platforms leverage the technology, human resources, and culture of fanaticism for data quality that we have developed over the past 30 years, as well as the AI/ML research and development we have invested in over the past fiveeight years.
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Key elements of our growth strategy include:
Driving New Customer Acquisition
We believe we are still in the early stages of penetrating our addressable markets. We intend to pursue new long-term, strategic customer relationships, especially with customers with large and growing commitments to AI innovation, where we can deliver a wide range of our capabilities and have meaningful impact.
Beginning in 2021, we substantially scaled our sales organization, most notably the sales organization supporting our Agility PR solutions product. In late 2021 and early 2022, we experienced challenges in retaining sales hires primarily in our Austin, Texas sales office. We have since closed that sales office, have focused on hiring and retaining sales talent in other locations and in building a data-driven sales organization. We believe that the current sales organization is operating well and will likely enable us to achieve our near-term growth targets.
Expanding Relationships with Existing Customers
We believe we have demonstrated a clear ability to “land-and-expand” within customer accounts. Once we engage with a customer within a specific line of business and specific use cases, and the customer experiences the benefits of working with us, it will often increase the number of use cases for which it engages us and expand to additional lines of business.
Continuing to Develop New Capabilities
We intend to invest significantlydevelop new capabilities designed around emerging customer needs and advances in scaling our sales and marketing. Through mostAI technologies. We intend to develop additional charter customer relationships, like the ongoing relationship we formed with one of 2020, we had 15 people in sales. Our 2021 budget, by contrast, anticipates ending 2021 with a sales team of 98 in total: 63 sales executives; 25 business development resources; and 10 sales managers and sales enablement directors. We expect this will deliver significant returns in future years.the world’s largest banks to co-develop an AI-enabled compliance platform.
Continuing to Innovate
We also planbelieve that our ability to innovate will continue to invest inbe an important contributor to our proprietary text annotation platformgrowth and Goldengate AI/ML platform as sourcesmarket traction. We work closely with our customers, assessing their requirements for enhancements to our existing capabilities and new capabilities with the goal of competitive advantage.better serving them. We also planhave well-defined roadmaps for our AI industry platforms to invest in building a proprietary resource management platform geared specifically to managing remote staffintroduce new features and freelancers. Prior to the global pandemic, our operating model was to almost exclusively use full-time employees working from large production centers. Propelled by the need to shift to remote working,functions that we are presently near 100% cloud-based and remote, which has enabledbelieve will enable us to lower fixed operating costs and achieve greater scalability.
generate growth by broadening the appeal of our platforms to potential new customers as well as increasing the opportunities for further expansions with existing customers.
We expect to fully fund these investments for growth from our internal resources without need for outsideand we may access capital through debt or equity financing.
Our Customers
Our customers include leading businesses across multiple verticals including banking, insurance, financial services, technology, digital retailing and information/media. One clientcustomer in the DDS segment generated approximately 14% and 16%10% of the Company’s total revenues in the fiscal yearsyear ended December 31, 2020 and 2019, respectively.2023. Another clientcustomer in the DDS segment generated 10%approximately 11% of the Company’s total revenues forin the fiscal year ended December 31, 2019.2022. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 20202023 and 2019,2022, revenues from non-US clientsnon-U.S. customers accounted for 54%37% and 55%38%, respectively, of the Company'sCompany’s revenues.
We have long-standing relationships with many of our clients, and we have provided services to the two clients referenced in the preceding paragraph for over ten years.customers. Our track record of delivering high-quality services helps us to solidify clientcustomer relationships. Many of our clientscustomers are recurring clients,customers, meaning that they have continued to provide additional projects to us after our initial engagement with them.
Our agreements with our clientscustomers are in many cases terminable on 30 to 90 days’ notice. A substantial portion of the services we provide to our clientscustomers is subject to their requirements.
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Sales and Marketing
We market and sell our solutions and platforms directly through our professional staff, senior management and direct sales personnel operating primarily from various locations in the U.S., Canada, the United Kingdom and Europe. In addition, we are increasingly developing and expanding our use of strategic partnerships and channel relationships for the establishment and development of new and existing clients.
customers.
In addition to our executive-level business development professionals and sales and marketing personnel, we also deploy solutions architects, technical support experts and consultants who support the development of new clientscustomers and new clientcustomer engagements. These resources work within teams (both permanent and ad hoc) that provide support to clients.customers.
Our marketing department and sales professionals work together to generate leads. Our sales professionals identify and qualify prospects, securing direct personal access to decision makers at existing and prospective clients.customers. They facilitate interactions between clientcustomer personnel and our service teams to define ways in which we can assist clientscustomers with their goals. For each prospective clientcustomer engagement, we assemble a team of our senior employees drawn from various disciplines within our Company. The team members assume assigned roles in a formalized process, using their combined knowledge and experience to understand the client’scustomer’s goals and collaborate with the clientcustomer on a solution.
Our marketing organization is responsible for developing and increasing the visibility and awareness of our brand and our service offerings, defining and communicating our value proposition, generating qualified, early-stage leads and furnishing effective sales support tools.
As part of our marketing strategy, we partner with media organizations to build awareness, establish a reputation as an industry thought leader and generate leads. Media partners include trade associations and publications, trade show producers and consulting organizations. These partnerships are particularly valuable in enterprise industries as we build our presence among digital content leaders and decision makers.
Primary marketing outreach activities include content marketing, event marketing (including exhibiting at trade shows, virtual summits, conferences and seminars), direct and database marketing, public and media relations (including speaking engagements), and web marketing (including integrated marketing campaigns, search engine optimization, search engine marketing and the maintenance and continued development of external websites).
Sales activities include lead generation, nurturing leads, engaging in discussions with prospective clientscustomers to understand their needs, demonstrating our products, designing solutions, responding to requests for proposals, and managing account and clientcustomer relationships and activities.
Personnel from our solutions analysis group, our clientcustomer services group and our engineering services group closely support our direct sales effort. These individuals assist the sales force in understanding the technical needs of clientscustomers and providing responses to these needs, including demonstrations, prototypes, pricing quotations and time estimates. In addition, account managers from our clientcustomer service group support our direct sales effort by providing ongoing project-level support to our clients.customers.
Competition
Major competitors across industry verticals include Amazon Sagemaker Ground Truth, Appen, CloudFactory, Defined Crowd, Deepen.ai, Lionbridge,Telus, Samasource, and Scale AI, , several of which are large firms with established clientcustomer bases, as well as technology service providers such as Cognizant Technology Solutions, ExlService Holdings, Inc., Genpact Limited, Infosys, and Tata Consultancy Services.
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We compete in the data engineering market by offering high-quality, services and competitive pricingcompetitively-priced solutions that leverage our technical platforms, IT infrastructure, offshore domain experts and economies of scale. Our competitive advantages are especially attractive to clientscustomers for undertakings that are complex, mission-critical, sizable in scope or scale, or that require high levels of information security.
Each of our industry platforms has its discrete set of competitors. Major competitors for our Synodex industry platform are Risk Righter, eNoah, Parameds and a few BPO companies, several of which are large firms with established clientcustomer bases. We also compete with in-house personnel at existing or prospective clientscustomers who may attempt to duplicate our services in-house or use alternative approaches to fulfill their needs.
Our Agility industry platform competes with Meltwater, Cision, Kantar, and Intrado, several of which are large firms with established clientcustomer bases, as well as PR firms that provide media monitoring and analysis services and journalist and influencer databases. Our competitors also include social media listening companies and start-ups offering platforms to amplify messages by targeting social media influencers.
Intellectual Property
Innodata depends,We depend, in part, upon itsour proprietary technologies and methodologies, including itsour Goldengate AI/MLAI platform, various applications of itsour platforms, itsour proprietary data models and other intellectual property rights. Innodata hasWe have a patent and several patent applications pending and believesbelieve that the duration of these patents is adequate relative to the expected lives of their applications. Innodata reliesWe rely on a combination of trade secret, license, nondisclosure and other contractual agreements and copyright and trademark laws to protect itsour intellectual property rights.
Innodata entersWe enter into confidentiality agreements with itsour employees, contractors and clients,customers, and limitslimit access to and distribution of Innodata’sour proprietary information and Innodata’s clients’ proprietary information. Innodatathat of our customers. We cannot assure that these arrangements will be adequate to deter misappropriation of itsour proprietary information or that itwe will be able to detect unauthorized use and take appropriate steps to enforce itsour intellectual property rights.
Information Security
Our operations facilities in Asia and our data centers in Asia are certified to information security management standard - ISO27001.ISO27001:2013. We employhave deployed multi-layered security consisting of a wide range of standard security features,controls and measures such as two-factor authentication, patch management, full disk encryption system, anti-virus with firewall and IDS/IPS capability, redundant next generation firewalls with intrusion detection and prevention features,feature sets, and we utilize appropriately certified cloud resources. When we are processing sensitivepersonally identifiable information covered by HIPAA, we utilize U.S.-based, co-located data centers or HIPAA compliant cloud computing services with advanced data encryption (AES 256 or comparablecomparable) applied to data at rest and in motion). Secure desktop virtualization technologies are used for safeguarding against data leaving secured environments in the USA.motion.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations that relate to our business, including those governing privacy and data protection. We comply with the requirements of the United States Health Insurance Portability and Accountability Act of 1996 as amended (including by the Health Information Technology for Economic and Clinical Health Data (HITECH)) (HIPAA), the United Kingdom’s General Data Protection Regulation as tailored by the Data Protection Act 2018, the EU General Data Protection Regulation, and local laws regulating data privacy, as applicable. We are certified to the EU-U.S. Privacy Shield framework.
Research and Development
Our Innodata Labs researches and develops AI-based technologies that we utilize in our operations and with our clients.customers. The Innodata Labs team is comprised of data scientists, including data scientists who have published leading papers on discrete topics in data science and have earned PhD degrees in fields such as data entity extraction.
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Our product engineering teams also engage in research and development efforts focused on enhancing the functionality and utility of our AI industry platforms, addressing new use cases and developing additional innovative technologies. Timely development of new functionality to support existing and new use cases is essential to maintaining our competitive position, and we release new versions of our software on a regular basis.
Customer feedback enables us to ensure that we stay aligned to our customers’ priorities and that we stay ahead of market needs. Our culture of innovation helps us attract and retain a highly motivated and talented team of AI experts and technologists. Our research and development center spans several geographical locations across North America and Asia-Pacific.
In mid-2022, we formed an Advisory Board dedicated to helping drive growth through innovation initiatives and advancing dialogue related to ethical AI and the future of AI technologies. The advisory board is currently comprised by a Chief Data Officer for Microsoft and the director of University of Michigan’s Artificial Intelligence Laboratory. We will likely consider adding additional members to our advisory board from time to time.
Environmental, Social, and Governance
We are values-driven company, committed to continuouslyhave built a robust corporate ESG program focused on social responsibility; improving how we perform as a steward of nature, manage relationships with our employees, suppliers, customersthe environment; and communities, and conduct our business.sustainability.
Social Responsibility
While weWe are driven by the vision of ushering in an era of broadly distributed, sustainable prosperity that can result from ethical AI and broad access to the promise of digital data and ubiquitous AI, we are cognizant that the disruption AI will inevitably cause will not be equitably distributed. Ironically, many of the communities in which we source human capital for AI projects – communities in India, the Philippines, and Sri Lanka – are also more heavily dependent on manual labor and face greater potential disruption as a resultbenefits of AI.
Therefore, as we set out on We launched our AI journey five years ago, we made a concomitant commitment to do our parti-Hope Program in 2016 to help economically disadvantaged youth (especially young women)children in thesemarginalized or economically-disadvantaged communities become technology-savvy. It was our aspiration that they become empowered beneficiariesface the challenges of an AI-enabled world rather than its victims.
increasingly AI-driven world. Our goal was to provide the gift of computer literacy to 25,000 children by 2025. We are proud to report that we attained our goal in the third quarter of 2023, with one of our operating subsidiaries handing over a smart classroom, an ideation room, and an open library (with over 80,000 books) to a publicly-funded higher education institution in the Philippines.
From 2016 to 2020,2023, our employees have contributed over 1,4002,900 person days to our I-Hopethe program, and we have contributed resources, to build 12building 22 fully-functional computer labs at schoolsand smart classrooms across India, the Philippines, and Sri Lanka. We take immense pride knowing that asAs a result of our work 4,426 morei-Hope, we believe approximately 40,400 children in these communities are now more technology proficient and readybetter prepared to take on challengesparticipate in opportunities that AI presents. Our contributions have been well-recognized. In 2023 we (through our operating subsidiaries) received, for the third time in four years, the Circle of navigating an increasingly AI-enabled world. In 2020, we wereExcellence Award for CSR Company of the proud recipients ofYear at the Asia CEO Awards CircleAwards-2023.
Environmental Stewardship
We are also committed to conducting our business in a manner that manages environmental issues responsibly and contributes to global efforts to curb carbon emissions. We fulfill this commitment by our efforts to conduct operations in an environmentally-sound manner.
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We have set metrics to monitor and target the reduction of greenhouse gas emissions, energy usage, and water usage. We believe that this monitoring has enabled us to improve our sustainability program continuously. We track and share with customers our emissions data for this work followed by DSWDscopes 1, 2, and 3.
Across all our global operations, we recycle e-waste and paper. In India, the Philippines, (Department of Social Welfare & Development) Regional Citation Award.
Our goal isand Sri Lanka, we sponsor grass-roots efforts designed to technology-enable 12,000 children by 2025,preserve the environment in the communities in which we operate and we have planted over 3,800 saplings in nature reserves in 2023, for a total of over 6,000 saplings since 2018. Our program has practices in place to ensure that the saplings will be devoting a portion of our revenue to this worthy goal.receive proper care and attention during their initial growth phase, which is crucial for their long-term survival.
Sustainability
EmployeesOur sustainability program is based on the following core elements: health and safety, business continuity management, information security, labor standards, anti-bribery and corruption, and management engagement and social impact. Our sustainability program is backed by ISO 27001:2013 (information security) certification, policies, and employee training for these core areas.
Employees
As of December 31, 2020,2023, we employed 169 persons in the United States, Canada and the United Kingdom, and 3,600 persons in global delivery centers in the Philippines, India, Sri Lanka, Canada, Germany, and Israel, and 3,7114,325 employees, 4,296 of our employees arewhich were full-time. Many of our employees hold advanced degrees in specialized fields such as law, business, technology, medicine, and social sciences. No employees are currently represented by a labor union, and we believe that our relations with our employees are satisfactory.
Corporate Offices
Our principal executive offices are located at 55 Challenger Road, Ridgefield Park, New Jersey 07660, just outside New York City, and our telephone number is (201) 371-8000. We have an additional office location in Ottawa, Canada. We have six operations centers in the Philippines, India, Sri Lanka, Germany, and Israel. We were founded in 1988.
Our website is www.innodata.com; information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. There we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with, or furnish it to, the SEC. Our SEC reports can be obtained through the Investor Relations section of our website or from the Securities and Exchange Commission at www.sec.gov.www.sec.gov.
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The risk factors set forth below describe what the Company believes to be the material factors, risks, and uncertainties related to our business, financial condition, and results of operations. The risks and uncertainties set forth below, as well as other factors described elsewhere in this Form 10-K or in other filings by the Company with the SEC, could adversely affect the Company’s business, financial condition and results of operations. Additional risks and uncertainties that are not currently known to the Company or that are not currently believed by the Company to be material may also harm the Company’s business, financial condition and results of operations.
Risks Related to Our Business and Operations
We have historically relied on a very limited number of clientscustomers that have accounted for a significant portion of our revenues, and our results of operations could be adversely affected if we were to lose one or more of these significant clients.
customers.
We have historically relied on a very limited number of clientscustomers that have accounted for a significant portion of our revenues. One clientcustomer in the DDS segment generated approximately 14% and 16%10% of the Company’s total revenues in the fiscal yearsyear ended December 31, 2020 and 2019, respectively.2023. Another clientcustomer in the DDS segment generated 10%approximately 11% of the Company’s total revenues forin the fiscal year ended December 31, 2019.2022. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 20202023 and 2019,2022, revenues from non-US clientsnon-U.S. customers accounted for 54%37% and 55%38%, respectively, of the Company'sCompany’s revenues. We may lose anyone or more of these clients,customers, or our other major clients,customers, as a result of our failure to meet or satisfy our client’scustomer’s requirements, the completion or termination of a project or engagement, or the client’scustomer’s selection of another service provider.
In addition, the volume of work performed for our major clientscustomers may vary from year to year, and services they require from us may change from year to year. They may also request that we modify certain key terms of our agreements with them as a condition of continuing to do business with us. If the volume of work performed for our major clientscustomers varies, if the services they require from us change, or if they require price concessions, our revenues and results of operations could be adversely affected, and we may incur a loss from operations. If certain key terms of our agreements with our major clientscustomers are modified, our revenues and results of operations may be adversely affected. Our services are typically subject to clientcustomer requirements, and in many cases are terminable upon 30 to 90 days’ notice. The loss of these clientscustomers or a significant variation in the volume of work performed for these clientscustomers may have a material adverse effect uponon our business, financial condition and results of operations.
A portion of our services is provided on a non-recurring basis for specific projects, and our inability to replace large projects when they are completed or otherwise terminated has adversely affected, and could in the future adversely affect, our revenues and results of operations.
We provide a portion of our services for specific projects that generate revenues that terminate on completion of a defined task. While we seek, whenever possible, on completion or termination of large projects, to counterbalance periodic declines in revenues with new arrangements to provide services to the same clientcustomer or others, our inability to obtain sufficient new projects to counterbalance any decreases in such work may adversely affect our future revenues and results of operations.
New acquisitions, joint ventures or strategic investments or partnerships could harm our operating results.
We may pursue acquisitions, joint ventures or engage in strategic investments or partnerships to grow and enhance our capabilities. There can be no assurance that we will successfully consummate any acquisitions or joint ventures, or realize profit from strategic investments, or achieve desired financial and operating results. Further, such activities involve a number of risks and challenges, including proper evaluation, diversion of management’s attention and proper integration with our current business. Accordingly, we might fail to realize the expected benefits or strategic objectives of any such venture we undertake. If we are unable to complete the kind of acquisitions for which we plan, we may not be able to achieve our planned rates of growth, profitability or competitive position in specific markets or services.
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Our new clientscustomers may sunset their products because of a lack of sufficient revenues or declining revenues, or a change in their business direction, and this may result in termination of our workservices for these clients.
customers.
As we obtain new opportunities and win new business, our clientscustomers may not generate the level of revenues that we initially anticipated at the time of signing a contract with them, or our clientsthem. Our customers may experience declining revenues with their existing products.products or may change their business direction. This could be due to various reasons beyond our or their control, and it could lead to termination of projects or contracts. As we normally invest in people and technology and incur other costs in anticipation of revenues, any such deviation from our expected plan or anticipated results could impact our margins and earnings.
Our business will suffer if we failsuccess is dependent on our ability to successfully develop new solutionsservices, platforms and productssolutions and enhance our existing services, platforms and solutions, and products in ordermarket acceptance of these offerings. Our success is also dependent on our ability to keep pacecompete with the rapidly evolving technological environment or to provide new offerings, which may not succeed.
vendors with lean cost and flexible cost models.
The information technology and consulting servicesartificial intelligence (AI) industries are characterized by rapid technological change, evolving industry standards, changing clientcustomer preferences, new product and service introductions and the emergence of new vendors with lean cost and flexible cost models. Our future success will depend on our ability to successfully develop productsservices, platforms and solutions that keep pace with changes in our addressable markets, such as when we re-designedand the acceptance of these services, platforms and solutions by our solutionsexisting and product portfolio in 2019.target customers. We cannot guarantee that we will be successful in developing new productsservices, platforms and solutions, addressing evolving technologies on a timely or cost-effective basis or, if these productsservices, platforms and solutions are developed, that we will be successful in the marketplace. We also cannot guarantee that we will be able to compete effectively with new vendors offering lean cost and flexible cost models, or that products, services or technologies developed by others will not render our productsservices, platforms and solutions non-competitive or obsolete. Our failure to address these developments could have a material adverse effect on our business, results of operations and financial condition.
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We operate in highly competitive markets. While we invest in developing and pursuing new solutionsservices, platforms and product offerings from time to time,solutions, our profitability could be reduced if these solutionsservices, platforms and productssolutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.
The markets for our services, productsplatforms and solutions are highly competitive. Some of our competitors have longer operating histories, significantly greater financial, human, technical and other resources, and greater name recognition than we do. There are relatively few barriers preventing companies from entering the markets in which we operate. As a result, new market entrants also pose a threat to our business. We also compete with in-house personnel at current and prospective clients,customers who may attempt to duplicate our offerings using their own personnel.
We have made and continue to make significant investments towards building-outbuilding out new capabilities to pursue growth.growth, including, for example, our investments in large language models. These investments increase our costs, and if these servicesnew capabilities do not yield the revenues or profit margins we expect, and we are unable to grow our business and revenue proportionately, our profitability may be reduced, or we may incur losses. If we are not able to compete effectively in the markets we serve or if we are not able to successfully develop new solutionsservices, platforms and product offerings,solutions, our revenues and results of operations could be adversely affected.
We depend on third-party technology in the provision of our services.
We rely upon certain software that we license from third parties, including software integrated with our internally developed software used in the provision of our services. These third-party software licenses may not continue to be available to us on commercially reasonable or competitive terms, if at all. The loss of, or inability to maintain or obtain any of these software licenses, could result in delays in the provision of our services until we develop, identify, license and integrate equivalent software. Any delay in the provision of our services could damage our business and adversely affect our results of operations. In addition, our Company utilizes third party data centers to serve our clientscustomers and generate revenue. Any disruption in the provision of services from these data centers could result in loss of revenue, clientcustomer dissatisfaction and loss of clients.customers.
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Our Agility segment relies on third parties to provide certain content and data for our solutions. The cessation by third parties to provide their content has adversely affected, and could in the future adversely affect, our revenue and results of operations.
Our Agility segment relies on third parties to provide or make available certain data for our information databases and our news and social media monitoring service. These third parties, in the past, have restricted access to certain content and have ceased providing content, and they may not renew agreements to provide content to us or may increase the price they charge for their content. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third parties. In the event we are unable to use or have access to such third-party content or are unable to enter into agreements with new third parties, current clientscustomers may discontinue their relationship with us, and it may be difficult to acquire new clients.
customers.
Our businesses are reliant on key employees, and we may face high attrition in our talent. We may not be able to replace displaced talent with new talent on a timely basis or with equivalent skill sets.
We are, to a considerable degree, reliant on the continuing leadership of our Chief Executive Officer and would be materially and adversely affected should he unexpectedly cease to be employed by us. In addition, our businesses are subject to fierce competition for talent, which could result in high attrition of our employees, or we may not be able to find the requisite talent to operate our businesses. A significant increase in the attrition rate among employees with specialized skills could decrease our operating efficiency and productivity. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future clientscustomers or to assimilate new employees successfully could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, fluctuations in our business may require that we lay off employees with possible negative effects on employee morale. We try to minimize these risks by actively promoting employee relationships and offering competitive salaries, but if we cannot mitigate these risks, our business and our operating performance could be adversely affected.
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We operate from multiple locations and our employees are very diverse, so we have significant coordination risks.
We are headquartered in Ridgefield Park, New Jersey, just outside New York City, and our Agility business is headquartered in Ottawa, Canada.City. We have six delivery centers inprimarily operate from the Philippines, India, Sri Lanka, Germany,Canada, the United Kingdom, Israel, the United States, and Israel.Germany. Our employees are geographically dispersed, as well as culturally diverse. Our personnel need to work together to successfully execute our business plans and we invest in various measures to improve coordination and teamwork. Should we fail in these efforts, our ability to execute our business plans may be adversely affected.
Our intellectual property rights are valuable and if we are unable to protect them or are subject to intellectual property rights claims, our business may be harmed.
Our intellectual property rights include certain trademarks, trade secrets, domain name registrations, and a patent and patent applications.patent. Although we take precautions to protect our intellectual property rights, these efforts may not be sufficient or effective. If we are unable to protect our intellectual property, we may experience difficulties in achieving and maintaining brand recognition.
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Disruptions in telecommunications, system failures, data corruption or virus attacks could harm our ability to execute our global resource model, which could result in clientcustomer dissatisfaction and a reduction of our revenues.
We use a distributed global resource model. Our North American workforce provides services from ourthe U.S. and Canadian offices, as well as from client sites;Canada, and the balance of our other international workforce provides services from our six offshore delivery centers in the Philippines, India, Sri Lanka, Germany,the United Kingdom, Israel and Israel.Germany. Our global facilities are linked with a telecommunications network that uses multiple service providers. We may not be able to maintain active voice and data communications between our various facilities and our clients'customers’ sites at all times due to disruptions in these networks, system failures, data corruption or virus attacks. Any significant failure in our ability to communicate, or the availability of our platforms, could result in a disruption in our business, which could hinder our performance, or our ability to complete clientcustomer projects on time, or provide services to our clients.customers. This, in turn, could lead to clientcustomer dissatisfaction and have an adverse effect on our business, results of operations and financial condition.
Even though we have implemented network security measures, our information technology systems may be vulnerable to computer viruses, cyber-attacks, break-ins and similar disruptions from unauthorized tampering or intentional and unintentional disclosure of sensitive and /or confidential personal information by employees and non-employees. Additionally, the Company may not be able to effectively identify and resolve such issues on a timely basis. The occurrence of any of the events described above could result in interruptions, delays, the loss or corruption of data, cessations in the availability of systems or liability under privacy laws or contracts, each of which could have a material adverse effect on our financial position and results of operations.
OurThe international nature of our operations subjectsubjects us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.
TheWe do business on an international level, with a major partportion of our operations is carried on in India, the Philippines, India,and Sri Lanka, in addition to our operations in Canada, Germany, Israel, Canadathe United Kingdom, and Germany,the United States, while our headquarters are in the U.S.,United States and our clientscustomers are primarily located in North America and Europe. While we do not depend on significant revenues from sources internal to the Asian countries in which we operate, we are nevertheless subject to certain adverse economic factors relating to overseas economies generally, including inflation, external debt, a negative balance of trade and underemployment. In certain of the countries in which we operate, tax authorities have exercised, and may continue to exercise, significant discretionary and arbitrary powers to make tax demands or decline to refund payments that may be due to us as per tax returns. Other risks associated with our international operations and business activities include:
| ● | difficulties in staffing international projects and managing international operations, including overcoming logistical and communications challenges; |
| ● | local competition, particularly in the Philippines, India and Sri Lanka; |
| ● | imposition of public sector controls; |
| ● | trade and tariff restrictions; |
| ● | price or exchange controls; |
| ● | currency control regulations; |
| ● | foreign tax consequences; |
| ● | data privacy laws and regulations; |
| ● | evolving regulation of artificial intelligence; |
| ● | intellectual property laws and enforcement practices; |
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| ● | labor disputes and related litigation and liability; |
| ● | limitations on repatriation of earnings; and |
| ● | changing laws and regulations, occasionally with retroactive effect. |
One or more of these factors could adversely affect our business, financial condition, and results of operations.
Political uncertainty, political unrest, terrorism, and natural calamities in the Philippines, India, Sri Lanka and Israel could adversely affect business conditions in those regions,countries, which in turn could disrupt our business and adversely impact our results of operations and financial condition.
