Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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, financial condition, developmental program expansion and position in the generative AI services market. Words such as "project," "believe," "expect," "can," "continue," "could," "intend," "may," "should," "will," "anticipate," "indicate," "predict," "likely," "estimate," "plan," "potential," "possible," or the negatives thereof, and other similar expressions generally identify forward-looking statements.

These forward-looking statements are based on management's current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including, without limitation, impacts resulting from ongoing geopolitical conflicts; 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; the likelihood of continued development of the markets, particularly new and emerging markets, that our services support; the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for our services; continuing reliance on project-based work in the Digital Data Solutions ("DDS") segment and the primarily at-will nature of such contracts and the ability of these customers to reduce, delay or cancel projects; potential inability to replace projects that are completed, canceled or reduced; our DDS segment's revenue concentration in a limited number of customers; our dependency on content providers in our Agility segment; our ability to achieve revenue and growth targets; difficulty in integrating and deriving synergies from acquisitions, joint ventures 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 potential effects of U.S. global trading and monetary policy, including the interest rate policies of the Federal Reserve; 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 ("SEC").

Our actual results could differ materially from the results referred to in any 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 SEC on February 24, 2025 and in our other filings that we may make with the SEC.

In light of these risks and uncertainties, there can be no assurance that the results referred to in any 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 U.S. 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. "Financial Statements" 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 are 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 35+ 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 35+ years creating high-quality data for many of the world's most demanding information companies. Approximately nine 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 and machine learning ("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

For several of the world's large technology companies, we support their efforts at building generative AI foundation models. For these companies, we provide or are poised to provide a range of scaled data solutions and services. Our scaled data solutions include providing instruction data sets for fine-tuning large language models ("LLMs") to understand prompts, to accept instruction, to converse, to apparently reason, and to perform the myriad of incredible feats that many of us have now experienced. We also provide reinforcement learning and reward modeling, services which are critical to provide the guardrails against toxic, bias and harmful responses, and model evaluation services.

For social media companies, financial services companies, and many others, we collect or create training data, annotate training data, and train AI algorithms for working with images, text, video, audio, code and sensor data.

We utilize a variety of leading third-party tools, proprietary tools and customer tools. For text annotation, we use our proprietary data annotation platform that incorporates AI to reduce costs 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 of in the course of our 35+ year history of creating high-quality data.

In addition, because collecting real-world data is often impracticable (due to data privacy regulations or the rarity of cohorts and outliers), we create high-quality synthetic data that maintains all of the statistical properties of real-world data, using a combination of domain specialists and machine technologies that leverage LLMs.

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.

For our customers that provide products and solutions that require intensive text data processing and analytics, 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, 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, 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.

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, 2024.

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 included within direct operating cost.

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-month periods ended September 30, 2025 and 2024 (in thousands).

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Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and its subsidiaries in accordance with U.S. GAAP before net interest expense (income), 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 for the three and nine-month periods ended September 30, 2025 and 2024 (in thousands).

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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, 2025 and 2024

Revenues

Total revenues were $62.6 million and $52.2 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $10.4 million or approximately 20%.

Revenues from the DDS segment were $54.8 million and $44.7 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $10.1 million or approximately 23%. The increase was primarily attributable to higher volume from existing customers.

Revenues from the Synodex segment were $1.7 million and $1.9 million for the three months ended September 30, 2025 and 2024, respectively, a decrease of $0.2 million or 11%. The decrease was primarily attributable to termination of a contract with one customer.

Revenues from the Agility segment were $6.1 million and $5.6 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $0.5 million or approximately 9%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform.

One customer in the DDS segment generated approximately 56% and 59% of the Company's total revenues for the three months ended September 30, 2025 and 2024, respectively. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 16% and 17% of the Company's total revenues for the three months ended September 30, 2025 and 2024, 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, recruitment costs and other direct expenses that are incurred in providing services to our customers.

