# Innodata Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Innodata Inc](/companies/inod.md) (CIK 903651)
- Form: 10-Q
- Filed: 2023-05-12
- Accepted by EDGAR: May 11, 2023, 17:54 ET
- Period: 2023-03-31
- Accession: 0001410578-23-001033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/903651/000141057823001033/inod-20230331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/903651/000141057823001033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $18.8m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $7.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $218.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$2.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 27,460,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $1.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $10.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $23.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $49.1m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $21.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $31.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $18.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,698 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

### CONDITION AND RESULTS OF OPERATIONS

### Cautionary Note Regarding Forward-Looking Statements

*Disclosures in this Quarterly Report on Form 10-Q (this “Report”) contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements include, without limitation, statements concerning our operations, economic performance, and financial condition. Words such as “project,” “believe,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “should,” “will,” “anticipate,” “indicate,” “predict,” “likely,” “estimate,” “plan,” “potential,” or the negatives thereof, and other similar expressions generally identify forward-looking statements.*

*These forward-looking statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, the expected or potential effects of the novel coronavirus (“COVID-19”) pandemic and the responses of governments, the general global population, our customers, and the Company thereto; impacts resulting from the rapidly evolving conflict between Russia and the Ukraine; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; pipeline opportunities and customer discussions which may not materialize into work or expected volumes of work; continuing reliance on project-based work in the DDS segment and the primarily at-will nature of such contracts and the ability of these customers to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; continuing DDS segment revenue concentration in a limited number of customers; potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; a continued downturn in or depressed market conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; changes in our business or growth strategy; the emergence of new, or growth in existing competitors; various other competitive and technological factors; the Company’s use of and reliance on information technology systems, including potential security breaches, cyber-attacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, customer, employee or Company information, or service interruptions; and other risks and uncertainties indicated from time to time on our filings with the Securities and Exchange Commission.*

*Our actual results could differ materially from the results referred to in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Part I, Item 1A. “Risk Factors”, “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2023 and in our other filings that we may make with the Securities and Exchange Commission. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements will occur, and you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof.*

*We undertake no obligation to update or review any guidance or other forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the federal securities laws.*

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Innodata Inc. and its subsidiaries and should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements contained in Part I, Item 1 of this Report.

### Business Overview

Innodata Inc. (NASDAQ: INOD) (including its subsidiaries, the “Company”, “Innodata”, “we”, “us” or “our”) is a leading data engineering company. Our mission is to help the world’s most prestigious companies deliver the promise of ethical, high-performing artificial intelligence (“AI”), which we believe will contribute to a safer and more prosperous world.

Innodata was founded on a simple idea: engineer the highest quality data so organizations across broad industry segments could make smarter decisions. Today, we believe we’re delivering the highest quality data for some 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 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, in collecting and annotating data at scale with consistency and high accuracy.

We are 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 world in which machines augment human activity in ways previously unimaginable.

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 seven 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.

### AI Data Preparation

We collect or create training data, annotate training data, and train AI algorithms for social media companies, robotics companies, financial services companies, and many others, working with images, text, video and audio. We utilize a variety of leading third-party image and video annotation tools. For text, we use our proprietary data annotation platform that incorporates AI to reduce cost while improving consistency and quality of output. Our proprietary data annotation platform features auto-tagging capabilities that apply to both classical and generative AI tasks. The platform encapsulates many of the innovations we conceived 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 large language models (LLMs).

### AI Model Deployment and Integration

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 help businesses fine-tune their own custom versions of our proprietary models and third-party foundation models to address domain-specific and customer-specific use cases.

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.

Our customers span a diverse range of industries and a wide range of AI use cases, benefiting from the short time-to-value and high economic returns of our AI solutions and platforms.

### AI-Enabled Industry Platforms

Our AI-enabled industry platforms address specific, niche market requirements we believe we can innovate with 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 public relations (which we brand as “Agility PR Solutions”). We are in the development with an additional AI-enabled industry platform to serve financial services institutions.

