Fellow Stockholders:
In 2018, we successfully executed the turnaround plan we laid out in late 2017, delivering $6.7
million of Adjusted EBITDA1, a significant improvement from 2017’s Adjusted EBITDA loss. In
fact, our 2018 Adjusted EBITDA was the highest it has been, as a percentage of revenue, since
2014. We accomplished this, in part, through technology innovation using deep learning, a
branch of AI, which enabled us to reduce human processing costs as well as related physical
plant and data center costs.
Our business today is, in several important respects, stronger than it was in 2014. I’ll start with
the obvious improvements. In 2018, just six percent of our revenues came from our largest
project compared to 11% in 2014. In 2018, 17% of our revenue came from SaaS subscription
business, but in 2014 we had no SaaS revenue. In 2018, we classified 88% of our revenue as
recurring versus just 75% in 2014.
There’s also a more subtle change for the better, which at this stage may be easy to miss. We
emerged from 2018 with expertise that resonates particularly well in today’s world: AI-
enabled data processing and human/machine hybridization. As we turn our focus from cost
rationalization to growth, which is exactly what we’re doing in 2019, we think this new
expertise will prove invaluable.
The AI technologies which we honed and refined internally in 2018 to drive our turnaround we
believe can now be the basis of new market offerings. And thanks to our 2018 turnaround, we
now have the capability of making the required investments. This year, we intend to invest
approximately $3 million in product management, product marketing, and technology
engineering so that we emerge from 2019 with a fresh product/service architecture that
broadens our addressable market and aligns with macro trends in digital data and technology.
Toward this end, we recently hired Rahul Singhal as our Chief Product Officer, a new role for
our company. Rahul “gets” data and AI, having led product initiatives for IBM’s Watson
Platform, where he grew usage of the Watson platform by 100-fold and launched 15 new
services.
Growth will also be our focus in 2019 for our two venture businesses, Agility and Synodex. For
2019, we are anticipating accelerating top-line growth in both of these businesses. Our venture
1 Adjusted EBITDA is a non-GAAP measure. For a discussion on Adjusted EBITDA and a reconciliation of
Adjusted EBITDA to U.S. GAAP see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Adjusted EBITDA” included in this Annual Report.
businesses leverage our core capabilities to provide specific industry solutions. Agility delivers
a SaaS platform and managed service for PR and communications professionals to target news,
information, and content to journalists and social media influencers and to monitor and
analyze coverage across traditional and social media sources. Synodex delivers a SaaS platform
and managed service for digital transformation of medical data.
In 2018, Agility’s annual recurring revenue, or ARR, grew year-over-year from $9.8 million to
$11 million, or 12%. In 2019, we anticipate accelerating this growth, and we think we’re in a
good position to do so. Our 2018 product engineering efforts have yielded some impressive
results. For example, we were the first in our competitive set to harness AI for monitoring
image-based news. In its Winter 2019 report, G2Crowd ranked Agility as an industry leader in
Media and Influencer Targeting Software, as #1 in terms of ease-of-use, and as the #1 easiest-
to-do-business-with provider.
As a result, we’re anticipating continued strengthening of customer revenue retention, which is
so critical to a SaaS business. We’re also anticipating gaining momentum in direct new business
development and channel sales. It is worth mentioning that, in line with investor expectations
of SaaS businesses, the benefits of scale in the Agility platform business model are significant,
with incremental margins north of 80%.
Revenues for our Synodex business grew by 11% in 2018 as compared to 2017, and we think
we can accelerate this, as well, in 2019 based on a combination of new business that we have
already secured and high-quality, late-stage prospects. In addition to serving the life insurance
industry, we are expecting to open at least one new addressable market early this year.
Information about our directors can be found under the heading “Proposal 1. Election of
Directors” in the accompanying Proxy Statement and information about our officers can be
found under the heading “Officers” in the accompanying Proxy Statement.
We look forward to sharing with you the progress we make through the year at executing our
strategy, and we thank you for your commitment to Innodata’s future and success.
Chairman, President & CEO
April 15, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
Commission file number 001-35774
INNODATA INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
55 Challenger Road
Ridgefield Park, New Jersey
(Address of principal executive offices)
(201) 371-8000
(Registrant's telephone number)
13-3475943
(I.R.S. Employer Identification No.)
07660
(Zip Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class
Common Stock $.01 par value
Preferred Stock Purchase Right
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Emerging growth company o
Non-accelerated filer þ Smaller reporting company þ
Accelerated filer o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing
price reported on The Nasdaq Stock Market on June 30, 2018) was $24,699,712.
The number of outstanding shares of the registrant’s common stock, $.01 par value, as of March 21, 2019 was 25,952,454.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for the 2019 Annual Meeting of Stockholders are incorporated by
reference in Items 10,11,12,13 and 14 of Part III of this Form 10-K.
INNODATA INC.
Form 10-K
For the Year Ended December 31, 2018
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Report of Management on Internal Control over Financial Reporting
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Page
1
12
23
24
24
24
25
25
25
41
42
42
42
42
43
44
44
44
45
45
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
46
46
Part IV
Signatures
47
2
PART I
Disclosures in this Form 10-K contain certain forward-looking statements, including without
limitation, statements concerning our operations, economic performance, and financial condition. These
forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words “project,” “head start,” "believe," "expect," “should,”
"anticipate," "indicate," "point to," “forecast,” “likely,” “goals,” “optimistic,” “foster,” “estimate,” “plan”
and other similar expressions generally identify forward-looking statements, which speak only as of their
dates.
These forward-looking statements are based largely on our current expectations and are subject to a
number of risks and uncertainties, including without limitation, that contracts may be terminated by clients;
projected or committed volumes of work may not materialize; the primarily at-will nature of contracts with
our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects;
continuing Digital Data Solutions segment revenue concentration in a limited number of clients; continuing
Digital Data Solutions segment reliance on project-based work; 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;
changes in our business or growth strategy; depressed market conditions; changes in external market factors;
the ability and willingness of our clients and prospective clients to execute business plans which give rise to
requirements for our services; changes in our business or growth strategy; the emergence of new or growing
competitors; various other competitive and technological factors; 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 the forward-looking
statements. In light of these risks and uncertainties, there can be no assurance that the results referred to in
the forward-looking statements contained in this Form 10-K will occur.
We undertake no obligation to update or review any guidance or other forward-looking information,
whether as a result of new information, future developments or otherwise.
Item 1. Business.
Business Overview
Innodata Inc. (NASDAQ: INOD) is a global services and technology company. We combine human
expertise with deep learning technologies to power leading information products and enterprise artificial
intelligence (AI)/digital transformation.
The Company, founded in 1988 and headquartered in northern New Jersey, features a 3,500-strong
global delivery and technology team spanning ten offices globally and a research and technology incubator,
Innodata Labs, which focuses on applied machine learning and emerging artificial intelligence.
Our core services are (i) data acquisition, transformation, and enrichment at scale; (ii) digital
operations management and analytics; and (iii) content applications. We report our core business as the
Digital Data Solutions (DDS) segment.
We also have venture businesses that leverage our core capabilities to provide specific industry
solutions. Our Synodex venture business delivers a SaaS platform and managed services for digital
transformation of medical data. Our Agility PR Solutions (Agility) venture business delivers a SaaS platform
3
and managed service for delivering news, information, and content to targeted journalists and influencers as
well as monitoring and analyzing coverage across traditional and social media sources. Each venture business
is reported as a separate segment.