The majority of our delivery centers areOur operations located in India, Israel, the Philippines India,and Sri Lanka and Israel. Theseare in countries and regionsthat remain vulnerable to disruptions from political uncertainty, political unrest, terrorist acts, and natural calamities.
Any damage to our network and/or information systems would damage our ability to provide services, in whole or in part, and/or otherwise damage our operations and could have an adverse effect on our business, financial condition or results of operations. Further, political tensions and escalation of hostilities in any of these countries could adversely affect our operations in these countries and therefore adversely affect our revenues and results of operations.
Our globalWhile the October 2023 Hamas attack against Israel and the ensuing conflict has not to date negatively impacted our operations expose usin Israel, continued or escalating conflict in the region could disrupt our operations in Israel and could have a broader impact that extends into other markets where we do business. We are unable to risks associated with public health crises.
We use a distributed global resource model, which exposes us to risks associated with public health crises, such as pandemics and epidemics. A public health crisis in onepredict whether acts of international terrorism, war or more ofother military actions involving the geographic areascountries in which we operate could affect our ability to provide services to our clients and adversely affect our results of operations.
The effects of the COVID-19 pandemic could materially adversely affect our results of operations and financial condition.
The novel coronavirus disease 2019 (“COVID-19”), which the World Health Organization declared a pandemic on March 11, 2020, continues to spread throughout the world. COVID-19 has created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, and contributed to significant declines and volatilitydo business will result in financial markets. In response to COVID-19, countries and local governmentsany long-term commercial disruptions or if such involvement or responses will have imposed restrictions on the operations of non-essential businesses and services, imposed travel restrictions and implemented societal lockdowns. Additionally, companies are taking precautions, such as requiring employees to work remotely and temporarily closing businesses. All of these factors have had, and are likely to continue to have, a severe adverse effect on global economic conditions, underemployment and unemployment, consumer spending and reductions in non-essential spending by governments and private companies, as well as uncertainty in financial markets. We have experienced limited operational disruptions and declines in customer demand for services to date; however, depending upon the extent and duration of the COVID-19 pandemic, we may experience aany long-term material adverse effect on our results of operations and financial condition as a result of the effects of COVID-19.
In response to the declaration of the COVID-19 pandemic we triggered our Business Continuity Plan for our global delivery centers and offices, enabling us to continue operations while safeguarding the health and welfare of our employees. While the pandemic presented, and may in the future present, new risks to our business, and there have been logistical and other challenges, there was no material adverse impact on our financial condition or results of operations for the year ended December 31, 2020.
The COVID-19 pandemic could have a material adverse effect on our results of operations and financial condition by, among others, customers with at-will contracts, particularly in our DDS segment, reducing, delaying or cancelling orders; reduced spending by customers on third-party service providers as part of cost-rationalization efforts or otherwise; or customers determining to bring services in-house and/or customers delaying or postponing data engineering needs. Additionally, the effects of COVID-19 could exacerbate any other risks or uncertainties to which we are subject. Lastly, should we experience material adverse effects on our results of operations, or financial condition, we may not be able to access additional sources of liquidity at rates that are acceptable to us, if at all.
The situation surrounding COVID-19 crisis remains fluid and the extent and duration of its impact to the economy remains unclear. For this reason, we cannot reasonably estimate with any degree of certainty the future impact to our results of operations and financial condition. The potential for a material impact on our results of operations and financial condition increases the longer the virus affects the level of economic activity in the United States and globally. In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by reducing capital expenditures, deferring investment activities, and reducing operating costs as we would likely have no other source of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.
Terrorist attacks or a war could adversely affect our results of operations.
Terrorist attacks and other acts of violence or war could affect us or our clientscustomers by disrupting normal business practices for extended periods of time and reducing business confidence. In addition, acts of violence or war may make travel more difficult and may effectively curtail our ability to serve our clients'customers’ needs, any of which could adversely affect our results of operations.
Our global operations expose us to risks associated with public health crises. Public health crises or outbreaks of pandemics could disrupt our operations and materially and adversely affect our results of operations and financial condition.
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We use a distributed global resource model, which exposes us to risks associated with public health crises, such as pandemics and epidemics. Widespread outbreaks of a pandemic, such as the COVID-19 pandemic, have created significant global economic downturn, disrupted global trade and supply chains, adversely impacted many industries, and contributed to significant volatility in financial markets. While we experienced limited operational disruption and decline in customer demand for services as a result of the COVID-19 pandemic, a public health crisis or an outbreak of a pandemic in one or more of the geographic areas in which we operate could affect our ability to provide services to our customers and adversely affect our results of operations and financial condition.
We may face various risks associated with shareholder activists or shareholder demands for better performance.
There is no assurance that we will not be subject to shareholder activism or demands. Such activities could interfere with our ability to execute our strategic plan, be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees.
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We are the subject of continuing litigation, including litigation by certain of our former employees.
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$5.9 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The potential payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to themselves in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (“USDC”) entered a preliminary injunction that enjoins these former employees from pursuing or seeking recognition or enforcement of the judgment against Innodata Inc. in the U.S. 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 principal relevant cases in the Philippines are Court of Appeals Case Nos. CA-G.R. SP No. 93295 Innodata Employees Association (IDEA), Eleanor Tolentino, et al. vs. Innodata Philippines, Inc., et al., and CA-G.R. SP No. 90538 Innodata Philippines, Inc. vs. Honorable Acting Secretary Manuel G. Imson, et al. (28 June 2007), the Department of Labor and Employment National Labor Relations Commission, Republic of the Philippines (NLRC-NCR-Case No.07-04713-2002, et al., Innodata Employees Association (IDEA) and Eleanor A. Tolentino, et al. vs. Innodata Philippines, Inc., et al), and the Department of Labor and Employment Office of the Secretary of Labor and Employment, Republic of the Philippines (Case No. OS-AJ-0015-2001, In Re: Labor Dispute at Innodata Philippines, Inc.). The U.S. District Court action is Civil Action No.: 2:17-cv-13268-SDW-LDW Innodata Inc. v. Myrna C. Augustin-Simon; et al.
We are also subject to various other legal proceedings and claims that have arisen in the ordinary course of business. While we believe that we have adequate reserves for those losses that we believe are probable and can be reasonably estimated, the ultimate results of legal proceedings and claims cannot be predicted with certainty.
While we currently believe that the ultimate outcome of these proceedings will not have a material adverse effect on our consolidated financial position or overall trends in our consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above- referenced Philippines action could have a material adverse impact on us, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the consolidated operating results of the period in which the ruling or recovery occurs. In addition, our estimate of the potential impact on our consolidated financial position or overall consolidated results of operations for the above - referenced legal proceedings could change in the future. See “Legal Proceedings”.
Our reputation could be damaged, or our profitability could suffer if we do not meet the controls and procedures in respect of the services, platforms and solutions we provide to our clients,customers, or if we contribute to our clients’customers’ internal control deficiencies.
Our clientscustomers may perform audits or require us to perform audits, provide audit reports or obtain certifications with respect to the controls and procedures that we use in the performance of services for such clients,customers, especially when we process data or information belonging to them. Our ability to acquire new clientscustomers and retain existing clientscustomers may be adversely affected and our reputation could be harmed if we receive a qualified opinion, or if we cannot obtain an appropriate certification or opinion with respect to our controls and procedures in connection with any such audit in a timely manner. Additionally, our profitability could suffer if our controls and procedures were to fail or to impair our client’scustomers’ ability to comply with itstheir own internal control requirements.
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In the past we have determined that our disclosure controls and procedures were not effective. If in the future we again determine that our disclosure controls and procedures are not effective, this could cause investors to lose confidence in our reported financial information and have a negative effect on the market prices for our common stock.
We had aare required to maintain disclosure controls and procedures designed to provide reasonable assurance that material weaknessinformation required to be disclosed by us in internal control overthe reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our principal executive officer and principal financial reportingofficer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020December 31, 2023 and cannot assure youconcluded that additional material weaknesses will not be identifiedour disclosure controls and procedures were effective as of December 31, 2023.
If in the future.
Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources. We regularly assess the adequacy of our internal control over financial reporting, remediate any control deficiencies that may be identified, and validate through testingfuture we determine that our disclosure controls and procedures are functioning as documented. We identifiedineffective, it could restrict our ability to access the capital markets, require significant resources to correct, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a material weaknessdecline in our internal control over financial reporting as of September 30, 2020 in accounting for capital leases under ASC Topics 840 and 842. We implemented enhancements to our internal controls to prevent and detect such errors from occurring in the future. Our failure to successfully remediate a material weakness could result in adverse consequences to us, including, but not limited to, a loss of investor confidence and cause a decline in the reliability of our financial statements, which could cause the market price of our stock to decline.
common stock.
Risks Related to Our Contracts
A portion of our revenue is generated from projects that we characterize as recurring in nature. Projects that we characterize as recurring are nevertheless subject to termination.
Our operating performance is materially dependent on the continuation of these projects. However, we are exposed to the risks that these projects may not be renewed by our clientscustomers or they could be terminated by our clientscustomers and we may not be able to replace these terminated projects with new recurring projects with similar profitability or clientscustomers may ask for a price reduction, which could adversely affect our revenue and results of operations.
Our solutions for the Agility segment are sold pursuant to subscription agreements, and if subscription clientscustomers elect either not to renew these agreements, or to renew these agreements for less expensive services, our revenues and results of operations will be adversely affected.
Our Agility segment derives its revenues primarily from subscription arrangements. Our clientscustomers may choose not to renew subscription agreements when they expire or may renew them at lower prices or for a significantly narrower scope of work. If large numbers of existing subscription clientscustomers do not renew these agreements or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater levels of revenue, our revenues and results of operations will be adversely affected.
If our clientscustomers are not satisfied with our services, they may terminate our contracts with them or our services and we may suffer reputational damage, which could have an adverse impact on our business.
Our business model depends in large part on our ability to attract additional work from our base of existing clients.customers. Our business model also depends on the relationships our account teams develop with our clientscustomers so that we can understand our clients’customers’ needs and deliver solutions and services that are tailored to those needs. If a clientcustomer is not satisfied with the quality of work performed by us, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the client’scustomer’s dissatisfaction with our services could damage our ability to obtain additional work from that client.customer. In particular, clients thatcustomers who are not satisfied might seek to terminate existing contracts, which could mean that we could incur costs for the services performed with no associated revenue upon termination of a contract. This could also direct future business to our competitors. In addition, negative publicity related to our clientcustomer services or relationships, regardless of its accuracy, may further damage our business by affecting our reputation and our ability to compete for new contracts with current and prospective clients.
20customers.
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Risks Related to Financial Performance or General Economic Conditions
Debt under our Revolving Credit Facility has a variable rate of interest that is based on SOFR which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future.
WeDebt outstanding under our Revolving Credit Facility has a variable rate of interest that is based on the secured overnight financing rate (“SOFR”) which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future. The future performance of SOFR cannot be predicted based on historical performance and the future level of SOFR may have little or no relation to historical levels of SOFR. Any patterns in market variable behaviors, such as correlations, may change in the future. Hypothetical or historical performance data are not indicative of, and have no bank facilities or linebearing on, the potential performance of credit.SOFR.
Our Revolving Credit Facility contains restrictive covenants that may impair our ability to conduct business.
We believeOur Revolving Credit Facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. For example, the Revolving Credit Facility contains a financial covenant that required us, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. As a result of these covenants and restrictions, we may be limited in how we conduct our existing cashbusiness, and cash equivalents and cash flows from operations will provide sufficient sources of liquiditywe may be unable to satisfy our financial needs for the next 12 months. However, we have no bank facilities or lines of credit, and reductions in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitionsraise additional debt or other events affectingfinancing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our accessRevolving Credit Facility and may impair our ability to capital could materiallyconduct business. We may not be able to maintain compliance with these covenants in the future and, adversely affectif we fail to do so, there are no assurances that we will be able to obtain waivers from the Company. See “Management Discussion and Analysis – Liquidity and Capital Resources” for additional information.
lender and/or amend the covenants.
A large portion of our accounts receivable isare payable by a limited number of clients;customers; the inability of any of these clientscustomers to pay its obligations receivable could adversely affect our results of operations.
Several significant clientscustomers account for a large percentage of our accounts receivable. If any of these clientscustomers were unable, or refused, for any reason, to pay our accounts receivable, our financial condition and results of operations could be materially adversely affected. As of December 31, 2020, 36%2023, 53% or $3.6$7.5 million of our accounts receivable was due from three clients. See “Management Discussion and Analysis – Liquidity and Capital Resources”.
customers.
In addition, we evaluate the financial condition of our clientscustomers prior to extending credit to them. We maintain specific allowances against doubtful receivables. Actual losses on clientcustomer balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients.customers. Macroeconomic conditions could also result in financial difficulties, including limited access to the credit markets, insolvency or bankruptcy, for our clients,customers, and, as a result, could cause clientscustomers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. If we are unable to timely collect from our clients,customers, our cash flows could be adversely affected.
Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.
We have experienced, and expect to continue to experience, significant fluctuations in our quarterly revenues and results of operations. During the past eight quarters, our net income (loss) ranged from net income of approximately $1.2$1.7 million in the fourth quarter of 20202023 to a loss of approximately $0.7$3.8 million in the second quarter of 2019.
2022.
We experience fluctuations in our revenue and earningsresults of operations as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely or on terms that are as attractive to us as the project that is being replaced. These and other factors may contribute to fluctuations in our results of operations from quarter to quarter.
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A high percentage of our operating expenses, particularly personnel and rent, are relatively fixed in advance of any particular quarter. As a result, unanticipated variations in the number and timing of our projects, or in employee wage levels and utilization rates, may cause us to significantly underutilize our production capacity and employees, resulting in significant variations in our operating results in any particular quarter, and have resulted in losses.
Weakness in the global economy, and in particular in the United States, Europe and the United Kingdom, could negatively impact our revenue and operating results.
The United States, Europe, the United Kingdom and other economies may suffer from uncertainty, volatility, disruption, and other adverse conditions, such as inflation, and these conditions have adversely impacted and may continue to adversely impact the business community and the financial markets. Adverse economic environment and pricingfinancial market conditions may negatively affect our customers and our markets, thereby negatively impacting our revenue and operating results. For example, weak market conditions have extended, and could continue to extend, the length of our sales cycle and cause potential customers to delay, defer, or decline to make purchases of our services, platforms, and solutions due to uncertainties surrounding the future performance of their businesses, limitations on their expenditures due to internal budget constraints, and the adverse effects of the economy on their business and financial condition. As a result, if economic and financial market conditions weaken or deteriorate, then our revenue and operating results, including our ability to grow and expand our business and operations, could be materially and adversely affected.
Pricing pressures could negatively impact our revenues and operating results.
Due to the intense competition involved in outsourcing and information technology services, we generally face pricing pressures from our clientscustomers due to competition from other companies in our markets. Our ability to maintain or increase pricing is restricted as clientscustomers generally expect to receive volume discounts or special pricing incentives as we do more business with them; moreover, our large clientscustomers may exercise pressure for discounts outside of agreed terms.
Our profitability could suffer if we are not able to maintain pricing on our existing projects and win new projects at appropriate margins. If our pricing structures do not accurately anticipate the cost and complexity of performing our work,services and providing our platforms and solutions, then our contracts could be unprofitable.
Our profit margin, and therefore our profitability, is dependent on the rates we are able to charge for our services, platforms and solutions measured against the costs of providing the services.service, platform or solution. If we are not able to maintain pricing on our existing services, platforms and solutions and win new projects at profitable margins, or if we underestimate the costs or complexities of new projects and incur losses, our profitability could suffer. The amounts we are able to recover for our services, platforms and solutions are affected by a number of factors, including competition, volume fluctuations, productivity of employees and processes, the value our clientcustomer derives from our services, platforms and solutions and general economic and political conditions.
Furthermore, we provide services and solutions either on a time-and-materials basis or on a fixed-price basis. Our pricing is highly dependent on our internal forecasts and predictions about our projects, which might be based on limited data and could turn out to be inaccurate. If we do not accurately estimate the costs and timing for completing projects, our contracts could prove unprofitable for us or yield lower profit margins than anticipated.
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We may not be able to obtain price or volume increases that are necessary to offset the effect of wage inflation and other government mandated cost increases.
We have experienced wage inflation and other government mandated cost increases in the Asian countries where we have the majority of our operations. In addition, we may experience adverse fluctuations in foreign currency exchange rates. These global events have put pressure on our profitability and our margins. Although we have tried to partially offset wage increases, foreign currency fluctuations and other such increases through price increases and improving our efficiency, we cannot ensure that we will be able to continue to do so in the future, which could negatively impact our results of operations.
Our international operations subject us to currency exchange fluctuations, which could adversely affect our results of operations.
Although most of our revenues are denominated in U.S. dollars, a significant portion of our revenues are denominated in Canadian dollars, Pound Sterling and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada, the United Kingdom and Israel, are incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S. denominated transactions into U.S. dollars in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Fluctuations in the value of these currencies relative to the U.S. dollar have in the past and could in the future continue to have a direct impact on our revenues and our results of operations.
The Philippines, India and IndiaSri Lanka have, at times, experienced high rates of inflation, as well as major fluctuations in the exchange rate between the Philippine pesosuch foreign currencies and the U.S. dollar and the Indian rupee and the U.S. dollar.
We are also subject to fluctuations in exchange rates that affect the value of funds held by our foreign subsidiaries.
Although we selectively undertake hedging activities to mitigate certain of these risks, our hedging activities may not be effective and may result in losses. See Note 14,16, “Derivatives,” to the consolidated financial statements.
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In the event that the governments of India or the Philippines or the government of another country changes its tax policies, rules and regulations, our tax expense may increase and affect our effective tax rates.
We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We are subject to the continual examination by tax authorities in India and in the Philippines, and the Company assesseswe assess the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from what is reflected in historical income tax and indirect tax provisions and accruals, and could result in a material effect on the Company’sour income tax provision, indirect tax expenses, net income or cash flows in the period or periods for which that determination is made. If additional taxes are assessed, it could have an adverse impact on our financial results.
In addition, changes in the tax rates, tax laws or the interpretation of tax laws in the jurisdictions where we operate, could affect our future results of operations.
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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. Our management 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 contestingcontested this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal.Tribunal and in January 2024 the Customs, Excise and Service Tax Appellate Tribunal ruled in the Company’s favor. In the event the Service Tax Department appeals this ruling and 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 to pay interest and penalties. The revenue of our Indian subsidiary during this period was approximately $64.0$56.0 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, of the Company’sin consultation with our tax counsel, the Company has not recorded any tax liability for this case.
In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000$121,000 previously granted to our 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. Management 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$0.8 million recorded as a receivable. Based on the Company’s assessment, of the Company’sin consultation with our tax counsel, the Company has not recorded any tax liability for this case.
Substantial recovery against us in the above referencedabove-referenced 2015 Service Tax Department case could have a material adverse impact on us, and unfavorable rulings or recoveries in other tax proceedings could have a material impact on the consolidated operating results of the period in which the rulings or recovery occurs.
If tax authorities in any of the jurisdictions in which we operate contest the manner in which we allocate our profits, our net loss could be higher.
A significant portion of the services we provide to our clientscustomers are provided by our Asian subsidiaries located in different jurisdictions. Tax authorities in some of these jurisdictions have from time to time challenged the manner in which we allocate our profits among our subsidiaries, and we may not prevail in any future challenge of this type. If such a challenge were successful, our worldwide effective tax rate could increase, thereby decreasing our profitability.
AnThe expiration or termination of our preferential tax rate incentives could adversely affect our results of operations.
Two of our foreign subsidiaries are subject to preferential tax rates. This tax incentive provides that we pay reduced income taxes with respect to those jurisdictions for a fixed period of time. An expiration or termination of these incentives could increase our worldwide effective tax rate, or increase our tax expense, thereby decreasing our net income and adversely affecting our results of operations.
Our earnings may be adversely affected if we change our intent not to repatriate our foreign earnings and profits or if such earnings and profits become subject to U.S. tax on a current basis.
A significant portion of our operations are conducted outside the U.S. Despite our access to the overseas earnings and the resulting toll charge, we intend to indefinitely reinvest the foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding tax that the Company has to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to approximately $47.0$50.4 million at December 31, 2020.2023. 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.
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It is unlikely that we will pay dividends.
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends in the foreseeable future. We expect that our earnings, if any, will be used to finance our growth.
Risks Related to Laws and Regulations
Governmental and clientcustomer focus on data security could increase our costs of operations. In addition, any incident in which we fail to protect our client’scustomer’s information against security breaches may result in monetary damages against us, and termination of our engagement by our client,customer, and may adversely impact our results of operations.
Certain laws and regulations regarding data privacy and security affecting our clientscustomers impose requirements regarding the privacy and security of information maintained by these clients,customers, as well as notification to persons whose personal information is accessed by an unauthorized third party. As a result of any continuing legislative initiatives and clientcustomer demands, we may have to modify our operations with the goal of further improving data security. The cost of compliance with these laws and regulations is high and is likely to increase in the future. Any such modifications may result in increased expenses and operating complexity, and we may be unable to increase the rates we charge for our services sufficiently to offset these increases. In addition, as part of the services we perform, we have access to confidential clientcustomer data, including sensitive personal data. As a result, we are subject to numerous laws and regulations designed to protect this information. We may also be bound by certain clientcustomer agreements to use and disclose the confidential clientcustomer information in a manner consistent with the privacy standards under regulations applicable to such client.customers. Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of management’s time and effort and may subject us to significant liabilities and other penalties.
If clientcustomer confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, or if any person, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data or otherwise mismanages or misappropriates that data, we may have substantial liabilities to our clients.customers. Any incidents with respect to the handling of such information could subject us to litigation or indemnification claims with our clientscustomers and other parties. In addition, any breach or alleged breach of our confidentiality agreements with our clientscustomers may result in termination of their engagements, resulting in associated loss of revenue and increased costs.
Our business is subject to applicable laws and regulations relating to foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable anti-bribery laws and regulations of the U.S. and other jurisdictions where we operate. For example, we are subject to the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 relating to corrupt and illegal payments to government officials and others.others. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or an agent acting on our behalf could fail to comply with applicable laws and regulations, and due to the complex nature of the risks, it may not always be possible for us to ascertain compliance with such laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other unintended punitive actions, and we could incur substantial legal fees and related expenses. In addition, such violations could damage our business and/or our reputation. All of the foregoing could have a material adverse effect on our financial condition and operating results.
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The legal and regulatory landscape applicable to artificial intelligence (AI) is evolving and changes to existing laws and regulations or new laws and regulations could adversely affect our business, financial condition and results of operations.
We use machine learning and artificial intelligence (AI) technologies in our services, platforms and solutions, and we are making investments in expanding our artificial intelligence capabilities, including ongoing deployment and improvement of existing machine learning and AI technologies, as well as developing new product features using AI technologies, including, for example, generative AI. The laws and regulations applicable to AI continue to develop and evolve. The use of AI technologies in our services, platforms and solutions may result in new governmental or regulatory scrutiny, ethical concerns, legal liability, or other complications that could adversely affect our business, financial condition, or results of operations.
Anti-outsourcing legislation, if adopted, could adversely affect our business, financial condition and results of operations and impair our ability to service our clients.
customers.
The issue of outsourcing of services abroad by U.S. companies is a topic of political discussion in the U.S. Measures aimed at limiting or restricting outsourcing by U.S. companies are under discussion in Congress and in numerous state legislatures. While no substantive anti-outsourcing legislation has been introducedadopted to date, given the ongoing debate over this issue, the introduction of such legislation is possible. If introduced, our business, financial condition and results of operations could be adversely affected and our ability to service our clientscustomers could be impaired.
Our growth could be hindered by visa restrictions.
Occasionally, we have employees from our other facilities visit or transfer to the U.S. to meet our clientscustomers or work on projects at a client’scustomer’s site. Any visa restrictions or new legislation putting a restriction on issuing visas could affect our business.
Immigration and visa laws and regulations in the U.S. and other countries are subject to legislative and administrative changes, as well as changes in the application of standards. Immigration and visa laws and regulations can be significantly affected by political forces and levels of economic activity. Our international expansion strategy and our business, results of operations and financial condition may be materially adversely affected if legislative or administrative changes to immigration or visa laws and regulations impair our ability to staff projects with our professionals who are not citizens of the country where the work is to be performed.
New and changing corporate governance and public disclosure requirements add uncertainty to our compliance policies and increase our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, other SEC regulations and the Nasdaq Stock Market rules, create uncertainty for companies like ours. These laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time, as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of revisions to such corporate governance standards.
Although we are committed to maintaining high standards of corporate governance and public disclosure, and complying with evolving laws, regulations and standards, if we fail to comply with new or changed laws, regulations or standards of corporate governance, our business and reputation may be harmed.
Item 1B. Unresolved Staff Comments.
None.
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Item 1C. Cybersecurity
Cybersecurity Risk Management and Strategy
We recognize the importance of developing, implementing and maintaining a firm cybersecurity posture to safeguard our information systems, protect the confidentiality, integrity and availability of our data and mitigate risks associated with cyber threats and attacks.
We are ISO/IEC 27001:2013 certified and the ISO Information Security Risk Management Standard is used as a reference guide for our risk management approach. We have a designated Chief Information Security Officer (CISO) who has primary responsibility for managing our cybersecurity risks. Our CISO has more than 28 years of experience in Information Security and holds a master’s degree in Information Technology. His in-depth knowledge and experience are instrumental in developing and executing our cybersecurity strategies. Our CISO is assisted by a team of Information Security Officers (ISOs) and a third-party consultant who has expertise in cybersecurity, information security risk management, and information systems audit and holds various certifications including, CISA, CISM, HITRUST Certified Common Security Framework Practitioner, QSA, and CSP.
Recognizing the inherent cybersecurity risks common to any organization, encompassing concerns such as unauthorized access to sensitive data, potential disruptions to business operations from cyber incidents, and the associated financial and reputational impacts arising from a cybersecurity breach, we have implemented comprehensive policies covering various aspects of cybersecurity and information management, including, without limitation, cyber risk management, information security practices, roles and responsibilities, access controls, cryptography, information classification, asset disposal, and vendor management. We periodically review and modify these policies to align with industry practice, trends and evolving threat landscapes. Compliance with these policies is expected from all employees and contractors.
We perform periodic assessments for identifying threats and vulnerabilities, covering relevant operational facets, and focusing on identifying, analyzing, evaluating, and treating cyber risks across business functions. Our risk assessment guidelines define risk measurement and prioritization, and consider factors such as likelihood, impact, and potential harm. Mitigation strategies are planned, covering technical and procedural measures, including incident response plans.
Incident Response
We maintain a comprehensive incident response plan. Key components include regular updates to ensure effectiveness, employee training programs, and establishing communication channels and relevant systems for proper incident reporting and logging procedures. Communication and notification protocols are defined for notifying third parties such as regulatory bodies, customers, and partners. Recovery strategies are developed for restoring normal operations, and post-incident analysis is conducted to identify lessons learned and improvements for future incident response efforts. The incident response plan also outlines procedures for prompt detection, response, and remediation efforts to minimize the impact of incidents.