Our Synodex industry platform transforms medical records into useable digital data organized in accordance with our proprietary data models or customer data models.

Our Agility industry platform provides marketing communications and public relations professionals with the ability to target and distribute content to journalists and social media influencers world-wide and to monitor and analyze global news (print, web, radio and TV) and social media.

Our operations are presently classified and reported in three reporting segments: Digital Data Solutions (DDS), Synodex and Agility.

### Prevailing Economic Conditions and Seasonality

#### Prevailing Economic Conditions

With the current level of demand for our services, we believe we have existing cash and cash equivalents that provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 months from the date of the filing of this Report (refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information). In the event we experience a significant or prolonged reduction in revenues, the likelihood of which is uncertain, we would seek to manage our liquidity by utilizing the Revolving Credit Facility, reducing capital expenditures, deferring investment activities, and reducing operating costs.

#### Seasonality

Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.

Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.

#### Trends

We view new customer acquisition as an indicator of our business momentum, sales and marketing efficiency, and competitive market positioning. During the three-month period ending March 31, 2023, we added 129 new customers. This is a 39% increase over the 93 new customers we added on average per quarter in 2021 and a 3% increase over the 126 new customers we added on average per quarter in 2022.

For further information, refer to the risk factor titled “Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stock price.” in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.

### Non-GAAP Financial Measures

In addition to the financial information prepared in conformity with U.S. GAAP (“GAAP”), we provide certain non-GAAP financial information. We believe that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results. In some respects, management believes non-GAAP financial measures are more indicative of our ongoing core operating performance than their GAAP equivalents by making adjustments that management believes are reflective of the ongoing performance of the business.

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 Quarterly Report on Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures that we present may differ from similar non-GAAP financial measures used by other companies.

#### Adjusted 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.

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 three months ended March 31, 2023 and 2022 (in thousands).

| ​ ​ Consolidated ​ | ​ ​ ​ | ​ ​ Three Months Ended March 31, 2023 ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | ---: |
| Gross Profit attributable to Innodata Inc. and Subsidiaries |  | 5,965 | 7,778 ​ |
| Depreciation and amortization |  | 1,065 | 839 ​ |
| Severance\*\* |  | 327 | - ​ |
| Stock-based compensation |  | 63 | 52 ​ |
| Adjusted Gross Profit |  | **7,420** | **8,669** **​** |
| ​ | ​ | ​ ​ | ​ ​ |
| Gross Margin |  | 32% | 37% |
| Adjusted Gross Margin |  | 39% | 41% |

| ​ ​ DDS Segment ​ | ​ ​ ​ | ​ ​ Three Months Ended March 31, 2023 ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | ---: |
| Gross Profit attributable to DDS Segment |  | 4,159 | 6,554 ​ |
| Depreciation and amortization |  | 200 | 190 ​ |
| Severance\*\* |  | 28 | - ​ |
| Stock-based compensation |  | 51 | 44 ​ |
| Adjusted Gross Profit |  | **4,438** | **6,788** **​** |
| ​ | ​ | ​ ​ | ​ ​ |
| Gross Margin |  | 33% | 41% |
| Adjusted Gross Margin |  | 35% | 43% |

| ​ ​ Synodex Segment ​ | ​ ​ ​ | ​ ​ Three Months Ended March 31, 2023 ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | ---: |
| Gross Profit/(Loss) attributable to Synodex Segment |  | 203 | (230) ​ |
| Depreciation and amortization |  | 162 | 41 ​ |
| Severance\*\* |  | - | - ​ |
| Stock-based compensation |  | - | - ​ |
| Adjusted Gross Profit |  | **365** | **(189)** **​** |
| ​ | ​ | ​ ​ | ​ ​ |
| Gross Margin |  | 11% | (14)% |
| Adjusted Gross Margin |  | 20% | (11)% |

| ​ ​ Agility Segment ​ | ​ ​ ​ | ​ ​ Three Months Ended March 31, 2023 ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | ---: |
| Gross Profit attributable to Agility Segment |  | 1,603 | 1,454 ​ |
| Depreciation and amortization |  | 703 | 608 ​ |
| Severance\*\* |  | 299 | - ​ |
| Stock-based compensation |  | 12 | 8 ​ |
| Adjusted Gross Profit |  | **2,617** | **2,070** **​** |
| ​ | ​ | ​ ​ | ​ ​ |
| Gross Margin |  | 38% | 40% |
| Adjusted Gross Margin |  | 62% | 57% |