Direct operating costs were $37.0 million and $30.9 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $6.1 million or 20%. The cost increase was primarily due to increased headcount to support higher volumes from existing customers. The increase in direct operating costs includes $4.8 million from direct and indirect labor related costs primarily on account of new hires, higher incentives and salary increases; higher recruitment fees of $0.6 million; higher cloud service subscriptions of $0.6 million, higher content costs of $0.3 million, higher depreciation and amortization of capitalized developed software of $0.2 million; and an increase in other direct operating costs of $0.3 million; offset in part by a favorableimpact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs as a percentage of total revenues were 59% for each of the three-month periods ended September 30, 2025 and 2024.

Direct operating costs for the DDS segment were $32.6 million and $27.0 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $5.6 million or 21%. The cost increase was primarily due to increased headcount to support higher volumes from existing customers. The increase in direct operating costs includes $4.8 million from direct and indirect labor related costs primarily on account of new hires, higher incentives and salary increases; higher recruitment fees of $0.6 million,higher cloud service subscriptions of $0.5 million,higher depreciation and amortization of $0.1 million; and an increase in other direct operating costs of $0.3 million; offset in part by a favorableimpact of foreign exchange rate fluctuations of $0.7 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 59% and 60% for the three months ended September 30, 2025 and 2024, respectively. The decrease in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to higher revenues, offset in part by higher direct operating costs.

Direct operating costs for the Synodex segment were $1.5 million for each of the three-month periods ended September 30, 2025 and 2024. Direct operating costs for the Synodex segment as a percentage of Synodex segment revenues were 88% and 79% for the three months ended September 30, 2025 and 2024, respectively. The increase in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to lower revenues due to the termination of a contract with one customer.

Direct operating costs for the Agility segment were $2.9 million and $2.4 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $0.5 million or 21%. The increase in direct operating costs was a resultof higher content costs of $0.3 million, higher depreciation and amortization of capitalized developed software of $0.1 million and an increase in other direct operating costs of $0.1 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 48% and 43% for the three months ended September 30, 2025 and 2024. The increase in direct operating costs of the Agility segment as a percentage of Agility segment revenues was due to higher direct operating costs offset by higher revenues.

Gross Profit and Gross Margin

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

Gross profit was $25.5 million and $21.3 million for the three months ended September 30, 2025 and 2024, respectively. The $4.2 million increase in gross profit was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in the DDS and Agility segments and lower revenues in the Synodex segment. Gross margin was 41% for each of the three-month periods ended September 30, 2025 and 2024.

Gross profit for the DDS segment was $22.2 million and $17.6 million for the three months ended September 30, 2025 and 2024, respectively. The $4.6 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 40% and 39% for the three months ended September 30, 2025 and 2024, respectively. The increase 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 $0.1 million and $0.5 million for the three months ended September 30, 2025 and 2024, respectively. The $0.4 million decrease in gross profit for the Synodex segment was due to lower revenues. Gross margin for the Synodex segment was 7% and 25% for the three months ended September 30, 2025 and 2024, respectively. The decrease in gross margin for the Synodex segment as a percentage of revenues was primarily due to lower revenues.

Gross profit for the Agility segment was $3.2 million for each of the three-month periods ended September 30, 2025 and 2024, respectively. Gross margin for the Agility segment was 53% and 58% for the three months ended September 30, 2025 and 2024. The decrease in gross margin for the Agility segment as a percentage of revenues was primarily due to higher direct operating costs, offset by higher revenues.

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 and cloud service subscriptions; professional and consultant fees; provision for credit losses; and other administrative overhead expenses.