Incident materiality is assessed through a collaborative process involving key personnel within our organization. Responsibility for conducting a materiality assessment lies with our management team, in consultation with advice from our third-party cybersecurity consultant, as appropriate. The materiality assessment considers various factors, including financial impact, reputational risk, regulatory implications, and potential harm to third parties. Upon completion of the materiality assessment, the disclosure of incidents, including those related to contractual, regulatory, or technology/security aspects, is handled by designated members of our senior management team. We consult with outside counsel or experts as appropriate, including on materiality analysis and disclosure matters.
As of the fiscal year ending December 31, 2023, there have been no identified cybersecurity incidents that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition.
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Engagement of Third Parties
Recognizing the complexity and evolving nature of cybersecurity threats, we have engaged a third-party consultant to assist with evaluating and testing our risk management approach. This enables us to leverage specialized knowledge and insights in connection with our cybersecurity strategies and processes.
Strategy
To enhance our current cybersecurity posture, we continue to invest in advanced threat detection technologies, provide cybersecurity training based on the latest trends and guidance to the employees, collaborate with industry partners and regulatory bodies to stay informed about emerging threats, reinforce our cybersecurity incident response plan to align with industry-specific regulations and legal obligations, integrate threat intelligence feeds for automatic detection of any misconfigurations, security threats, and foster a collaborative, cross-functional, and accelerated approach to incident response.
Cybersecurity Governance
Our Board of Directors is aware of the critical nature of managing the risks associated with cybersecurity threats. The Board of Directors has established oversight mechanisms to ensure effective governance in managing these risks.
Board of Director Oversight
Our Audit Committee has primary responsibility for overseeing risk management, including with respect to cybersecurity. The Audit Committee monitors management’s compliance, and reports to the Board of Directors. The CISO, who is responsible for developing our cybersecurity strategy and managing our cybersecurity risks, reports directly to the Audit Committee on these matters.
Management’s Role
Our cybersecurity governance framework incorporates policies, procedures, regular meetings, and controls to manage and mitigate cybersecurity risks. Aligned with industry standards and regulatory requirements, the framework is overseen and regularly evaluated by our leadership team responsible for implementation. Regular risk assessments are conducted to identify and assess potential cybersecurity risks, informing the development of proactive risk mitigation strategies within the governance framework.
The governance framework is closely integrated via a structured compliance reporting framework operating across various governance levels. This framework also operates across geographic locations, with location specific compliance meetings conducted at a local management level and led by the CISO with assistance from the ISO team. This structured compliance reporting is intended to ensure that the highest levels of management are kept abreast of potential cybersecurity risks facing the Company, with the escalation of significant cybersecurity matters to the Audit Committee and ultimately to the Board of Directors, as appropriate.
Notwithstanding the extensive approach we take to cybersecurity, we may not be successful in preventing or mitigating a cybersecurity incident that could have a material adverse effect on us. While we maintain cybersecurity insurance, the costs related to cybersecurity threats or disruptions may not be fully insured. See Item 1A. “Risk Factors” for a discussion of cybersecurity risks.
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Our services are primarily performed from ourWe maintain leased property in Ridgefield Park, New Jersey, which is our headquarters, and seven overseas delivery centers in the Philippines, India, Sri Lanka, Canada, Germany,Israel and Israel, all of which are leased.Germany. The square footage of all our leased properties totals approximately 236,000.181,000. Our leased properties in the Philippines, Sri Lanka, Germany and Israel are primarily used by our DDS segment; and our leased property in India is primarily used by our DDS and Synodex segments; and our leased property in Canada is primarily used by our Agility segment.segments. Our leased property in the United States is our corporate headquarters and is used by all segments.
In addition, we may need to lease additional property in the future. We believe that we will be able to obtain suitable additional facilities on commercially reasonable terms on an “as needed” basis.
Reference is made to Note 6,8, “Commitments and Contingencies - Litigation,” to the consolidated financial statements in Item 8 of this Report, which is incorporated by reference herein.
In addition, On February 21, 2024, a putative class action lawsuit was filed in the U.S. District Court for the District of New Jersey against the Company and certain of its current and former officers (D’Agostino v. Innodata Inc., et al., Case Number 2:24-CV-00971 (the “D’Agostino Complaint”). The D’Agostino Complaint asserts claims against all defendants for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. The D’Agostino Complaint alleges that defendants made materially false and misleading statements related to its AI business and development and related financial results, growth, and prospects. The D’Agostino Complaint seeks unspecified compensatory and punitive damages, costs, attorneys’ fees, and other unspecified relief. The Company intends to defend against the D’Agostino Complaint vigorously.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Innodata Inc. (the “Company”) Common Stock is quoted on The Nasdaq Stock Market LLC under the symbol “INOD”. On February 10, 2021,7, 2024, there were 6454 stockholders of record of the Company’s Common Stock based on information provided by the Company'sCompany’s transfer agent. The number of stockholders of record is based upon the actual number of holders registered at such date and does not include holders of shares in “street names” or persons, partnerships, associates, corporations, or other entities identified in security position listings maintained by depositories. We did not have any sales of unregistered securities during the year ended December 31, 2020. We do not anticipate paying any dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information for the Company'sCompany’s equity compensation plans in effect as of December 31, 2020:2023:
| | | | | | | |
|
| Number of Securities |
| | |
| Number of Securities |
| | to be Issued Upon | | Weighted-Average | | Remaining Available | |
| | Exercise of | | Exercise Price of | | for Future Issuance | |
| | Outstanding Options, | | Outstanding Options, | | Under Equity | |
Plan Category | | Warrants and Rights | | Warrants and Rights(3) | | Compensation Plans | |
|
| (a) |
| | (b) |
| (c) |
Equity compensation plans approved by security holders (1) | | 5,567,966 | | $ | 3.22 | | - |
Equity compensation plans approved by security holders (2) |
| 1,444,523 | | $ | 3.41 |
| 1,981,406 |
Equity compensation plans not approved by security holders |
| - | |
| - |
| - |
Total |
| 7,012,489 | | | |
| 1,981,406 |
| Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
| Equity compensation plans approved by security holders (1) | 5,906,884 | $ | 1.61 | 2,925,638 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 5,906,884 | $ | 1.61 | 2,925,638 | ||||||||
(1) 2013 Stock Plan, approved by the stockholders, see Note 10,12, “Stock Options,”Options”, to the consolidated financial statements.
(2) 2021 Equity Compensation Plan, approved by stockholders, see Note 12, “Stock Options”, to the consolidated financial statements.
(3) Restricted stock units were excluded when determining the weighted-average exercise price of outstanding options, warrants and rights.
Purchase or Unregistered Sales of Equity Securities
We did not repurchasepurchase any shares of our common stock during 2020.
the year ended December 31, 2023.
We did not have any sales of unregistered equity securities during the year ended December 31, 2020.2023.
Item 6. Selected Financial Data.[Reserved]
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Not applicable to smaller reporting companies.Table of Contents
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report, which are incorporated by reference herein.Report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions based upon management’s current expectations. Our actual results could differ materially from the results referred to in any forward-looking statements. statement. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this report.
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Correction of Immaterial Errors – During the preparation of the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating to the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses from December 31, 2017 to December 31, 2019 and an overstatement of expenses for the nine months ended September 30, 2020.
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020 would have been material to such period. Accordingly, the prior period financial statements were corrected by revising such consolidated financial statements for comparability. For the December 31, 2019 consolidated financial statements included in this Form 10-K, the corrections are as follows:
Report.
Executive Overview
We are a global data engineering company. We operate in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
The following table sets forth certain financial data for the two years ended December 31, 20202023 and 2019:2022:
| (Dollars in millions) | |||||||||||||||||||||||||||
| Years Ended December 31, | |||||||||||||||||||||||||||
| 2020 | % of revenue | 2019 | % of revenue | ||||||||||||||||||||||||
| | | | | | | | | | | | ||||||||||||||||
|
| (Dollars in millions) |
| ||||||||||||||||||||||||
| | Years Ended December 31, |
| ||||||||||||||||||||||||
|
| 2023 |
| % of revenue |
| 2022 |
| % of revenue |
| ||||||||||||||||||
| Revenues | $ | 58.2 | 100.0 | % | $ | 55.9 | 100.0 | % | | $ | 86.8 |
| 100.0 | % | $ | 79.0 |
| 100.0 | % | ||||||||
| Direct operating costs | 38.4 | 66.0 | % | 37.3 | 66.7 | % | |
| 55.5 |
| 63.9 | % |
| 51.5 |
| 65.1 | % | ||||||||||
Gross Profit | | $ | 31.3 |
| 36.1 | % | $ | 27.5 |
| 34.9 | % | ||||||||||||||||
| Selling and administrative expenses | 18.7 | 32.0 | % | 19.5 | 34.9 | % | | | 31.0 | | 35.7 | % | | 37.9 | | 48.2 | % | ||||||||||
| Income (loss) from operations | 1.1 | 2.0 | % | (0.9 | ) | (1.6 | )% | |
| 0.3 |
| 0.4 | % |
| (10.5) |
| (13.3) | % | |||||||||
| Other expense | 0.1 | 0.1 | |||||||||||||||||||||||||
Interest expense | |
| 0.2 |
|
| |
| - |
|
| | ||||||||||||||||
| Income (loss) before provision for income taxes | 1.0 | (1.0 | ) | |
| 0.1 |
|
| |
| (10.5) |
|
| | |||||||||||||
| Provision for income taxes | 0.4 | 1.1 | |
| 1.0 |
|
| | | 1.5 |
|
| | ||||||||||||||
| Net income (loss) | 0.6 | (2.1 | ) | ||||||||||||||||||||||||
Net Loss | | $ | (0.9) |
|
| | $ | (12.0) |
|
| | ||||||||||||||||
For a summary of our Critical Accounting Estimates and Policies, please refer to Note 1 of the Notes to our Consolidated Financial Statements, which are included elsewhere in this Report.
28Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP (“GAAP”), we provide certain non-GAAP financial information. We believe that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results. In some respects, management believes non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents by making adjustments that management believes are reflective of the ongoing performance of the business.
We believe that the presentation of this non-GAAP financial information provides investors with greater transparency by providing investors a more complete understanding of our financial performance, competitive position, and prospects for the future, particularly by providing the same information that management and our Board of Directors use to evaluate our performance and manage the business. However, the non-GAAP financial measures presented in this Annual Report on Form 10-K have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.
Adjusted Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as revenues less direct operating costs attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP, plus depreciation and amortization of intangible assets, stock-based compensation, non-recurring severance and other one-time costs.
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We define Adjusted Gross Margin by dividing Adjusted Gross Profit over total U.S. GAAP revenues.
We use Adjusted Gross Profit and Adjusted Gross Margin to evaluate results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.
The following table contains a reconciliation of Gross Profit and Gross Margin in accordance with the U.S. GAAP attributable to Innodata Inc. and its subsidiaries to Adjusted Gross Profit and Adjusted Gross Margin for the years ended December 31, 2023 and 2022 (in thousands).
| | | | | | | |
| | Year Ended December 31, | | ||||
Consolidated | | 2023 | | 2022 | | ||
| | | | | | | |
Gross Profit attributable to Innodata Inc. and Subsidiaries | | $ | 31,293 | | $ | 27,468 | |
Depreciation and amortization |
| | 4,608 |
| | 3,774 |
|
Severance** |
| | 327 |
| | - |
|
Stock-based compensation |
| | 294 |
| | 214 |
|
Adjusted Gross Profit | | $ | 36,522 | | $ | 31,456 |
|
| | | | | | | |
Gross Margin | |
| 36 | % |
| 35 | % |
Adjusted Gross Margin | |
| 42 | % |
| 40 | % |
| | | | | | | |
|
| Year Ended December 31, | | ||||
DDS Segment | | 2023 | | 2022 | | ||
| | | | | | | |
Gross Profit attributable to DDS Segment | | $ | 21,519 | | $ | 21,347 | |
Depreciation and amortization |
| | 1,053 | | | 579 |
|
Severance** |
| | 28 | | | - |
|
Stock-based compensation |
| | 261 | | | 178 |
|
Adjusted Gross Profit | | $ | 22,861 | | $ | 22,104 |
|
| | | | | | | |
Gross Margin | | | 35 | % |
| 38 | % |
Adjusted Gross Margin | |
| 37 | % |
| 39 | % |
| | | | | | | |
| | | | | | | |
|
| Year Ended December 31, | | ||||
Synodex Segment | | 2023 | | 2022 | | ||
| | | | | | | |
Gross Profit/(Loss) attributable to Synodex Segment | | $ | 799 | | $ | (874) | |
Depreciation and amortization |
| | 623 |
| | 656 |
|
Severance** |
| | - |
| | - |
|
Stock-based compensation |
| | 1 |
| | - |
|
Adjusted Gross Profit/(Loss) | | $ | 1,423 | | $ | (218) |
|
| | | | | | | |
Gross Margin | |
| 11 | % |
| (12) | % |
Adjusted Gross Margin | |
| 19 | % |
| (3) | % |
33
| | | | | | | |
|
| Year Ended December 31, | | ||||
Agility Segment | | 2023 | | 2022 | | ||
| | | | | | | |
Gross Profit attributable to Agility Segment | | $ | 8,975 | | $ | 6,995 | |
Depreciation and amortization |
| | 2,932 |
| | 2,539 |
|
Severance** |
| | 299 |
| | - |
|
Stock-based compensation |
| | 32 |
| | 36 |
|
Adjusted Gross Profit | | $ | 12,238 | | $ | 9,570 |
|
| | | | | | | |
Gross Margin | |
| 51 | % |
| 46 | % |
Adjusted Gross Margin | |
| 69 | % |
| 62 | % |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before interest expense, income taxes, depreciation and amortization of intangible assets (which derives EBITDA), plus additional adjustments for loss on impairment of intangible assets and goodwill, stock-based compensation, income (loss) attributable to non-controlling interests, non-recurring severance, and other one-time costs. We use Adjusted EBITDA to evaluate core results of operations and trends between fiscal periods and believe that these measures are important components of our internal performance measurement process.
The following table contains a reconciliation of GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the years ended December 31, 2023 and 2022 (in thousands).
| | | | | | | |
|
| Year Ended December 31, |
| ||||
Consolidated | | 2023 |
| 2022 |
| ||
| | | | | | | |
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | (908) | | $ | (11,935) | |
Provision for income taxes | |
| 1,028 | |
| 1,522 | |
Interest expense | |
| 400 | |
| 11 | |
Depreciation and amortization | |
| 4,716 | |
| 3,889 | |
Severance** | | | 580 | | | - | |
Stock-based compensation | |
| 4,027 | |
| 3,283 | |
Non-controlling interests | |
| 19 | |
| (70) | |
Adjusted EBITDA (loss) - Consolidated | | $ | 9,862 | | $ | (3,300) | |
| | | | | | | |
|
| Year Ended December 31, |
| ||||
DDS Segment |
| 2023 |
| 2022 |
| ||
| | | | | | | |
Net income (loss) attributable to DDS Segment | | $ | 223 | | $ | (711) | |
Provision for income taxes | |
| 1,018 | |
| 1,423 | |
Interest expense | |
| 395 | |
| 10 | |
Depreciation and amortization | |
| 1,161 | |
| 694 | |
Severance** | | | 33 | | | - | |
Stock-based compensation | |
| 3,511 | |
| 2,690 | |
Non-controlling interests | |
| 19 | |
| 4 | |
Adjusted EBITDA - DDS Segment | | $ | 6,360 | | $ | 4,110 | |
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| | | | | | |
|
| Year Ended December 31, | ||||
Synodex Segment | | 2023 |
| 2022 | ||
| | | | | | |
Net income (loss) attributable to Synodex Segment | | $ | 219 | | $ | (2,525) |
Depreciation and amortization | | | 623 | |
| 656 |
Severance** | | | 6 | | | - |
Stock-based compensation | |
| 167 | |
| 258 |
Non-controlling interests | |
| - | |
| (74) |
Adjusted EBITDA (loss) - Synodex Segment | | $ | 1,015 | | $ | (1,685) |
| | | | | | |
|
| Year Ended December 31, | ||||
Agility Segment | | 2023 |
| 2022 | ||
| | | | | | |
Net loss attributable to Agility Segment | | $ | (1,350) | | $ | (8,699) |
Provision for income taxes | |
| 10 | |
| 99 |
Interest expense | |
| 5 | |
| 1 |
Depreciation and amortization | |
| 2,932 | |
| 2,539 |
Severance** | | | 541 | | | - |
Stock-based compensation | |
| 349 | |
| 335 |
Adjusted EBITDA (loss) - Agility Segment | | $ | 2,487 | | $ | (5,725) |
**Represents non-recurring severance incurred for a reduction in headcount in connection with the re-alignment of the Company’s cost structure.
Results of Operations
Amounts in the MD&A below are after elimination of any inter-segment profit and have been rounded. All percentages have been calculated using rounded amounts.
Year Ended December 31, 20202023 Compared to the Year Ended December 31, 20192022
Revenues
Total revenues were $58.2$86.8 million and $79.0 million for the yearyears ended December 31, 2020,2023 and 2022, respectively, an increase of $2.3$7.8 million or 4% from total revenues of $55.9 million for the year ended December 31, 2019.
approximately 10%.
Revenues from the DDS segment were $42.0$61.6 million and $41.3$56.5 million for the years ended December 31, 20202023 and 2019,2022, respectively, an increase of $0.7$5.1 million or approximately 2%9%. The net increase was dueprimarily attributable to higher volume from two existing and one client, partiallynew customer, offset in part by lower volumerevenues of $8.5 million from two clientsa large social media company that underwent a significant management change in the second half of the DDS segment.
2022.
Revenues from the Synodex segment were $4.8$7.5 million and $3.9$7.1 million for the years ended December 31, 20202023 and 2019,2022, respectively, an increase of $0.9$0.4 million or approximately 23%6%. The increase was primarily due to higher volume from three clients, partially offset by lower volume from two clients.
existing customers.
Revenues from the Agility segment were $11.4$17.7 million and $10.7$15.4 million for the yearyears ended December 31, 20202023 and 2019,2022 respectively, an increase of $ 0.7$2.3 million or approximately 7%15%. The increase was primarily attributable to higher revenuesvolumes from subscriptions to our Agility media database.AI-enabled industry platform and newswire product.
One clientcustomer in the DDS segment generated approximately 14% and 16%10% of the Company’s total revenues in the fiscal yearsyear ended December 31, 2020 and 2019, respectively. 2023. Another clientcustomer in the DDS segment generated 10%approximately 11% of the Company’s total revenues forin the fiscal year ended December 31, 2019. 2022. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 20202023 and 2019,2022, revenues from non-US clientsnon-U.S. customers accounted for 54%37% and 55%38%, respectively, of the Company's revenues respectively.Company’s revenues.
35
Direct Operating Costs
Direct operating costs consist of direct payroll,and indirect labor costs, occupancy costs, data center hosting fees, cloud services, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss)(gain) loss on forward contracts, foreign currency remeasurement gain (loss),revaluation (gain) loss, and other direct expenses that are incurred in providing services to our clients.
customers.
Direct operating costs were $38.4$55.5 million and $37.3$51.5 million for the years ended December 31, 20202023 and 2019,2022, respectively, an increase of $1.1$4.0 million or approximately 3%8%. ThisThe increase in direct operating costs was primarily due to higher revenues from two existing and one new customer in the DDS segment, offset in part by cost optimization efforts aimed at improving operational efficiency. The increase in direct operating costs includes a net increase of $0.7 million from direct and indirect labor related costs primarily on account of labor costs for new hires and salary increases, offset in part by reductions in headcount in line with cost optimization efforts in the first half of 2023; higher recruitment fees of $0.9 million for new hires; higher depreciation and amortization of capitalized developed software of $0.8 million; an unfavorable impact of exchange rate fluctuations of $0.8 million; higher content costs of $0.3 million, and other direct operating costs of $0.5 million. Direct operating costs as a percentage of total revenues were approximately 64% and 65% for the years ended December 31, 2023 and 2022, respectively. The decrease in direct operating costs as a percentage of revenues during the year was primarily due to an increase in labor related costs of $2.1 million, and technology-related expenditures in connection with our BCP in response to the COVID-19 pandemic of $1.1 million. The increase wasrevenues, offset in part by reductionsan increase in occupancy and related costs of $1.1 million, content acquisition costs of $0.2 million, and a decrease of $0.8 million due to reversal of a one-time charge of $0.4 million made in the second quarter of 2019 for an assessment of retroactive foreign social security contributions that was successfully adjudicated. Directdirect operating costs as percentage of total revenues were 66% and 67% for the years ended December 31, 2020 and 2019, respectively.
costs.
Direct operating costs for the DDS segment were $28.5$40.1 million and $27.5$35.1 million for the years ended December 31, 20202023 and 2019,2022, respectively, an increase of $1.0$5.0 million or approximately 4%14%. ThisThe increase in direct operating costs was primarily due to anhigher revenues from two existing and one new customer. The increase in direct operating costs includes a net increase of $2.3 million from direct and indirect labor related costs primarily on account of $1.8labor costs for new hires, and higher incentives and salary increases; higher recruitment fees of $0.9 million for new hires; an unfavorable impact of exchange rate fluctuations of $0.8 million; higher depreciation and amortization of capitalized developed software of $0.5 million and technology-related expenditures in connection with our BCP in response to the COVID-19 pandemic of $1.1 million. The increase was offset in part by reductions in occupancy and relatedother direct operating costs of $1.0 million and a decrease of $0.8 million due to reversal of a one-time charge of $0.4 million made in the second quarter of 2019 for an assessment of retroactive foreign social security contributions that was successfully adjudicated.$0.5 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 68%approximately 65% and 67%62% for the years ended December 31, 20202023 and 2019,2022, respectively.
The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues during the year was primarily due to an increase in direct operating costs, offset in part by an increase in revenues.
Direct operating costs for the Synodex segment were approximately $3.4$6.7 million and $3.2$8.0 million for the years ended December 31, 20202023 and 2019,2022, respectively, an increasea decrease of $0.2$1.3 million or 6%approximately 16%. The increasedecrease in direct operating costs was principallyprimarily due to cost optimization efforts aimed at improving operational efficiency. The decrease was due to lower direct labor related costs associated with the increase in volume.of $1.3 million. Direct operating costs for the Synodex segment as a percentage of segment revenues were 71%approximately 89% and 82%113% for the years ended December 31, 20202023 and 2019,2022, respectively. The decrease in Directdirect operating costs of the Synodex segment as a percentage of Synodex segment revenues during the year was primarily due to lower direct operating costs and higher revenue.
revenues.
Direct operating costs for the Agility segment were approximately $6.5$8.7 million and $6.6$8.4 million for the years ended December 31, 20202023 and 2019,2022, respectively, a decreasean increase of $0.1$0.3 million or 2%approximately 4%. This decreaseThe increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase in direct operating cost includes higher depreciation and amortization of capitalized developed software of $0.4 million and higher content related costs of $0.3 million, offset in part by a reductiondecrease in content acquisition costs.direct labor costs of $0.3 million and other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 57%approximately 49% and 62%55% for the years ended December 31, 20202023 and 2019,2022, respectively. The decrease in Directdirect operating costs of the Agility segment as a percentage of Agility segment revenues duringwas due to higher revenues, offset in part by higher direct operating costs.
Gross Profit and Gross Margin
Gross profit is derived by revenues less direct operating costs, while Gross margin as a percentage is derived by dividing gross profit over revenues.
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Gross profit was $31.3 million and $27.5 million for the yearyears ended December 31, 2023 and 2022, respectively. The $3.8 million increase in gross profit was primarily due to higher revenue from subscriptionsrevenues in all segments, offset in part by higher direct operating costs in the DDS and Agility segments. Gross margin was 36% and 35% for the years ended December 31, 2023 and 2022, respectively.
Gross profit for the DDS segment was $21.5 million and $21.3 million for the years ended December 31, 2023 and 2022, respectively. The $0.2 million increase in gross profit for the DDS segment was primarily due to ourhigher revenues offset in part by higher direct operating costs. Gross margin for the DDS segment was 35% and 38% for the years ended December 31, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment as a percentage of revenues was primarily due to higher direct operating costs offset in part by higher revenues.
Gross profit for the Synodex segment was $0.8 million and a loss of $0.9 million for the years ended December 31, 2023 and 2022, respectively. The $1.7 million change in gross profit for the Synodex segment was primarily due to lower direct operating costs and higher revenues. Gross margin for the Synodex segment was 11% and (12)% for the years ended December 31, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment as a percentage of revenues was primarily due to lower direct operating costs and higher revenues.
Gross profit for the Agility intelligent data platformsegment was $9.0 million and newswire products.$7.0 million for the years ended December 31, 2023 and 2022, respectively. The $2.0 million increase in gross profit for the Agility segment was primarily due to higher revenues, offset in part by higher direct operating costs. Gross margin for the Agility segment was 51% and 46% for the years ended December 31, 2023 and 2022, respectively. The increase in gross margin for the Agility segment as a percentage of revenues was primarily due to higher revenues, offset in part by higher direct operating costs.
Selling and Administrative Expenses
Selling and administrative expenses consist of managementpayroll and administrative salaries, sales and marketingrelated costs including commissions, bonuses, and stock-based compensation; marketing, advertising, trade conferences and related expenses; new services research and related software development third-partyexpenses, software advertising and trade conferences,subscriptions, professional fees and consultant costs,fees, provision for doubtful accounts and other administrative overhead costs.
expenses.
Selling and administrative expenses were $18.7approximately $31.0 million and $38.0 million for the yearyears ended December 31, 2020 compared to $19.5 million for the year ended December 31, 2019,2023 and 2022, respectively, a decrease of $0.8$7.0 million or 4%approximately 18%. ThisThe decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease in selling and administrative expenses includes lower labor and related expenses of $3.4 million primarily on account of headcount reductions, offset in part by salary increases and higher commissions; lower marketing travel and occupancyrelated expenses of $0.3 million$1.8 million; lower recruitment and professional fees of $0.5$1.2 million; lease termination expense of $0.2 million; a favorable impact of foreign exchange rate fluctuations of $0.2 million and a decrease in other selling and administrative expenses of $0.2 million. Selling and administrative expenses as a percentage of total revenues were 32%approximately 36% and 35%48% for the years ended December 31, 20202023 and 2019, respectively. The decrease in selling and administrative expenses as percentage of revenues during the year was primarily due to higher revenues and lower selling and administrative costs.
Selling and administrative expenses for the DDS segment were $12.4 million for the year ended December 31, 2020 compared to $13.1 million for the year ended December 31, 2019, a decrease of $0.7 million or 5%. This decrease was primarily due to lower marketing, travel and occupancy expenses of $0.2 million and professional fees of $0.5 million. As a percentage of DDS revenues, DDS selling and administrative expenses were 30% and 32% for the years ended December 31, 2020 and 2019,2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher revenues and lower selling and administrative expenses in all segments.
Selling and administrative expenses for the DDS segment were approximately $20.1 million and $20.7 million for the years ended December 31, 2023 and 2022 respectively, a decrease of $0.6 million or approximately 3%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease in selling and administrative expenses includes lower recruitment and professional fees of $0.6 million; lower marketing related expenses of $0.5 million and lower provisions for doubtful accounts of $0.2 million. These costs were offset in part by higher stock-based compensation, commissions and incentives of $0.6 million, and an increase in other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were approximately 33% and 37% for the years ended December 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to higher revenues and lower selling and administrative expenses.