\*\*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 U.S. GAAP net income (loss) attributable to Innodata Inc. and its subsidiaries to Adjusted EBITDA (loss) for the three months ended March 31, 2023 and 2022 (in thousands).

| ​ ​ Consolidated | ​ | ​ ​ Three Months Ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| Net loss attributable to Innodata Inc. and Subsidiaries | ​ | $(2,116) | ​ | $(2,815) |
| Provision for income taxes | ​ | ​ 218 | ​ | ​ 475 |
| Interest expense, net | ​ | ​ 63 | ​ | ​ 3 |
| Depreciation and amortization | ​ | ​ 1,091 | ​ | ​ 873 |
| Severance\*\* | ​ | ​ 580 | ​ | ​ - |
| Stock-based compensation | ​ | ​ 962 | ​ | ​ 537 |
| Non-controlling interests | ​ | ​ 3 | ​ | ​ (75) |
| Adjusted EBITDA / (loss) | ​ | $801 | ​ | $(1,002) |

| ​ ​ DDS Segment | ​ ​ | ​ ​ Three Months Ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| Net income (loss) attributable to DDS Segment | ​ | $(641) | ​ | $763 |
| Provision for income taxes | ​ | ​ 215 | ​ | ​ 533 |
| Interest expense, net | ​ | ​ 62 | ​ | ​ 3 |
| Depreciation and amortization | ​ | ​ 225 | ​ | ​ 224 |
| Severance\*\* | ​ | ​ 33 | ​ | ​ - |
| Stock-based compensation | ​ | ​ 806 | ​ | ​ 371 |
| Non-controlling interests | ​ | ​ 3 | ​ | ​ - |
| Adjusted EBITDA | ​ | $703 | ​ | $1,894 |

| ​ ​ Synodex Segment | ​ ​ | ​ ​ Three Months Ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Net income (loss) attributable to Synodex Segment | ​ | $14 | ​ | $(785) |
| Depreciation and amortization | ​ | ​ 162 | ​ | 41 |
| Severance\*\* | ​ | ​ 6 | ​ | ​ - |
| Stock-based compensation | ​ | 58 | ​ | 49 |
| Non-controlling interests | ​ | - | ​ | (75) |
| Adjusted EBITDA / (loss) | ​ | $240 | ​ | $(770) |

| ​ ​ Agility Segment | ​ ​ | ​ ​ Three Months Ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| Net loss attributable to Agility Segment | ​ | $(1,489) | ​ | $(2,793) |
| Provision for income taxes | ​ | ​ 3 | ​ | ​ (58) |
| Interest expense, net | ​ | ​ 1 | ​ | ​ - |
| Depreciation and amortization | ​ | ​ 704 | ​ | ​ 608 |
| Severance\*\* | ​ | ​ 541 | ​ | ​ - |
| Stock-based compensation | ​ | ​ 98 | ​ | ​ 117 |
| Adjusted EBITDA (loss) | ​ | $(142) | ​ | $(2,126) |

\*\*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

The amounts in the MD&A below have been rounded. All percentages have been calculated using rounded amounts.

### Three Months Ended March 31, 2023 and 2022

#### Revenues

Total revenues were $18.8 million and $21.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or approximately 11%.

Revenues from the DDS segment were $12.7 million and $15.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, a decrease of $3.2 million or approximately 20%. The decrease was primarily attributable to lower volume from one customer offset in part by an increase in volume from another customer.

Revenues from the Synodex segment were $1.9 million and $1.7 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.2 million or approximately 12%. The increase was primarily attributable to higher volume from existing customers.