Selling and administrative expenses were $13.7 million and $9.9 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $3.8 million or 38%. The increase in selling and administrative expenses was primarily due to higher expenses associated with the increase in revenues. The increase in selling and administrative expenses includes higher selling and administrative payroll and related expenses of $4.0 million, primarily on account of new hires, salary increases, incentives and bonuses; higher software subscriptions of $0.4 million, and an unfavorableimpact of foreign exchange rate fluctuations of $0.2 million; offset in part bylower professional fees of $0.5 million, lower expenses for marketing-related activities of $0.1 million and a decrease in other selling and administrative expenses of $0.2 million. Selling and administrative expenses as a percentage of total revenues were 22% and 19% for the three months ended September 30, 2025 and 2024, respectively. The increase in selling and administrative expenses as a percentage of total revenues was primarily attributable to higher selling and administrative expenses in all segments and lower revenues in the Synodex segment, offset by higher revenues in the DDS and Agility segments.

Selling and administrative expenses for the DDS segment were $10.2 million and $7.0 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $3.2 million or 46%. The increase in selling and administrative expenses was primarily due to higher expenses associated with the increase in revenues. The increase in selling and administrative expenses includes higher selling and administrative payroll and related expenses of $3.4 million, primarily on account of new hires, salary increases, incentives and bonuses; higher software subscriptions of $0.3 million and an increase in other selling and administrative expenses of $0.1 million; offset in part bylower professional fees of $0.6 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 19% and 16% for the three months ended September 30, 2025 and 2024, respectively. The increase in selling and administrative expenses of the DDS segment as a percentage of DDS segment revenues was primarily attributable to higher selling and administrative expenses, offset by higher revenues.

Selling and administrative expenses for the Synodex segment were $0.2 million and $0.1 million for the three months ended September 30, 2025 and 2024, an increase of $0.1 million or 100%. The increase in selling and administrative expenses is due to higher selling and administrative payroll and related expenses of $0.1 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 12% and 5% for the three months ended September 30, 2025 and 2024. The increase in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable to higher selling and administrative expenses and lower revenues.

Selling and administrative expenses for the Agility segment were $3.3 million and $2.8 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $0.5 million or 18%. The increase in selling and administrative expenses includes selling and administrative labor and related expenses of $0.5 million, primarily on account of new hires, salary increases, incentives and bonuses; an unfavorableimpact of foreign exchange rate fluctuations of $0.2 million; higher professional fees of $0.1 million and higher software subscriptions of $0.1 million; offset by lower expenses for marketing-related activities of $0.1 million and a decrease in other selling and administrative expenses of $0.3 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 54% and 50% for the three months ended September 30, 2025 and 2024, respectively. The increase in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to higher selling and administrative expenses, offset by higher revenues.

Income Taxes

We recorded a provision for income taxes of $3.8 million and a benefit from income taxes of $5.9 million for the three months ended September 30, 2025 and 2024, respectively. The change is due to the release of the valuation allowance in the prior period; and the effect of the following in the current period: higher Federal and State income tax expense on U.S. operations, deemed interest provision, the effect of unrecognized tax benefits, in accordance with ASC 740, the effect of stock-based compensation, and the tax impact of IRS section 162(m) adjustments; partially offset by the favorable effect of withholding taxes.

The provision for the current quarter primarily reflects Federal and State income tax expense on U.S. operations, deemed interest provision, the effect of stock-based compensation, the tax impact of IRS section 162(m) adjustments, partially offset by the favorable impact of withholding taxes.

Although the Company generated taxable income in the United States during the period, the related current tax liability was partially offset by the utilization of deferred tax assets arising from the net operating loss carryforwards ("NOLCOs").

Net Income

Net income was $8.3 million and $17.4 million for the three months ended September 30, 2025 and 2024, respectively. The $9.1 million decrease was due to a higher income tax provision, higher direct operating costs in the DDS and Agility segments, higher selling and administrative expenses in all segments and lower revenues in the Synodex segment; offset in part by higher revenues in the DDS and Agility segments and higher interest income in the current quarter.

Net income for the DDS segment was $8.4 million and $16.5 million for the three months ended September 30, 2025 and 2024, respectively. The $8.1 million decrease was due to a higher income tax provision, higher direct operating costs and higher selling and administrative expenses, offset in part by higher revenues and higher interest income in the current quarter.