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Selling and administrative expenses for the Synodex segment was $0.9were $0.6 million and $1.7 million for the yearyears ended December 31, 2020 compared to $0.7 million for the year ended December 31, 2019, an increase2023 and 2022 respectively, a decrease of $0.2$1.1 million or 29%approximately 65%. This increaseThe decrease in selling and administrative expenses was primarily due to labor related expenses.the cost optimization efforts aimed at improving operational efficiency. The decrease in selling and administrative expenses includes lower payroll-related costs of $0.5 million; lower professional fees of $0.5 million, and a decrease in other selling and administrative expenses of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 19%approximately 8% and 18%24% for the years ended December 31, 20202023 and 2019,2022, respectively.
The decrease in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to lower selling and administrative expenses and higher revenues.
Selling and administrative expenses for the Agility segment were $5.4$10.3 million and $5.7$15.6 million for the years ended December 31, 20202023 and 2019,2022, respectively, a decrease of $0.3$5.3 million or 5%approximately 34%. ThisThe decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease in selling and administrative expenses includes lower labor and related expenses.expenses of $3.5 million primarily on account of headcount reductions offset in part by higher commissions; lower marketing related expenses of $1.3 million; a favorable impact of foreign exchange rate fluctuations of $0.2 million; lease termination expense of $0.2 million; lower professional fees of $0.1 million and a decrease in other selling and administrative expenses of $0.2 million. These lower selling and administrative expenses were offset in part by a higher provision for doubtful accounts of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 47%approximately 58% and 53%101% for the years ended December 31, 20202023 and 2019,2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to higher revenues and lower selling and administrative expenses.
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expenses and higher revenues.
Goodwill Impairment
On March 31, 2020, we determined that adverse changes in macroeconomic trends asAs of September 30, 2023, the Company performed its annual goodwill impairment analysis on the Agility segment. It involved a consequencequantitative goodwill impairment test and estimated the fair value based on a combination of the continuing COVID-19 pandemic constitutedincome approach (estimates of future discounted cash flows) and the market approach (market multiples for similar companies) using unobservable inputs (Level 3). The income approach uses a triggering event underdiscounted cash flow (“DCF”) method that utilizes the Financial Accounting Standards Board’s (the “FASB”present value of cash flows to estimate the segment’s fair value. The future cash flows of the segment were projected based on the Company’s estimates of future revenues, operating income, and other factors such as working capital and capital expenditures. As part of the DCF analysis, the Company projected revenue and operating profit and assumed long-term revenue growth rates in the terminal year. The market approach utilizes multiples of revenues and earnings before interest expense, taxes, depreciation, and amortization (“EBITDA”) Accounting Standards Codification (“ASC”) No. 350, “Intangibles - Goodwill and Other” and ASC No. 360, “Impairment or Disposalto estimate the segment’s fair value. The market multiples used for the segment were based on a group of Long-Lived Assets”). We completed our impairment analysis procedures as of March 31, 2020. We determinedcomparable companies’ market multiples applied to the Company’s revenue. The Company concluded that there wasis no impairment of long-lived assets in any of the reporting units as of March 31, 2020.goodwill.
On September 30, 2020, we performed our annual goodwill assessment for the Agility segment in accordance with the provisions of the FASB’s Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 350)”, by using a single step approach that evaluates the carrying value of goodwill and comparing it against the reporting unit’s fair value. Our conclusion was consistent with the results of the March 31, 2020 impairment test.
Income Taxes
We recorded a provision for income taxes of approximately $0.4$1.0 million and $1.1$1.5 million for the years ended December 31, 20202023 and 2019,2022, respectively. Tax-related charges primarily consisted of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate primarily due to the minimal pre-tax income and valuation allowance recorded on the deferred taxes onof the U.S., Canadian, German and Canadian entities.the United Kingdom subsidiaries, tax effects of foreign operations, IRS section 162 (m) adjustments, offset in part by the effect of stock-based compensation. See Note 4,6, “Income Taxes” of the notes to the consolidated financial statements for additional information.
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The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the years ended December 31, 20202023 and 20192022 are summarized in the table below:
| | | | | |
|
| 2023 |
| 2022 |
|
Federal income tax expense (benefit) at statutory rate |
| 21.0 | % | (21.0) | % |
Effect of: |
|
|
|
| |
Change in valuation allowance |
| 578.6 |
| 36.9 | |
Tax effects of foreign operations |
| 562.6 |
| 2.5 | |
Section 162 (m) |
| 452.0 |
| - | |
Return to provision true up |
| 264.4 |
| 0.3 | |
Increase in unrecognized tax benefits (ASC 740) |
| 199.6 |
| 0.7 | |
Withholding tax | | 106.6 | | - | |
Foreign operations permanent differences - foreign exchange gains and losses |
| 76.9 |
| 1.1 | |
State income tax net of federal benefit |
| 0.1 |
| 0.2 | |
Research and development credit | | (67.3) | | - | |
Foreign rate differential |
| (102.5) |
| (4.7) | |
Deemed interest |
| (149.2) |
| (1.9) | |
Tax effect of intercompany settlement | | (234.0) | | - | |
Effect of stock-based compensation |
| (961.6) |
| (0.3) | |
Other |
| (7.6) |
| 0.7 | |
Effective tax rate |
| 739.6 | % | 14.5 | % |
| 2020 | 2019 | |||||||
| Federal income tax expense (benefit) at statutory rate | 21.0 | % | (21.0 | )% | ||||
| Effect of: | ||||||||
| Change in valuation allowance | 137.7 | 22.4 | ||||||
| Increase in unrecognized tax benefits (ASC 740) | 31.5 | 55.1 | ||||||
| Tax effects of foreign operations | 57.7 | 59.7 | ||||||
| Foreign operations permanent differences - foreign exchange gains and losses | (1.3 | ) | (12.2 | ) | ||||
| Deemed interest | (2.1 | ) | - | |||||
| State income tax net of federal benefit | (4.3 | ) | 1.3 | |||||
| Foreign rate differential | (8.6 | ) | 0.8 | |||||
| Effect of share based compensation | (10.9 | ) | - | |||||
| Return to provision true up | (10.8 | ) | (2.6 | ) | ||||
| Change in rates | (172.7 | ) | - | |||||
| Withholding tax | 1.5 | 6.0 | ||||||
| Other | (0.3 | ) | (7.3 | ) | ||||
| Effective tax rate | 38.4 | % | 102.2 | % | ||||
Despite access to overseas earnings and the resulting toll charge, we intend to indefinitely reinvest earnings and profits in our foreign subsidiaries on account of the foreign jurisdiction withholding taxes that we would have to incur on the actual remittances. Unremitted foreign earnings and profits amounted to approximately $47.0$50.4 million at December 31, 2020.2023. If such foreign earnings and profits are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity.entities. In addition, we also have a valuation allowance on the deferred tax assets of our Canadian, German and the United Kingdom subsidiaries. Our Canadian subsidiaries also have research and development credits available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes.
Tax Assessments
In September 2015, our 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. We disagree 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. We are vigorously contesting contested this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. and in January 2024 the Customs, Excise and Service Tax Appellate Tribunal ruled in the Company’s favor. In the event the Service Tax Department appeals this ruling and is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by our 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 to payfor interest and penalties.penalties. The revenuerevenues of our Indian subsidiary during this period was approximately $64.0$56.0 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 our counsel’s assessment in consultation with our tax counsel, we have not recorded any tax liability for this case.
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In a separate action relating to service tax refunds, in October 2016, our Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000$121,000 previously granted to our 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. We disagree with the basis of this decision and are contesting it vigorously.it. We expect delays in our Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently have service tax credits of approximately $1.0$0.8 million recorded as a receivable. Based on our counsel’s assessment in consultation with our tax counsel, we have not recorded any tax liability for this case.
Substantial recovery against us in the above referenced 2015 Service Tax Department case could have a material adverse impact on us, 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.
Net Income (Loss)
We had a net incomeloss of $0.6$0.9 million and $12.0 million during the yearyears ended December 31, 2020, compared to a net loss of $2.12023 and 2022, respectively. The $11.1 million during the year ended December 31, 2019. The $2.7 million improvementchange was attributabledue to higher revenues, of $2.3 million,lower selling and a decreaseadministrative expenses in all segments and lower income tax, provision of $0.7 million, partially offset in part by higher direct operating expenses of $0.3 million.
costs in the DDS and Agility segments in the current fiscal year.
Net income for the DDS segment was $0.3$0.2 million and a net loss of $0.7 million for the year ended December 31, 2020, compared to a net loss of $0.52023 and 2022, respectively. The $0.9 million for the year ended December 31, 2019. The $0.8 million improvementchange was attributabledue to higher revenues, of $0.7 millionlower selling and a decreaseadministrative expenses and lower income tax, offset in tax provisions of $0.4 million, partially offsetpart by higher direct operating expenses of $0.3 million.
costs in the current fiscal year.
Net income for the Synodex segment was $0.5$0.2 million and a loss of $2.6 million for the yearyears ended December 31, 2020, compared to breakeven for the year ended December 31, 2019.2023 and 2022, respectively. The $0.5$2.8 million increasechange was primarily attributabledue to thelower direct operating costs and selling and administrative expenses, and higher revenues of $0.9 million offset in part by higher operating expenses of $0.4 million.
the current fiscal year.
Net loss for the Agility segment was $1.3 million and a net loss of $8.7 million for the years ended December 31, 2023 and 2022, respectively. The $7.4 million change was primarily due to lower selling and administrative expenses and higher revenues, offset in part by higher direct operating costs in the current fiscal year.
Adjusted Gross Profit and Margin
Adjusted Gross Profit and Adjusted Gross Margin are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit and Adjusted Gross Margin to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin” above.
Adjusted gross profit was $36.5 million and $31.5 million for the years ended December 31, 2023 and 2022, respectively. The $5.0 million increase in adjusted gross profit was due to a higher gross profit, higher depreciation and amortization, and non-recurring severance. Adjusted gross margin was 42% and 40% for the years ended December 31, 2023 and 2022, respectively.
Adjusted gross profit for the DDS segment was $22.9 million and $22.1 million for the years ended December 31, 2023 and 2022, respectively. The $0.8 million increase in adjusted gross profit for the DDS Segment was due to higher depreciation and amortization and higher gross profit. Adjusted gross margin for the DDS segment was 37% and 39% for the years ended December 31, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment as a percentage of revenues was primarily due to higher direct operating costs offset in part by higher revenues.
Adjusted gross profit for the Synodex segment was $1.4 million and a loss of $0.2 million for the yearyears ended December 31, 2020, compared2023 and 2022, respectively. The $1.6 million change in adjusted gross profit in the Synodex segment was due to higher gross profit. Adjusted gross margin for the Synodex segment was 19% and (3)% for the years ended December 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment as a net losspercentage of $1.6revenues was primarily due to lower direct operating costs and higher revenues.
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Adjusted gross profit for the Agility segment was $12.2 million and $9.6 million for the yearyears ended December 31, 2019.2023 and 2022, respectively. The $1.4$2.6 million improvementincrease in adjusted gross profit for the Agility segment was due to higher gross profit, higher depreciation and amortization, and non-recurring severance. Adjusted gross margin for the resultAgility segment was 69% and 62% for the years ended December 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment as a percentage of revenues was primarily due to higher revenues, offset in part by higher direct operating costs.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of $0.7 million, reductions in operating expensesAdjusted EBITDA to the most directly comparable GAAP measure, please see the description of $0.4“Non-GAAP Financial Measures – Adjusted EBITDA” above.
Adjusted EBITDA was $9.9 million and a loss of $3.3 million for the years ended December 31, 2023 and 2022, respectively. The $13.2 million change in Adjusted EBITDA was due to a lower net loss, higher depreciation and amortization, stock-based compensation, interest expense, and non-recurring severance, offset in part by lower provisions for income taxes.
Adjusted EBITDA for the DDS segment was $6.4 million and $4.1 million for the years ended December 31, 2023 and 2022, respectively. The $2.3 million increase in Adjusted EBITDA was due to higher net income in the DDS segment, higher stock-based compensation, depreciation and amortization and interest expense, offset in part by a lower tax benefitprovision.
Adjusted EBITDA for the Synodex segment was $1.0 million and a loss of $0.3 million.$1.7 million for the years ended December 31, 2023 and 2022, respectively. The $2.7 million change in Adjusted EBITDA was due to a lower net loss in the Synodex segment.
Adjusted EBITDA for the Agility segment was $2.5 million and a loss of $5.7 million for the years ended December 31, 2023 and 2022, respectively. The $8.2 million change in Adjusted EBITDA was due to a lower net loss in the Agility segment, non-recurring severance, higher depreciation and amortization, offset in part by lower tax provision.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, are as follows:
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2023 |
| 2022 | ||||||||||
| Cash and cash equivalents | $ | 17,573 | $ | 10,874 | | $ | 13,806 | | $ | 9,792 | ||||
Short term investments - other | | | 14 | | | 507 | ||||||||
| Working capital | 13,515 | 8,250 | |
| 9,142 | |
| 2,869 | ||||||
On December 31, 2020,2023, we had cash and cash equivalents of $17.6$13.8 million, of which $10.2$6.5 million was held by our foreign subsidiaries and $7.4$7.3 million was held in the United States. Despite the passage of the new tax law under which we may repatriate funds from overseas after paying the toll charge, it is our intent, as of December 31, 2020,2023, to permanentlyindefinitely reinvest the overseas funds in our foreign subsidiaries on account ofdue to the withholding tax that we would have to incur on the actual remittances.
We have used, and plan to use, our cash and cash equivalents for (i) investments in the Agility segment;capital investments; (ii) the expansion of our other operations; (iii) technology innovation; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of December 31, 2020,2023, we had working capital of approximately $13.5$9.1 million, as compared to working capital of approximately $8.3$2.9 million as of December 31, 2019.
On May 4, 2020, we received loan proceeds2022. The increase in working capital of $579,700 under the Paycheck Protection Program (PPP), which was established as part of the Coronavirus Aid, Relief and Economic Security Act. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The unforgiven portion of the loan$6.3 million is payable over two years at an interest rate of 1% per year, with a deferral of payments until the date that the Small Business Administration remits the borrower’s loan forgiveness amountprimarily due to the lender. On January 29, 2021, we filed our loan forgiveness application for 100%impact of higher revenues thereby increasing receivables by $4.8 million, cash proceeds from stock option exercises of $3.3 million offset by a decrease in working capital of $1.8 million used in operations during the approved loan under the PPP.year ended December 31, 2023.
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Proceeds from stock option exercises for the year ended December 31, 20202023 were $2.6$3.3 million.
We did not have any material commitments for capital expenditures as of December 31, 2020.
2023.
We believe that our existing cash and cash equivalents and cash flows from operations will provide sufficient sources of liquidity to satisfy our financial needs for the nextat least 12 months from the date of issuance of these financial statements. However,
On April 4, 2023, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as we have no bank facilities or lineslender, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. On July 21, 2023, Innodata Services LLC signed a Joinder Agreement to join the Credit Agreement as a co-borrower. The Credit Agreement provides for a secured revolving line of credit reductions(the “Revolving Credit Facility”) up to an amount equal to the lesser of the borrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in our cashaccordance with the terms of the Credit Agreement and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materiallyon the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and adversely affectcertain other reserves and adjustments. As of December 31, 2023, such borrowing base calculation equaled approximately $10.0 million. The Credit Agreement contains a financial covenant that requires the Company.Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”) plus 2.25%. We did not utilize the Revolving Credit Facility during the year ended December 31, 2023 and through the date of filing of this Report.
Net Cash Provided by Operating Activities
Cash provided by our operating activities for the year ended December 31, 20202023 was $5.7$5.9 million resulting from our net loss of $0.9 million, adjusted for non-cash expenses of $9.9 million and was the result of the net income of $0.6 million, the effect of adjustments for non-cash items of $3.4 million and sources ofa decrease in working capital of $1.6$3.1 million. Adjustments for non-cash items primarily consisted of $2.3 million for depreciation and amortization, stock-based compensation of $0.9 million and $0.2 million for other non-cash items. Working capital activities primarily consisted of sources from a $1.4 million increase in accrued salaries, wages and related benefits, a $0.8 million increase in income and other taxes, offset by a $0.6 million increase in prepaid expenses and other current assets. Refer to the Consolidated Statements of Cash Flows for further details.
Cash providedused by our operating activities for the year ended December 31, 20192022 was $4.3$1.2 million and was the result of theresulting from our net loss of $2.1$12.0 million, the effect of adjustmentsadjusted for non-cash itemsexpenses of $3.6$8.9 million and sources ofan increase in working capital of $2.9$1.9 million. Adjustments for non-cash items primarily consisted of $2.7 million for depreciation and amortization, stock option expense of $0.8 million and $0.1 million for other non-cash items. Working capital activities primarily consisted of sources from a $1.2 million decrease in our accounts receivable, a $1.2 million decrease in prepaid and other current assets, and a $0.9 million increase in income and other taxes which was offset in part by a use of $0.5 million due to an increase in other working capital. The reduction in accounts receivable is a result of higher collections during the year ended December 31, 2019. Refer to the Consolidated Statements of Cash Flows for further details.
Our days’ sales outstanding were 6250 days and 6648 days for the years ended December 31, 20202023 and 2019,2022, respectively. We calculate DSO by first dividing the total revenues for the period by average net accounts receivable, which is the sumaverage of net accounts receivable at the beginning of the period and net accounts receivable at the end of the period, to yield an amount we refer to as the “accounts receivable turnover”. Then we divide the total number of days within the period reported by the accounts receivable turnover to yield DSO expressed in number of days.
Net Cash Used in Investing Activities
Cash used in our investing activities was $1.4 million and $1.7 million for the yearsyear ended December 31, 2020 and 2019, respectively.2023 was $5.1 million consisting of capital expenditures of $5.6 million offset in part by proceeds from sale of investments of $0.5 million. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for internallycapitalized developed software. Capital expenditures for the year ended December 31, 20202023 amounting to $1.4$5.6 million consisted of $0.6$2.9 million for the DDS segment, and $0.8$1.8 million for the Agility segment and $0.9 million for the Synodex segment.
ForCash used in our investing activities for the year 2020,ended December 31, 2022 was $7.0 million consisting of capital expenditures of $6.5 million and the purchase of short-term investments of $0.5 million. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software. Capital expenditures for the year ended December 31, 2022 amounting to $6.5 million consisted of $3.1 million for the DDS segment, $2.0 million for the Agility segment, and $1.4 million for the Synodex segment.
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For calendar year 2024, we anticipate that capital expenditures for ongoing technology, equipment, new platform development, and infrastructure upgrades will approximate $2.0 to $2.3$6.0 million, a portion of which we may finance.
Net Cash Used in Financing Activities
Cash provided by financing activities for the year ended December 31, 20202023 was $2.9 million primarily from PPP loan proceeds of stock option exercises of $3.3 million, offset in part by payment of long-term obligations of $0.4 million.
Cash used in financing activities for the year ended December 31, 2022 was primarily for payments of long-term obligation of $0.6 million, andreduced in part by proceeds from stock option exercises of $2.6$0.3 million. Payments of long-term obligations were $0.9 million and $0.6 million for December 31, 2020 and 2019, respectively. Cash used in financing activities for 2019 was $1.8 million for the repurchase of 1,503,095 shares of our common stock at a volume-weighted average price of $1.23 per share.
Inflation, Seasonality and Prevailing Economic Conditions
Although most of our revenues are denominated in U.S. dollars, a significant portion of our revenuesrevenue is denominated in Canadian dollars, Pound Sterling and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada and Israel, are incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S. denominated transactions into U.S. dollars in accordance with U.S. GAAP. Thus, we are exposed to the risk that fluctuations in the value of these currencies relative to the U.S. dollar could have a direct impact on our revenues and our results of operations.
The Philippines and India have at times experienced high rates of inflation as well as major fluctuations in the exchange rate between the Philippine peso and the U.S. dollar and the Indian rupee and the U.S. dollar. As of December 31, 2020,2023, the aggregate notional amount of our hedges was $10.5 million consisting of approximately $4.3 million against the Indian rupee, was approximately $2.9and $6.2 million, and $4.0 million for against the Philippine peso. peso.
Fluctuations in exchange rates also affect the value of funds held by our foreign subsidiaries. We do not currently intend to hedge these assets.
Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to high inflation in wage rates in the countries in which we operate. We generally perform work for our clientscustomers under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients.
customers.
Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenuerevenues and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.
Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.
Trends
We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the year ended December 31, 2023, we added 517 new customers, an average of 129 new customers per quarter. This is a 3% increase over the 126 new customers we added on average per quarter in 2022 and a 39% increase from the 93 new customers we added on average per quarter in 2021. Importantly, in addition to the customer count, we recognize that the size and scale of new customers significantly impacts our growth trajectory. While in the year December 31, 2023 there was a 3% increase from the average of 126 new customers per quarter in 2022, it is noteworthy that we are placing emphasis on acquiring customers that align with our strategic goals, leading to a focus on the potential revenue value of new customer engagements over sheer number of new customer engagements.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
See Financial Statement Index and Financial Statements commencing on page F-1, which are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)(Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of December 31, 2020.2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of December 31, 2020,2023, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management and director authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –- Integrated Framework (2013) - issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020.
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial information will not be prevented or detected on a timely basis.
2023.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
44
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended December 31, 20202023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. These changes relate to remediation of the material weakness on appropriate review procedures related to evaluation and proper accounting for lease contracts consistent with capital lease accounting under U.S. GAAP. The Company implemented enhancements to its internal controls to prevent and detect errors by instituting additional controls and procedures that entails a comprehensive review of new lease contracts to ensure that all appropriate clauses are thoroughly evaluated and accounted for in accordance with ASC 842 guidance.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
36
45
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information called for by Items 401, 405, if required, and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K, including information about our directors and executive officers, is incorporated by reference from the Company’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20202023 fiscal year.
The Company has a code of ethics that applies to all of its employees, officers, and directors, including its principal executive officer, principal financial officer, principal accounting officer and corporate controller. The text of the Company’s code of ethics is posted on its website at www.innodata.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors in accordance with applicable Nasdaq and SEC requirements.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20202023 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item regarding the Company’s equity compensation plans is set forth in Part II, Item 5 of this Annual Report on Form 10-K under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated by reference herein. The information called for under Item 403 of Regulation S-K by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20202023 fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20202023 fiscal year.
Item 14. Principal Accountant’s Fees and Services.
The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 20212024 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20202023 fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) | Financial Statements. The following Report of Independent Registered Public Accounting firm, consolidated financial statements, and accompanying notes are included in Item 8. Index to Financial Statements: |
Reports of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of December 31, 20202023 and 2019.2022.
Consolidated Statements of Operations and Comprehensive Income (Loss)Loss for the years ended December 31, 20202023 and 2019.2022.
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20202023 and 2019.2022.
Consolidated Statements of Cash Flows for the years ended December 31, 20202023 and 2019.2022.
37
46
Item 16. Form 10K10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
| INNODATA INC. | |||
| | | ||
| | By: | /s/ Jack S. Abuhoff | |
| | | Jack S. Abuhoff | |
| | | | |
| | | Chief Executive Officer and President | |
| | | March | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |||
Signature | Title | Date | ||
| | | | |
/s/ Jack S. Abuhoff | | Chief Executive Officer and President | | March |
Jack S. Abuhoff | | (Principal Executive Officer) | | |
| | | | |
/s/ | | Interim Chief Financial Officer | | March |
Marissa B. Espineli | | (Principal Financial Officer and | | |
| | | | |
/s/ Louise C. Forlenza | | Director | | March |
Louise C. Forlenza | | | | |
| | | | |
/s/ Stewart R. Massey | | Director | | March |
Stewart R. Massey | | | | |
| | | | |
/s/ Nauman (Nick) Toor | | Director (Chairman) | | March |
Nauman (Nick) Toor | | | | |
47
INNODATA INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| PAGE |
| |
| F-2 |
| |
Consolidated Balance Sheets as of December 31, | F-4 |
| |
F-5 | |
| |
F-6 | |
| |
Consolidated Statements of Cash Flows for the years ended December 31, | F-7 |
| |
F-8 |
F-1
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Innodata Inc.
Ridgefield Park, New Jersey
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Innodata Inc. and subsidiaries (the “Company”) as of December 31, 2020,2023 and 2022, the related consolidated statements of operationsoperation and comprehensive income,loss, stockholders’ equity, and cash flows for each of the yearyears then ended, December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20202023 and 2022, and the results of its operations and its cash flows for the yearyears then ended, in conformity with accounting principles generally accepted in the United States of America.
Revision to 2019 consolidated financial statements.
We have also audited the revision adjustments to 2019 consolidated financial statements to correct the immaterial errors as discussed in Note 1 to the consolidated financial statements. In our opinion, such revision adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2019 consolidated financial statements of the Company other than with respect to the revision adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2019 consolidated financial statements taken as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
Matter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (i) relate(1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionopinions on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
F-2
DescriptionTable of Matter:Contents
As described in Note 3 to the consolidated financial statements, the Company’s Intangible assets and goodwill balance was $ 6.8 million as of December 31, 2020. Goodwill is tested for impairment at least annually at the reporting unit level and more frequently when an event occurs, or circumstances change, that indicates the carrying value may not be recoverable. The determinationMeasurement of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasts of future revenues and operating margins and discount rates which are complex and subjective. Changes in these assumptions could have a significant impact on the fair value.
We identified the intangible assets, including goodwill, impairment assessment of the Agility Segment Reporting Unit as a critical audit matter considering materiality of the amounts involved together with the inherent subjectivity related to principal assumptions, which are dependent on current and future economic factors including uncertainties arising from corona virus disease 2019 (“COVID-19”) pandemic; hence assessment of carrying values of intangible asset including goodwillprovision for these unit is considered to be complex and determined to be a critical audit matter in our current period audit. Auditing management’s judgments regarding forecasts of future revenue, operating margin, and the discount rate to be applied, involved a high degree of subjectivity.
How the matter was addressed in our audit:
The primary procedures we performed to address this critical audit matter included:
income tax expenses
Description of Matter
The Company operates in various countries and is subject to income taxes in multiple tax jurisdictions withand during the ordinary course of business, there are many tax positions for which the ultimate tax determination is uncertain due to complexities of transfer pricing, and changing tax laws, and is involved in various tax caseslitigations with respective tax authorities. Uncertainties arise primarily from certain ongoing tax litigations and open tax years for its foreign subsidiaries. As described in Note 46 to the consolidated financial statements, at December 31, 2023, the Company has recognized accruals with respectrecorded unrecognized tax benefits of $1.9 million for uncertain tax positions aggregating $ 3.2 million as of December 31, 2020.
positions.
We identified measurement of accruals for the aforementioned income tax exposures as a critical audit matter, as the amounts involved are material, and the determination of provision for taxes requires the Company to make judgments on tax issues and develop estimates regarding the Company’s exposure to tax risks. Further, auditing management judgments on whether the tax positions are probable of being sustained in tax assessments involves a high degree of subjectivity.
