Innodata Inc: Form 10-Q for the period ended Sep 30, 2023

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,” “possible,” “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, impacts resulting from the continuing conflict between Russia and the Ukraine and Hamas' attack against Israel and the ensuing conflict; investments in large language models; 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; 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; our 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 in 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 nine months ended September 30, 2023, we added 372 new customers, an average of 124 new customers per quarter. This is a 33% increase over the 93 new customers we added on average per quarter in 2021 and a 1% decrease from the 126 new customers we added on average per quarter in 2022. 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 first three quarters of 2023 there was a 1% decrease 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.

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 and nine months ended September 30, 2023 and 2022 (in thousands).

** 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 and nine months ended September 30, 2023 and 2022 (in thousands).

** 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 September 30, 2023 and 2022

Revenues

Total revenues were $22.2 million and $18.4 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $3.8 million or approximately 20%.

Revenues from the DDS segment were $16.1 million and $12.8 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $3.3 million or approximately 26%. The net increase was primarily attributable to higher volume from one existing and one new customer, offset in part by lower revenue of $1.0 million from a large social media company that underwent a significant management change in the second half of 2022.

Revenues from the Synodex segment were $1.7 million and $1.8 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $0.1 million or approximately 6%. The decrease was primarily attributable to lower volume from existing customers.

Revenues from the Agility segment were $4.4 million and $3.8 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $0.6 million or approximately 16%. The increase was primarily 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% of the Company’s total revenues for the three months ended September 30, 2023. No customer generated more than 10% of the Company’s total revenues for the three months ended September 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2023 and 2022, revenues from non-U.S. customers accounted for 40% and 35%, 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 $13.9 million and $12.4 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $1.5 million or 12%. The net increase in direct operating costs was primarily due to higher revenues from one new and one existing customer, offset in part by cost optimization efforts aimed at improving operational efficiency. The net increase includes higher direct and indirect labor related costs amounting to $0.5 million primarily on account of new hires and salary increases; higher recruitment fees of $0.6 million for new hires; an unfavorable impact of foreign exchange rate fluctuations of $0.2 million; and higher depreciation and amortization of capitalized developed software of $0.2 million. Direct operating costs as a percentage of total revenues were 63% and 67% for the three months ended September 30, 2023 and 2022, respectively. The decrease in direct operating cost as a percentage of total revenues was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in the DDS Segment.

Direct operating costs for the DDS segment were approximately $10.2 million and $8.0 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $2.2 million or 28%. The increase in direct operating costs was primarily due to higher revenues from one new and one existing customer, offset in part by cost optimization efforts aimed at improving operational efficiency. The net increase includes higher direct and indirect labor related costs amounting to $1.1 million primarily on account of new hires and salary increases, offset in part by headcount reductions; higher recruitment fees of $0.6 million for new hires; an unfavorable impact of foreign exchange rate fluctuations of $0.2 million; higher depreciation and amortization of capitalized developed software of $0.1 million; and an increase in other direct operating costs of $0.2 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 63% for each of the three-month periods ended September 30, 2023 and 2022, respectively.

Direct operating costs for the Synodex segment were $1.7 million and $2.2 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $0.5 million or 23%. The decrease in direct operating costs was primarily due to cost optimization efforts aimed at improving operational efficiency and lower revenues. The decrease includes lower direct labor costs of $0.4 million and a decrease in other direct operating costs of $0.1 million. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 100% and 122% for the three months ended September 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to lower direct operating costs.

Direct operating costs for the Agility segment were $2.0 million and $2.2 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $0.2 million or 9%. The decrease in direct operating costs was primarily due to the cost optimization efforts aimed at improving operational efficiency. Total direct and indirect labor cost reductions from the cost optimization initiatives was $0.3 million, offset in part by higher depreciation and amortization of capitalized developed software of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 45% and 58% for the three months ended September 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Agility segment as a percentage of Agility segment revenues was primarily due to increased revenues from subscriptions to our Agility AI-enabled platform and newswire products and lower 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.

Gross profit was $8.2 million and $6.1 million for the three months ended September 30, 2023 and 2022, respectively. The $2.1 million increase in gross profit was due to higher revenues in the DDS and Agility segments; and lower direct operating costs in the Synodex and Agility segments, offset in part by higher direct operating costs in the DDS segment. Gross margin was 37% and 33% for the three months ended September 30, 2023 and 2022, respectively. The increase in gross profit as a percentage of revenues was due to higher revenues in the DDS and Agility segments; and lower direct operating costs in the Synodex and Agility segments.