The Synodex segment was breakeven and had a net income of $0.4 million for the three months ended September 30, 2025 and 2024, respectively. The $0.4 million decrease is due to lower revenues, and higher selling and administrative expenses in the current quarter.

The Agility segment had a net loss of $0.1 million and a net income of $0.5 million for the three months ended September 30, 2025 and 2024, respectively. The $0.6 million change was due to higher selling and administrative expenses and higher direct operating costs, offset in part by higher revenues in the current quarter.

Earnings per share

Basic and diluted earnings per share were $0.26 and $0.24 compared to $0.60 and $0.51 for the three months ended September 30, 2025 and 2024, respectively. A per share decrease of $0.34 and $0.27, respectively. The decrease in earnings per share was primarily due to the tax benefit recognized in the prior year arising from the utilization of net operating loss carryforwards, which did not recur in the current 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 $27.7 million and $22.9 million for the three months ended September 30, 2025 and 2024, respectively. The $4.8 million increase was due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in the DDS and Agility segments and lower revenues in the Synodex segment. Adjusted gross margin was 44% for each of the three - month periods ended September 30, 2025 and 2024, respectively.

Adjusted gross profit for the DDS segment was $23.4 million and $18.3 million for the three months ended September 30, 2025 and 2024, respectively. The $5.1 million increase in adjusted gross profit for the DDS segment was due to higher revenues, offset in part by higher direct operating costs. Adjusted gross margin for the DDS segment was 43% and 41% for the three months ended September 30, 2025 and 2024, respectively. The increase in the adjusted 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.

Adjusted gross profit for the Synodex segment was $0.2 million and $0.6 million for the three months ended September 30, 2025 and 2024, respectively. The $0.4 million decrease in adjusted gross profit in the Synodex segment was due to lower revenues. Adjusted gross margin for the Synodex segment was 14% and 31% for the three months ended September 30, 2025 and 2024, respectively. The decrease in the adjusted gross margin for the Synodex segment as a percentage of revenues was primarily due to lower revenues.

Adjusted gross profit for the Agility segment was $4.1 million and $4.0 million for the three months ended September 30, 2025 and 2024, respectively. The $0.1 million increase in adjusted gross profit for the Agility segment was primarily due to higher revenues, offset in part by higher direct operating costs. Adjusted gross margin for the Agility segment was 66% and 71% for the three months ended September 30, 2025 and 2024, respectively. The decrease in the adjusted gross margin for the Agility segment as a percentage of revenues was primarily due to higher direct operating costs, offset by higher revenues.

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 $16.2 million and $13.9 million for the three months ended September 30, 2025 and 2024, respectively. The $2.3 million increase in Adjusted EBITDA was due to a higher income tax provision, higher stock-based compensation and higher depreciation and amortization, offset in part by lower net income and higher interest income in the current quarter.

Adjusted EBITDA for the DDS segment was $15.2 million and $12.1 million for the three months ended September 30, 2025 and 2024, respectively. The $3.1 million increase in Adjusted EBITDA in the DDS Segment was due to a higher income tax provision, higher stock-based compensation, and higher depreciation and amortization, offset in part by lower net income and higher interest income in the current quarter.

Adjusted EBITDA for the Synodex segment was $0.1 million and $0.5 million for the three months ended September 30, 2025 and 2024. The $0.4 million decrease in Adjusted EBITDA in the Synodex segment was due to lower net income in the current quarter.

Adjusted EBITDA for the Agility segment was $0.9 million and $1.2 million for the three months ended September 30, 2025 and 2024, respectively. The $0.3 million decrease in Adjusted EBITDA in the Agility segment was due to lower net income, offset in part by higher stock-based compensation and higher depreciation and amortization in the current quarter.

Nine Months Ended September 30, 2025 and 2024

Revenues

Total revenues were $179.3 million and $111.3 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $68.0 million or approximately 61%.

Revenues from the DDS segment were $156.2 million and $89.8 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $66.4 million or approximately 74%. The increase was primarily attributable to higher volume from existing customers.