How the matter was addressed in our audit:
The primary procedures we performed to address this critical audit matter included:
| ● |
| ● |
| ● |
| o |
| o | inspecting the correspondences and assessment orders with applicable tax authorities |
| o |
/s/S/ BDO INDIAIndia LLP
We have served as the Company'sCompany’s auditor since 2020.
Mumbai, India
March 11, 20214, 2024
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Innodata Inc.
Opinion on the Financial Statements
We have audited, before the effects of the adjustments for the correction of the errors described in Note 1 (Correction of Immaterial Errors), the accompanying consolidated balance sheet of Innodata Inc. and Subsidiaries (the Company) as of December 31, 2019, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, except for the errors described in Note 1 (Correction of Immaterial Errors), the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and its results of operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments for the correction of the errors described in Note 1(Correction of Immaterial Errors), and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by BDO India LLP. (The 2019 consolidated financial statements before the effects of the adjustments discussed in Note 1 are not presented herein).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Adoption of New Accounting Standard
As discussed in Note 7 to the consolidated financial statements, the Company adopted Accounting Standards Codification ASU 2016-02, beginning January 1, 2019 and applied the practical expedients consistently for all of its leases.
/s/ CohnReznick LLP
Parsippany, New Jersey
March 16, 2020
We have served as the Company's auditor from 2008 to 2020.
INNODATA INC. AND SUBSIDIARIES
DECEMBER 31, 20202023 AND 20192022
(in thousands, except share and per share data)
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 17,573 | $ | 10,874 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $670 and $750, respectively | 10,048 | 9,723 | ||||||
| Prepaid expenses and other current assets | 4,240 | 3,407 | ||||||
| Total current assets | 31,861 | 24,004 | ||||||
| Property and equipment, net | 7,227 | 6,887 | ||||||
| Right-of-use-asset, net | 6,610 | 7,005 | ||||||
| Other assets | 2,563 | 2,110 | ||||||
| Deferred income taxes, net | 2,187 | 1,906 | ||||||
| Intangibles, net | 4,656 | 5,477 | ||||||
| Goodwill | 2,150 | 2,108 | ||||||
| Total assets | $ | 57,254 | $ | 49,497 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,435 | $ | 1,419 | ||||
| Accrued expenses and other | 3,490 | 3,340 | ||||||
| Accrued salaries, wages and related benefits | 5,719 | 4,265 | ||||||
| Income and other taxes | 5,000 | 4,183 | ||||||
| Long-term obligations - current portion | 1,712 | 1,440 | ||||||
| Operating lease liability - current portion | 990 | 1,107 | ||||||
| Total current liabilities | 18,346 | 15,754 | ||||||
| Deferred income taxes, net | 44 | 363 | ||||||
| Long-term obligations, net of current portion | 6,282 | 4,534 | ||||||
| Operating lease liability, net of current portion | 6,332 | 6,731 | ||||||
| Total liabilities | 31,004 | 27,382 | ||||||
| Commitments and contingencies | ||||||||
| Non-controlling interests | (3,390 | ) | (3,417 | ) | ||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Serial preferred stock; 4,998,000 shares authorized, none outstanding | - | - | ||||||
| Common stock, $.01 par value; 75,000,000 shares authorized; 28,984,000 shares issued and 25,800,000 outstanding at December 31, 2020; 27,643,000 shares issued and 24,459,000 outstanding at December 31, 2019 | 289 | 275 | ||||||
| Additional paid-in capital | 31,921 | 28,426 | ||||||
| Retained earnings | 4,833 | 4,216 | ||||||
| Accumulated other comprehensive loss | (938 | ) | (920 | ) | ||||
| 36,105 | 31,997 | |||||||
| Less: treasury stock, 3,184,000 shares at December 31, 2020 and 2019, at cost | (6,465 | ) | (6,465 | ) | ||||
| Total stockholders’ equity | 29,640 | 25,532 | ||||||
| Total liabilities and stockholders’ equity | $ | 57,254 | $ | 49,497 | ||||
| | | | | | |
|
| 2023 |
| 2022 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 13,806 | | $ | 9,792 |
Short term investments - other | | | 14 | | | 507 |
Accounts receivable, net of allowance for doubtful accounts | |
| 14,288 | |
| 9,528 |
Prepaid expenses and other current assets | |
| 3,969 | |
| 3,858 |
Total current assets | |
| 32,077 | |
| 23,685 |
Property and equipment, net | |
| 2,281 | |
| 2,511 |
Right-of-use-asset, net | | | 5,054 | | | 4,309 |
Other assets | |
| 2,445 | |
| 1,498 |
Deferred income taxes, net | |
| 1,741 | |
| 1,475 |
Intangibles, net | |
| 13,758 | |
| 12,526 |
Goodwill | |
| 2,075 | |
| 2,038 |
Total assets | | $ | 59,431 | | $ | 48,042 |
LIABILITIES, NON-CONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 2,662 | | $ | 2,630 |
Accrued expenses and other | |
| 6,583 | |
| 7,250 |
Accrued salaries, wages and related benefits | |
| 7,799 | |
| 6,136 |
Income and other taxes | |
| 3,848 | |
| 3,230 |
Long-term obligations - current portion | |
| 1,261 | |
| 877 |
Operating lease liability - current portion | | | 782 | | | 693 |
Total current liabilities | |
| 22,935 | |
| 20,816 |
Deferred income taxes, net | |
| 22 | |
| 65 |
Long-term obligations, net of current portion | |
| 6,778 | |
| 5,079 |
Operating lease liability, net of current portion | | | 4,701 | | | 4,036 |
Total liabilities | | | 34,436 | | | 29,996 |
| | | | | | |
Commitments and contingencies | |
| - | |
| - |
| | | | | | |
Non-controlling interests | | | (708) | | | (727) |
STOCKHOLDERS’ EQUITY: | |
| | |
| |
Serial preferred stock; 4,998,000 shares authorized, none outstanding | |
| - | |
| - |
Common stock, $.01 par value; 75,000,000 shares authorized; 31,937,000 shares issued and 28,753,000 outstanding at December 31, 2023 and 30,589,000 shares issued and 27,405,000 outstanding at December 31, 2022 | |
| 320 | |
| 306 |
Additional paid-in capital | |
| 43,152 | |
| 35,815 |
Deficit | |
| (9,683) | |
| (8,775) |
Accumulated other comprehensive loss | |
| (1,621) | |
| (2,108) |
| |
| 32,168 | |
| 25,238 |
Less: treasury stock, 3,184,000 shares at December 31, 2023 and 2022, at cost | |
| (6,465) | |
| (6,465) |
Total stockholders’ equity | |
| 25,703 | |
| 18,773 |
Total liabilities, non-controlling interests and stockholders’ equity | | $ | 59,431 | | $ | 48,042 |
See notes to consolidated financial statements.
F-6
F-4
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)LOSS
YEARS ENDED DECEMBER 31, 20202023 AND 20192022
(In thousands, except per share amounts)
| 2020 | 2019 | |||||||
| Revenues | $ | 58,240 | $ | 55,858 | ||||
| Operating costs and expenses: | ||||||||
| Direct operating costs | 38,398 | 37,325 | ||||||
| Selling and administrative expenses | 18,662 | 19,481 | ||||||
| Interest expense, net | 135 | 120 | ||||||
| 57,195 | 56,926 | |||||||
| Income (loss) before provision for income taxes | 1,045 | (1,068 | ) | |||||
| Provision for income taxes | 401 | 1,091 | ||||||
| Consolidated net income (loss) | 644 | (2,159 | ) | |||||
| Income (loss) attributable to non-controlling interests | 27 | (17 | ) | |||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 617 | $ | (2,142 | ) | |||
| Income (loss) per share attributable to Innodata Inc. and Subsidiaries: | ||||||||
| Basic | $ | 0.03 | $ | (0.08 | ) | |||
| Diluted | $ | 0.02 | $ | (0.08 | ) | |||
| Weighted average shares outstanding: | ||||||||
| Basic | 24,607 | 25,774 | ||||||
| Diluted | 25,573 | 25,774 | ||||||
| Comprehensive income (loss): | ||||||||
| Consolidated net income (loss) | $ | 644 | $ | (2,159 | ) | |||
| Pension liability adjustment, net of taxes | (391 | ) | (1,504 | ) | ||||
| Change in fair value of derivatives, net of taxes | (33 | ) | 33 | |||||
| Foreign currency translation adjustment, net of taxes | 406 | 566 | ||||||
| Other comprehensive loss | (18 | ) | (905 | ) | ||||
| Total comprehensive income (loss) | 626 | (3,064 | ) | |||||
| Comprehensive income (loss) attributed to non-controlling interest | 27 | (17 | ) | |||||
| Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 599 | $ | (3,047 | ) | |||
See notes to consolidated financial statements.
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020 AND 2019
(In thousands)
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | |||||||||||||||||||||||||
| January 1, 2019 as reported | 27,558 | 275 | 27,579 | 6,595 | (15 | ) | 1,681 | (4,622 | ) | 29,812 | ||||||||||||||||||||||
| Revision adjustments | - | - | - | (237 | ) | - | - | - | (237 | ) | ||||||||||||||||||||||
| January 1, 2019 as adjusted | 27,558 | 275 | 27,579 | 6,358 | (15 | ) | 1,681 | (4,622 | ) | 29,575 | ||||||||||||||||||||||
| Net loss | - | - | - | (1,602 | ) | - | - | - | (1,602 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | - | 1,503 | (1,843 | ) | (1,843 | ) | ||||||||||||||||||||||
| Stock-based compensation | 75 | - | 836 | - | - | - | - | 836 | ||||||||||||||||||||||||
| Exercise of stock options | 10 | - | 11 | - | - | - | - | 11 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (1,504 | ) | - | - | (1,504 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | - | - | - | - | 566 | - | - | 566 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | 33 | - | - | 33 | ||||||||||||||||||||||||
| December 31, 2019 as reported | 27,643 | 275 | 28,426 | 4,756 | (920 | ) | 3,184 | (6,465 | ) | 26,072 | ||||||||||||||||||||||
| Revision adjustments | - | - | - | (540 | ) | - | - | - | (540 | ) | ||||||||||||||||||||||
| December 31, 2019 as adjusted | 27,643 | 275 | 28,426 | 4,216 | (920 | ) | 3,184 | (6,465 | ) | 25,532 | ||||||||||||||||||||||
| Net income | - | - | - | 617 | - | - | - | 617 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 913 | - | - | - | - | 913 | ||||||||||||||||||||||||
| Exercise of stock options | 1,341 | 14 | 2,582 | - | - | - | - | 2,596 | ||||||||||||||||||||||||
| Pension liability adjustments, net of taxes | - | - | - | - | (391 | ) | - | - | (391 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment, netof taxes | - | - | - | - | 406 | - | - | 406 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net of taxes | - | - | - | - | (33 | ) | - | - | (33 | ) | ||||||||||||||||||||||
| December 31, 2020 | 28,984 | $ | 289 | $ | 31,921 | $ | 4,833 | $ | (938 | ) | 3,184 | $ | (6,465 | ) | $ | 29,640 | ||||||||||||||||
See notes to consolidated financial statements.
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | |
|
| 2023 |
| 2022 | ||
Revenues | | $ | 86,775 | | $ | 79,001 |
Direct operating costs | |
| 55,482 | |
| 51,533 |
Selling and administrative expenses | |
| 30,975 | |
| 37,940 |
Interest expense, net | |
| 179 | |
| 11 |
| | | 86,636 | | | 89,484 |
Income (loss) before provision for income taxes | |
| 139 | |
| (10,483) |
| | | | | | |
Provision for income taxes | |
| 1,028 | |
| 1,522 |
| | | | | | |
Consolidated net loss | |
| (889) | |
| (12,005) |
| | | | | | |
Income (loss) attributable to non-controlling interests | |
| 19 | |
| (70) |
| | | | | | |
Net Loss attributable to Innodata Inc. and Subsidiaries | | $ | (908) | | $ | (11,935) |
| | | | | | |
Loss per share attributable to Innodata Inc. and Subsidiaries: | |
| | |
| |
Basic and Diluted | | $ | (0.03) | | $ | (0.44) |
| | | | | | |
Weighted average shares outstanding: | |
|
| |
|
|
Basic and Diluted | | | 28,131 | | | 27,278 |
| | | | | | |
Comprehensive Loss: | |
|
| |
|
|
Consolidated net loss | | $ | (889) | | $ | (12,005) |
Pension liability adjustment, net of taxes | |
| (326) | |
| 772 |
Foreign currency translation adjustment | | | 407 | | | (676) |
Change in fair value of derivatives, net of taxes | |
| 406 | |
| (12) |
Other comprehensive income | |
| 487 | |
| 84 |
Total comprehensive loss | |
| (402) | |
| (11,921) |
Comprehensive income (loss) attributed to non-controlling interest | |
| 19 | |
| (70) |
Comprehensive loss attributable to Innodata Inc. and Subsidiaries | | $ | (421) | | $ | (11,851) |
YEARS ENDED DECEMBER 31, 2020 AND 2019
(In thousands)
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Consolidated net income (loss) | $ | 644 | $ | (2,159 | ) | |||
| Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,266 | 2,697 | ||||||
| Stock-based compensation | 913 | 836 | ||||||
| Deferred income taxes | (618 | ) | (313 | ) | ||||
| Pension cost | 791 | 335 | ||||||
| Loss on disposal of property and equipment | 48 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (481 | ) | 1,216 | |||||
| Prepaid expenses and other current assets | (555 | ) | 1,248 | |||||
| Other assets | 270 | 332 | ||||||
| Accounts payable, accrued expenses and other | 155 | (589 | ) | |||||
| Accrued salaries, wages and related benefits | 1,449 | �� | (249 | ) | ||||
| Income and other taxes | 778 | 926 | ||||||
| Net cash provided by operating activities | 5,660 | 4,280 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (1,414 | ) | (1,667 | ) | ||||
| Proceeds from disposal of property and equipment | 39 | - | ||||||
| Net cash used in investing activities | (1,375 | ) | (1,667 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from bank loan | 580 | - | ||||||
| Proceeds from exercise of stock options | 2,596 | 11 | ||||||
| Payment of long-term obligations | (864 | ) | (567 | ) | ||||
| Purchase of treasury stock | - | (1,843 | ) | |||||
| Net cash provided by (used in) financing activities | 2,312 | (2,399 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 102 | (209 | ) | |||||
| Net increase in cash and cash equivalents | 6,699 | 5 | ||||||
| Cash and cash equivalents, beginning of year | 10,874 | 10,869 | ||||||
| Cash and cash equivalents, end of year | $ | 17,573 | $ | 10,874 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 348 | $ | 962 | ||||
| Cash paid for operating leases | $ | 2,286 | $ | 2,110 | ||||
| Cash paid for interest | $ | 141 | $ | 130 | ||||
See notes to consolidated financial statements.
F-5
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2023 AND 2022
(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 | | - | | | - | | | - | | | (11,935) | | | - | | - | | | - | | | (11,935) |
Stock-based compensation | | - | | | - | | | 3,283 | | | - | | | - | | - | | | - | | | 3,283 |
Stock option exercises |
| 249 | |
| 3 | |
| 329 | |
| - | |
| - | | - | |
| - | |
| 332 |
Shares withheld for taxes on restricted shares vesting | | (7) | | | - | | | (53) | | | - | | | - | | - | | | - | | | (53) |
Redemption of non-controlling interest |
| - | |
| - | |
| (2,865) | |
| - | |
| - | | - | |
| - | |
| (2,865) |
Pension liability adjustments, net of taxes |
| - | |
| - | |
| - | |
| - | |
| 772 | | - | |
| - | |
| 772 |
Foreign currency translation adjustment |
| - | |
| - | |
| - | |
| - | |
| (676) | | - | |
| - | |
| (676) |
Change in fair value of derivatives, net of taxes |
| - | |
| - | |
| - | |
| - | |
| (12) | | - | |
| - | |
| (12) |
December 31, 2022 | | 30,589 | | | 306 | | | 35,815 | | | (8,775) | | | (2,108) | | (3,184) | | | (6,465) | | | 18,773 |
Net loss attributable to Innodata Inc. and Subsidiaries |
| - | |
| - | |
| - | |
| (908) | |
| - | | - | |
| - | |
| (908) |
Stock-based compensation |
| - | |
| - | |
| 4,027 | |
| - | |
| - | | - | |
| - | |
| 4,027 |
Stock option exercises | | 1,351 | | | 14 | | | 3,310 | | | - | | | - | | - | | | - | | | 3,324 |
Shares withheld for exercise net settlement |
| (3) | |
| - | |
| - | |
| - | | | - | | - | | | - | |
| - |
Pension liability adjustments, net of taxes | | - | | | - | | | - | | | - | | | (326) | | - | | | - | | | (326) |
Foreign currency translation adjustment |
| - | |
| - | |
| - | |
| - | |
| 407 | | - | |
| - | |
| 407 |
Change in fair value of derivatives, net of taxes | | - | | | - | | | - | | | - | | | 406 | | - | | | - | | | 406 |
December 31, 2023 |
| 31,937 | | $ | 320 | | $ | 43,152 | | $ | (9,683) | | $ | (1,621) | | (3,184) | | $ | (6,465) | | $ | 25,703 |
See notes to consolidated financial statements.
F-6
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2023 AND 2022
(In thousands)
| | | | | | |
|
| | |
| | |
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: |
| |
|
| |
|
Consolidated net loss | | $ | (889) | | $ | (12,005) |
Adjustments to reconcile consolidated net loss to net cash | |
| | |
| |
provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 4,716 | |
| 3,889 |
Stock-based compensation | |
| 4,027 | |
| 3,283 |
Deferred income taxes | |
| (276) | |
| 217 |
Provision for doubtful accounts | | | 426 | | | 480 |
Pension cost | |
| 1,046 | |
| 943 |
Loss on lease termination | | | - | | | 125 |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (5,116) | |
| 1,303 |
Prepaid expenses and other current assets | |
| 372 | |
| (226) |
Other assets | |
| (171) | |
| 750 |
Accounts payable, accrued expenses and other | |
| (490) | |
| 322 |
Accrued salaries, wages and related benefits | |
| 1,653 | |
| (310) |
Income and other taxes | |
| 605 | |
| 13 |
Net cash provided by (used in) operating activities | |
| 5,903 | |
| (1,216) |
Cash flows from investing activities: | |
|
| |
|
|
Capital expenditures | |
| (5,564) | |
| (6,526) |
Proceeds from (purchase of) short term investments - others | | | 493 | | | (507) |
Net cash used in investing activities | |
| (5,071) | |
| (7,033) |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from exercise of stock options | | | 3,324 | | | 332 |
Payment of long-term obligations | | | (452) | | | (639) |
Net cash provided by (used in) financing activities | |
| 2,872 | |
| (307) |
Effect of exchange rate changes on cash and cash equivalents | |
| 310 | |
| (554) |
Net increase (decrease) in cash and cash equivalents | |
| 4,014 | |
| (9,110) |
Cash and cash equivalents, beginning of year | |
| 9,792 | |
| 18,902 |
Cash and cash equivalents, end of year | | $ | 13,806 | | $ | 9,792 |
Supplemental disclosures of cash flow information: | |
| | |
| |
Vendor financed software licenses acquired | | $ | 1,162 | | $ | - |
Cash paid for income taxes | | $ | 753 | | $ | 1,107 |
Cash paid for operating leases | | $ | 1,557 | | $ | 1,838 |
Cash paid for interest | | $ | 400 | | $ | 19 |
See notes to consolidated financial statements.
F-7
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Description of Business - Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a globalleading data engineering company. The Company solves complex data challenges usingCompany’s mission is to help the world’s most prestigious companies deliver the promise of ethical, high-performing artificial intelligence (AI)(“AI”), which the Company believes will contribute to a safer and human expertise.
more prosperous world.
The Company provides large-scalewas founded on a simple idea: engineer the highest quality data annotation services and platforms to companies who require high-qualityso organizations across broad industry segments could make smarter decisions. Today, the Company believes it is delivering the highest quality data for trainingsome of the world’s most innovative technology companies to use to train the AI models of the future.
AI holds the promise that computers can perceive and machine learning (ML) algorithms.understand the world, enabling products and services that would have been previously unimaginable and impossible with traditional coding. AI learns from data, and the highest-performing AI will have learned from the highest-quality data. The Company also provides AI/ML-based solutions to help companies apply AI/ML to real-world problems relating to analyzingbelieves that it can contribute meaningfully by harnessing its capabilities, honed over 30 years, in collecting and deriving insights from documents. For industry-specific, document-intensive industry use cases, the Company provides AI-augmented software-as-a-service (SaaS) platformsannotating data at scale with consistency and discrete managed services.
high accuracy.
The Company’sCompany is also helping companies deploy and integrate AI into their operations and products and providing innovative AI-enabled industry platforms, and serviceshelping ensure that its customers’ businesses are powered by Goldengate, its proprietary AI/ML platform, as well as other technologies it has developed. In addition, the Company bring to bear 3,500 + employees spanning nine countries with expertiseprepared for a world in data pertaining to many professional fields. The Company’s hybrid approach of using AI/MLwhich machines augment human activity in conjunction with human experts enables the Company to deliver superior data quality with even the most complex and sensitive data.
ways previously unimaginable.
The Company developed its capabilities and honed its customer- and quality-centric cultureapproaches progressively over the last 30 years creating high-quality data for many of the world’s most demanding information companies. Approximately fiveeight years ago, the Company formed Innodata Labs, a research and development center, to research, develop and apply machine learning and emerging AI to its large-scale, human-intensive data operations. In 2019, the Company began packaging the capabilities that emerged from its R&D efforts in order to align with several fast-growing new markets and help companies use AI/ML to drive performance benefits and business insights.
The Company’s historical core competency in high-quality data, combined with these R&D efforts in applied AI, created the foundation for the evolution of the Company’s offerings, which include AI Data Preparation, AI Model Deployment and Integration, and AI-Enabled Industry Platforms.
AI Data Preparation
For several of the world’s large technology companies, the Company supports their efforts at building generative AI foundation models. For these companies, the Company provides or is poised to provide a range of scaled data solutions and services. The Company’s scaled data solutions include providing instruction data sets for fine-tuning LLMs to understand prompts, to accept instruction, to converse, to apparently reason, and to perform the myriad of incredible feats that many of us have now experienced. The Company anticipates this strategy will enable italso provides reinforcement learning and reward modeling, services which are critical to accelerate growth.provide the guardrails against toxic, bias and harmful responses, and model evaluation services.
Data Annotation
The Company trains AI algorithms forFor social media companies, robotics companies, financial services companies, and many others, the Company collects or creates training data, annotates training data, and trains AI algorithms for working with images, text, video, audio, code and audio. Data sciences teams seek partners that can perform data preparation functions for them at large-scale and at high quality, while using automated tools to minimize cost. Moreover, as AI projects become more specialized and mission-critical, data preparation is becoming increasingly complex, requiring deep domain knowledge and an infrastructure in which data security is assured.
sensor data.
The Company utilizeutilizes a variety of leading third-party imagetools, proprietary tools and video annotationcustomer tools. For text annotation, the Company useuses its proprietary textdata annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. The Company’s proprietary textdata annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. It alsoThe platform encapsulates many of the innovations the Company has conceived of in the course of its 30-year history of creating high-quality data.
F-10
F-8
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
In addition, because collecting real-world data is often impracticable (due to data privacy regulations or rarity of cohorts and outliers), the Company creates high-quality synthetic data that maintains all of the statistical properties of real-world data, using a combination of domain specialists and machine technologies that leverage large language models (LLMs).
AI/ML Solutions
AI Model Deployment and Integration
The Company helps businesses leverage the latest AI technologies to achieve their goals. The Company develops custom AI models (where it selects the appropriate algorithms, tunes hyperparameters, trains and validates the models, and updates the models as required). The Company also provides AI/MLhelps businesses fine-tune their own custom versions of the Company’s proprietary models and third-party foundation models to address domain-specific and customer-specific use cases.
For the Company’s customers that provide products and solutions that require intensive text data processing and analytics, in addition to companies that intensively process textual datadeploying and seek to obtain the benefits of AI/ML technologies without having to develop AI/ML engineering capabilities in-house. For such companies, the Company often integrates one or more of its pre-trained text processing algorithms as a foundation for an overall solution. The Company’s algorithms are accessible as microservices via application programming interfaces (APIs), enabling easy integration.
In conjunction with AI/ML solutions,integrating AI models, the Company often provides a range of data engineering support services including data transformation, data curation, data hygiene, data consolidation, data extraction, data compliance, and master data management.
The Company’s customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns of the Company’s AI/MLAI solutions provide.and platforms.
AI/MLAI-Enabled Industry Platforms
The Company’s AI-enabled industry platforms address specific, niche market requirements that the Company believes it can fulfill in large partinnovate with its AI/ML technologies. The Company deploys these industry platforms as software-as-a-service (SaaS) and as managed services. These platforms benefit from the Company’s technology infrastructure, its industry-specific knowledge, its strong customer relationships and experience merging technology with the business processes of its customers. To date, the Company has built an industry platform for medical records data extraction and transformation (which the Company brands as “Synodex®”) and an industry platform for marketing communications/public relations news distribution and monitoring (which the Company brands as “Agility PR Solutions”).
The Company is in development with an additional AI-enabled industry platform to serve financial services institutions.
The Company’s Synodex industry platform transforms medical records into useable digital data organized in accordance with its proprietary data models or clientcustomer data models. At the end of 2020, the Company had 20 clients utilizing its Synodex platform, including John Hancock Insurance, the insurance operating unit of John Hancock Financial (a division of Manulife) and one of the largest life insurers in the United States.
The Company’s Agility industry platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news (print, web, radio and TV) and social media.
The Company’s operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
Critical Accounting Policies and Estimates
Principles of Consolidation -The consolidated financial statements include the accounts of Innodata Inc. and its wholly owned subsidiaries, and the Synodex and docGenix, a limited liability companiescompany that areis majority-owned by the Company. The non-controlling interests in the Synodex and docGenix limited liability companies are accounted forcompany have call and put options that can be settled in cash or stock. Accordingly, this is presented in temporary equity in accordance with Financial Accounting Standards Board (FASB) non-controlling interest guidance. All intercompany transactions and balances have been eliminated in consolidation.
F-9
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Use of Estimates - In preparing 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates.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 obligation,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. Revenues forRevenue from agreements billed on a time-and-materials basis areis recognized as services are performed. Revenues underRevenue from fixed-fee agreements, which areis not significant to overall revenues, areis 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 ourthe 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. RevenuesRevenue from the reseller agreements areis recognized at the gross amount received for the goods in accordance with ourthe Company functioning as a principal due to ourthe 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.
Revenues includeRevenue 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.
F-10
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
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. Revenues are 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.
Included in prepaid expenses and other current assets on the accompanying consolidated balance sheets are contract acquisition costs amounting to $0.8 million for each of the years ended December 31, 2023 and 2022. 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 our locationsthe Company’s subsidiaries in the Philippines, India, Sri Lanka, Israel, and Hong Kong, the United Kingdom and Canada (other than the Agility subsidiaries) is the U.S. dollar. Transactions denominated in Philippine pesos, Indian and Sri Lankan rupees, Israeli shekels, United Kingdom pound sterling and Hong KongCanadian 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 aton December 31, 20202023 and 2019December 31, 2022 are translated at the exchange rate in effect as of those dates. NonmonetaryNon-monetary assets liabilities, and stockholders’ equity are translated at the appropriate historical rates. Included in direct operating costs were foreign exchange losses (gains) resulting from such transactionstranslations of approximately $108,000$0.4 million and $158,000($1.3) million for the years ended December 31, 20202023 and 2019,2022, respectively.