Gross profit for the DDS segment was $5.8 million and $4.8 million for the three months ended September 30, 2023 and 2022, respectively. The $1.0 million increase in gross profit for the DDS segment was primarily due to higher revenues, offset in part by higher direct operating costs. Gross margin for the DDS segment was 36% and 37% for the three months ended September 30, 2023 and 2022, respectively. The decrease in gross margin for the DDS segment as a percentage of revenues was primarily due to higher revenues, offset in part by higher direct operating costs.

Gross profit for the Synodex segment was breakeven for the three months ended September 30, 2023 and a loss of $0.4 million for the three months ended September 30, 2022. The $0.4 million change in gross profit for the Synodex segment was primarily due to lower direct operating costs. Gross margin for the Synodex segment was 0% and (24)% for the three months ended September 30, 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.

Gross profit for the Agility segment was $2.4 million and $1.7 million for the three months ended September 30, 2023 and 2022, respectively. The $0.7 million increase in gross profit for the Agility segment was primarily due to higher revenues and lower direct operating costs. Gross margin for the Agility segment was 55% and 43% for the three months ended September 30, 2023 and 2022, respectively. The increase in gross margin for the Agility segment as a percentage of revenues was primarily due to higher revenues and lower direct operating costs.

Selling and Administrative Expenses

Selling and administrative expenses consist of payroll and related costs including commissions, bonuses, and stock-based compensation; marketing, advertising, trade conferences and related expenses; new services research and related software development expenses, software subscriptions, professional and consultant fees, provision for doubtful accounts and other administrative overhead expenses.

Selling and administrative expenses were $7.4 million and $9.1 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $1.7 million or 19%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $1.0 million primarily on account of headcount reduction, offset in part by higher commissions and salary increases; lower marketing related expenses of $0.4 million; lower recruitment and professional fees of $0.1 million, a favorable impact of foreign exchange rate fluctuations of $0.1 million and a decrease in other selling and administrative expenses of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 33% and 49% for the three months ended September 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher revenues in the DDS and Agility segments; offset in part by higher selling and administrative expenses in the DDS segment.

Selling and administrative expenses for the DDS segment were $4.9 million and $4.8 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $0.1 million or 2%. The increase is mainly from higher commissions of $0.1 million and an increase in other selling and administrative expenses of $0.1 million, offset in part by lower marketing-related expenses of $0.1 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 30% and 38% for the three months ended September 30, 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, offset in part by higher selling and administrative expenses.

Selling and administrative expenses for the Synodex segment were $0.2 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $0.2 million or 50%. The decrease in selling and administrative expenses was attributable to lower labor and related expenses of $0.1 million and lower professional fees of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 12% and 22% for the three months ended September 30, 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 lower revenues.

Selling and administrative expenses for the Agility segment were $2.3 million and $3.9 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $1.6 million or 41%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $1.0 million primarily on account of headcount reductions offset in part by higher commissions; lower marketing related expenses of $0.3 million; a favorable impact of foreign exchange rate fluctuations of $0.1 million, and other selling and administrative expenses of $0.2 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 52% and 103% for the three months ended September 30, 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 and higher revenues.

Income Taxes

We recorded a provision for income taxes of $0.4 million and $0.3 million for the three months ended September 30, 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 Income (Loss)

We had a net income of $0.4 million and a net loss of $3.3 million during the three months ended September 30, 2023 and 2022, respectively. The $3.7 million change was due to higher revenues in the DDS and Agility segments and lower operating costs and expenses in the Synodex and Agility segment.

Net income for the DDS segment was $0.4 million and a net loss of $0.3 million for the three months ended September 30, 2023 and 2022, respectively. The $0.7 million change was due to higher revenues; offset in part by higher operating costs and expenses in the current quarter.

Net loss for the Synodex segment was $0.2 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively. The $0.6 million change was due to lower operating costs and expenses, offset in part by lower revenues in the current quarter.