Revenues from the Agility segment were $4.2 million and $3.6 million for the three months ended March 31, 2023 and March 31, 2022, respectively, an increase of $0.6 million or approximately 17%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

One customer in the DDS segment generated approximately 11% and another customer in the DDS segment generated 11% of the Company’s total revenues for the three months ended March 31, 2023. Another customer in the DDS segment generated approximately 21% of the Company’s total revenues for the three months ended March 31, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended March 31, 2023 and 2022, revenues from non-U.S. customers accounted for 39% and 37% respectively, of the Company’s total revenues.

#### Direct Operating Costs

Direct operating costs consist of direct and indirect labor costs, occupancy costs, data center hosting fees, cloud services, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our customers.

Direct operating costs were $12.9 million and $13.4 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.5 million or 4%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.8 million primarily on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, higher depreciation and amortization of capitalized developed software of $0.1 million and an increase in other direct operating costs of $0.4 million. Direct operating costs as a percentage of total revenues were 69% and 63% for the three-month periods ended March 31, 2023 and 2022, respectively. The increase in direct operating cost as a percentage of total revenues was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs in the DDS and Synodex segments.

Direct operating costs for the DDS segment were approximately $8.6 million and $9.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.7 million or 8%. The cost decrease was primarily due to lower revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in direct operating costs includes lower direct and indirect labor related costs amounting to $1.9 million primarily, on account of reductions in headcount, offset in part by salary increases and severance; unfavorable impact of foreign exchange rate fluctuations of $0.8 million, an increase in other direct operating costs of $0.4 million. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 68% and 58% for the three months ended March 31, 2023 and 2022, respectively. The increase in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower direct operating costs.

Direct operating costs for the Synodex segment were $1.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.2 million or 11%. The cost decrease was primarily due to lower direct labor costs of $0.3 million, offset in part by an increase in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 89% and 112% for the three months ended March 31, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to an increase in revenues and a decrease in direct operating costs.

Direct operating costs for the Agility segment were $2.6 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $0.4 million or 18%. The cost increase was primarily due to higher revenues and cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The cost increase was primarily due to an increase in direct labor costs of $0.4 million including severance higher depreciation and amortization of capitalized developed software of $0.1 million, offset in part by a decrease in other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 62% and 61% for the three months ended March 31, 2023 and 2022, respectively. The increase in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to an increase in direct operating costs, offset in part by increased revenues from subscriptions to our Agility AI-enabled platform and newswire products.

#### Gross Profit and Gross Margin

Gross profit is derived by revenues less direct operating costs, while Gross margin in percentage is derived by dividing gross profit over revenues.

Gross profit was $6.0 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022. The $1.8 million decrease in gross profit was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs. Gross margin was 32% and 37% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin was primarily due to lower revenues in the DDS segment, offset in part by lower direct operating costs.

Gross profit for the DDS segment was $4.2 million for the three months ended March 31, 2023 compared to $6.6 million for the three months ended March 31, 2022. The $2.4 million decrease in gross profit for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs. Gross margin for the DDS segment was 33% and 41% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment was primarily due to lower revenues, offset in part by lower direct operating costs.

Gross profit for the Synodex segment was $0.2 million for the three months ended March 31, 2023 compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.4 million increase in gross profit for the Synodex segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Synodex segment was 11% and (14%) for the three months ended March 31, 2023 and 2022, respectively. The increase in gross margin for the Synodex segment was primarily due to higher revenues and lower direct operating costs.

Gross profit for the Agility segment was $1.6 million for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022. The $0.1 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 38% and 40% for the three months ended March 31, 2023 and 2022, respectively. The decrease in gross margin for the Agility segment was primarily due to higher direct operating costs, offset in part by higher revenues.

#### Selling and Administrative Expenses

Selling and administrative expenses consist of sales, marketing, new services research and related software development, administrative payroll and related costs including commissions, bonuses, stock-based compensation, marketing costs, third-party software, advertising, trade conferences, professional fees and consultant costs, and other administrative overhead costs.