The functional currency for the Company’s subsidiary in Germany is the Euro. The functional currencies for the Company’s Agility subsidiaries in Germany, the United Kingdom and Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are prepared in thesetheir 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 consolidated financial statements. Income, expenses, and cash flows are translated at weighted averageweighted-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'stockholders’ equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying consolidated statements of operations and comprehensive income (loss). The amount of foreign currency translation adjustment was $406,000 and $566,000 for the years ended December 31, 2020 and 2019, respectively.
loss.
Derivative Instruments - The Company accounts for derivative transactions in accordance with ASCthe FASB’s Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments,” withInstruments”. For derivative instruments that are designated and qualify as cash flow hedges, the corresponding unrealized gain or loss recognized outrightentire 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 income.costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs. The total notional value of designated outstanding foreign currency forward contracts atwas $10.5 million and $14.2 million as of December 31, 2020 was $6.9 million.
2023 and 2022, respectively.
Cash Equivalents - For financial statement purposes, the Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Short term Investments-other - For financial statement purposes, the Company considers investments made in time deposits and treasury bills having an original maturity of more than three months but less than one year from the balance sheet date under short term investments.
F-11
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Concentration of Credit Risk - The Company maintains its cash with highly rated financial institutions, located in the United States and in foreign locations where the Company has its operations. At December 31, 2023, the Company had cash and cash equivalents of $13.8 million, of which $6.5 million was held by its foreign subsidiaries and $7.3 million was held in the United States. To the extent that such cash exceeds the maximum insurance levels, the Company is uninsured. The Company has not experienced any losses in such accounts.
Accounts Receivable - Accounts receivable is generally recorded at the invoiced amounts, net of an allowance for expected losses. The Company establishes credit terms for new customers based upon management’s review of their credit information and project terms, and performs ongoing credit evaluations of its customers, adjusting credit terms when management believes appropriate based upon payment history and an assessment of the customer’s current creditworthiness.
We record an allowance for credit losses for estimated losses resulting from the failure of our customers to make the required payments and provisions for billing adjustments relating to quality issues on delivered services. The allowance for credit losses is based on a review of specifically identified accounts and an overall aging analysis applied to accounts pooled based on similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices, and current economic trends based on our expectations over the expected life of the receivables, generally ninety days or less. Actual credit losses could differ from those estimates.
Property and Equipment- Property and equipment are stated at cost and are depreciated on the straight-line method over the estimated useful lives of the related assets, which is generally two to ten years.years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Certain assets under capital leases are amortized over the lives of the respective leases or the estimated useful lives of the assets, whichever is shorter.
Capitalized Developed Software Development Costs- theThe Company incurs development costs related to software it develops for its internal use software.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 is generally ranges between from three and nine to ten years. All other research and maintenance costs are expensed as incurred. Capitalized developed software and development costs – in progress as of December 31, 20202023 and 20192022 were $1.4$3.5 million and $2.5$2.8 million, respectively. CompletedThe cumulative completed capitalized developed software and development cost as of December 31, 20202023 and 2019 were $10.72022 was $15.2 million and $8.1$11.8 million, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived Assets -- Management assesses the recoverability of its long-lived assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following factors, if present, may trigger an impairment review: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) significant decline in the Company’s stock price for a sustained period; and (iv) a change in the Company’s market capitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-mentioned factors, an impairment analysis is performed, using undiscounted cash flow projections. Management makes assumptions regarding estimated future cash flows and other factors to determine the fair value of these respective assets. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair value and is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
F-12
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Goodwill and Other Intangible Assets –- The Company performs a valuation of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, clientcustomer relationships, backlog and trademarks. Liabilities relatedtrademarks, having useful lives which range from ten to intangibles principally consist of unfavorable vendor contracts.twelve years. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible assets are amortized into direct operating costs ratably over their expected related revenue streams over their useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level annually during the third quarter of each fiscal year (as of September 30 of that year) or when an event occurs, or circumstances change, that indicates the carrying value may not be recoverable.
The Company performed its annual goodwill assessment for the Agility segment as of September 30, 2020. In performing the assessment, the Company adhered to the provisions of ASU 2017-04 by using a single step approach that determines the carrying value of goodwill and comparing it against the excess of the reporting unit’s fair value. Based on the Company’s assessment, the Company reached the conclusion that there was no goodwill2023 for impairment. The impairment becausetest involves estimating the fair value based on a combination of income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies) using unobservable inputs (Level 3). The Company concluded that there is no impairment of goodwill for the Agility segment’s goodwill exceeded its carrying value.
segment.
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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Synodex and Agility segments cannot be predicted with certainty, the Company maintains a valuation allowance against all the U.S.United States, Canadian and CanadianEuropean (principally Germany and the United Kingdom) 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 consolidated statements of operations and comprehensive loss.
Accounting for Leases - In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as modified (“ASU 2016-02”Accounting Standards for Codifications (ASC 842 “Accounting for Leases”), which replaced existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.assets. The Company adopted ASU 2016-02 effective January 1, 2019. Upon adoption, the Company recognizedrecognizes a right-of-use asset and corresponding lease liability.liability for all its operating leases. See Note 6,9, Operating Leases.
F-13
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets, or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:
| a. | there is a change in contractual terms, other than a renewal or extension of the arrangement; |
| b. | a renewal option is exercised, or extension granted, unless the term of the renewal or extension was initially included in the lease term; |
| c. | there is a change in the determination of whether fulfillment is dependent on a specified asset; or |
| d. | there is a substantial change to the asset. |
Whenever a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).
Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. As of December 31, 2020,2023, all of the Company’s leases are classified under operating leases. Operating lease payments are recognized as an operating expense on a straight-line basis over the lease term.
Accounting for Stock-Based Compensation - The Company measures and recognizes stock-based compensation expense for all share-based payment awards made to employees and directors based on the estimated fair value at the grant date. The stock-based compensation expense is recognized over the requisite service period. The fair value of stock option grants is determined using the Black-Scholes option-pricing model and the fair value of restricted stock units is determined using the Binomial option pricing model.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For restricted stock units which are time vested, the fair value is determined based on the grant date fair value.
The stock-based compensation expense related to the Company’s stock plans were allocated as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
| | Year Ended December 31, | ||||||||||||
|
| 2023 |
| 2022 | ||||||||||
| Direct operating costs | $ | 158 | $ | 113 | | $ | 294 | | $ | 214 | ||||
| Selling and adminstrative expenses | 755 | 723 | ||||||||||||
Selling and administrative expenses | |
| 3,733 | |
| 3,069 | ||||||||
| Total stock-based compensation | $ | 913 | $ | 836 | | $ | 4,027 | | $ | 3,283 | ||||
Fair Value of Financial Instruments - The carrying amounts of financial instruments approximated their fair value as of December 31, 20202023 and 2019,2022, because of the relativerelatively short maturity of these instruments. See Note 14, Financial Instruments.
16, Derivatives.
Fair value measurements and disclosures define fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three levels. The three levels are defined as follows:
| ● | Level 1: Unadjusted quoted price in active market for identical assets and liabilities. |
F-14
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
| ● | Level 2: Inputs other than those included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. |
The Company’s forward contracts are at level 2 in the fair value hierarchy.
Accounts Receivable - The Company establishes credit terms for new clients based upon management’s review of their credit information and project terms, and performs ongoing credit evaluations of its clients, adjusting credit terms when management believes appropriate based upon payment history and an assessment of the client’s current creditworthiness. The Company records an allowance for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due (accounts outstanding longer than the payment terms are considered past due), the Company’s previous loss history, the client’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. This cannot guarantee that credit loss rates in the future will not be greater than those experienced in the past. In addition, there is credit exposure if the financial condition of one of the Company’s major clients were to deteriorate. In the event that the financial condition of one of the Company’s clients were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be necessary. The allowance for doubtful accounts as of December 31, 2020 and 2019 was approximately $0.7 million and $0.8 million, respectively. Total amounts written off against the existing allowance for doubtful accounts for the year ended December 31, 2020 was $0.3 million.
Concentration of Credit Risk - The Company maintains its cash with highly rated financial institutions, located in the United States and in foreign locations where the Company has its operations. At December 31, 2020, the Company had cash and cash equivalents of $17.6 million, of which $10.2 million was held by its foreign subsidiaries with local banks located mainly in Asia and $7.4 million was held in the United States. To the extent that such cash exceeds the maximum insurance levels, the Company is uninsured. The Company has not experienced any losses in such accounts.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income (Loss) per Share –- Income (loss) per share is computed using the weighted-average number of common shares outstanding during the year. Diluted income (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two class” method of computing income (loss) per share is used.
Pension - The Company records annual pension costs based on calculations, which include various actuarial assumptions including discount rates, compensation increases and other assumptions involving demographic factors. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The Company believes that the assumptions used in recording its pension obligations are reasonable based on its experience, market conditions and inputs from its actuaries.
Deferred Revenue - Deferred revenue represents payments received from clientscustomers in advance of providing services and amounts deferred if conditions for revenue recognition have not been met. Included in accruedAccrued expenses and other on the accompanying consolidated balance sheets is deferred revenue amounting to $1.2$3.5 million and $1.1$4.4 million as of December 31, 20202023 and 2019,2022, respectively. 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 years ended December 31, 2023 and 2022, respectively (in thousands):
| | | | | | |
|
| December 31, | ||||
| | 2023 | | 2022 | ||
Balance at January 1 | | $ | 4,366 | | $ | 4,509 |
Net deferred revenue in the period | | | 21,619 | | | 29,756 |
Revenue recognized | | | (22,586) | | | (29,618) |
Currency translations and other adjustments | | | 124 | | | (281) |
Balance at December 31 |
| $ | 3,523 |
| $ | 4,366 |
Recent Accounting Pronouncements - – In December 2019,On November 27, 2023, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiativeStandards Update (ASU) No. 2023-07, “Improvements to reduce complexity in the accounting standards.Reportable Segment Disclosures,”. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standardASU’s effective date is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We do not expect that the adoption of the new guidance will have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities. The Company adopted the standard and it had no material impact on the Company’s consolidated financial statements.
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 codification 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, 20222023. The adoption of the ASU 2023-07 will enhance expense disclosures in segment reporting and interim periods within thoseother qualitative disclosures and allows for disclosing multiple measures of segment profit or loss. The Company does not expect any significant impact from the adoption of this standard.
On December 14, 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU’s effective date is for fiscal years whichbeginning after December 15, 2024. The adoption of the ASU 2023-09 will be fiscal 2023 for us if we continueenhance quantitative and qualitative disclosures related to be classified as a Smaller Reportingrate reconciliation of significant components and income tax paid. The Company with earlydoes not expect any significant impact from the adoption permitted.of this standard.
F-15
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
2. Short Term Investments - other
We do not expect that
Short-term investments include investments made by the adoptionCompany in treasury bills and certificates of deposit which are considered as highly liquid investments having an original maturity period of more than three months but less than one year from the balance sheet date.
| | | | | | |
|
| December 31, | ||||
| | 2023 |
| 2022 | ||
| | | | | | |
Treasury bills | | $ | - | | $ | 494 |
Certificates of deposit | |
| 14 | |
| 13 |
| | | | | | |
Total | | $ | 14 | | $ | 507 |
3.Accounts Receivable
Accounts receivable consists of the new guidance will have a materialfollowing:
| | | | | | |
|
| December 31, | ||||
| | 2023 |
| 2022 | ||
Gross Accounts receivable | | $ | 15,505 | | $ | 10,741 |
Allowance for doubtful accounts | | | (1,217) | | | (1,213) |
Accounts receivable, net |
| $ | 14,288 |
| $ | 9,528 |
As of January 1, 2023 the Company has adopted ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses”, and based on the Company’s assessment there was no impact on ourthe financial statements or other related disclosures. The basis of allowance for doubtful accounts is further elaborated in Note 1, “Critical Accounting Policies and Estimates” to the consolidated financial statements.
Correction of Immaterial Errors – DuringActivity in the preparation ofallowance for the September 30, 2020 condensed consolidated financial statements, certain historical errors were identified relating tocredit losses for the accounting for capital leases under ASC Topics 840 and 842. The lease obligations under certain leases were not recorded at their present values at the inception of the leases; in addition, the asset buyout prices were not reassessed in December 2019 by the Company, both of which resulted in an understatement of expenses fromyear ended December 31, 2017 to December2023 was as follows (in thousands):
| | | |
|
| For the Year Ended | |
|
| December 31, 2023 | |
Balance at January 1, 2023 |
| $ | 1,213 |
Additions charged to expense | | | 426 |
Write-offs against allowance | | | (426) |
Foreign currency translation adjustment |
| | 4 |
Balance at December 31, 2023 | | $ | 1,217 |
F-16
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2019 and an overstatement of expenses for the nine months ended September 30, 2020.2023 AND 2022
The errors were not material, either quantitatively or qualitatively, in any of the reported periods. However, the corrections, if recorded in the three-month period ended September 30, 2020 would have been material to such period. Accordingly, the prior period financial statements were corrected by revising such consolidated financial statements for comparability. For the December 31, 2019 consolidated financial statements included in this Form 10-K, the corrections are as follows:
The Company evaluated each year’s/period’s errors under Staff Accounting Bulletins 99 and 108 and concluded that a restatement of year’s/prior periods’ consolidated financial statements is not required. Accordingly, the consolidated financial statements for prior periods (March 31, 2020 and June 30, 2020) will be revised in future Forms 10-Q to be filed with the Securities and Exchange Commission.
Reclassifications – Certain information presented in the 2019 supplemental disclosures of cash flow information has been revised to conform to the 2020 presentation.
| 4. Property and equipment |
Property and equipment, which include amounts recorded under capital leases, are stated at cost less accumulated depreciation and amortization (in thousands), and consist of the following:
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2023 |
| 2022 | ||||||||||
| Equipment | $ | 11,199 | $ | 12,826 | | $ | 11,315 | | $ | 12,391 | ||||
| Capitalized software development costs | 10,693 | 8,074 | ||||||||||||
| Capitalized software development cost - work in progress | 1,360 | 2,536 | ||||||||||||
Computer software | |
| 4,465 | |
| 4,447 | ||||||||
| Furniture and equipment | 1,437 | 2,119 | |
| 1,128 | |
| 1,163 | ||||||
| Leasehold improvements | 3,267 | 4,492 | |
| 2,547 | |
| 2,554 | ||||||
Capital work-in-progress | | | 434 | | | - | ||||||||
| Total | 27,956 | 30,047 | |
| 19,889 | |
| 20,555 | ||||||
| Less: accumulated depreciation and amortization | (20,729 | ) | (23,160 | ) | |
| (17,608) | |
| (18,044) | ||||
| $ | 7,227 | $ | 6,887 | |||||||||||
| | $ | 2,281 | | $ | 2,511 | ||||||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the property and equipment was capitalized software development cost - in progress. The estimated useful lives of the property and equipment rangesrange between two years and ten years. Depreciation and amortization expense of property and equipment excluding capitalized software development cost - in progress were approximately $1.4$1.2 million and $1.7 million for each of the years ended December 31, 20202023 and 2019,2022, respectively.
5. Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill for the yearsyear ended December 31, 2020 and 20192023 were as follows (in thousands):
| Balance as of January 1, 2019 | $ | 2,050 | ||
| Foreign currency translation | 58 | |||
| Balance as of December 31, 2019 | 2,108 | |||
| Foreign currency translation | 42 | |||
| Balance as of December 31, 2020 | $ | 2,150 |
| | | |
Balance - January 1, 2023 |
| $ | 2,038 |
Foreign currency translation adjustment | |
| 37 |
Balance - December 31, 2023 | | $ | 2,075 |
The Company determined that adverse changes in macroeconomic trends as a consequenceAs of the continuing COVID-19 pandemic constituted a triggering event under U.S. GAAP (Accounting Standards Codification (ASC) No. 350, “Intangibles - Goodwill and Other” and ASC No. 360, “Impairment or Disposal of Long-Lived Assets”). The Company completed its impairment analysis procedures as of March 31, 2020. The Company determined that there was no impairment of long-lived assets in any of the reporting units as of March 31, 2020.
On September 30, 2020, The2023 the Company performed its annual goodwill assessmentimpairment analysis on the Agility segment. It involved a quantitative goodwill impairment test and estimated the fair value based on a combination of the income approach (estimates of future discounted cash flows) and the market approach (market multiples for similar companies) using unobservable inputs (Level 3). The income approach uses a discounted cash flow (“DCF”) method that utilizes the present value of cash flows to estimate the segment’s fair value. The future cash flows of the segment were projected based on the Company’s estimates of future revenues, operating income, and other factors such as working capital and capital expenditures. As part of the DCF analysis, the Company projected revenue and operating profit and assumed long-term revenue growth rates in the terminal year. The market approach utilizes multiples of revenues and earnings before interest expense, taxes, depreciation, and amortization (“EBITDA”) to estimate the segment’s fair value. The market multiples used for the Agility segment in accordance withwere based on a group of comparable companies’ market multiples applied to the provisionsCompany’s revenue. The Company concluded that there is no impairment of ASU 2017-04, by using a single-step approach that determines the carrying value of goodwill and compares it against the reporting unit’s fair value. The Company’s conclusion was consistent with the results of the March 31, 2020 impairment test.
goodwill.
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 approachapproaches using comparable entities to further validate the carrying values. The Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit as of the impairment test measurement date. The carrying value of Goodwill was $2,150,000$2.1 million and $2,108,000$2.0 million as of December 31, 20202023, and 2019,2022, respectively.
F-17
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Information regarding our acquisition-relatedthe Company acquired intangible assets isand capitalized developed software was as follows for the dates indicated (in thousands):
| Developed technology | Customer relationships | Trademarks and trade names | Patents | Media Contact Database | Total | |||||||||||||||||||
| Gross carrying amounts: | ||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 2,999 | $ | 2,081 | $ | 855 | $ | 42 | $ | 3,546 | $ | 9,523 | ||||||||||||
| Foreign currency translation | 109 | 96 | 16 | 1 | 60 | 282 | ||||||||||||||||||
| Balance as of December 31, 2019 | 3,108 | 2,177 | 871 | 43 | 3,606 | 9,805 | ||||||||||||||||||
| Foreign currency translation | 67 | 51 | 11 | 2 | 64 | 195 | ||||||||||||||||||
| Balance as of December 31, 2020 | $ | 3,175 | $ | 2,228 | $ | 882 | $ | 45 | $ | 3,670 | $ | 10,000 | ||||||||||||
| | | | | | | | | | | | |
| | December 31, 2023 | ||||||||||
|
| |
| |
| Foreign Currency |
| | ||||
| | Gross | | Accumulated | | Translation | | Net | ||||
| | Carrying Value | | Amortization | | Adjustment | | Carrying Value | ||||
Acquired Intangible Assets |
| |
|
| |
|
| |
|
| |
|
Developed technology | | $ | 2,999 | | $ | (2,640) | | $ | 7 | | $ | 366 |
Customer relationships | |
| 2,096 | |
| (1,645) | |
| 10 | |
| 461 |
Trademarks and tradenames | |
| 852 | |
| (774) | |
| 2 | |
| 80 |
Patents | |
| 43 | |
| (40) | |
| - | |
| 3 |
Media Contact Database | |
| 3,492 | |
| (2,621) | |
| 16 | |
| 887 |
Total Acquired Intangible Assets | | $ | 9,482 | | $ | (7,720) | | $ | 35 | | $ | 1,797 |
| | | | | | | | | | | | |
Capitalized Developed Software | |
|
| |
|
| |
|
| |
|
|
Capitalized Developed Software | | $ | 15,216 | | $ | (6,862) | | $ | 138 | | $ | 8,492 |
Capitalized Developed Software - in Progress | |
| 3,480 | |
| - | |
| (11) | |
| 3,469 |
Total Capitalized Developed Software | | $ | 18,696 | | $ | (6,862) | | $ | 127 | | $ | 11,961 |
| | | | | | | | | | | | |
Total | | $ | 28,178 | | $ | (14,582) | | $ | 162 | | $ | 13,758 |
| Developed technology | Customer relationships | Trademarks and trade names | Patents | Media Contact Database | Total | |||||||||||||||||||
| Accumulated amortization: | ||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 1,137 | $ | 766 | $ | 440 | $ | 19 | $ | 886 | $ | 3,248 | ||||||||||||
| Amortization expense | 305 | 178 | 120 | 4 | 357 | 964 | ||||||||||||||||||
| Foreign currency translation | 51 | 39 | 7 | 1 | 18 | 116 | ||||||||||||||||||
| Balance as of December 31, 2019 | 1,493 | 983 | 567 | 24 | 1,261 | 4,328 | ||||||||||||||||||
| Amortization expense | 308 | 179 | 55 | 4 | 361 | 907 | ||||||||||||||||||
| Foreign currency translation | 43 | 30 | 7 | 1 | 28 | 109 | ||||||||||||||||||
| Balance as of December 31, 2020 | $ | 1,844 | $ | 1,192 | $ | 629 | $ | 29 | $ | 1,650 | $ | 5,344 | ||||||||||||
| Net carrying values - December 31, 2020 | $ | 1,331 | $ | 1,036 | $ | 253 | $ | 16 | $ | 2,020 | $ | 4,656 | ||||||||||||
| Net carrying values - December 31, 2019 | $ | 1,615 | $ | 1,194 | $ | 304 | $ | 19 | $ | 2,345 | $ | 5,477 | ||||||||||||
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
| | |
| |
| Foreign Currency |
| | ||||
| | Gross | | Accumulated | | Translation | | Net | ||||
| | Carrying Value | | Amortization | | Adjustment | | Carrying Value | ||||
Acquired Intangible Assets |
|
| |
|
| |
|
| |
|
| |
Developed technology | | $ | 3,169 | | $ | (2,468) | | $ | (43) | | $ | 658 |
Customer relationships | |
| 2,228 | |
| (1,560) | |
| (42) | |
| 626 |
Trademarks and tradenames | |
| 880 | |
| (740) | |
| (8) | |
| 132 |
Patents | |
| 45 | |
| (38) | |
| 1 | |
| 8 |
Media Contact Database | |
| 3,648 | |
| (2,358) | |
| (68) | |
| 1,222 |
Total Acquired Intangible Assets | | $ | 9,970 | | $ | (7,164) | | $ | (160) | | $ | 2,646 |
| | | | | | | | | | | | |
Capitalized Developed Software | |
|
| |
|
| |
|
| |
|
|
Capitalized Developed Software | | $ | 11,845 | | $ | (4,398) | | $ | (348) | | $ | 7,099 |
Capitalized Developed Software - in Progress | |
| 2,787 | |
| - | |
| (6) | |
| 2,781 |
Total Capitalized Developed Software | | $ | 14,632 | | $ | (4,398) | | $ | (354) | | $ | 9,880 |
| | | | | | | | | | | | |
Total | | $ | 24,602 | | $ | (11,562) | | $ | (514) | | $ | 12,526 |
Amortization expense relating to acquisition-relatedacquired intangible assets was approximately $0.9 million for each of the years ended December 31, 2023 and $1.02022, respectively.
Amortization expense relating to capitalized developed software was approximately $2.7 million and $1.8 million for the years ended December 31, 20202023 and 2019,2022, respectively.
F-18
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Estimated annual amortization expense for intangible assets subsequent to December 31, 20202023 is as follows (in thousands):
| | | | ||||
| Year | Amortization |
| Amortization | ||||
| 2021 | $ | 931 | |||||
| 2022 | 931 | ||||||
| 2023 | 931 | ||||||
| 2024 | 829 | | $ | 4,929 | |||
| 2025 | 684 | |
| 3,976 | |||
2026 | | | 2,704 | ||||
2027 | |
| 739 | ||||
2028 | |
| 597 | ||||
| Thereafter | 350 | |
| 813 | |||
| $ | 4,656 | ||||||
| | $ | 13,758 | ||||
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 6. Income Taxes |
The significant components of the provision for income taxes for the years ended December 31, 20202023 and 20192022 were as follows (in thousands):
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||||
| Current income tax expense (benefit): |
| |
|
| |
| ||||||||
| Foreign | $ | 1,065 | $ | 1,333 | | $ | 1,181 | | $ | 1,131 | ||||
| Federal | 15 | 71 | |
| 120 | |
| 144 | ||||||
| State and local | (61 | ) | - | |
| 3 | |
| 30 | |||||
| 1,019 | 1,404 | |||||||||||||
| |
| 1,304 | |
| 1,305 | ||||||||
| Deferred income tax expense (benefit): | |
|
| |
|
| ||||||||
| Foreign | (628 | ) | (323 | ) | |
| (286) | |
| 207 | ||||
| Federal | 10 | 10 | |
| 10 | |
| 10 | ||||||
| State and local | - | - | |
| - | |
| - | ||||||
| (618 | ) | (313 | ) | |||||||||||
| |
| (276) | |
| 217 | ||||||||
| Provision for income taxes | $ | 401 | $ | 1,091 | | $ | 1,028 | | $ | 1,522 | ||||
F-19
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the years ended December 31, 20202023 and 20192022 is summarized as follows:
| | | | | |
|
| 2023 |
| 2022 |
|
Federal income tax expense (benefit) at statutory rate |
| 21.0 | % | (21.0) | % |
Effect of: |
| |
| | |
Change in valuation allowance |
| 578.6 |
| 36.9 | |
Tax effects of foreign operations |
| 562.6 |
| 2.5 | |
Section 162 (m) | | 452.0 | | - | |
Return to provision true up |
| 264.4 |
| 0.3 | |
Increase in unrecognized tax benefits (ASC 740) |
| 199.6 |
| 0.7 | |
Withholding tax | | 106.6 | | - | |
Foreign operations permanent differences - foreign exchange gains and losses | | 76.9 | | 1.1 | |
State income tax net of federal benefit |
| 0.1 |
| 0.2 | |
Research and development credit | | (67.3) | | - | |
Foreign rate differential |
| (102.5) |
| (4.7) | |
Deemed interest | | (149.2) | | (1.9) | |
Tax effect of intercompany settlement | | (234.0) | | - | |
Effect of stock-based compensation |
| (961.6) |
| (0.3) | |
Other | | (7.6) | | 0.7 | |
Effective tax rate |
| 739.6 | % | 14.5 | % |
| 2020 | 2019 | |||||||
| Federal income tax expense (benefit) at statutory rate | 21.0 | % | (21.0 | )% | ||||
| Effect of: | ||||||||
| Change in valuation allowance | 137.7 | 22.4 | ||||||
| Increase in unrecognized tax benefits (ASC 740) | 31.5 | 55.1 | ||||||
| Tax effects of foreign operations | 57.7 | 59.7 | ||||||
| Foreign operations permanent differences - foreign exchange gains and losses | (1.3 | ) | (12.2 | ) | ||||
| Deemed interest | (2.1 | ) | - | |||||
| State income tax net of federal benefit | (4.3 | ) | 1.3 | |||||
| Foreign rate differential | (8.6 | ) | 0.8 | |||||
| Effect of share based compensation | (10.9 | ) | - | |||||
| Return to provision true up | (10.8 | ) | (2.6 | ) | ||||
| Change in rates | (172.7 | ) | - | |||||
| Withholding tax | 1.5 | 6.0 | ||||||
| Other | (0.3 | ) | (7.3 | ) | ||||
| Effective tax rate | 38.4 | % | 102.2 | % | ||||
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are classified as non-current. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 20202023 and 20192022 were as follows (in thousands):
| | | | | | |
| | December 31, | ||||
|
| 2023 |
| 2022 | ||
Deferred income tax assets: |
| |
|
| |
|
Allowances not currently deductible | | $ | 283 | | $ | 301 |
Depreciation and amortization | |
| 58 | |
| 9 |
Equity compensation not currently deductible | |
| 2,098 | |
| 1,579 |
Net operating loss carryforwards | |
| 10,514 | |
| 10,758 |
Research and development credits | | | 452 | | | 362 |
Expenses not deductible until paid | |
| 1,972 | |
| 1,694 |
Other | |
| 133 | |
| (220) |
Total gross deferred income tax assets before valuation allowance | |
| 15,510 | |
| 14,483 |
Valuation allowance | |
| (13,769) | |
| (13,008) |
Deferred income tax assets, net | | | 1,741 | | | 1,475 |
| | | | | | |
Deferred income tax liabilities: | |
|
| |
|
|
Other | |
| (22) | |
| (65) |
Total deferred income tax liabilities | |
| (22) | |
| (65) |
| | | | | | |
Net deferred income tax assets | | $ | 1,719 | | $ | 1,410 |
| | | | | | |
Net deferred income tax assets | | $ | 1,741 | | $ | 1,475 |
Net deferred income tax liability | | | (22) | | | (65) |
| | | | | | |
Net deferred income tax assets | | $ | 1,719 | | $ | 1,410 |
F-20
INNODATA INC. AND SUBSIDIARIES
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Deferred income tax assets: | ||||||||
| Allowances not currently deductible | $ | 192 | $ | 223 | ||||
| Depreciation and amortization | 334 | 297 | ||||||
| Equity compensation not currently deductible | 778 | 966 | ||||||
| Net operating loss carryforwards | 6,751 | 5,317 | ||||||
| Expenses not deductible until paid | 1,691 | 1,245 | ||||||
| Other | 358 | 379 | ||||||
| Total gross deferred income tax assets before valuation allowance | 10,104 | 8,427 | ||||||
| Valuation allowance | (7,917 | ) | (6,521 | ) | ||||
| Deferred income tax assets, net | 2,187 | 1,906 | ||||||
| Deferred income tax liabilities: | ||||||||
| Intangibles from acquisition of MediaMiser | - | (316 | ) | |||||
| Other | (44 | ) | (47 | ) | ||||
| Total deferred income tax liabilities | (44 | ) | (363 | ) | ||||
| Net deferred income tax assets | $ | 2,143 | $ | 1,543 | ||||
| Net deferred income tax assets | $ | 2,187 | $ | 1,906 | ||||
| Net deferred income tax liability | (44 | ) | (363 | ) | ||||
| Net deferred income tax assets | $ | 2,143 | $ | 1,543 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are available. As of December 31, 2020,2023, the Company continues to maintain a valuation allowance on all U.S.of the Company’s United States, Canadian, German and Canadian netUnited Kingdom subsidiaries’ deferred tax assets.