Net income for the Agility segment was $0.1 million and a net loss of $2.2 million for the three months ended September 30, 2023 and 2022, respectively. The $2.3 million change was due to lower operating costs and expenses and higher revenues in the current quarter.

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 $9.5 million and $7.1 million for the three months ended September 30, 2023 and 2022, respectively. The $2.4 million increase in adjusted gross profit was due to higher gross profit and higher depreciation and amortization. Adjusted gross margin was 43% and 38% for the three months ended September 30, 2023 and 2022, respectively. The increase in adjusted gross margin as a percentage of revenues was due to higher gross profit and higher depreciation and amortization.

Adjusted gross profit for the DDS segment was $6.2 million and $5.0 million for the three months ended September 30, 2023 and 2022, respectively. The $1.2 million increase in adjusted gross profit for the DDS Segment was due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the DDS segment was 39% for each of the three-month periods ended September 30, 2023 and 2022, respectively.

Adjusted gross profit for the Synodex segment was $0.1 million and a loss of $0.3 million for the three months ended September 30, 2023 and 2022, respectively. The $0.4 million change in adjusted gross profit in the Synodex segment was due to higher gross profit. Adjusted gross margin for the Synodex segment was 9% and (14)% for the three months ended September 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment as a percentage of revenues was due to higher gross profit.

Adjusted gross profit for the Agility segment was $3.2 million and $2.3 million for the three months ended September 30, 2023 and 2022, respectively. The $0.9 million increase in adjusted gross profit for the Agility segment was due to higher gross profit and higher depreciation and amortization. Adjusted gross margin for the Agility segment was 72% and 60% for the three months ended September 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment as a percentage of revenues was due to higher gross profit and higher depreciation and amortization.

Adjusted EBITDA

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

Adjusted EBITDA was $3.2 million and a loss of $1.2 million for the three months ended September 30, 2023 and 2022, respectively. The $4.4 million change in Adjusted EBITDA was due to a lower net loss and higher depreciation and amortization, stock-based compensation, interest expense and tax provision.

Adjusted EBITDA for the DDS segment was $2.2 million and $0.9 million for the three months ended September 30, 2023 and 2022, respectively. The $1.3 million increase in Adjusted EBITDA in the DDS Segment was due to a lower net loss, higher interest expense, depreciation and amortization, tax provision and stock-based compensation.

Adjusted EBITDA for the Synodex segment was $0.1 million and a loss of $0.6 million for the three months ended September 30, 2023 and 2022, respectively. The $0.7 million change in Adjusted EBITDA in the Synodex segment was due to a lower net loss.

Adjusted EBITDA for the Agility segment was $0.9 million and a loss of $1.6 million for the three months ended September 30, 2023 and 2022, respectively. The $2.5 million change in Adjusted EBITDA in the Agility segment was due to a lower net loss and higher depreciation and amortization, and stock-based compensation.

Nine Months Ended September 30, 2023 and 2022

Revenues

Total revenues were $60.7 million and $59.6 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1.1 million or approximately 2%.

Revenues from the DDS segment were $42.0 million and $42.9 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $0.9 million or approximately 2%. The decrease was primarily attributable to lower revenue of $7.9 million from a large social media company that underwent a significant management change in the second half of 2022, offset in part by higher volume from one new and one existing customer.

Revenues from the Synodex segment were $5.7 million and $5.4 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $0.3 million or approximately 6%. The increase was primarily attributable to higher volume from an existing customer.

Revenues from the Agility segment were $13.0 million and $11.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1.7 million or approximately 15%. The increase was primarily attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform and newswire product.

Two customers in the DDS segment generated 10.2% and 10%, respectively, of the Company’s total revenues for the nine months ended September 30, 2023. Another customer in the DDS segment generated approximately 13% of the Company’s total revenues for the nine months ended September 30, 2022. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 42% and 37% of the Company’s total revenues for the nine months ended September 30, 2023 and 2022, respectively.

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 $39.5 million and $38.8 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $0.7 million or 2%. The increase in direct operating costs was primarily due to higher revenues from one new and one existing customer, offset in part by our continued cost optimization efforts aimed at improving operational efficiency. The net increase includes an unfavorable impact of exchange rate fluctuations of $1.7 million; higher depreciation and amortization of capitalized developed software of $0.6 million; higher recruitment costs of $0.6 million; higher content related costs of $0.3 million and an increase in other direct operating costs of $0.4 million. These non-labor cost increases were offset in part by a net reduction in direct and indirect labor related costs amounting to $2.9 million primarily on account of reductions in headcount, offset in part by salary increases and labor costs of new hires. Direct operating costs as a percentage of total revenues were 65% for each of the nine-month periods ended September 30, 2023 and 2022, respectively.