Selling and administrative expenses were $7.8 million and $10.2 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2.4 million or 24%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.9 million, primarily on account of headcount reduction, offset in part by salary increases and severance; lower recruitment and professional fees of $1.0 million, marketing expenses of $0.5 million and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also offset in part by higher provisions for doubtful accounts of $0.2 million. Selling and administrative expenses as a percentage of total revenues were 41% and 48% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower expenditures in all segments, offset in part by lower revenues in the DDS segment.

Selling and administrative expenses for the DDS segment were $4.5 million and $5.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.8 million or 15%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower administrative and selling labor and related expenses of $0.1 million, primarily on account of headcount reductions; lower recruitment and professional fees of $0.5 million, and a decrease in other selling and administrative expenses of $0.2 million, primarily from lower marketing expenses and lower provision for doubtful accounts. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 35% and 33% for each of the three-month periods ended March 31, 2023 and 2022, respectively. The increase in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to lower revenues, offset in part by lower selling and administrative expenses.

Selling and administrative expenses for the Synodex segment were $0.2 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.4 million or 67%. The decrease in selling and administrative expenses was primarily attributable to lower professional fees of $0.3 million and lower payroll-related costs of $0.2 million; offset by an increase 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 11% and 35% for the three months ended March 31, 2023 and 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, offset in part by higher revenues.

Selling and administrative expenses for the Agility segment were $3.1 million and $4.3 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $1.2 million or 28%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency and the Company’s ability to scale and respond to market conditions. The decrease in selling and administrative expenses includes lower selling and administrative labor and related expenses of $0.6 million, primarily on account of headcount reduction and severance; lower recruitment and professional fees of $0.2 million, marketing expenses of $0.4 million, and leasehold improvement write-offs from lease terminations of $0.2 million. These lower selling and administrative expenses were also 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 74% and 119% for the three months ended March 31, 2023 and 2022, respectively. The decrease in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to lower selling and administrative expenses, offset in part by an increase in revenues.

#### Income Taxes

We recorded a provision for income taxes of $0.2 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.

Tax-related charges primarily consisted of a provision for foreign taxes recorded in accordance with local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate primarily due to losses incurred by our U.S. entities, Canadian and European principally (Germany and the United Kingdom) subsidiaries, and a valuation allowance recorded on the deferred taxes of the U.S., Canadian, German and the United Kingdom subsidiaries.

#### Net Loss

We incurred a net loss of $2.1 million and $2.8 million during the three months ended March 31, 2023 and 2022, respectively. The $0.7 million change was a result of lower operating costs in all segments in the current quarter, offset in part by higher revenues in the Synodex and Agility segments.

Net loss for the DDS segment was $0.6 million for the three months ended March 31, 2023, compared to a net income of $0.8 million for the three months ended March 31, 2022. The $1.4 million change was primarily attributable to lower revenues in the current quarter offset in part by lower operating costs and lower tax provision.

The Synodex segment was breakeven for the three months ended March 31, 2023, compared to a net loss of $0.8 million for the three months ended March 31, 2022. The $0.8 million change was due to lower operating costs, offset in part by higher revenues in the current quarter.

Net loss for the Agility segment was $1.5 million for the three months ended March 31, 2023, compared to a net loss of $2.8 million for the three months ended March 31, 2022. The $1.3 million change was due to higher revenues, lower selling and administrative costs, offset in part by higher direct operating costs in the current quarter.

#### Adjusted Gross Profit

Adjusted gross profit for the three months ended March 31, 2023 was $7.4 million compared to $8.7 million for the three months ended March 31, 2022. The $1.3 million decrease in adjusted gross profit is due to a lower gross profit, offset in part by higher depreciation and amortization, and non- recurring severance. Adjusted gross margin was 39% and 41% for the three months ended March 31, 2023 and 2022, respectively. The decrease in adjusted gross margin was due to a lower gross profit, offset in part by higher depreciation and amortization, and non-recurring severance.