Our Core Business (Digital Data Solutions (DDS) Segment)
We specialize in combining deep neural networks and human expertise in multiple domains
(including health, science, and law) to make “unstructured information” (sometimes referred to as “content”)
useable. For business information companies, “useable” means that the content can be sold via subscription to
a digital product. For enterprises, “useable” means that the content can drive digital process transformation
and AI. We work with all classes of data, including sensitive and protected data.
We also develop digital products for business information companies and digital systems which
replace legacy systems and processes.
In 2018, we continued to implement a strategy we initiated in 2017 focused on technology
differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner,
more cost-effective operations.
Our Approach: Deep Neural Networks and Experts-in-the-loop
Finding the right approach for mixing machines and experts-in-the-loop for each customer
requirement is one of our core competencies. On the human side, we have over three thousand staff with deep
domain expertise in legal, tax, regulatory, scientific, technical, and health-related content. Many hold
advanced degrees. They work from our global operations centers in North and South America, Europe, Israel,
India, Sri Lanka and the Philippines. Our operations centers in Asia are ISO 27001 certified. On the
technology side, we use deep learning, a sophisticated machine learning technique which is a branch of
artificial intelligence that has enjoyed great success in real-world applications.
In our approach, content is fed first into our deep learning machines that automate much of the work,
but distinguish between what they can automatically process and what requires human intervention. Work that
requires humans is “pushed” to human experts. Once human experts perform tasks, their output is then fed
back to the machines, which, as a result, become “smarter” and achieve over time progressively greater levels
of automation. (See “Our Technology and Infrastructure”, below.)
Our Customers
Our customers include leading digital businesses in banking and financial services, technology, and
digital retailing and four of the largest information industry companies in the world, spanning financial, legal,
healthcare and scientific vertical markets.1 Our customers often seek to use digital data in combination with
AI to support their businesses or to digitally transform operations. Our information industry customers sell
subscriptions to data products that require enhanced digital data.
1 According to Outsell Inc., business information is a $1.7 trillion industry consisting of more than 7,000 publishers, information
providers and software service firms worldwide. Many of our clients specialize in the scientific, technical and health (STH) area
(estimated revenues of $14.6 billion) and the legal and regulatory (L&R) area (estimated revenues of $24.3 billion). “Information
Industry Outlook 2019 – Trust is the New Algorithm.” (October 3, 2018).
4
Our Services
(i) Data Acquisition, Transformation, and Enrichment at Scale
In order to use content in an information product or in AI, there are often significant obstacles that
must be overcome: the content may be contained in multiple websites; it may be in disparate formats; and it
may lack the necessary semantics and metadata to make it product- or AI-ready. Innodata overcomes these
obstacles by combining advanced technology and human subject matter experts, enabling us to produce highly
refined product- and AI-ready content efficiently and at scale.
Acquiring unstructured data often involves monitoring thousands of sources such as websites in real-
time for new or changing content and then automatically extracting the changed content. One of the
challenges with web data monitoring and extraction is that the HTML code underlying web pages often
changes, causing programs and scripts to break. We overcome this by using enterprise-class tools for content
change detection and extraction. These tools use both machine learning-based visual data abstraction
combined with traditional programmatic approaches. With visual abstraction, the technology knows what the
content “looks like” and recognizes when a data element moves from one spot on a Web page to another.
Digital data transformation can refer to a large number of very specific tasks necessary to create well-
structured, valid XML, such as text zoning, editing, format tagging, format conversion, extraction, cross-
reference capture, and linking.
Digital data enrichment often includes structural tagging as well as semantic enrichment such as entity
tagging and normalization. Data enrichment also includes text categorization - classifying content to systems
that organize knowledge such as ontologies and knowledge graphs. This kind of enrichment enables powerful
information retrieval and discovery and provides hooks for integration and interoperability.
(ii) Digital Operations Management and Analytics
We provide digital operations management and analytics for an increasing diversity of complex
functions. At present, these include IP rights management, contract management, customer relations, data
processing, regulatory reporting, publishing workflow management, publisher relationship management, and
transaction management. Our services draw on a combination of industry and functional expertise from our
thousands of global delivery resources, many with advanced degrees, augmented by sophisticated machine
learning and robotics process automation (RPA) technology.
Our digital operations management solutions often leverage our core competency in augmenting
human expert effort with advanced technology and configuring the technology to continually improve as a
result of expert feedback. In this way, we provide high-quality, cost-effective solutions for our customers that
become increasingly automated, resulting in further cost and improvements in both productivity and response
time.
Many of the operations we manage are mission-critical for our customers (as opposed to back-office),
are unique, and have multiple contingencies and potential points of failure. To manage this complexity, we
have developed methodologies and best practices around process management and risk mitigation, and we
work with clients at a strategic business and technology level.
Examples of recent deployments:
• Digitally transforming and managing a complex operation for rights and royalty management
for a leading provider of print and interactive online properties.
• Migrating a large-scale scanning and metadata capture center owned by a nonprofit digital
library to one of the Company’s Philippine facilities, assuming responsibility for managing
5
complex logistics, technology, and productivity.
• Provisioning the entire back-end production capabilities for an online learning platform
providing over 24 million course-specific study resources.
• Providing customer support and AI model training for a Chinese multinational conglomerate
specializing in e-commerce.
(iii) Content Applications
We develop and maintain applications used in conjunction with product- or AI-ready content we
create. Our content applications address knowledge representation, search/discovery, and digital
transformation of customer workflows. Our scope of services spans full-stack development, knowledge
engineering, and integration support.
Examples of recent engagements:
• As part of a digital transformation initiative for a national standards body, developing a
content workflow management solution using MarkLogic and RSuite that automated content
ingestion and managed multi-channel delivery.
• Building a content workflow management solution and automated distribution system to
manage multi-channel delivery for the principal professional association for scholars of
language and literature with 25,000 members in 100 countries.
• Developing a regulatory content management solution that includes business activity
monitoring and reporting for one of the “Big Four” accounting and professional services
firms.
Our Technology and Infrastructure
Our deep learning technologies are built on frameworks such as TensorFlow and Torch that layer
algorithms to create artificial neural networks that continuously learn on the job, constantly improving the
quality and accuracy of results.
Our content processing application infrastructure consists of three integrated tiers. The first tier is an
orchestration layer featuring a console we use to configure our workflow engines. Each workflow is
customized around the content acquisition, transformation, and enrichment tasks required to transform a
specific input into a specific output. This is where we oversee and manage AI, setting our accuracy thresholds
and quality assurance parameters to decide when cognitive tasks that have been performed by machines are
sent for human review.
The second tier of our data processing application infrastructure is a microservices layer of deep
learning networks which perform discrete tasks automatically. Microservices are invoked by workflows via
RESTful APIs. Our deep neural networks are trained to understand domain-specific terms and meaning and
can be deployed to enforce privacy and maintain customer-proprietary learning. We have built domain-
specific and task-specific microservices that perform deep sequence labelling, text categorization, and
computer vision. The technology works by observing text patterns using algorithms and assigning labels
based on these observed values.
For each cognitive decision, the machines provide a result together with a confidence score. A high
confidence score means the machine is confident that it has performed accurately and the content is ready to
be deployed in an information product or for AI. A low confidence score means expert review is required.