Direct operating costs for the DDS segment were approximately $27.6 million and $26.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1.3 million or 5%. The increase includes an unfavorable impact of exchange rate fluctuations of $1.7 million; higher recruitment costs of $0.6 million; higher depreciation and amortization of capitalized developed software of $0.3 million and an increase in other direct operating costs of $0.3 million. These non-labor cost increases were offset in part by a net reduction in direct and indirect labor related costs amounting to $1.6 million primarily on account of cost optimization efforts aimed at improving operational efficiency, offset in part by salary increases and labor costs of new hires. Direct operating costs for the DDS segment as percentage of DDS segment revenues were 66% and 61% for the nine months ended September 30, 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 higher direct operating costs and lower revenues.

Direct operating costs for the Synodex segment were $5.2 million and $6.2 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $1.0 million or 16%. The decrease in direct operating costs was primarily due to cost optimization efforts aimed at improving operational efficiency. The decrease includes lower direct labor costs of $1.1 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 91% and 115% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to lower direct operating costs and higher revenues.

Direct operating costs for the Agility segment were $6.7 million and $6.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $0.4 million or 6%. The increase in direct operating costs was primarily due to higher revenues offset by cost optimization efforts aimed at improving operational efficiency. The increase includes higher depreciation and amortization of capitalized developed software of $0.3 million and higher content related costs of $0.3 million, offset in part by a decrease in direct labor costs of $0.2 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 52% and 56% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in direct operating costs of the Agility segment as a percentage of Agility segment revenues was 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.

Gross profit was $21.1 million and $20.8 million for the nine months ended September 30, 2023 and 2022, respectively. The $0.3 million increase in gross profit was primarily due to higher revenues in the Synodex and Agility segments, offset in part by higher direct operating costs in the DDS and Agility segments. Gross margin was 35% for each of the nine-month periods ended September 30, 2023 and 2022, respectively.

Gross profit for the DDS segment was $14.3 million and $16.6 million for the nine months ended September 30, 2023 and 2022, respectively. The $2.3 million decrease in gross profit for the DDS segment was primarily due to higher direct operating costs and lower revenue. Gross margin for the DDS segment was 34% and 39% for the nine months ended September 30, 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 and lower revenues.

Gross profit for the Synodex segment was $0.5 million and a loss of $0.8 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.3 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 9% and (16)% for the nine months ended September 30, 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 segment was $6.3 million and $5.0 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.3 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 48% and 45% for the nine months ended September 30, 2023 and 2022. 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 payroll and related costs including commissions, bonuses, and stock-based compensation; marketing, advertising, trade conferences and related expenses; new services research and related software development expenses, software subscriptions, professional and consultant fees, provision for doubtful accounts and other administrative overhead expenses.

Selling and administrative expenses were $22.8 million and $29.6 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $6.8 million or 23%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $3.9 million primarily on account of headcount reduction, offset in part by salary increases, higher commissions and severance; lower recruitment and professional fees of $1.2 million; lower marketing related expenses of $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 $0.4 million. These lower selling and administrative expenses were offset in part by a higher provision for doubtful accounts of $0.3 million. Selling and administrative expenses as a percentage of total revenues were 38% and 50% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in selling and administrative expenses as a percentage of total revenues was primarily attributable to lower selling and administrative expenses in all segments and higher revenues in the Agility and Synodex segments.

Selling and administrative expenses for the DDS segment were $14.2 million and $15.6 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $1.4 million or 9%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $0.8 million primarily on account of headcount reductions and lower commissions; lower recruitment and professional fees of $0.5 million; and lower marketing related expenses of $0.5 million, offset in part by a higher provision for doubtful accounts of $0.1 million and an increase in other selling and administrative expenses of $0.3 million. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues was 34% and 36% for the nine months ended September 30, 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 lower selling and administrative expenses, offset in part by lower revenues.