Adjusted gross profit for the DDS segment was $4.4 million and $6.8 million for the three months ended March 31, 2023 and 2022, respectively. The $2.4 million decrease in adjusted gross profit for the DDS Segment is due to lower gross profit, offset in part by higher non-recurring severance. Adjusted gross margin for the DDS segment was 35% and 43% for the three months ended March 31, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment was due to lower gross profit, offset in part by higher non-recurring severance.

Adjusted gross profit for the Synodex segment for the three months ended March 31, 2023 was $0.4 million compared to a loss of $0.2 million for the three months ended March 31, 2022. The $0.6 million increase in adjusted gross profit in the Synodex segment is due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Synodex segment was 20% and (11%) for the three months ended March 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment was due to higher gross profit and higher depreciation and amortization.

Adjusted gross profit for the Agility segment was $2.6 million and $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $0.5 million increase in adjusted gross profit for the Agility segment is due to higher gross profit, higher non-recurring severance, and depreciation and amortization. Adjusted gross margin for the Agility segment was 62% and 57% for the three months ended March 31, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment was due to higher gross profit, higher non-recurring severance, and depreciation and amortization.

#### Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2023 was $0.8 million compared to a loss of $1.0 million for the three months ended March 31, 2022. The $1.8 million increase in Adjusted EBITDA was due to a lower net loss, higher stock-based compensation, and higher depreciation and amortization and non-recurring severance, offset in part by a lower tax provision.

Adjusted EBITDA for the DDS segment was $0.7 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively. The $1.2 million decrease in Adjusted EBITDA in the DDS Segment is due to a higher net loss and lower tax provision, offset in part by higher stock-based compensation and higher non-recurring severance.

Adjusted EBITDA for the Synodex segment for the three months ended March 31, 2023 was $0.2 million compared to a loss of $0.8 million for the three months ended March 31, 2022. The $1.0 million increase in Adjusted EBITDA in the Synodex segment is due to a lower net loss and higher depreciation and amortization.

Adjusted EBITDA for the Agility segment was a loss of $0.1 million and loss of $2.1 million for the three months ended March 31, 2023 and 2022, respectively. The $2.0 million increase in Adjusted EBITDA in the Agility segment is due to a lower net loss and higher depreciation and amortization and non-recurring severance.

Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA to the most directly comparable GAAP measure, please see the description of “Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Margin, and Adjusted EBITDA” above.

### Liquidity and Capital Resources

Selected measures of liquidity and capital resources, expressed in thousands, were as follows:

| ​ ​ ​ | ​ ​ | ​ ​ March 31, 2023 | ​ ​ | ​ ​ December 31, 2022 |
| --- | --- | ---: | --- | ---: |
| Cash and cash equivalents | ​ | $10,330 | ​ | $9,792 |
| Short term investments - other | ​ | ​ 512 | ​ | ​ 507 |
| Working capital | ​ | 2,323 | ​ | 2,869 |

On March 31, 2023, we had cash and cash equivalents of $10.3 million and short-term investments of $0.5 million, of which $3.1 million was held by our foreign subsidiaries, and $7.2 million was held in the United States. The short-term investments of $0.5 million were 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 March 31, 2023, to indefinitely reinvest the overseas funds in our foreign subsidiaries due 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) capital investments; (ii) the expansion of our operations; (iii) technology innovation; (iv) product management and strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business acquisitions. As of March 31, 2023, we had working capital of approximately $2.3 million, as compared to working capital of approximately $2.9 million as of December 31, 2022. The decrease in working capital is due to additional accruals for severance costs and payroll related taxes offset in part by decrease in accounts receivable, accounts payable and accrued expenses during the three months ended March 31, 2023.

We did not have any material commitments for capital expenditures as of March 31, 2023.

We believe that our existing cash and cash equivalents and internally generated funds will provide sufficient sources of liquidity to satisfy our financial needs for at least the next 12 months from the date of this Report. On April 4, 2023, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender, Innodata Synodex, LLC, Innodata docGenix, LLC, and Agility PR Solutions LLC. 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 borrowing 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 reserves and adjustments. As of the date of entry into the Credit Agreement, such borrowing base calculation equaled approximately $3.3 million. Reference is made to Note 15, “Subsequent Events” in the condensed consolidated financial statements of this Report, which is incorporated by reference herein. Any material decreases in our cash and cash equivalents from operating losses, capital expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the Company.