Our third layer is human experts-in-the-loop. When an expert review is required, the human experts
use tools we refer to as “workbenches” to apply their expertise to a task. The workbenches are integrated with
the microservice endpoints in one of two ways. In one deployment, only low-confidence data is sent to
6
workbenches for human review. In an alternative deployment, we send both high-confidence and low-
confidence data back to the workbench, displaying the confidence level for each decision taken by the
machine. In both of these deployments, human-reviewed work is retroactively fed back into the deep neural
network, enabling it to get smarter. The result is continuous, predicable improvement and progressively
greater levels of automation.
Our data storage and application hosting platform has been built utilizing an innovative enterprise
infrastructure platform enabling robust performance scaling, strong security, high availability, and advanced
business continuity. We support a range of strategies to suit our customers’ needs for data security,
compliance, scalability and reliability. We can host data and applications in our own data centers at our
production facilities or we can utilize third-party cloud services which provide the benefit of “infinite
scalability” of hardware resources. When we are processing sensitive information for banks and insurance
companies, we utilize U.S.-based, co-located data centers in combination with advanced data encryption (both
at rest and in motion to the AES 256 or similar standard) and desktop virtualization technologies, ensuring
that data never leaves secured environments in the U.S. We employ a range of security features including
monitored firewalls and intrusion detection devices. We can deploy on-premises, as well, and our machine
learning microservices can be consumed via API.
We comply with the requirements of the United States Health Insurance Portability and
Accountability Act of 1996 as amended (HIPAA) (including by the Health Information Technology for
Economic and Clinical Health Data (HITECH)) and the United Kingdom’s Data Protection Act 2018, as
applicable. Innodata Inc. is certified to the EU-U.S. Privacy Shield framework, which certification includes
Synodex and Agility as covered entities.
Our DDS segment includes our Innodata docGenix, LLC subsidiary (docGenix). As of December 31,
2018, Innodata Inc. owned 94% of docGenix.
Our Venture Businesses
Our venture businesses provide specific industry solutions. We have chosen to invest in these
businesses because
(typically data
acquisition/transformation/enrichment at scale, content applications, and global workforce deployment), have
attractive business models such as SaaS (software-as-a-service), and expand our addressable market. Each
venture business is reported as its own business segment.
leverage one or more of our core capabilities
they
Synodex Segment
Synodex (www.synodex.com) enables clients in the insurance and healthcare sectors to transform
medical records into useable digital data and to apply technologies to the digital data to augment decision
support.
The main focus of the Synodex business is the extraction and classification of data from unstructured
medical records in an innovative way to provide improved data service capabilities for insurance
underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support
services. Synodex has developed and deployed its APS.Extract® product for specific use with life insurance
underwriting and claims.
Our Synodex segment operates through our Innodata Synodex, LLC subsidiary. As of December 31,
2018, Innodata Inc. owned 92.5% of Innodata Synodex, LLC, an increase of 1.5% from December 31, 2017.
At the end of 2018, Synodex had 11 clients, including RGA Reinsurance Company and John Hancock
Insurance. RGA Reinsurance Company is the principal operating subsidiary of Reinsurance Group of
7
America, Incorporated (NYSE: RGA), one of the top 10 largest providers of life reinsurance in the world
according to A.M. Best. John Hancock Insurance is the insurance operating unit of John Hancock Financial (a
division of Manulife) and one of the largest life insurers in the United States. Synodex is engaged in business
discussions with other reinsurance companies and insurance carriers that have expressed interest in utilizing
its services.
Agility Segment
Agility PR Solutions (www.agilitypr.com) provides tools and related professional services that enable
public relations (PR) and communications professionals to discover influencers, amplify messages, monitor
coverage, and measure the impact of campaigns. Agility has been ranked as the #1 easiest to use media
database and as a leader in media and influencer targeting and media monitoring, out-performing significantly
larger, more established competitors.2 The media intelligence solutions market is estimated to be $3.2 billion
and growing 7% annually.3 The market is highly fragmented, with only a limited number of providers of
integrated solutions such as Agility.
Agility’s software-as-a-service (SaaS) tools include:
• An influencer targeting solution to help PR professionals identify influencers. The Agility media
database includes detailed contact information for over 840,000 unique influencers globally including
journalists, outlets, and bloggers. Live social media streams to allow users to research influencers by
tracking activity and keywords across multiple social media channels.
• An outreach and content amplification solution enabling PR professionals to distribute news,
information, and content to targeted influencers.
Integrated newswire services.
•
• A media monitoring solution to help PR professionals track what is being said about their brand,
industry or competitors and track engagement. Users can monitor and report on coverage across print,
broadcast, online and social media sources, including AI-powered image monitoring. The self-serve
monitoring tool enables users to create alerts, compile and share coverage briefings and clipbooks.
• A media analysis solution to help PR professionals analyze coverage, determine PR campaign reach
and effectiveness, and create and distribute reports.
Agility’s professional services include:
• Media monitoring and PR measurement services delivered by a team of media analysts who use our
SaaS monitoring solution to pull coverage and curate daily news briefs. This powerful media
monitoring solution is for clients with complex monitoring or reporting requirements.
• Advanced PR reporting and measurement services including custom reports, PR measurement and
social media / influencer analysis.
To provision our services, we maintain a big data engine that stores and indexes media content. We index
approximately two billion media items each year.
Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a
PR awards program that recognizes outstanding performance among PR and communications professionals
and agencies, are properties of Agility.
2 G2 Crowd
3 Burton-Taylor
8
Our Opportunity
Digital data has gained an increasing role across enterprises that seek to use AI to drive analytics and
enhance operational excellence. At the same time, information companies are seeking to shift from products
that are exclusively discovery-based products to products that provide predictive and prescriptive value. To
accomplish these objectives, businesses often seek the ability to aggregate, integrate, transform and enhance
data on a massive scale.
At the same time, digital businesses are pushing the boundaries of how technology can improve
process and operational efficiencies. To accomplish these objectives, businesses often seek the ability to
manage complex operations leveraging the benefits of sophisticated technologies.
We believe that we are well-poised to benefit from these global trends, enabling us to enhance our
existing services as our customers’ needs evolve and to increase our addressable market opportunity by
developing new solution offerings and expanding into adjacent markets.
Clients
Two clients in our DDS segment each generated more than 10% of our total revenues in the 2018 and
2017 fiscal years. In 2018, revenues from Wolters Kluwer affiliated companies (the “WK Clients”) were
approximately $10.6 million or 19% of total revenues, and revenues from Reed Elsevier affiliated companies
(the “RE Clients”) were approximately $6.4 million, or 11% of total revenues. No other client generated more
than 10% of our total revenues in 2018. These two clients together generated approximately 30% of our total
revenues in each of the fiscal years ended December 31, 2018 and 2017.
We have long-standing relationships with many of our clients, and we have provided services to the
two clients mentioned in the preceding paragraph for over ten years. Our track record of delivering high-
quality services helps us to solidify client relationships. Many of our clients are recurring clients, meaning that
they have continued to provide additional projects to us after our initial engagement with them.
Our contractual arrangements with the RE Clients during 2018 consisted of three master services
agreements (“MSAs”) and separately agreed to statements of work (“SOWs”) for specific services. Two of the
MSAs have indefinite terms and the third MSA has a term that ends on October 31, 2019. RE Clients may
terminate the MSAs on notice periods ranging from zero to six months, and they may terminate certain
individual SOWs on notice periods of up to 90 days. They may also terminate certain of the MSAs and SOWs
on notice periods of three months or less for “cause” and for insolvency related events, and on changes of
control, force majeure and the imposition of certain price increases by the Company that are not acceptable to
them. We may terminate two of the MSAs on notice periods of 180 days, and we may also terminate certain
MSAs and SOWs for “cause”, insolvency related events affecting the RE Clients, and other defined events.