Selling and administrative expenses for the Synodex segment were $0.5 million and $1.5 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $1.0 million or 67%. 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 professional fees of $0.5 million, lower payroll-related costs of $0.2 million and a decrease in other selling and administrative expenses of $0.3 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 9% and 28% for the nine months ended September 30, 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 and higher revenues.

Selling and administrative expenses for the Agility segment were $8.1 million and $12.5 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $4.4 million or 35%. The decrease in selling and administrative expenses was primarily due to the cost optimization efforts aimed at improving operational efficiency. The decrease includes lower labor and related expenses of $2.9 million primarily on account of headcount reductions; lower marketing related expenses of $0.7 million; lower professional fees of $0.2 million; a favorable impact of foreign exchange rate fluctuations of $0.2 million; lease termination expense of $0.2 million; and a decrease in other selling and administrative expenses of $0.4 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 62% and 111% for the nine months ended September 30, 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 and higher revenues.

Income Taxes

We recorded a provision for income taxes of $0.8 million and $1.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiaries, and a valuation allowance recorded on deferred taxes on these entities and tax effects of foreign operations, including foreign exchange gains and losses.

Net Loss

We incurred a net loss of $2.6 million and $10.0 million during the nine months ended September 30, 2023 and 2022, respectively. The $7.4 million change was a result of lower operating costs and expenses in all segments in the current nine-month period and higher revenues in the Synodex and Agility segments.

Net loss for the DDS segment was $0.8 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively. The change of $0.6 million was primarily attributable to lower revenues in the current nine-month period.

The Synodex segment was breakeven and had a net loss of $2.2 million for the nine months ended September 30, 2023 and 2022, respectively. The $2.2 million change was due to lower operating costs and expenses and higher revenues in the current nine-month period.

Net loss for the Agility segment was $1.8 million and $7.6 million for the nine months ended September 30, 2023 and 2022, respectively. The $5.8 million change was due to lower operating costs and expenses and higher revenues in the current nine-month period.

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 $25.1 million and $23.7 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.4 million increase in adjusted gross profit was due to a higher gross profit and higher depreciation and amortization, and non-recurring severance. Adjusted gross margin was 41% and 40% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the adjusted gross margin as a percentage of revenues was due to higher gross profit, higher depreciation and amortization, and non-recurring severance.

Adjusted gross profit for the DDS segment was $15.3 million and $17.2 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.9 million decrease in adjusted gross profit for the DDS Segment was due to lower gross profit, offset in part by higher depreciation and amortization. Adjusted gross margin for the DDS segment was 36% and 40% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the adjusted gross margin for the DDS segment as a percentage of revenues was due to lower gross profit, offset in part by higher depreciation and amortization.

Adjusted gross profit for the Synodex segment was $1.0 million and a loss of $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.4 million change in adjusted gross profit in the Synodex segment was due to higher gross profit. Adjusted gross margin for the Synodex segment was 17% and (7)% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Synodex segment as a percentage of revenues was due to higher gross profit.

Adjusted gross profit for the Agility segment was $8.8 million and $6.9 million for the nine months ended September 30, 2023 and 2022, respectively. The $1.9 million increase 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 Agility segment was 68% and 61% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the adjusted gross margin for the Agility segment as a percentage of revenues was due to higher gross profit, higher depreciation and amortization and non-recurring severance.

Adjusted EBITDA

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

Adjusted EBITDA was $5.6 million and a loss of $3.5 million for the nine months ended September 30, 2023 and 2022, respectively. The $9.1 million change in Adjusted EBITDA was due to a lower net loss, higher depreciation and amortization, higher stock-based compensation, non-recurring severance and interest expense, offset in part by lower provisions for income taxes.

Adjusted EBITDA for the DDS segment was $3.7 million and $3.4 million for the nine months ended September 30, 2023 and 2022, respectively. The $0.3 million increase in Adjusted EBITDA was due to higher stock-based compensation, depreciation and amortization and interest expense offset in part by lower net income in the DDS segment and lower tax provision.

Adjusted EBITDA for the Synodex segment was $0.6 million and a loss of $1.7 million for the nine months ended September 30, 2023 and 2022, respectively. The $2.3 million change in Adjusted EBITDA was due to a lower net loss in the Synodex segment and non-controlling interest.