### Cash Flows

#### Net Cash Provided by (Used in) Operating Activities

Cash provided by our operating activities for the three months ended March 31, 2023 was $1.8 million primarily on account of the following factors: our net loss for the period of $2.1 million; a source of $2.3 million from non-cash expenses consisting of depreciation and amortization of $1.1 million, stock-based compensation of $1.0 million, pension costs of $0.3 million; partially offset by a decrease in deferred taxes of $0.1 million. Net changes from working capital accounts further sourced an additional $1.6 million in working capital, mainly from a decrease in accounts receivable of $1.1 million, a decrease in prepaid expenses and other current assets of $0.2 million; an increase in accrued salaries, wages and related benefits of $0.6 million and an increase in income and other taxes of $0.3 million; offset in part by a decrease in accounts payable, accrued expenses and other of $0.6 million. Refer to the condensed consolidated statements of cash flows for further details.

Cash used in our operating activities for the three months ended March 31, 2022 was $1.5 million primarily on account of the following factors: our net loss for the period of $2.9 million; a source of $1.6 million from non-cash expenses consisting of depreciation and amortization of $0.9 million, stock-based compensation of $0.5 million, a loss of $0.1 million on termination of one of our operating lease contracts and $0.1 million due to other non-cash transactions. Net changes from working capital accounts further utilized an additional $0.2 million in working capital, mainly from an increase in accounts payable and accrued expenses of $0.5 million and an increase in accrued salaries, wages and related benefits of $0.4 million; offset in part by a decrease in accounts receivable of $0.5 million and a net reduction in other working capital accounts of $0.2 million. Refer to the condensed consolidated statements of cash flows for further details.

#### Net Cash Used in Investing Activities

For the three months ended March 31, 2023 and 2022, cash used in our investing activities was $1.7 million and $1.9 million, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software.

During the next 12 months, it is anticipated that capital expenditures for capitalized developed software and ongoing technology, equipment and infrastructure upgrades will approximate to $6.5 million, a portion of which we may finance.

#### Net Cash Provided by (Used in) Financing Activities

Cash provided by financing activities for the three months ended March 31, 2023 was primarily from proceeds of stock option exercises of $0.3 million.

Cash used in financing activities for the three months ended March 31, 2022 was primarily for payments of long-term obligations of $39,000, offset in part by proceeds from stock option exercises of $26,000 and redemption of non-controlling interest of $1,000.

### Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our condensed consolidated results of operations and financial position.

The significant accounting policies used in preparing our condensed consolidated financial statements contained in this Report are the same as those described in the Company’s Annual Report on Form 10-K, unless otherwise noted, and we believe those critical accounting policies affect our more significant estimates and judgments in the preparation of our condensed consolidated financial statements.

### Off-Balance Sheet Arrangements

None.

## Controls and procedures

As filed, 1,491 characters.

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision, and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of March 31, 2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,482 characters.

For information regarding Risk Factors, please refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by the following additional risk factors, which shall be deemed to replace, in its entirety, the risk factor in our Annual Report on Form 10-K entitled, “*We have no bank facilities or line of credit.”*

**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.**

Debt 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 bearing on, the potential performance of SOFR.

**Our Revolving Credit Facility contains restrictive covenants that may impair our ability to conduct business.**

Our 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 requires 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 business, and we may be unable to raise additional debt or other financing 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 Revolving Credit Facility and may impair our ability to conduct business. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, there are no assurances that we will be able to obtain waivers from the lender and/or amend the covenants.

Filed May 12, 2023.
Source: SEC EDGAR, the filing index for accession 0001410578-23-001033. Last ingested by Listed: Oct 30, 2026, 12:03 ET. No prices; not investment advice.