The MSAs contain confidentiality, limitation of liability, indemnification and other standard provisions.
Our contractual arrangements with the WK Clients during calendar year 2018 consisted of four MSAs
and separately agreed to SOWs for specific services. Two MSAs have indefinite terms, one MSA continues in
effect until the completion of all services performed under the MSA, and the fourth MSA has a term that ends
on the later of March 2, 2020 or the expiration date of all SOWs issued under the MSA. WK Clients may
terminate certain MSAs on notice periods of 30 days, and they may terminate certain individual SOWs on
notice periods ranging from 10 days to six months. WK Clients may also terminate certain of the MSAs and
SOWs on notice periods of 60 days or less for “cause” and for insolvency related events, and on changes of
control, force majeure and the imposition of certain price increases by the Company that are not acceptable to
them. We may terminate certain of the MSAs on notice periods of 30 days, and we may also terminate certain
MSAs and SOWs for “cause”, insolvency related events affecting the WK Clients, and other defined events.
The MSAs contain confidentiality, limitation of liability, indemnification and other standard provisions.
9
Our agreements with our other clients are in many cases terminable on 30 to 90 days' notice. A
substantial portion of the services we provide to our clients is subject to their requirements.
Competitive Strengths
Our expertise in digital data. We are primarily focused on helping clients across multiple vertical
industries by supplying enriched digital data at a lower cost which is either incorporated in clients’
information products or used for AI.
Our focus on applied machine learning and emerging artificial intelligence (AI). Our Innodata Labs
develops machine learning and deep learning-based technologies that we utilize in our operations and with our
customers. Our engineering and IT teams create workbench tools that integrate with our machine learning and
deep learning microservices to enable human review where necessary.
Our focus on human expertise. We have a large global staff in multiple domains (including health,
science, and law). We integrate human experts with our machine learning and deep learning-based
technologies to create superior outcomes for our clients that require enriched content that is product- and AI-
ready.
Our focus on quality. We have achieved a reputation with our clients for consistent high-quality. We
maintain independent quality assurance capabilities in all geographies where we have delivery centers. Our
quality assurance teams in Asia are compliant and certified to the ISO 9001:2008 quality management system
standards.
Our global delivery models. We have operations in eight countries in North America, Europe and
Asia. We provide services to our clients through a comprehensive global delivery model that integrates both
local and global resources to obtain the best economic results.
Our proven track record and reputation. By consistently providing high-quality services, we have
achieved a track record of client successes. This track record is reflected in our reputation as a leading service
provider within the media, publishing and information services sector. Our reputation and brand connote an
assurance of expertise, quality execution and risk mitigation.
Our long-term relationships with clients. We have long-term relationships with many of our clients,
who frequently retain us for additional projects after a successful initial engagement. We believe there are
significant opportunities for additional growth with our existing clients, and we seek to expand these
relationships by increasing the depth and breadth of the services we provide. This strategy allows us to use our
in-depth client-specific knowledge to provide more fully integrated services and develop closer relationships
with those clients.
Our ability to scale. We have demonstrated the ability to expand our teams and facilities to meet the
needs of our clients. By virtue of the significant numbers of professional staff working on projects, we are
able to build teams for new engagements quickly. We have also demonstrated the ability to hire and train staff
quickly in order to service diverse and often large-scale needs of our clients.
Our internal infrastructure. We own and operate some of the most advanced content delivery centers
in the world, which are linked by multi-redundant data connections. Our Wide Area Network – along with our
Local Area Networks, Storage Area Networks and data centers – is configured with industry standard
redundancy, often with more than one backup to help ensure 24x7 availability. Our infrastructure is built to
accommodate advanced tools, processes and technologies that support our content and technical experts. We
encrypt all individual protected health information, both at rest and in motion, to the AES 256 or similar
standard, and we employ a range of security features including managed firewalls and intrusion services.
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Sales and Marketing
For our DDS and Synodex segments we market and sell our services directly through our professional
staff, senior management and direct sales personnel operating primarily from various locations in the U.S.,
and for our Agility segment we market and sell our services primarily from our offices in Canada and the
United Kingdom and through our personnel in the U.S. In addition, we are increasingly developing and
expanding our use of strategic partnerships and channel relationships for the establishment and development
of new and existing customers. Our corporate headquarters is located at Ridgefield Park, New Jersey, just
outside New York City. During 2018, we had four executive-level business development and marketing
professionals and approximately 55 sales and marketing personnel. We also deploy solutions architects,
technical support experts and consultants who support the development of new clients and new client
engagements. These resources work within teams (both permanent and ad hoc) that provide support to clients.
Our marketing department and sales professionals work together to generate leads. Our sales
professionals identify and qualify prospects, securing direct personal access to decision makers at existing and
prospective clients. They facilitate interactions between client personnel and our service teams to define ways
in which we can assist clients with their goals. For each prospective client engagement, we assemble a team of
our senior employees drawn from various disciplines within our Company. The team members assume
assigned roles in a formalized process, using their combined knowledge and experience to understand the
client’s goals and collaborate with the client on a solution.
Our marketing organization is responsible for developing and increasing the visibility and awareness
of our brand and our service offerings, defining and communicating our value proposition, generating
qualified, early-stage leads and furnishing effective sales support tools.
As part of our marketing strategy we partner with media organizations to build awareness, establish a
reputation as an industry thought leader, and generate leads. Media partners include trade associations and
publications, trade show producers and consulting organizations. These partnerships are particularly valuable
in enterprise industries as we build our presence among digital content leaders and decision makers.
Primary marketing outreach activities include content marketing, event marketing (including
exhibiting at trade shows, conferences and seminars), direct and database marketing, public and media
relations (including speaking engagements), and web marketing (including integrated marketing campaigns,
search engine optimization, search engine marketing and the maintenance and continued development of
external websites).
Sales activities include lead generation, nurturing leads, engaging in discussions with prospective
customers to understand their needs, demonstrating our products, designing solutions, responding to requests
for proposals, and managing account and client relationships and activities.
Personnel from our solutions analysis group, our client services group and our engineering services
group closely support our direct sales effort. These individuals assist the sales force in understanding the
technical needs of clients and providing responses to these needs, including demonstrations, prototypes,
pricing quotations and time estimates. In addition, account managers from our customer service group support
our direct sales effort by providing ongoing project-level support to our clients.
Competition
Our Digital Data Solutions segment operates in a highly competitive, fragmented and intense market.
Major competitors in data services include Apex CoVantage, Aptara, Cenveo, Infosys, HCL Technologies,
Macmillan India, SPI Technologies, JSI S.A.S. Groupe Jouve and Thomson Digital. Major competitors in
operations management and analytics include Cognizant Technology Solutions, ExlService Holdings, Inc.,
Genpact Limited, Infosys, and Tata Consultancy Services.
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We compete in this market by offering high-quality services and competitive pricing that leverage our
technical skills, IT infrastructure, offshore model and economies of scale. Our competitive advantages are
especially attractive to clients for undertakings that are technically challenging, are sizable in scope or scale,
are continuing, or that require a highly fail-safe environment with technology redundancy.