Revenues from the Synodex segment were $5.7 million and $5.8 million for the nine months ended September 30, 2025 and 2024, respectively, a decrease of $0.1 million or 2%. The decrease was primarily attributable to termination of a contract with one customer.

Revenues from the Agility segment were $17.4 million and $15.7 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $1.7 million or approximately 11%. The increase was principally attributable to higher volumes from subscriptions to our Agility AI-enabled industry platform.

One customer in the DDS segment generated approximately 58% and 44% of the Company's total revenues for the nine months ended September 30, 2025 and 2024, respectively. No other customer accounted for 10% or more of total revenues during these periods. Further, revenues from non-U.S. customers accounted for 16% and 24% of the Company's total revenues for the nine months ended September 30, 2025 and 2024, 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, recruitment costs and other direct expenses that are incurred in providing services to our customers.

Direct operating costs were $107.5 million and $71.0 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $36.5 million or 51%. The cost increase was primarily due to increased headcount to support higher volumes from existing customers. The increase in direct operating costs includes $34.2 million from direct and indirect labor related costs primarily on account of new hires, higher incentives and salary increases;higher cloud service subscriptions of $1.5 million, higher content costs of $0.7 million; higher depreciation and amortization of capitalized developed software of $0.7 million; an increase in travel and related costs of $0.2 million and an increase in other direct operating costs of $0.4 million; offset in part by lower recruitment fees of $1.2 million. Direct operating costs as a percentage of total revenues were 60% and 64% for the nine months ended September 30, 2025 and 2024, 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 all segments.

Direct operating costs for the DDS segment were $94.9 million and $59.6 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $35.3 million or 59%. The cost increase was primarily due to increased headcount to support higher volumes from existing customers. The increase in direct operating costs includes $34.0 million from direct and indirect labor related costs primarily on account of new hires, higher incentives and salary increases;higher cloud service subscriptions of $1.3 million,higher depreciation and amortization of $0.8 million; an increase in travel and related costs of $0.2 million and an increase in other direct operating costs of $0.3 million; offset in part by lower recruitment fees of $1.3 million. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 61% and 66% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in direct operating costs of the DDS segment as a percentage of DDS segment revenues was primarily attributable to higher revenues, offset in part by higher direct operating costs.

Direct operating costs for the Synodex segment were $4.6 million and $4.5 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $0.1 million or 2%. The increase in direct operating costs is due to higher indirect labor related costs of $0.1 million;higher cloud service subscriptions of $0.2 million; offset in part by lower depreciation and amortization of $0.1 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 81% and 78% for the nine months ended September 30, 2025 and 2024, respectively. The increase in direct operating costs of the Synodex segment as a percentage of Synodex segment revenues was due to higher direct operating costs and lower revenues.

Direct operating costs for the Agility segment were $8.0 million and $6.9 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $1.1 million or 16%. The increase in direct operating costs was a resultof higher direct labor costs of $0.1 million, higher content costs of $0.7 million, higher recruitment fees of $0.1 million and an increase in other direct operating costs of $0.2 million. Direct operating costs for the Agility segment as a percentage of Agility segment revenues were 46% and 44% for the nine months ended September 30, 2025 and 2024. The increase in direct operating costs of the Agility segment as a percentage of Agility segment revenues was due to higher direct operating costs offset by higher revenues.

Gross Profit and Gross Margin

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

Gross profit was $71.8 million and $40.3 million for the nine months ended September 30, 2025 and 2024, respectively. The $31.5 million increase in gross profit was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in all segments. Gross margin was 40% and 36% for the nine months ended September 30, 2025 and 2024, respectively. The increase in gross margin was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in all segments.