The Company maintained a valuation allowance of approximately $7.9$13.8 million and $6.5$13.0 million as of December 31, 20202023 and 2019,2022, respectively. The valuation allowance relates to U.S.the United States, and the Company’s Canadian, subsidiariesGerman and the United Kingdom subsidiaries’ deferred tax assets. The net change in the total valuation allowance was an increase of $1.4$0.8 million and $1.8$3.9 million for the years ended December 31, 20202023 and December 31, 2019,2022, respectively.
Despite the access to the overseas earnings and the resulting toll charge, we intendthe Company intends to indefinitely reinvest the foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding tax that the Company has to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to approximately $47.0$50.4 million at December 31, 2020.2023. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United States and foreign components of income (loss)loss before provision for income taxes for each of the two years ended December 31, were as follows (in thousands):
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
| | 2023 | | 2022 | ||||||||||
| United States | $ | 930 | $ | (537 | ) | | $ | 2,025 | | $ | (4,023) | |||
| Foreign | 115 | (531 | ) | |
| (1,886) | |
| (6,460) | |||||
| Totals | $ | 1,045 | $ | (1,068 | ) | | $ | 139 | | $ | (10,483) | |||
At December 31, 2020,2023, the Company had available U.S. federal net operating loss (NOL) carryforwards of approximately $15.5$21.2 million and recognized research and development credits of approximately $0.1 million. These net operating lossNOL carryforwards expire at various times from the year 2032 through the year 2035.2035 and the research and development credit expires in 2043. The potential benefits from these balances have not been recognized for financial statement purposes.
On March 27, 2020, the CARES Act was signed into law in response to the economic challenges facing US businesses. Under the CARES Act, the Internal Revenue Code was amended to allow for federal NOL carrybacks for five years to offset previous yearsyears’ taxable income or canfor the NOL to be carryforwardcarried forward indefinitely to offset 100% of taxable income for the tax year 2020 and 80% of taxable income for tax years 2021 and thereafter. As of the date the financial statements were available to be issued, the state NOL carryforwards, if not utilized, will expire beginning in 2022.2032.
AtOn December 31, 2020,2023, the Company’s Canadian subsidiaries had available net operating lossCanadian NOL carryforwards of approximately $16.1$27.0 million in Canada whichthat will begin to expire in 2028.2036 and research and development credits of approximately $1.4 million that have no expiry. The potential benefits from these balances have not been recognized for financial statement purposes.
On December 31, 2023, the Company’s German and the United Kingdom subsidiaries had available NOL carryforwards of approximately $1.7 million. The potential benefits from these balances have not been recognized for financial statement purposes.
The Company had unrecognizedreserves for uncertain tax benefitspositions of $3.2$1.9 million and $3.0$1.7 million as of December 31, 20202023, and 2019, respectively.2022, respectively, where the ultimate tax determination is uncertain due to complexities of tax laws. The increase in unrecognized tax benefits resulted from additional accruals for the current tax year. The Company expects that unrecognized tax benefits as of December 31, 20202023 and December 31, 2019,2022, if recognized, would have a material impact on the Company’s effective tax rate.
F-21
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open tax years for U.S. Federal and state taxes from 20162019 through 2020.2023. Various foreign subsidiaries have open tax years from 20032005 through 2019,2022, some of which are under audit by local tax authorities. The Company believes that its accruals for uncertain tax positions as of December 31, 20202023 under ASC 740, Income Taxes are adequate to cover the Company’s income tax exposures.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest for the years ended (amounts in(in thousands):
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
| | Unrecognized Tax | ||||||||||||
| | Benefits | ||||||||||||
| | December 31, | ||||||||||||
|
| 2023 |
| 2022 | ||||||||||
| Balance at January 1 | $ | 2,957 | $ | 2,424 | | $ | 1,680 | | $ | 1,753 | ||||
| Increase for current year tax position | 308 | 355 | ||||||||||||
| Decrease for prior year tax position | (161 | ) | - | |||||||||||
Decrease for prior year tax positions | |
| (68) | |
| (290) | ||||||||
Increase for current year tax positions | |
| 247 | |
| 311 | ||||||||
| Interest accrual | 199 | 234 | |
| 97 | |
| 67 | ||||||
| Foreign currency revaluation | (72 | ) | (56 | ) | ||||||||||
Foreign currency remeasurement | |
| (14) | |
| (161) | ||||||||
| Balance at December 31 | $ | 3,231 | $ | 2,957 | | $ | 1,942 | | $ | 1,680 | ||||
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 contestingcontested this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal.Tribunal and in January 2024 the Customs, Excise and Service Tax Appellate Tribunal ruled in the Company’s favor. In the event the Service Tax Department appeals this ruling and 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 revenuerevenues of ourthe Company’s Indian subsidiary during this period was approximately $64.0$56.0 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 ofin consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.
In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000$121,000 previously granted to ourthe 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$0.8 million recorded as a receivable. Based on the Company’s assessment ofin consultation with the Company’s tax counsel, the Company has not recorded any tax liability for this case.
F-22
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
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.
7. Long-term obligations |
Total long-term obligations as of December 31, 20202023 and 20192022 consisted of the following (in thousands):
| | | | | | |
| | December 31, | ||||
|
| 2023 |
| 2022 | ||
| | | | | | |
Pension obligations - accrued pension liability | | $ | 7,128 | | $ | 5,906 |
Settlement agreement | | | - | | | 50 |
Microsoft licenses (1) | | | 911 |
| | - |
| | | 8,039 | |
| 5,956 |
Less: Current portion of long-term obligations | |
| 1,261 | |
| 877 |
Totals | | $ | 6,778 | | $ | 5,079 |
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Pension obligations - accrued pension liability | $ | 5,940 | $ | 4,611 | ||||
| Settlement agreement (1) | 518 | 708 | ||||||
| Capital lease obligations | 209 | 655 | ||||||
| Microsoft licenses (2) | 747 | - | ||||||
| Bank loans payable (3) | 580 | - | ||||||
| 7,994 | 5,974 | |||||||
| Less: Current portion of long-term obligations | 1,712 | 1,440 | ||||||
| Totals | $ | 6,282 | $ | 4,534 | ||||
(1) Represents payment to be made pursuant to a settlement agreement entered into in December 2018 between a subsidiary of the Company and 19 former employees of such subsidiary. The balance is payable in monthly installments throughIn March 2023.
(2) On April 2020,2023, the Company renewed a vendor agreement to acquire certain additional software licenses, and to receive technical support and subsequentfuture software upgrades on these and other currently owned software licenses through February 2023.2026. Pursuant to this agreement, the Company was obligatedis contractually liable to pay approximately $0.4 million annually over the term of the agreement.
(3) On May 4, 2020, the Company received loan proceeds of $579,700 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended. The loans and accrued interest are forgivable, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. On January 29, 2021, the Company filed its loan forgiveness application for 100% of the approved loan under the PPP.
| 8. Commitments and contingencies |
Litigation –- In 2008, a judgment was rendered in the Philippines against a Philippine subsidiary of the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the Philippine subsidiary. The potential payment amount aggregates to approximately $6.8$5.9 million, plus legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to accrue at 6% per annum. The potential payment amount as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees of the Philippine subsidiary indicated that they proposed to record the judgment as to themselves in New Jersey. In January 2018, in response to an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (USDC)(“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 StatesU.S. 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.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ofin 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.
F-23
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
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$450,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.
Foreign Currency - To the extent that the currencies of the Company’s production facilities located in the Philippines, India, Sri Lanka and Israel fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain clientcustomer projects. In addition, the Company is exposed to the risk of foreign currency fluctuation on the non-U.S. dollar denominated revenues, and on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in local currency.
Indemnifications - The Company is obligated under certain circumstances to indemnify directors, certain officers and certain employees against costs and liabilities incurred in actions or threatened actions brought against such individuals because such individuals acted in the capacity of director, officer or fiduciary of the Company. In addition, the Company has contracts with certain clientscustomers pursuant to which the Company has agreed to indemnify the clientcustomer for certain specified and limited claims.claims under such contract. These indemnification obligations occur in the ordinary course of business and, in many cases, do not include a limit on potential maximum future payments. As of December 31, 2020,2023, the Company has not recorded a liability for any obligations arising as a result of these indemnification obligations.
9. Operating Leases
The Company has various lease agreements for its offices and service delivery centers. The Company has determined that the risks and benefits related to the leased properties are retained by the lessors. Accordingly, these are accounted for as operating leases.
These lease agreements are for terms ranging from twothree to eleven years and, in most cases, provide for rental escalations ranging from 1.75% to 10%15%. Most of these agreements are renewable at the mutual consent of the parties to the contract.
The Company adopted ASU 2016-02, effective January 1, 2019, and applied the practical expedients consistently for all of its leases. Accordingly, the Company:
In addition, the Company elected to retrospectively determine the lease term and assess impairment of the right-of-use asset.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the standard, the Company recognizes an operating lease liability and right-of-use asset.asset in compliance with current lease accounting standard ASC 842. The amount of right-of use asset is equal to the present value of the remaining lease payments discounted using the incremental borrowing rate of each respective country. Modifications, if any are recalculated and corresponding adjustments are made to the carrying values of both the lease liability and right-of-use assets.
A right-of-use asset is measured as the amount of the lease liability adjusted for the amount of deferred straight-line rent, prepaid rent and lease incentive allowances previously recognized.
The table below summarizes the amounts recognized in the financial statements related to operating leases for the years presented (in thousands):
| Year Ended | ||||||||||||||
December 31, 2020 | December 31, 2019 | |||||||||||||
| | | | | | | ||||||||
|
| Year Ended | ||||||||||||
|
| December 31, 2023 |
| December 31, 2022 | ||||||||||
| | | | | | | ||||||||
| Rent expense for long-term operating leases | $ | 1,667 | $ | 1,813 | | $ | 1,252 | | $ | 1,336 | ||||
| Rent expense for short-term leases | 619 | 297 | |
| 305 | |
| 502 | ||||||
| Total rent expense | $ | 2,286 | $ | 2,110 | | $ | 1,557 | | $ | 1,838 | ||||
F-24
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The following table presents the maturity profile of the Company’s operating lease liabilities based on the contractual undiscounted payments with a reconciliation of these amounts to the remaining net present value of the operating lease liability reported in the consolidated balance sheet as of December 31, 20202023 (in thousands):
| | | | ||||
| Year | Amount | | Amount | ||||
| 2021 | $ | 1,565 | |||||
| 2022 | 1,531 | ||||||
| 2023 | 1,261 | ||||||
| | | | ||||
| 2024 | 1,027 | | $ | 1,292 | |||
| 2025 | 1,043 | |
| 1,316 | |||
| 2026 and thereafter | 3,490 | ||||||
2026 | |
| 1,348 | ||||
2027 | |
| 1,344 | ||||
2028 | | | 965 | ||||
2029 and thereafter | |
| 869 | ||||
| Total lease payments | 9,917 | |
| 7,134 | |||
| Less: Interest | (2,595 | ) | |
| (1,651) | ||
| Net present value of lease liabilities | $ | 7,322 | | $ | 5,483 | ||
| | | | ||||
| Current portion | $ | 990 | | $ | 782 | ||
| Long-term portion | 6,332 | |
| 4,701 | |||
| Total | $ | 7,322 | | $ | 5,483 | ||
The weighted average remaining lease terms and discount rates for all of our operating leases as of December 31, 20202023 were as follows:
| | | | |
Weighted-average lease term remaining | 63 months | | ||
Weighted-average discount rate | 9.45% | |
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Pension Benefits |
U.S. Defined Contribution Pension Plan - The Company has a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, pursuant to which substantially all of its U.S. employees are eligible to participate after completing six months of service. Participants may elect to contribute a portion of their compensation to the plan. Under the plan, the Company has the discretion to match a portion of participants’ contributions. For the years ended December 31, 20202023 and 2019,2022, the Company did not make any matching contributions.
Non-U.S. Pension Benefits - The accounting standard for pensions requires an employer to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive loss to report the funded status of defined benefit pension and other post-retirement benefit plans.
Most of the non-U.S. subsidiaries provide for government-mandated defined pension benefits. For certain of these subsidiaries, vested eligible employees are provided a lump sum payment upon retiring from the Company at a defined age. The lump sum amount is based on the salary and tenure as of retirement date. Other non-U.S. subsidiaries provide for a lump sum payment to vested employees on retirement, death, incapacitation or termination of employment, based upon the salary and tenure as of the date employment ceases. The liability for such defined benefit obligations is determined and provided on the basis of actuarial valuations. As of December 31, 2020,2023, these plans were unfunded. Pension expense for our foreign subsidiaries totaled approximately $0.8$1.2 million and $0.3$1.1 million for the years ended December 31, 20202023 and 2019,2022, respectively.
F-25
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The following tables set out the status of the non-U.S. pension benefits and the amounts (in thousands) recognized in the Company’s consolidated financial statements and the components of pension costs as of and for each of the two years in the period ended December 31, 2020:
2023 and 2022 were as follows (in thousands):
Benefit Obligations:
| | | | | | |
|
| 2023 |
| 2022 | ||
| | | | | | |
Projected benefit obligation at beginning of the year | | $ | 5,906 | | $ | 6,839 |
Service cost | |
| 568 | |
| 592 |
Interest cost | |
| 478 | |
| 352 |
Actuarial loss (gain) | |
| 324 | |
| (713) |
Foreign currency exchange rates changes | |
| 54 | |
| (862) |
Curtailment | |
| - | |
| (48) |
Benefits paid | |
| (202) | |
| (254) |
Projected benefit obligation at end of the year | | $ | 7,128 | | $ | 5,906 |
The Company incurred an actuarial loss of $0.3 million for the year ended December 31, 2023, and an actuarial gain of $0.7 million for the year ended December 31, 2022. This was mainly due to changes in the discount rates used. Actuarial (gains) losses are recorded as part of other comprehensive income and are not reflected as part of net periodic pension cost.
| 2020 | 2019 | |||||||
| Projected benefit obligation at beginning of the year | $ | 4,611 | $ | 2,591 | ||||
| Service cost | 492 | 289 | ||||||
| Interest cost | 249 | 194 | ||||||
| Actuarial loss (gain) | 505 | 1,720 | ||||||
| Foreign currency exchange rates changes | 168 | 52 | ||||||
| Benefits paid | (85 | ) | (235 | ) | ||||
| Projected benefit obligation at end of the year | $ | 5,940 | $ | 4,611 | ||||
Components of Net Periodic Pension Cost:
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||||
| | | | | | | ||||||||
| Service cost | $ | 492 | $ | 289 | | $ | 568 | | $ | 592 | ||||
| Interest cost | 249 | 194 | |
| 478 | |
| 352 | ||||||
| Actuarial gain (loss) recognized | 50 | (148 | ) | |||||||||||
Curtailment | |
| - | |
| (16) | ||||||||
Actuarial loss recognized | |
| 147 | |
| 210 | ||||||||
| Net periodic pension cost | $ | 791 | $ | 335 | | $ | 1,193 | | $ | 1,138 | ||||
The accumulated benefit obligation, which represents benefits earned to date, was approximately $3.7$3.9 million and $2.9$3.2 million asfor each of the years ended December 31, 20202023 and 2019, respectively.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2022.
Amounts recognized in the consolidated balance sheets for the years ended December 31, 20202023 and 20192022 consisted of the following (in thousands):
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||||
| | | | | | | ||||||||
| Current accrued benefit cost | $ | 332 | $ | 570 | | $ | 880 |
| $ | 828 | ||||
| Non-current accrued benefit cost | 5,608 | 4,041 | |
| 6,248 |
|
| 5,078 | ||||||
| Total amount recognized | $ | 5,940 | $ | 4,611 | | $ | 7,128 |
| $ | 5,906 | ||||
Current accrued benefit cost for pension benefits was included in the current portion of long-term obligations in the consolidated balance sheets. Non-current accrued benefit cost for pension benefits was included in long-term obligations, net of current portion, in the consolidated balance sheets.
F-26
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Actuarial assumptions for all non-U.S. plans are described below. The discount rates are used to measure the year endyear-end benefit obligations and the earnings effects for the subsequent year. The assumptions for each of the two years in the period ended December 31, 20202023 and 2022 were as follows:
| 2020 | 2019 | |||||||||||
| | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||
| | | | | ||||||||
| Discount rate | 3.57%-8.06% | 4.85%-10.42% |
| 6.73%-12.8% | | 5.13%-20% | ||||||
| Rate of increase in compensation level | 5%-7% | 5%-7% |
| 7.5%-14.5% | | 7.5%-20% | ||||||
Estimated Future Benefit Payments:
As of December 31, 2020,2023, the following benefit payments, which reflect expected future service, as appropriate, were expected to be paid (in thousands):
| Years Ending December 31, | Amount | ||||
| 2021 | $ | 629 | |||
| 2022 | 234 | ||||
| 2023 | 157 | ||||
| 2024 | 206 | ||||
| 2025 | 413 | ||||
| 2026 to 2030 | 3,251 | ||||
| $ | 4,890 | ||||
| | | |
Year |
| | Amount |
| | | |
2024 | | $ | 889 |
2025 | |
| 431 |
2026 | |
| 267 |
2027 | | | 749 |
2028 | | | 175 |
2029 to 2032 | |
| 5,108 |
| | $ | 7,619 |
11. Capital Stock |
Common Stock - The Company is authorized to issue 75,000,000 shares of common stock. Each share of common stock has one vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. No common stock dividends have been declared to date.
Preferred Stock - The Company is authorized to issue 4,998,000 shares of preferred stock. The Board of Directors is authorized to fix the terms, rights, preferences and limitations of the preferred stock and to issue the preferred stock in series that differ as to their relative terms, rights, preferences and limitations.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stockholders Rights Agreement - On February 1, 2019, the Board of Directors declared a dividend of one preferred share purchase right (each, a “Right,” and collectively, the “Rights”) for each outstanding share of the Company’s common stock on February 15, 2019. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as rights agent, dated as of February 1, 2019 (the “Rights Agreement”). Each Right entitles its holder to purchase, under certain conditions, one one-thousandth of a share of Series C Participating Preferred Stock (“Preferred Stock”). Each one one-thousandth of a share of Preferred Stock has substantially the same rights as one share of the Company’s common stock. Subject to the terms and conditions of the Rights Agreement, Rights become exercisable ten days after the public announcement that a “Person” has become an “Acquiring Person” (as each such term is defined in the Rights Agreement) by obtaining beneficial ownership of 20% or more of the Company’s outstanding common stock, or, if earlier, ten business days (or a later date determined by the Board of Directors before any Person becomes an Acquiring Person) after a Person begins a tender or exchange offer which, if completed, would result in that Person becoming an Acquiring Person. Any Rights held by an Acquiring Person are void and may not be exercised.
If a Person becomes an Acquiring Person, all holders of Rights, except the Acquiring Person, may purchase at the Right’s then-current exercise price, the Company’s common stock having a market value equal to twice the exercise price. Moreover, at any time after a Person becomes an Acquiring Person (unless such Person acquires 50 percent or more of the common stock of the Company then outstanding, as more fully described in the Rights Agreement), the Board of Directors may exchange one share of the Company’s common stock for each outstanding Right (other than rights owned by such Person, which would have become void). In addition, if the Company is acquired in a merger or other business combination transaction after a Person becomes an Acquiring Person, all holders of Rights, except the Acquiring Person, may purchase at the Right’s then-current exercise price, a number of the acquiring company’s common stock having a market value of twice the exercise price. If the Company receives a “qualifying offer” (which includes certain all-cash fully financed tender offers or exchange offers for all of the Company’s outstanding common stock), under certain circumstances, holders of 10 percent of the Company’s outstanding common stock (excluding stock held by the offeror and its affiliates and associates) may direct the Board of Directors to call a special meeting of stockholders to consider a resolution exempting such “qualifying offer” from the Rights Agreement. The Rights themselves have no voting power. The Board of Directors may redeem the Rights at an initial redemption price of $0.001 per Right under certain circumstances set forth in the Rights Agreement.
The Rights Agreement was approved by the Company’s stockholders at the 2019 annual meeting. The Rights will expire on January 31, 2022 unless earlier redeemed or exchanged.
Common Stock Reserved - As of December 31, 2020,2023, the Company had available for future issuance 2,925,6381,981,406 shares of common stock pursuant to the Company’s stock option plans.
Treasury Stock - In July 2019, the Company’s Board of Directors authorized the repurchase of up to $2.0 million of its common stock in open market or private transactions. There is no expiration date associated with the program. The total value of common stock acquired underThere were no share repurchases in the plan was $1.5 million asyears ended December 31, 2023 and 2022. As of December 31, 2020.2023, the Company repurchased 1.5 million shares of its common stock under the July 2019 authorization with a value of $1.8 million.
12. Stock Options
F-30The Innodata Inc. 2013 Stock Plan (as amended, the “2013 Plan”) expired in accordance with its terms on June 3, 2023. Pursuant to the terms of the 2013 Plan, no further awards may be granted under the 2013 Plan following its expiration. As of December 31, 2023, there were 5,567,966 shares of our common stock underlying outstanding options or rights under the 2013 Plan. Outstanding awards made under the 2013 Plan prior to the 2013 Plan’s expiration will remain in effect until such awards have been satisfied or terminated in accordance with the terms of the 2013 Plan and such awards.
F-27
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
On June 7, 2016,9, 2022, stockholders of the Company approved amendments to the Innodata Inc. 2013 Stock2021 Equity Compensation Plan (as amended, the “Plan”“2021 Plan”). The number of shares of common stock of Innodata Inc. that may be delivered, purchased or used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under the 2021 Plan after June 7, 2016 is 5,858,8924,000,000 (the Share Reserve)“Share Reserve”). Shares subject to an option or stock appreciation right granted under the 2021 Plan after June 7, 2016 count against the Share Reserve as one share for every share granted, and shares subject to any other type of award granted under the 2021Plan after June 7, 2016 count against the Share Reserve as two shares for every share granted. Any award, or portion of an award, under the Plan or under the Company’s 2009 Stock Plan (as amendedgranted for awards granted prior to April 11, 2022, and restated (the Prior Plan)) that expires or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or canceled as to any shares without delivery of shares or other consideration will be added back to the Share Reserve as one share for each such share that was subject to an option or stock appreciation right granted under the Plan or the Prior Plan, and twoa half shares for each suchevery share that was subject to an award other than an optiongranted for awards granted on or stock appreciation right granted under the Plan or the Prior Plan. If anyafter April 11, 2022. Any shares are withheld, tendered or exchanged by a participant in the 2021 Plan as full or partial payment to Innodata of the exercise price under an option under the Plan or the Prior2021 Plan or in satisfaction of a participant’s tax withholding obligations with respect to any award under the 2021 Plan, or the Prior Plan, there will not be added back to the Share Reserve one share for each such share that was withheld, tendered or exchanged in respect of an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was withheld, tendered or exchanged in respect of an award other than an option or stock appreciation right granted under the Plan or the Prior Plan.
Reserve.
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted, and weighted-average assumptions were as follows:
| For the Years Ended December 31, | |||||||||||||||
| 2020 | 2019 | ||||||||||||||
| | | | | | | | ||||||||
| | For the Years Ended December 31, |
| ||||||||||||
| | 2023 | | 2022 |
| ||||||||||
| | | | | | | | ||||||||
| Weighted average fair value of options granted | $ | 0.61 | $ | 0.56 |
| $ | 2.56 |
| $ | 2.67 | | ||||
| Risk-free interest rate | 0.29%-0.56% | 1.68% - 2.55% |
| | 4.34 | % |
| 1.94% - 4.09 | % | ||||||
| Expected life (years) | 5-6 | 5-6 | |||||||||||||
Expected term (years) |
| | 6.0 | |
| 3-6.42 | | ||||||||
| Expected volatility factor | 46.75%-50.09% | 45.03%-46.38% |
| | 75.35 | % |
| 62%-79 | % | ||||||
| Expected dividends | None | None |
| | None | |
| None | | ||||||
The Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. The expected term of options granted is based on a combination of vesting schedules, term of the options and historical experience. Expected volatility is based on the historical volatility of the Company’s common stock. The Company uses an expected dividend yield of zero since it has never declared or paid any dividends on its capital stock.