The Synodex segment competes in the insurance data analysis industry with an initial focus on
applying innovative technology to speed accurate decision making and to improve productivity in the
processing of medical files for the life insurance industry. Major competitors are Risk Righter, EMSI,
Parameds, and other BPO companies all of whom are large firms with established client bases. We also
compete with in-house personnel at existing or prospective clients who may attempt to duplicate our services
in-house or use alternative approaches to fulfill their needs.
For our Agility segment, our primary competitors are companies such as Meltwater, Cision, Kantar,
Infomart, Nasdaq, Intelligent I.Q., Trendkite and Custom Scoop, several of which are large firms with
established customer bases, as well as PR firms that provide media monitoring and analysis services and
journalist and influencer databases. Our competitors also include social media listening companies and start-
ups offering platforms to amplify messages by targeting social media influencers.
Locations
We are headquartered in Ridgefield Park, New Jersey, just outside New York City. Our Agility
business is headquartered in Ottawa, Canada and we have an additional location in London, the United
Kingdom. We have ten delivery centers in the Philippines, India, Sri Lanka, Canada, Germany, the United
Kingdom and Israel.
Employees
As of December 31, 2018, we employed approximately 147 persons in the United States, Canada and
the United Kingdom, and over 3,000 persons in ten global delivery centers in the Philippines, India, Sri Lanka,
Canada, Germany, the United Kingdom and Israel. As of December 31, 2018, approximately 212 of our
employees were dedicated to the Synodex segment, and approximately 261 of our employees were dedicated to
the Agility segment. Most of our employees have graduated from at least a two-year college program. Many of
our employees hold advanced degrees in law, business, technology, medicine and social sciences. No employees
are currently represented by a labor union, and we believe that our relations with our employees are satisfactory.
Corporate Information
Our principal executive offices are located at 55 Challenger Road, Ridgefield Park, New Jersey 07660,
and our telephone number is (201) 371-8000. Our website is www.innodata.com; information contained on our
website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. There
we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we
electronically file that material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC
reports can be obtained through the Investor Relations section of our website or from the Securities and
Exchange Commission at www.sec.gov.
Item 1A. Risk Factors.
We have historically relied on a very limited number of clients that have accounted for a significant
portion of our revenues, and our results of operations could be adversely affected if we were to lose one or
more of these significant clients.
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We have historically relied on a very limited number of clients that have accounted for a significant
portion of our revenues. Two clients in our DDS segment generated approximately 30% of our total revenues in
each of the fiscal years ended December 31, 2018 and 2017, respectively. No other client accounted for 10% or
more of total revenues during these periods. Further, in the years ended December 31, 2018 and 2017, revenues
from non-US clients accounted for 56% and 51%, respectively, of our revenues. We may lose any of these
clients, or our other major clients, as a result of our failure to meet or satisfy our client’s requirements, the
completion or termination of a project or engagement, or the client’s selection of another service provider.
In addition, the volume of work performed for our major clients may vary from year to year, and
services they require from us may change from year to year. They may also request that we modify certain
key terms of our agreements with them as a condition of continuing to do business with us. If the volume of
work performed for our major clients varies, if the services they require from us change, or if they require
price concessions, our revenues and results of operations could be adversely affected, and we may incur a loss
from operations. If certain key terms of our agreements with our major clients are modified, our revenues and
results of operations may be adversely affected. Our services are typically subject to client requirements, and
in many cases are terminable upon 30 to 90 days’ notice.
We have no bank facilities or line of credit.
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 the next 12 months. However, we have no
bank facilities or lines of credit, and reductions in our cash and cash equivalents from operating losses, capital
expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the
Company. See “Management Discussion and Analysis – Liquidity and Capital Resources” for additional
information.
Our common stock may become subject to delisting from The Nasdaq Stock Market.
Nasdaq may under Nasdaq Listing Rule 5810 delist the Company’s common stock if the closing bid
price for its common stock is less than $1.00 per share for 30 consecutive business days and the Company
does not thereafter cure all listing deficiencies during Nasdaq-designated compliance periods.
A portion of our services is provided on a non-recurring basis for specific projects, and our inability to
replace large projects when they are completed or otherwise terminated has adversely affected, and could
in the future adversely affect, our revenues and results of operations.
We provide a portion of our services for specific projects that generate revenues that terminate on
completion of a defined task. While we seek, wherever possible, on completion or termination of large projects,
to counterbalance periodic declines in revenues with new arrangements to provide services to the same client or
others, our inability to obtain sufficient new projects to counterbalance any decreases in such work may
adversely affect our future revenues and results of operations.
A portion of our revenue is generated from projects which we characterize as recurring in nature.
Projects that we characterize as recurring are nevertheless subject to termination.
Our operating performance is materially dependent on the continuation of these projects. However, we
are exposed to risks where these projects could be terminated by our clients and we may not be able to replace
these terminated projects with new recurring projects with similar profitability or clients may ask for a price
reduction which could adversely affect our revenue and results of operations.
Our solutions for the Agility segment are sold pursuant to subscription agreements, and if subscription
clients elect either not to renew these agreements, or to renew these agreements for less expensive
services, our revenues and results of operations will be adversely affected.
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Our Agility segment derives its revenues primarily from subscription arrangements. Our clients may
choose not to renew subscription agreements when they expire or may renew them at lower prices or for a
significantly narrower scope of work. If large numbers of existing subscription clients do not renew these
agreements or renew these agreements on terms less favorable to us, and if we cannot replace or supplement
those non-renewals with new subscription agreements generating the same or greater level of revenue, our
revenues and results of operations will be adversely affected.
New acquisitions, joint ventures or strategic investments or partnerships could harm our operating
results.
We may pursue acquisitions, joint ventures or engage in strategic investments or partnerships to grow
and enhance our capabilities. We cannot assure that we will successfully consummate any acquisitions or joint
ventures, or profit by strategic investments, or achieve desired financial and operating results. Further, such
activities involve a number of risks and challenges, including proper evaluation, diversion of management’s
attention and proper integration with our current business. Accordingly, we might fail to realize the expected
benefits or strategic objectives of any such venture we undertake. If we are unable to complete the kind of
acquisitions for which we plan, we may not be able to achieve our planned rates of growth, profitability or
competitive position in specific markets or services.
A large portion of our accounts receivable is payable by a limited number of clients; the inability of any of
these clients to pay its accounts receivable would adversely affect our results of operations.
Several significant clients account for a large percentage of our accounts receivable. If any of these
clients were unable, or refused, for any reason, to pay our accounts receivable, our financial condition and results
of operations would be adversely affected. As of December 31, 2018, 48% or $5.1 million, of our accounts
receivable was due from three clients. See “Management Discussion and Analysis – Liquidity and Capital
Resources.”
In addition, we evaluate the financial condition of our clients and usually bill and collect on relatively
short cycles. We maintain specific allowances against doubtful receivables. Actual losses on client balances
could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances.
There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic
conditions could also result in financial difficulties, including limited access to the credit markets, insolvency
or bankruptcy, for our clients, and, as a result, could cause clients to delay payments to us, request
modifications to their payment arrangements that could increase our receivables balance, or default on their
payment obligations to us. If we are unable to collect timely from our clients, our cash flows could be
adversely affected.
Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult
and could negatively affect our stock price.
We have experienced, and expect to continue to experience, significant fluctuations in our quarterly
revenues and results of operations. During the past eight quarters, our net income ranged from a profit of
approximately $693,000 in the third quarter of 2018 to a loss of approximately $2.1 million in the fourth quarter
of 2017.