Gross profit for the DDS segment was $61.3 million and $30.2 million for the nine months ended September 30, 2025 and 2024, respectively. The $31.1 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 39% and 34% for the nine months ended September 30, 2025 and 2024, respectively. The increase 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 $1.1 million and $1.3 million for the nine months ended September 30, 2025 and 2024, respectively. The $0.2 million decrease in gross profit for the Synodex segment was primarily due to lower revenues and higher direct operating cost. Gross margin for the Synodex segment was 19% and 23% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in gross margin for the Synodex segment as a percentage of revenues was primarily due to lower revenues and higher direct operating costs.

Gross profit for the Agility segment was $9.4 million and $8.7 million for the nine months ended September 30, 2025 and 2024, respectively. The $0.7 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 54% and 56% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in gross margin for the Agility segment as a percentage of revenues was primarily due to higher direct operating costs offset by higher revenues.

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 and cloud service subscriptions; professional and consultant fees; provision for credit losses; and other administrative overhead expenses.

Selling and administrative expenses were $42.8 million and $27.2 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $15.6 million or 57%. The increase in selling and administrative expenses was primarily due to higher expenses associated with the increase in revenues. The increase in selling and administrative expenses includes higher selling and administrative payroll and related expenses of $11.1 million, primarily on account of new hires, salary increases, incentives and bonuses;higher professional fees of $3.3 million, higher expenses for marketing-related activities of $0.7 million, and higher software subscriptions of $0.6 million; offset in part by a decrease in other selling and administrative expenses of $0.1 million. Selling and administrative expenses as a percentage of total revenues were 24% for each of the nine-month periods ended September 30, 2025 and 2024.

Selling and administrative expenses for the DDS segment were $32.3 million and $19.0 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $13.3 million or 70%. The increase in selling and administrative expenses includes higher selling and administrative payroll and related expenses of $9.2 million, primarily on account of new hires, salary increases, incentives and bonuses;higher professional fees of $2.9 million, higher expenses for marketing-related activities of $0.6 million and higher software subscriptions of $0.4 million, and an increase in other selling and administrative expenses of $0.2 million. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues were 21% for each of the nine-month periods ended September 30, 2025 and 2024.

Selling and administrative expenses for the Synodex segment were $0.6 million and $0.3 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $0.3 million or 100%. The increase in selling and administrative expenses includes selling and administrative labor and related expenses of $0.1 million, primarily on account of incentives and bonuses and an increase in other selling and administrative expenses of $0.2 million. Selling and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 11% and 5% for the nine months ended September 30, 2025 and 2024, respectively. The increase in selling and administrative expenses of the Synodex segment as a percentage of Synodex segment revenues was primarily attributable due to higher selling and administrative expenses and lower revenues.

Selling and administrative expenses for the Agility segment were $9.9 million and $7.9 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of $2.0 million or 25%. The increase in selling and administrative expenses includes higher selling and administrative payroll and related expenses of $1.8 million, primarily on account of new hires, salary increases, incentives and bonuses; higher professional fees of $0.4 million; higher software subscriptions of $0.2 million; higher expenses for marketing-related activities of $0.1 million; offset in part by a decrease in other selling and administrative expenses of $0.5 million. Selling and administrative expenses for the Agility segment as a percentage of Agility segment revenues were 57% and 50% for the nine months ended September 30, 2025 and 2024, respectively. The increase in selling and administrative expenses of the Agility segment as a percentage of Agility segment revenues was primarily due to higher selling and administrative expenses, offset in part by higher revenues.

Income Taxes

We recorded a provision for income taxes of $6.7 million and a benefit from income taxes of $5.2 million for the nine months ended September 30, 2025 and 2024, respectively. The change in the income tax provision is mainly due to the release of the valuation allowance in the prior period; and the effect of the following in the current period, higher Federal and State income tax expense on U.S. operations, the tax impact of IRS section 162(m) adjustments, and deemed interest provision; partially offset by the favorable effect of stock-based compensation.