Adjusted EBITDA for the Agility segment was $1.2 million and a loss of $5.2 million for the nine months ended September 30, 2023 and 2022, respectively. The $6.4 million change in Adjusted EBITDA was due to a lower net loss in the Agility segment, non-recurring severance, higher depreciation and amortization and offset in part by lower tax provision and stock-based compensation.

Liquidity and Capital Resources

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

On September 30, 2023, we had cash and cash equivalents of $14.8 million, of which $5.1 million was held by our foreign subsidiaries, and $9.7 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 September 30, 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 September 30, 2023, we had working capital of approximately $6.4 million, as compared to working capital of approximately $2.9 million as of December 31, 2022. The increase in working capital of $3.5 million is primarily due to proceeds from stock option exercises of $3.2 million and other net cash inflows of $0.3 million from growth in operations and the results of the cost optimization strategies implemented during the nine months ended September 30, 2023.

We did not have any material commitments for capital expenditures as of September 30, 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, 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 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 September 30, 2023, such borrowing base calculation equaled approximately $4.7 million. The Credit Agreement contains a financial covenant that will require 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”) plus 2.25%. We did not utilize the Revolving Credit Facility during the three months ended September 30, 2023 and through the date of filing of this Report.

Cash Flows

Net Cash Provided by (Used in) Operating Activities

Cash provided by our operating activities for the nine months ended September 30, 2023 was $5.8 million resulting from our net loss of $2.5 million, adjusted for non-cash expenses of $7.1 million and an increase in working capital of $1.2 million. Refer to the condensed consolidated statements of cash flows for further details.

Cash used by our operating activities for the nine months ended September 30, 2022 was $1.7 million resulting from our net loss of $10.0 million, adjusted for non-cash expenses of $6.1 million and a decrease in working capital of $2.2 million. Refer to the condensed consolidated statements of cash flows for further details.

Net Cash Used in Investing Activities

For the nine months ended September 30, 2023 and 2022, the net cash used in our investing activities was $3.8 million and $5.3 million, respectively. The total capital expenditures for the nine months ended September 30, 2023 were $4.3 million, offset in part by proceeds from maturity 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.

During the next 12 months, it is anticipated that capital expenditures for capitalized developed software and ongoing technology, equipment and infrastructure upgrades will approximate $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 nine months ended September 30, 2023 was $2.8 million primarily from proceeds of stock option exercises of $3.1 million, offset in part by payment of long-term obligations of $0.3 million.

Cash used in financing activities for the nine months ended September 30, 2022 was $0.2 million primarily for payments of long-term obligations of $0.5 million, offset in part by proceeds from stock option exercises of $0.3 million.

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.

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 September 30, 2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 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 nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

**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 factors in our Annual Report on Form 10-K entitled, “**We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.”, “Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.”, “Political uncertainty, political unrest, terrorism, and natural calamities in the Philippines, India, Sri Lanka and Israel could adversely affect business conditions in those countries, which in turn could disrupt our business and adversely impact our results of operations and financial condition.” **and “**We have no bank facilities or line of credit.”

We operate in highly competitive markets. While we invest in developing and pursuing new services, platforms and solutions, our profitability could be reduced if these services, platforms and solutions do not yield the profit margins we expect, or if the new offerings do not generate the planned revenues.

The markets for our services, platforms 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 customers who may attempt to duplicate our offerings using their own personnel.

We have made and continue to make significant investments towards building out new capabilities to pursue growth, including, for example, our investments in large language models. These investments increase our costs, and if these new 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 services, platforms and solutions, our revenues and results of operations could be adversely affected.

The international nature of our operations subjects us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth.

We do business on an international level, with a major portion of our operations carried on in the Philippines, India, Sri Lanka, Canada, the United Kingdom, Israel and Germany, while our headquarters are in the U.S., and our customers 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;
• 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 countries, which in turn could disrupt our business and adversely impact our results of operations and financial condition.

Our operations located in the Philippines, India, Sri Lanka and Israel are in countries that 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.

While the recent Hamas attack against Israel and the ensuing conflict has not to date negatively impacted our operations in 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 predict whether acts of international terrorism, war or other military actions involving the countries in which we do business will result in any long-term commercial disruptions or if such involvement or responses will have any long-term material adverse effect on our business, results of operations, or financial condition.

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.