F-28
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Stock Options
2013 Plan
A summary of stock 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 years ended December 31, 2023 and 2022 are presented below.
| | | | | | | | | | |
|
| |
| | |
| Weighted-Average |
| | |
| | | | Weighted -Average | | Remaining | | | | |
| | Number of | | Exercise | | Contractual Term | | Aggregate | ||
| | Options | | Price | | (years) | | Intrinsic Value | ||
Outstanding at January 1, 2022 |
| 5,536,896 | | $ | 2.66 |
| | | | |
Granted |
| 1,774,558 | |
| 4.91 |
| | | | |
Exercised |
| (248,763) | |
| 1.34 |
| | | | |
Forfeited/Expired |
| (372,201) | |
| 6.55 |
| | | | |
Outstanding at December 31, 2022 | | 6,690,490 | | $ | 3.09 | | 7.19 | | $ | 5,989,709 |
Granted* | | 25,000 | | | 3.31 | | | | | |
Exercised | | (1,287,462) | | | 2.37 | | | | | |
Forfeited/Expired | | (88,866) | | | 6.27 | | | | | |
Outstanding at December 31, 2023 |
| 5,339,162 | | $ | 3.22 |
| 6.38 | | $ | 28,640,009 |
| | | | | | | | | | |
Exercisable at December 31, 2023 |
| 3,475,780 | | $ | 2.18 |
| 6.40 | | $ | 22,237,334 |
| | | | | | | | | | |
Vested and Expected to Vest at December 31, 2023 |
| 5,339,162 | | $ | 3.22 |
| 6.38 | | $ | 28,640,009 |
* Includes 25,000 stock options granted to a non-employee member of the Company’s advisory board.
F-29
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
2021 Plan
A summary of option activity under the PlansInnodata Inc. 2021 Equity Compensation Plan, as amended and restated effective as of December 31, 2020,April 11, 2022 (the “2021 Plan”) and changes during each of the years ended December 31, 20202023 and 2019, is2022 are presented below.
| | | | | | | | | | |
|
| |
| |
| Weighted- |
| | ||
| | | | Weighted - | | Average | | | ||
| | | | Average | | Remaining | | Aggregate | ||
| | Number of | | Exercise | | Contractual | | Intrinsic | ||
| | Options | | Price | | Term (years) | | Value | ||
| | | | | | | | | | |
Outstanding at January 1, 2022 |
| - | | $ | - |
| | | | |
Granted |
| 1,030,000 | |
| 3.46 |
| | | | |
Exercised |
| - | |
| - |
| | | | |
Forfeited/Expired |
| (2,500) | |
| 3.41 |
| | | | |
Outstanding at December 31, 2022 |
| 1,027,500 | | $ | 3.46 |
| 9.75 | | $ | - |
Granted |
| 3,000 | |
| 13.05 |
| | | | |
Exercised |
| (63,595) | |
| 4.59 |
| | | | |
Forfeited/Expired |
| (43,334) | |
| 3.41 |
| | | | |
Outstanding at December 31, 2023 |
| 923,571 | | $ | 3.41 |
| 8.76 | | $ | 4,786,252 |
| | | | | | | | | | |
Exercisable at December 31, 2023 |
| 386,209 | | $ | 3.34 |
| 8.74 | | $ | 2,023,601 |
| | | | | | | | | | |
Vested and Expected to Vest at December 31, 2023 |
| 923,571 | | $ | 3.41 |
| 8.76 | | $ | 4,786,252 |
Restricted Stock Awards
There were no outstanding awards of restricted stock under the 2013 Plan or the 2021 Plan (collectively, the “Equity Plans”) during each of the years ended December 31, 2023 and 2022.
Restricted Stock Units
Restricted stock unit activity under the Equity Plans during each of the years ended December 31, 2023 and 2022 are presented below:
| Number of Options | Weighted - Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2019 | 4,982,040 | $ | 2.14 | |||||||||||||
| Granted | 2,112,500 | 1.25 | ||||||||||||||
| Exercised | (10,000 | ) | 1.11 | |||||||||||||
| Forfeited/Expired | (256,237 | ) | 2.42 | |||||||||||||
| Outstanding at December 31, 2019 | 6,828,303 | $ | 1.86 | 6.86 | $ | 89,405 | ||||||||||
| Granted | 1,080,000 | 1.37 | ||||||||||||||
| Exercised | (1,357,116 | ) | 1.97 | |||||||||||||
| Forfeited/Expired | (644,303 | ) | 3.06 | |||||||||||||
| Outstanding at December 31, 2020 | 5,906,884 | $ | 1.61 | 7.34 | $ | 21,769,727 | ||||||||||
| Exercisable at December 31, 2020 | 3,923,564 | $ | 1.79 | 6.66 | $ | 13,769,733 | ||||||||||
| Vested and Expected to Vest at December 31, 2020 | 5,906,884 | $ | 1.61 | 7.34 | $ | 21,769,727 | ||||||||||
| | | | | |
|
| |
| Weighted- | |
| | Number of | | Average | |
| | Restricted Stock | | Grant Date | |
| | Units | | Fair Value | |
| | | | | |
Unvested at January 1, 2023 | | 700,000 | | $ | 5.59 |
Granted | | 49,756 | | | 8.29 |
Vested |
| - |
| | - |
Forfeited/Expired |
| - |
| | - |
Unvested at December 31, 2023 |
| 749,756 | | $ | 5.77 |
F-30
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
During the year ended December 31, 2023, a total of 49,756 restricted stock units (“RSUs”) were granted. 28,804 RSUs were granted to employees under the 2013 Plan, and 20,952 RSUs were granted to non-employee directors of the Company under the 2021 Plan. Vesting of the RSUs granted to employees is contingent on continuous employment by the employee for a 12-month period from the date of grant, and each fully vested RSU represents the right to receive one share of the Company’s common stock or the fair market value of one share of common stock, at the Company’s discretion, and is classified as an equity award. Vesting of the RSUs granted to the non-employee directors occurs on the earlier of (i) one year from the date of grant; or (ii) the date of the Company’s 2024 annual meeting of stockholders, and each fully vested RSU represents the right to receive one share of the Company’s common stock and is classified as an equity award.
The totalstock-based compensation expense is recognized on a straight-line basis over a period of 12 months. The fair value of restricted stock units is based on the closing price of the stock at the time of the grant.
| | | | | |
|
| |
| Weighted- | |
| | Number of | | Average | |
| | Restricted Stock | | Grant Date | |
| | Units | | Fair Value | |
| | | | | |
Unvested at January 1, 2022 | | - | | $ | - |
Granted |
| 700,000 | | | 5.59 |
Vested |
| - | |
| - |
Forfeited/Expired |
| - | |
| - |
Unvested at December 31, 2022 |
| 700,000 | | $ | 5.59 |
During the year ended December 31, 2022, 700,000 performance-based RSUs were granted under the Equity Plans and remain non-vested as of December 31, 2023. Vesting of these RSUs is contingent on the achievement of certain financial performance goals and continuation of employment for a defined period. Each RSU vests pursuant to the vesting schedule found in the respective RSU agreement. The fair value of restricted stock units is estimated on the date of grant using the Binomial option pricing model.
The compensation cost related to non-vested stock options not yet recognized as of December 31, 2020 totals2023 totaled approximately $1.1$3.5 million. The weighted-average period over which these costs will be recognized is 2115 months.
A summaryThe compensation cost related to non-vested restricted stock units not yet recognized as of restricted shares under the Company’s Plan are presented below:December 31, 2023 totaled approximately $3.1 million. The weighted-average period over which these costs will be recognized is 14 months.
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||
| Outstanding January 1, 2019 | - | ||||||||
| Granted | 75,000 | $ | 1.38 | ||||||
| Vested | - | ||||||||
| Unvested at December 31, 2019 | 75,000 | ||||||||
| Granted | - | ||||||||
| Vested | (25,000 | ) | |||||||
| Forfeited/Expired | - | ||||||||
| Unvested at December 31, 2020 | 50,000 | $ | 1.38 | ||||||
F-31
INNODATA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2023 AND 2022 |
Accumulated other comprehensive loss, as reflected in the consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustment and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive loss as of December 31, 20202023 and 2019,2022, and reclassifications out of accumulated other comprehensive loss for the years then ended, are presented below (in thousands):
| | | | | | | | | | | | |
|
| | |
| | |
| Foreign Currency |
| Accumulated Other | ||
| | Pension Liability | | Fair Value of | | Translation | | Comprehensive | ||||
| | Adjustment | | Derivatives | | Adjustment | | Loss | ||||
| | | | | | | | | | | | |
Balance at January 1, 2023 | | $ | (86) | | $ | (365) | | $ | (1,657) | | $ | (2,108) |
Other comprehensive income (loss) before reclassifications, net of taxes | |
| (322) | |
| 185 | |
| 407 | |
| 270 |
Total other comprehensive loss before reclassifications, net of taxes | |
| (408) | |
| (180) | |
| (1,250) | |
| (1,838) |
Net amount reclassified to earnings | |
| (4) | |
| 221 | |
| - | |
| 217 |
Balance at December 31, 2023 | | $ | (412) | | $ | 41 | | $ | (1,250) | | $ | (1,621) |
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | |
|
| | |
| | |
| Foreign Currency |
| Accumulated Other | ||
| | Pension Liability | | Fair Value of | | Translation | | Comprehensive | ||||
| | Adjustment | | Derivatives | | Adjustment | | Loss | ||||
| | | | | | | | | | | | |
Balance at January 1, 2022 | | $ | (858) | | $ | (353) | | $ | (981) | | $ | (2,192) |
Other comprehensive income (loss) before reclassifications, net of taxes | |
| 561 | |
| (1,118) | |
| (676) | |
| (1,233) |
Total other comprehensive loss before reclassifications, net of taxes | |
| (297) | |
| (1,471) | |
| (1,657) | |
| (3,425) |
Net amount reclassified to earnings | |
| 211 | |
| 1,106 | |
| - | |
| 1,317 |
Balance at December 31, 2022 | | $ | (86) | | $ | (365) | | $ | (1,657) | | $ | (2,108) |
Taxes related to each component of other comprehensive loss were not material for the fiscal years presented and therefore not disclosed separately.
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at January 1, 2020 | $ | (53 | ) | $ | 33 | $ | (900 | ) | $ | (920 | ) | |||||
| Other comprehensive income (loss) before reclassifications, net of taxes | - | (106 | ) | 406 | 300 | |||||||||||
| Total other comprehensive loss before reclassifications, net of taxes | (53 | ) | (73 | ) | (494 | ) | (620 | ) | ||||||||
| Net amount reclassified to earnings | (391 | ) | 73 | - | (318 | ) | ||||||||||
| Balance at December 31, 2020 | $ | (444 | ) | $ | - | $ | (494 | ) | $ | (938 | ) | |||||
| Pension Liability Adjustment | Fair Value of Derivatives | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at January 1, 2019 | $ | 1,451 | $ | - | $ | (1,466 | ) | $ | (15 | ) | ||||||
| Other comprehensive income before reclassifications, net of taxes | - | 46 | 566 | 612 | ||||||||||||
| Total other comprehensive income (loss) before reclassifications, net of taxes | 1,451 | 46 | (900 | ) | 597 | |||||||||||
| Net amount reclassified to earnings | (1,504 | ) | (13 | ) | - | (1,517 | ) | |||||||||
| Balance at December 31, 2019 | $ | (53 | ) | $ | 33 | $ | (900 | ) | $ | (920 | ) | |||||
All reclassifications out of accumulated other comprehensive loss had an impact on direct operating costs in the consolidated statements of operations and comprehensive income (loss).loss.
14. Segment reporting and concentrations |
The Company’s operations are classified in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.
The DDS segment provides a range of solutionsAI data preparation services, collecting or creating training data, annotating training data, and platformstraining AI algorithms for solving complex data challenges that companies face when they seek to obtain the benefits ofits customers, and AI systemsmodel deployment and analytics platforms. These include data annotation, data transformation, data curation and intelligent automation.integration. The DDS segment also provides a varietyrange of data engineering support services for clients in the information industry that relate to content operationsincluding data transformation, data curation, data hygiene, data consolidation, data extraction, data compliance, and product development.
master data management.
The Synodex segment provides an intelligent dataindustry platform that transforms medical records into useable digital data organized in accordance with ourits proprietary data models or clientcustomer data models.
F-32
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The Agility segment provides an intelligent dataindustry platform that provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news channels (print, web, radio and TV) and social media channels.
A significant portion of the Company’s revenues is generated from its locations in the Philippines, India, Sri Lanka, Canada, Germany, Israel, United States and the United Kingdom and Israel.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kingdom.
Revenues from external clients andcustomers, segment operating profit (loss), and other reportable segment information wereare as follows (in thousands):
| | | | | | |
| | For The Years Ended December 31, | ||||
|
| 2023 |
| 2022 | ||
Revenues: |
| |
|
| |
|
DDS | | $ | 61,576 | | $ | 56,523 |
Synodex | |
| 7,511 | |
| 7,105 |
Agility | |
| 17,688 | |
| 15,373 |
Total Consolidated | | $ | 86,775 | | $ | 79,001 |
| | | | | | |
Income (loss) before provision for income taxes(1): | |
| | |
| |
DDS | | $ | 1,823 | | $ | 1,393 |
Synodex | |
| (299) | |
| (3,213) |
Agility | |
| (1,385) | |
| (8,663) |
Total Consolidated | | $ | 139 | | $ | (10,483) |
| | | | | | |
Income (loss) before provision for income taxes(2): | |
| | |
| |
DDS | | $ | 1,260 | | $ | 716 |
Synodex | |
| 219 | |
| (2,599) |
Agility | |
| (1,340) | |
| (8,600) |
Total Consolidated | | $ | 139 | | $ | (10,483) |
| | | | | | |
|
| December 31, 2023 |
| December 31, 2022 | ||
Total assets: |
| |
|
| |
|
DDS | | $ | 37,232 | | $ | 25,758 |
Synodex | |
| 3,379 | |
| 3,270 |
Agility | |
| 18,820 | |
| 19,014 |
Total Consolidated | | $ | 59,431 | | $ | 48,042 |
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| DDS | $ | 41,983 | $ | 41,172 | ||||
| Synodex | 4,828 | 3,942 | ||||||
| Agility | 11,429 | 10,744 | ||||||
| Total Consolidated | $ | 58,240 | $ | 55,858 | ||||
| Income (loss) before provision for income taxes(1): | ||||||||
| DDS | $ | 1,260 | $ | 944 | ||||
| Synodex | 357 | (129 | ) | |||||
| Agility | (572 | ) | (1,883 | ) | ||||
| Total Consolidated | $ | 1,045 | $ | (1,068 | ) | |||
| Income (loss) before provision for income taxes(2): | ||||||||
| DDS | $ | 980 | $ | 683 | ||||
| Synodex | 536 | 40 | ||||||
| Agility | (471 | ) | (1,791 | ) | ||||
| Total Consolidated | $ | 1,045 | $ | (1,068 | ) | |||
| | | | | | |
|
| December 31, 2023 |
| December 31, 2022 | ||
Goodwill: |
| |
|
| |
|
Agility | | $ | 2,075 | | $ | 2,038 |
Total | | $ | 2,075 | | $ | 2,038 |
| December 31, 2020 | December 31, 2019 | |||||||
| Total assets: | ||||||||
| DDS | $ | 27,767 | $ | 23,115 | ||||
| Synodex | 457 | 675 | ||||||
| Agility | 29,030 | 25,707 | ||||||
| Total Consolidated | $ | 57,254 | $ | 49,497 | ||||
| December 31, 2020 | December 31, 2019 | |||||||
| Goodwill: | ||||||||
| Agility | $ | 2,150 | $ | 2,108 | ||||
| Total | $ | 2,150 | $ | 2,108 | ||||
| (1) | Before elimination of any inter-segment profits |
| (2) | After elimination of any inter-segment profits |
F-33
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
Long-lived assets as of December 31, 20202023 and 20192022 by geographic region were comprised of (in thousands):
| | | | | | |
|
| 2023 |
| 2022 | ||
United States | | $ | 9,101 | | $ | 7,205 |
Foreign countries: | |
| | |
| |
Canada | |
| 7,328 | |
| 7,675 |
United Kingdom | |
| 1,028 | |
| 1,198 |
Philippines | |
| 3,484 | |
| 3,682 |
India | |
| 1,791 | |
| 1,195 |
Sri Lanka | |
| 423 | |
| 426 |
Israel | |
| 13 | |
| 3 |
Total foreign | |
| 14,067 | |
| 14,179 |
Totals | | $ | 23,168 | | $ | 21,384 |
| 2020 | 2019 | |||||||
| United States | $ | 4,045 | $ | 4,521 | ||||
| Foreign countries: | ||||||||
| Canada | 9,044 | 8,708 | ||||||
| United Kingdom | 1,759 | 1,907 | ||||||
| Philippines | 4,545 | 5,135 | ||||||
| India | 930 | 508 | ||||||
| Sri Lanka | 319 | 678 | ||||||
| Israel | 1 | 19 | ||||||
| Germany | - | 1 | ||||||
| Total foreign | 16,598 | 16,956 | ||||||
| Totals | $ | 20,643 | $ | 21,477 | ||||
Long-lived assets include the unamortized balance of right-of-use assets amounting to $5.1 million and $4.3 million as of December 31, 2023 and December 31, 2022, respectively.
One clientcustomer in the DDS segment generated approximately 14% and 16%10% of the Company’s total revenues in the fiscal yearsyear ended December 31, 2020 and 2019, respectively. 2023. Another clientcustomer in the DDS segment generated 10%approximately 11% of the Company’s total revenues forin the fiscal year ended December 31, 2019. 2022. No other clientcustomer accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 20202023 and 2019,2022, revenues from non-US clientsnon-U.S. customers accounted for 54%37% and 55%38%, respectively, of the Company'sCompany’s revenues.
Revenues for each of the two years in the period ended December 31, 20202023 and 20192022 by geographic region (determined based upon client’scustomer domicile), were as follows (in thousands):
| 2020 | 2019 | |||||||||||||
| | | | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||||
| United States | $ | 26,764 | $ | 25,015 | | $ | 54,430 | | $ | 48,724 | ||||
| United Kingdom | 11,184 | 9,577 | |
| 10,766 | |
| 10,901 | ||||||
| The Netherlands | 6,695 | 6,982 | |
| 7,291 | |
| 6,829 | ||||||
| Canada | 5,791 | 6,192 | |
| 7,156 | |
| 5,508 | ||||||
| Others - principally Europe | 7,806 | 8,092 | |
| 7,132 | |
| 7,039 | ||||||
| Totals | $ | 58,240 | $ | 55,858 | | $ | 86,775 | | $ | 79,001 | ||||
As of December 31, 2020,2023, approximately 55%31% of the Company'sCompany’s accounts receivable was due from foreign (principally European) clientscustomers and 36%53% of accounts receivable was due from three clients.customers. As of December 31, 2019,2022, approximately 60%44% of the Company'sCompany’s accounts receivable was due from foreign (principally European) clientscustomers and 44%45% of accounts receivable was due from three clients.four customers. No other clientcustomer accounted for 10% or more of the accounts receivable as of December 31, 2020.2023 and 2022.
15. Loss per Share
| | | | | | |
| | For the Years Ended | ||||
| | December 31, | ||||
|
| 2023 |
| 2022 | ||
Net loss attributable to Innodata Inc. and Subsidiaries | | $ | 908 |
| $ | 11,935 |
Weighted average common shares outstanding | |
| 28,131 | |
| 27,278 |
Dilutive effect of outstanding options | |
| - | | | - |
Adjusted for dilutive computation | |
| 28,131 | |
| 27,278 |
F-34
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income (loss) attributable to Innodata Inc. and Subsidiaries | $ | 617 | $ | (2,142 | ) | |||
| Weighted average common shares outstanding | 24,607 | 25,774 | ||||||
| Dilutive effect of outstanding options | 966 | - | ||||||
| Adjusted for dilutive computation | 25,573 | 25,774 | ||||||
Basic income (loss)loss per share is computed using the weighted-average number of common shares outstanding during the year. Diluted income per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the two-class method of computing loss per share is used.
Options to purchase 1.66.3 million shares of common stock for the year ended December 31, 2020,2023 were outstanding but not included in the computation of diluted income (loss)loss per share because the effect would be antidilutive.
Options to purchase 5.3 million shares of common stock for the year ended December 31, 2022 were outstanding but not included in the computation of diluted loss per share because the exercise price of the options were greater than the average market price of the common shares and therefore have not been considered as potential equity shares. Options to purchase 6.8 million shares of common stock for the year ended December 31, 2019 were outstanding but not included in the computation of diluted loss per share because the effect would have been anti-dilutive.
16. Derivatives |
The Company conducts a large portion of its operations in international markets which subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenuerevenues are incurred in another currency. The Company is also subject to wage inflation and other government mandated increases and operating expenses in Asian countries where the Company has the majority of its operations. The Company’s primary inflation and exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.
In addition, although most of the Company’s revenue is denominated in U.S. dollars, a significant portion of total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
The Company’s policy is to enter derivative instrument contracts with terms that coincide with the underlying exposure being hedged for a period up to 12 months. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument is recorded to Other comprehensive income (loss). Upon settlement of these contracts, the change in the fair value recorded in Other comprehensive income (loss) are reclassified to earnings and included as part of Direct operating costs. For derivative instruments that are not designated as hedges, any change in fair value is recorded directly in earnings as part of Direct operating costs.
The Company was previously following hedge accounting guidelines and formally documenteddocuments all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. However, commencing November 2020, the Company discontinued this practice. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. The total notional amount for outstanding derivatives designated as hedges was $6.9$10.5 million and $4.3$14.2 million as of December 31, 20202023 and 2019,2022, respectively.
INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of derivative instruments included within the consolidated balance sheets as of December 31, 20202023 and 20192022 (in thousands):
| Fair Value | ||||||||||||||||||
| Balance Sheet Location | 2020 | 2019 | ||||||||||||||||
| Derivatives: | ||||||||||||||||||
| | | | | | | | | ||||||||||
|
| Balance Sheet Location |
| Fair Value | ||||||||||||||
| | | | 2023 | | 2022 | ||||||||||||
Derivatives designated as hedging instruments: |
|
|
| |
|
| |
| ||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 48 | $ | 33 | | Accrued expenses | | $ | - | | $ | 365 | |||||
Foreign currency forward contracts |
| Prepaid expenses and other current assets | | $ | 41 | | $ | - | ||||||||||
F-35
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
The effect of foreign currency forward contracts designated as cash flow hedges on the consolidated statements of operations for the years ended December 31, 20202023 and 20192022 were as follows (in thousands):
| 2020 | 2019 | |||||||||||||
| Net loss recognized in OCI(1) | $ | (106 | ) | $ | 46 | |||||||||
| | | | | | | ||||||||
|
| 2023 |
| 2022 | ||||||||||
Net gain (loss) recognized in OCI(1) | | $ | 185 | | $ | (1,118) | ||||||||
| Net loss reclassified from accumulated OCI into income(2) | $ | (73 | ) | $ | 13 | | $ | (221) | | $ | (1,106) | |||
| Net gain recognized in income(3) | $ | - | $ | - | | $ | - | | $ | - | ||||
17. Line of Credit On April 4, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, and Innodata Inc., Innodata Synodex, LLC, Innodata docGenix, LLC and Agility PR Solutions LLC as co-borrowers. On July 21, 2023, Innodata Services LLC signed a Joinder Agreement to join the Credit Agreement as a co-borrower. The Credit Agreement provides for a secured revolving line of credit (the “Revolving Credit Facility”) up to an amount equal to the lesser of the (1)(1) Net change in fair value of the effective portion classified into other comprehensive income (“OCI”) (2) Effective portion classified within direct operating costs. (3) There were no ineffective portions for the period presented. effective portion classified intoborrowing base and $10.0 million with a maturity date of April 4, 2026. The Revolving Credit Facility’s borrowing base is calculated in accordance with the terms of the Credit Agreement and on the basis of 85% of eligible accounts, 85% of eligible foreign accounts up to $2.0 million and certain other comprehensive income ("OCI"reserves and adjustments. As of December 31, 2023, such borrowing base calculation equaled approximately $10.0 million. The Credit Agreement contains a financial covenant that requires the Borrowers, on a consolidated basis, to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 by December 31, 2023. Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to the daily simple secured overnight financing rate (“SOFR”)
(2)Effective portion classified within direct operating costs
(3)There were no ineffective portions18. Subsequent Event
On February 21, 2024, a putative class action lawsuit was filed in the U.S. District Court for the period presented.District of New Jersey against the Company and certain of its current and former officers (D’Agostino v. Innodata Inc., et al., Case Number 2:24-CV-00971 (the “D’Agostino Complaint”). The D’Agostino Complaint asserts claims against all defendants for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. The D’Agostino Complaint alleges that defendants made materially false and misleading statements related to its AI business and development and related financial results, growth, and prospects. The D’Agostino Complaint seeks unspecified compensatory and punitive damages, costs, attorneys’ fees, and other unspecified relief. The Company intends to defend against the D’Agostino Complaint vigorously.
F-36
Exhibit Index update
Exhibits which are indicated as being included in previous filings are incorporated herein by reference.
10.8 | | | Filed as Exhibit 10.57 to Form 10-K dated March 15, 2017 | |
| | | | |
10.9 | | | Filed as Exhibit 10.1 to Form 8-K dated August 28, 2018 | |
| | | | |
10.10 | | Form of Stock Option Grant Letter for July 13, 2018 Grant, for Directors* | | Filed as Exhibit 10.59 to Form 10-K dated March 26, 2019 |
| | | | |
10.11 | | Form of Stock Option Grant Letter for July 13, 2018 Grant, for Messrs. Abuhoff and Mishra* | | Filed as Exhibit 10.60 to Form 10-K dated March 26, 2019 |
| | | | |
10.12 | | | Filed as Appendix A to Definitive Proxy Statement dated April 26, 2022 | |
| | | | |
10.13 | | | Filed as Exhibit 10.1 to S-8 Registration Statement dated June 16, 2021 | |
| | | | |
10.14 | | | Filed as Exhibit 10.2 to S-8 Registration Statement dated June 16, 2021 | |
| | | | |
10.15 | | | Filed as Exhibit 10.1 to Form 8-K dated | |
| | | | |
10.16 | | | Filed as Exhibit 10.1 to Form | |
| | | | |
10.17 | | | Filed as Exhibit | |
| | | | |
32.2 | | | Furnished herewith | |
| | | | |
97.1 | | | Filed herewith | |
| | | | |
101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: | | Filed herewith |
| | (i) the Consolidated Balance Sheets, | | |
| | (ii) the Consolidated Statements of Operations and Comprehensive Loss, | | |
| | (iii) the Consolidated Statements of Stockholders’ Equity, | | |
| | (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial | | |
| | | | |
104 | | Cover Page Interactive Data File | | Included in Exhibit 101. |
* Exhibit represents a management contract or compensatory plan, contract or arrangement required to be filed as Exhibits to this Annual Report on Form 10-K.