The provision for the current period primarily reflects Federal and State income tax expense on U.S. operations, the tax impact of IRS section 162(m) adjustments, deemed interest provision, and income tax expense attributable to the Company's subsidiaries in foreign jurisdictions in accordance with applicable local tax regulations. The tax provision was partially offset by the favorable effect of stock-based compensation, the favorable impact of withholding taxes, and the release of valuation allowances on deferred tax assets of one of the Company's Canadian and the Company's German subsidiary, resulting from improved expectations of future taxable income in those jurisdictions.

Although the Company generated taxable income in the United States during the period, the related current tax liability was partially offset by the utilization of deferred tax assets arising from the net operating loss carryforwards ("NOLCOs").

Net Income

Net income was $23.3 million and $18.4 million for the nine months ended September 30, 2025 and 2024, respectively. The $4.9 million increase was a result of higher revenues in the DDS and Agility segments and higher interest income, offset in part by higher direct operating costs, higher selling and administrative expenses in all segments, and an increase in the income tax provision in the current period.

Net income for the DDS segment was $23.4 million and $16.5 million for the nine months ended September 30, 2025 and 2024, respectively. The $6.9 million increase was primarily attributable to higher revenues and higher interest income, offset in part by higher direct operating costs, higher selling and administrative expenses, and an increase in the income tax provision in the current period.

Net income for the Synodex segment was $0.5 million and $1.0 million for the nine months ended September 30, 2025 and 2024. The $0.5 million decrease was due to lower revenues, higher direct operating costs and higher selling and administrative expenses in the current period.

The Agility segment had a net loss of $0.6 million and a net income of $0.9 million for the nine months ended September 30, 2025 and 2024, respectively. The $1.5 million change was due to higher selling and administrative expenses, and higher direct operating costs, offset in part by higher revenues in the current period.

Earnings per share

Basic and diluted earnings per share were $0.74 and $0.67 compared to $0.64 and $0.55 for the nine months ended September 30, 2025 and 2024, respectively. A per share increase of $0.10 and $0.12, respectively. Despite the prior year tax benefit related to the utilization of net operating loss carryforwards, earnings per share increased for the nine-month period due to improved profitability and operating leverage, reflecting higher revenues and cost efficiencies across the business.

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 $78.0 million and $44.7 million for the nine months ended September 30, 2025 and 2024, respectively. The $33.3 million increase in adjusted gross profit was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in all segments. Adjusted gross margin was 43% and 40% for the nine months ended September 30, 2025 and 2024, respectively. The increase in adjusted gross margin was primarily due to higher revenues in the DDS and Agility segments, offset in part by higher direct operating costs in all segments.

Adjusted gross profit for the DDS segment was $64.8 million and $31.9 million for the nine months ended September 30, 2025 and 2024, respectively. The $32.9 million increase in adjusted gross profit for the DDS segment was due to higher revenues, offset in part by higher direct operating costs. Adjusted gross margin for the DDS segment was 41% and 35% for the nine months ended September 30, 2025 and 2024, respectively. The increase in the adjusted 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.

Adjusted gross profit for the Synodex segment was $1.4 million and $1.7 million for the nine months ended September 30, 2025 and 2024, respectively. The $0.3 million decrease in adjusted gross profit in the Synodex segment was due to lower revenues and higher direct operating costs. Adjusted gross margin for the Synodex segment was 25% and 30% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in the adjusted gross margin for the Synodex segment as a percentage of revenues was primarily due to lower revenues and higher direct operating costs.

Adjusted gross profit for the Agility segment was $11.8 million and $11.1 million for the nine months ended September 30, 2025 and 2024, respectively. The $0.7 million increase in adjusted gross profit for the Agility segment was due to higher revenues, offset in part by higher direct operating costs. Adjusted gross margin for the Agility segment was 68% and 71% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in the adjusted gross margin for the Agility segment as a percentage of revenues was primarily due to higher direct operating costs offset by higher revenues.

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 $42.2 million and $20.4 million for the nine months ended September 30, 2025 and 2024, respectively. The $21.8 million increase in Adjusted EBITDA was due to higher net income, a higher income tax provision, higher stock-based compensation, and higher depreciation and amortization, offset in part by higher interest income in the current period.