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 or on terms that are
as attractive to us as the project that is being replaced. These and other factors may contribute to fluctuations in
our results of operations from quarter to quarter.
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A high percentage of our operating expenses, particularly personnel and rent, are relatively fixed in
advance of any particular quarter. As a result, unanticipated variations in the number and timing of our projects,
or in employee wage levels and utilization rates, may cause us to significantly underutilize our production
capacity and employees, resulting in significant variations in our operating results in any particular quarter, and
have resulted in losses.
The economic environment and pricing pressures could negatively impact our revenues and operating
results.
Due to the intense competition involved in outsourcing and information technology services, we
generally face pricing pressures from our clients. Our ability to maintain or increase pricing is restricted as
clients generally expect to receive volume discounts or special pricing incentives as we do more business with
them; moreover, our large clients may exercise pressure for discounts outside of agreed terms.
Our profitability could suffer if we are not able to maintain pricing on our existing projects and win
new projects at appropriate margins.
Our profit margin, and therefore our profitability, is dependent on the rates we are able to recover for
our services. If we are not able to maintain pricing on our existing services and win new projects at profitable
margins, or if we underestimate the costs or complexities of new projects and incur losses, our profitability
could suffer. The rates we are able to recover for our services are affected by a number of factors, including
competition, volume fluctuations, productivity of employees and processes, the value our client derives from
our services and general economic and political conditions.
If our pricing structures do not accurately anticipate the cost and complexity of performing our work,
then our contracts could be unprofitable.
We provide services either on a time-and-materials basis or on a fixed-price basis. Our pricing is
highly dependent on our internal forecasts and predictions about our projects, which might be based on
limited data and could turn out to be inaccurate. If we do not accurately estimate the costs and timing for
completing projects, our contracts could prove unprofitable for us or yield lower profit margins than
anticipated.
We may not be able to obtain price increases that are necessary to offset the effect of wage inflation and
other government mandated cost increases.
We have experienced wage inflation and other government mandated cost increases in the Asian
countries where we have the majority of our operations. In addition, we may experience adverse fluctuations
in foreign currency exchange rates. These global events have put pressure on our profitability and our
margins. Although we have tried to partially offset wage increases, foreign currency fluctuations and other
such increases through price increases and improving our efficiency, we cannot ensure that we will be able to
continue to do so in the future, which would negatively impact our results of operations.
If our clients are not satisfied with our services, they may terminate our contracts with them or our
services, which could have an adverse impact on our business.
Our business model depends in large part on our ability to attract additional work from our base of
existing clients. Our business model also depends on relationships our account teams develop with our clients
so that we can understand our clients’ needs and deliver solutions and services that are tailored to those needs.
If a client is not satisfied with the quality of work performed by us, or with the type of services or solutions
delivered, then we could incur additional costs to address the situation, the profitability of that work might be
impaired, and the client’s dissatisfaction with our services could damage our ability to obtain additional work
from that client. In particular, clients that are not satisfied might seek to terminate existing contracts, which
would mean that we could incur costs for the services performed with no associated revenue upon termination
of a contract. This could also direct future business to our competitors. In addition, negative publicity related
15
to our client services or relationships, regardless of its accuracy, may further damage our business by affecting
our ability to compete for new contracts with current and prospective clients.
Our new clients may sunset their products because of lack of sufficient revenues or declining revenues,
and this may result in termination of our work for these clients.
As we obtain new opportunities and win new business, our clients may not generate the level of
revenues that we initially anticipated at the time of signing a contract with them, or our clients may experience
declining revenues with their existing products. This could be due to various reasons beyond our control, and
it could lead to termination of projects or contracts. As we normally invest in people or technology and incur
other costs in anticipation of revenues, any such deviation from our expected plan would impact our margins
and earnings.
Our business will suffer if we fail to develop new services and enhance our existing services in order to
keep pace with the rapidly evolving technological environment or provide new service offerings, which
may not succeed.
The information technology and consulting services industries are characterized by rapid
technological change, evolving industry standards, changing client preferences, new product and service
introductions and the emergence of new vendors with lean cost and flexible cost models. Our future success
will depend on our ability to develop solutions that keep pace with changes in the markets in which we
provide services. We cannot guarantee that we will be successful in developing new services, addressing
evolving technologies on a timely or cost-effective basis or, if these services are developed, that we will be
successful in the marketplace. We also cannot guarantee that we will be able to compete effectively with new
vendors offering lean cost and flexible cost models, or that products, services or technologies developed by
others will not render our services non-competitive or obsolete. Our failure to address these developments
could have a material adverse effect on our business, results of operations and financial condition.
We invest in developing and pursuing new service offerings from time to time. Our profitability could
be reduced if these services do not yield the profit margins we expect, or if the new service offerings do
not generate the planned revenues.
We have made and continue to make significant investments towards building-out new capabilities to
pursue growth. These investments increase our costs, and if these services 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.
We depend on third-party technology in the provision of our services.
We rely upon certain software that we license from third parties, including software integrated with
our internally developed software used in the provision of our services. These third-party software licenses
may not continue to be available to us on commercially reasonable or competitive terms, if at all. The loss of,
or inability to maintain or obtain any of these software licenses, could result in delays in the provision of our
services until we develop, identify, license and integrate equivalent software. Any delay in the provision of
our services could damage our business and adversely affect our results of operations. In addition, our
Company utilizes third party data centers to serve our clients and generate revenue. Any disruption in
provision of services from these data centers could result in loss of revenue, client dissatisfaction and loss of
clients.
Our Agility segment relies on third parties to provide certain content and data for our solutions, and if
those third-parties discontinue providing their content, our revenue and results of operations could be
adversely affected.
Our Agility segment relies on third parties to provide or make available certain data for our
information databases and our news and social media monitoring service. These third parties may not renew
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agreements to provide content to us or may increase the price they charge for their content. Additionally, the
quality of the content provided to us may not be acceptable to us and we may need to enter into agreements
with additional third parties. In the event we are unable to use such third-party content or are unable to enter
into agreements with new third parties, current clients may discontinue their relationship with us, and it may
be difficult to acquire new clients.
Our businesses are reliant on key employees, and we may face high attrition in our talent. We may not
be able to replace displaced talent with new talent on a timely basis or with equivalent skill sets.
We are reliant to a considerable degree on the continuing leadership of our Chief Executive Officer
and would be materially and adversely affected should he unexpectedly not be employed by us. In addition,
our businesses are subject to fierce competition for talent which could result in high attrition of our
employees, or we may not be able to find the requisite talent to operate our businesses. A significant increase
in the attrition rate among employees with specialized skills could decrease our operating efficiency and
productivity. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the
needs of our existing and future clients or to assimilate new employees successfully could have a material
adverse effect on our business, results of operations, financial condition and cash flows. In addition,
fluctuations in our business may require that we lay off employees with possible negative effects on employee
morale. We try to minimize these risks by actively promoting employee relationships and offering competitive
salaries, but if we cannot mitigate these risks, our business and our operating performance could be adversely
affected.
We compete in highly competitive markets.
The markets for our services 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. If we fail to be competitive with these companies in the future, we may lose market share, which could
adversely affect our revenues and results of operations.
There are relatively few barriers preventing companies from competing. As a result, new market
entrants also pose a threat to our business. We also compete with in-house personnel at current and prospective
clients, who may attempt to duplicate our services using their own personnel. If we are not able to compete
effectively, our revenues and results of operations could be adversely affected.
We operate from multiple locations and our employees are very diverse so we have significant
coordination risks.
We are headquartered in Ridgefield Park, New Jersey, just outside New York City, and our Agility
business is headquartered in Ottawa, Canada and has an additional location in London, the United Kingdom.
We have ten delivery centers in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and
Israel. Our employees are geographically dispersed as well as culturally diverse. Our personnel need to work
together to successfully execute our business plans and we invest in various measures to improve coordination
and teamwork. Should we fail in these efforts our ability to execute our business plans may be adversely
affected.
Our intellectual property rights are valuable, and if we are unable to protect them or are subject to
intellectual property rights claims, our business may be harmed.
Our intellectual property rights include certain trademarks, trade secrets, domain name registrations, a
patent and patent applications. Although we take precautions to protect our intellectual property rights, these
efforts may not be sufficient or effective. In addition, various events outside of our control pose a threat to our
intellectual property rights as well as to our business. If we are unable to protect our intellectual property, we
may experience difficulties in achieving and maintaining brand recognition.
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Disruptions in telecommunications, system failures, data corruption or virus attacks could harm our
ability to execute our global resource model, which could result in client dissatisfaction and a reduction
of our revenues.
We use a distributed global resource model. Our onshore workforce provides services from our
United States and Canada offices, as well as from client sites; and our offshore workforce provides services
from our nine offshore delivery centers in the Philippines, India, Sri Lanka, Germany, the United Kingdom
and Israel. Our global facilities are linked with a telecommunications network that uses multiple service
providers. We may not be able to maintain active voice and data communications between our various
facilities and our clients' sites at all times due to disruptions in these networks, system failures, data corruption
or virus attacks. Any significant failure in our ability to communicate, or the availability of our platforms,
could result in a disruption in our business, which could hinder our performance, or our ability to complete
client projects on time, or provide services to our clients. This, in turn, could lead to client dissatisfaction and
an adverse effect on our business, results of operations and financial condition.
A material breach in security relating to our information systems could adversely affect us.
Even though we have implemented network security measures, our servers may be vulnerable to
computer viruses, cyber-attacks, break-ins and similar disruptions from unauthorized tampering. The
occurrence of any of the events described above could result in interruptions, delays, the loss or corruption of
data, cessations in the availability of systems or liability under privacy laws or contracts, each of which could
have a material adverse effect on our financial position and results of operations.
Governmental and client focus on data security could increase our costs of operations. In addition, any
incident in which we fail to protect our client’s information against security breaches may result in
monetary damages against us, and termination of our engagement by our client, and may adversely
impact our results of operations.
Certain laws and regulations regarding data privacy and security affecting our clients impose
requirements regarding the privacy and security of information maintained by these clients, as well as
notification to persons whose personal information is accessed by an unauthorized third party. As a result of
any continuing legislative initiatives and client demands, we may have to modify our operations with the goal
of further improving data security. The cost of compliance with these laws and regulations is high and is
likely to increase in the future. Any such modifications may result in increased expenses and operating
complexity, and we may be unable to increase the rates we charge for our services sufficiently to offset these
increases. In addition, as part of the service we perform, we have access to confidential client data, including
sensitive personal data. As a result, we are subject to numerous laws and regulations designed to protect this
information. We may also be bound by certain client agreements to use and disclose the confidential client
information in a manner consistent with the privacy standards under regulations applicable to such client. Any
failure on our part to comply with these laws and regulations can result in negative publicity and diversion of
management time and effort and may subject us to significant liabilities and other penalties.
If client confidential information is inappropriately disclosed due to a breach of our computer
systems, system failures or otherwise, or if any person, including any of our employees, negligently disregards
or intentionally breaches controls or procedures with which we are responsible for complying with respect to
such data or otherwise mismanages or misappropriates that data, we may have substantial liabilities to our
clients. Any incidents with respect to the handling of such information could subject us to litigation or
indemnification claims with our clients and other parties. In addition, any breach or alleged breach of our
confidentiality agreements with our clients may result in termination of their engagements, resulting in
associated loss of revenue and increased costs.
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.
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The major part of our operations is carried on in the Philippines, India, Sri Lanka, Israel, the United
Kingdom, Canada and Germany, while our headquarters are in the United States, and our clients 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 may 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 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 regulation;
• labor disputes and related litigation and liability;
• intellectual property laws and enforcement practices;
• 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 and results of operations.
Our international business is subject to applicable laws and regulations relating to foreign corrupt
practices, the violation of which could adversely affect our operations.
We must comply with all applicable anti-bribery laws and regulations of the U.S. and other
jurisdictions where we operate. For example, we are subject to the U.S. Foreign Corrupt Practices Act and the
U.K. Bribery Act relating to corrupt and illegal payments to government officials and others. Although we
have policies and controls in place that are designed to ensure compliance with these laws and regulations, it
is possible that an employee or an agent acting on our behalf could fail to comply with applicable laws and
regulations, and due to the complex nature of the risks, it may not always be possible for us to ascertain
compliance with such laws and regulations. In such event, we could be exposed to civil penalties, criminal
penalties and other sanctions, including fines or other unintended punitive actions, and we could incur
substantial legal fees and related expenses. In addition, such violations could damage our business and/or our
reputation. All of the foregoing could have a material adverse effect on our financial condition and operating
results.
Our international operations subject us to currency exchange fluctuations, which could adversely affect
our results of operations.
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Although most of our revenues are denominated in U.S. dollars, a significant portion of our revenues is
denominated in Canadian dollars, Pound Sterling and Euros. In addition, a significant portion of our expenses,
primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada, the United Kingdom and Israel,
is incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we
translate all non-U.S. denominated transactions into U.S. dollars in accordance with accounting principles
generally accepted in the United States. We do not currently undertake hedging activities to offset the risk of
adverse foreign currency fluctuations. As a result, fluctuations in the exchange rate between the U.S. dollar
and other currencies may affect our financial results.
Fluctuations in exchange rates also affect the value of funds held by our foreign subsidiaries. We do not
currently intend to hedge these assets.
In the event that the government of India, the Philippines or the government of another country
changes its tax policies, rules and regulations, our tax expense may increase and affect our effective tax
rates.
We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We are subject to
the continual examination by tax authorities in India and in the Philippines, and the Company assesses the
likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for
income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits
could be materially different from what is reflected in historical income tax and indirect tax provisions and
accruals, and could result in a material effect on the Company’s income tax provision, indirect tax expenses,
net income or cash flows in the period or periods for which that determination is made. If additional taxes are
assessed, it could have an adverse impact on our financial results.
In addition, changes in the tax rates, tax laws or the interpretation of tax laws in the jurisdiction where
we operate, could affect our future results of operations.
In 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in
India regarding the classification of services provided by this subsidiary, asserting that the services provided
by this subsidiary fall under the category of online information and database access or retrieval services (OID
Services), and not under the category of business support services (BS Services) that are exempt from service
tax as historically indicated in this subsidiary’s service tax filings. The Company disagrees with the Service
Tax Department’s position and is vigorously contesting these assertions. In the event the Service Tax
Department is successful in proving that the services fall under the category of OID Services, the revenues
earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be
subject to a service tax of between 12.36% and 15%. The revenue of our Indian subsidiary during this period
was approximately $67.0 million. In accordance with new rules promulgated by the Service Tax Department,
as of December 1, 2016 service tax is no longer applicable to OID or BS Services.