Adjusted EBITDA for the DDS segment was $39.0 million and $15.5 million for the nine months ended September 30, 2025 and 2024, respectively. The $23.5 million increase in Adjusted EBITDA in the DDS Segment was due to higher net income, a higher income tax provision, higher stock-based compensation, and higher depreciation and amortization, offset in part by higher interest income in the current period.

Adjusted EBITDA for the Synodex segment was $1.0 million and $1.5 million for the nine months ended September 30, 2025 and 2024, respectively. The $0.5 million decrease in Adjusted EBITDA in the Synodex segment was due to lower net income and lower depreciation and amortization in the current period.

Adjusted EBITDA for the Agility segment was $2.2 million and $3.4 million for the nine months ended September 30, 2025 and 2024, respectively. The $1.2 million decrease in Adjusted EBITDA in the Agility segment was due to lower net income, offset in part by higher stock-based compensation and a higher income tax provision in the current period.

Liquidity and Capital Resources

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

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On September 30, 2025, we had cash and cash equivalents of $73.9 million, of which $20.7 million was held by our foreign subsidiaries, and $53.2 million was held in the United States.

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, 2025, we had working capital of approximately $75.3 million, as compared to working capital of approximately $41.5 million as of December 31, 2024. The increase in working capital is due to increased collections from higher revenues and proceeds from stock option exercises in the period, offset by capital expenditures during the period to build future capacity.

We did not have any material commitments for capital expenditures as of September 30, 2025.

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.

We maintain a revolving line of credit facility. See Note 13, Line of Credit, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated by reference herein.

On August 8, 2024, we filed a Registration Statement on Form S-3 (Registration No. 333-281379) (the "Form S-3"), as amended on September 16, 2024, and declared effective on October 10, 2024, with the SEC, which includes a base prospectus that allows us to offer and sell, from time to time, in one or more offerings, common stock, preferred stock, debt securities, warrants or units up to an aggregate public offering price of $50.0 million. The Form S-3 is intended to preserve our flexibility to raise capital from time to time, if and when needed.

Cash Flows

Net Cash Provided by Operating Activities

Cash provided by our operating activities for the nine months ended September 30, 2025 was $33.9 million resulting from net income of $23.3 million, adjusted for non-cash expenses of $17.4 million and a decrease in working capital of $6.8 million. Refer to the Condensed Consolidated Statements of Cash Flows for further details.

Cash provided by our operating activities for the nine months ended September 30, 2024 was $17.7 million resulting from net income of $18.4 million, adjusted for non-cash expenses of $1.9 million and a decrease in working capital of $2.6 million. Refer to the Condensed Consolidated Statements of Cash Flows for further details.

Cash provided by operating activities increased to $ 33.9 million from $17.7 million in the prior-year period, primarily due to higher non-cash reconciling items, including a higher deferred tax provision and increased share-based compensation expense. These non-cash items were offset in part by a net use of cash in working capital, driven by change in receivables.

Net Cash Used in Investing Activities

Cash used in our investing activities was $8.3 million and $5.5 million for the nine-month periods ended September 30, 2025 and 2024, respectively. These capital expenditures were principally for the purchase of technology equipment including servers, network infrastructure and workstations, and expenditures for capitalized developed software. Capital expenditures for the nine months ended September 30, 2025 amounting to $8.3 million consisted of $5.6 million for the DDS segment, $1.8 million for the Agility segment and $0.9 million for the Synodex segment.

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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 $11.0 million, a portion of which we may finance.

Net Cash Provided by Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2025 was $1.1 million primarily from proceeds of stock option exercises of $1.5 million, offset in part by payment of long-term obligations of $0.4 million.

Cash provided by financing activities for the nine months ended September 30, 2024 was $0.2 million primarily from proceeds of stock option exercises of $0.8 million, offset in part by payment of long-term obligations of $0.5 million and withholding taxes on net settlement of restricted stock awards of $0.1 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 credit losses 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.

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