In 2016, the Company’s Indian subsidiary received notices of appeal from the Indian Service Tax
Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to
our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall
under the category of OID Services and not BS Services. The appeal was determined in favor of the Service
Tax Department. The Indian subsidiary disagrees with the basis of this decision and is contesting it
vigorously. The Company expects delays in its Indian subsidiary receiving further service tax refunds until
this matter is adjudicated with finality, and currently has service tax credits of approximately $1.0 million
recorded as a receivable.
Substantial recovery against us in the above referenced 2015 Service Tax Department case could have
a material adverse impact on us, and unfavorable rulings or recoveries in other tax proceedings could have a
material impact on the consolidated operating results of the period in which the rulings or recovery occurs.
Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this
20
case.
If tax authorities in any of the jurisdictions in which we operate contest the manner in which we allocate
our profits, our net income could decrease.
A significant portion of the services we provide to our clients are provided by our Asian subsidiaries
located in different jurisdictions. Tax authorities in some of these jurisdictions have from time to time challenged
the manner in which we allocate our profits among our subsidiaries, and we may not prevail in this type of
challenge. If such a challenge were successful, our worldwide effective tax rate could increase, thereby
decreasing our net income.
An expiration or termination of our preferential tax rate incentives could adversely affect our results of
operations.
One of our foreign subsidiaries is subject to preferential tax rates. These tax incentives provide that we
pay reduced income taxes in those jurisdictions for a fixed period of time that varies depending on the
jurisdiction, or they may result in lowering our expenses. An expiration or termination of these incentives could
substantially increase our worldwide effective tax rate, or increase our tax expense, thereby decreasing our net
income and adversely affecting our results of operations.
Our earnings may be adversely affected if we change our intent not to repatriate our foreign earnings
or if such earnings become subject to U.S. tax on a current basis.
In December 2017, the President signed the U.S. Tax Cuts and Jobs Act (2017 Tax Act), which includes
a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law.
One such provision relates to a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign
earnings and profits (E&P), referred to as the toll charge. A significant portion of our operations are conducted
outside the United States. Despite the access to the overseas earnings and the resulting toll charge, we intend
to indefinitely reinvest the foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction
withholding tax that the Company has to incur on the actual remittances. Unremitted earnings of foreign
subsidiaries amounted to approximately $21.0 million at December 31, 2018. If such earnings are repatriated
in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue the
applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
Anti-outsourcing legislation, if adopted, could adversely affect our business, financial condition and
results of operations and impair our ability to service our clients.
The issue of outsourcing of services abroad by U.S. companies is a topic of political discussion in the
United States. Measures aimed at limiting or restricting outsourcing by U.S. companies are under discussion
in Congress and in numerous state legislatures. While no substantive anti-outsourcing legislation has been
introduced to date, given the ongoing debate over this issue, the introduction of such legislation is possible. If
introduced, our business, financial condition and results of operations could be adversely affected and our
ability to service our clients could be impaired.
Our growth could be hindered by visa restrictions.
Occasionally, we have employees from our other facilities visit or transfer to the United States to
meet our clients or work on projects at a client’s site. Any visa restrictions or new legislation putting a
restriction on issuing visas could affect our business.
Immigration and visa laws and regulations in the United States and other countries are subject to
legislative and administrative changes as well as changes in the application of standards. Immigration and visa
laws and regulations can be significantly affected by political forces and levels of economic activity. Our
international expansion strategy and our business, results of operations and financial condition may be
21
materially adversely affected if legislative or administrative changes to immigration or visa laws and
regulations impair our ability to staff projects with our professionals who are not citizens of the country where
the work is to be performed.
Political uncertainty, political unrest, terrorism, and natural calamities in the Philippines, India, Sri
Lanka and Israel could adversely affect business conditions in those regions, which in turn could
disrupt our business and adversely impact our results of operations and financial condition.
We conduct the majority of our production operations in the Philippines, India, Sri Lanka and
Israel. These countries and regions 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.
Terrorist attacks or a war could adversely affect our results of operations.
Terrorist attacks and other acts of violence or war could affect us or our clients by disrupting normal
business practices for extended periods of time and reducing business confidence. In addition, acts of violence
or war may make travel more difficult and may effectively curtail our ability to serve our clients' needs, any of
which could adversely affect our results of operations.
We may face various risks associated with shareholder activists or shareholder demands for better
performance.
There is no assurance that we will not be subject to shareholder activism or demands. Such activities
could interfere with our ability to execute our strategic plan, be costly and time-consuming, disrupt our
operations, and divert the attention of management and our employees.
We are the subject of continuing litigation, including litigation by certain of our former employees.
In 2008, a judgment was rendered in the Philippines against a Philippines subsidiary of the Company
that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the
Philippines subsidiary. The payment amount aggregates approximately $6.2 million, plus legal interest that
accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to
accrue at 6% per annum. The payment amount as expressed in U.S. dollars varies with the Philippine peso to
U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees indicated that they
proposed to record the judgment as to them in New Jersey. In January 2018, in response to an action initiated
by Innodata Inc., the United States District Court for the District of New Jersey (the “USDC”) entered a
preliminary injunction that enjoins these former employees from pursuing or seeking recognition or
enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and
until further order of the Court. In June 2018, the USDC entered a consent order administratively closing the
action subject to return of the action to the active docket upon the written request of Innodata Inc. or the
former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction
remaining in full force and effect. The principal relevant cases in the Philippines are Court of Appeals Case
Nos. CA-G.R. SP No. 93295 Innodata Employees Association (IDEA), Eleanor Tolentino, et al. vs. Innodata
Philippines, Inc., et al., and CA-G.R. SP No. 90538 Innodata Philippines, Inc. vs. Honorable Acting Secretary
Manuel G. Imson, et al. (28 June 2007), the Department of Labor and Employment National Labor Relations
Commission, Republic of the Philippines (NLRC-NCR-Case No.07-04713-2002, et al., Innodata Employees
Association (IDEA) and Eleanor A. Tolentino, et al. vs. Innodata Philippines, Inc., et al), and the Department
22
of Labor and Employment Office of the Secretary of Labor and Employment, Republic of the Philippines
(Case No. OS-AJ-0015-2001, In Re: Labor Dispute at Innodata Philippines, Inc.). The U.S. District Court
action is Civil Action No.: 2:17-cv-13268-SDW-LDW Innodata Inc. v. Myrna C. Augustin-Simon; et al.
We are also subject to various other legal proceedings and claims which arise in the ordinary course
of business. While we believe that we have adequate reserves for those losses we believe are probable and can
be reasonably estimated, the ultimate results of legal proceedings and claims cannot be predicted with
certainty.
While we currently believe that the ultimate outcome of these proceedings will not have a material
adverse effect on our consolidated financial position or overall trends in our consolidated results of
operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above-
referenced Philippines action could have a material adverse impact on us, and unfavorable rulings or
recoveries in the other proceedings could have a material adverse impact on the consolidated operating results
of the period in which the ruling or recovery occurs. In addition, our estimate of potential impact on our
consolidated financial position or overall consolidated results of operations for the above referenced legal
proceedings could change in the future. See “Legal Proceedings.”
Our reputation could be damaged, or our profitability could suffer if we do not meet the controls and
procedures in respect of the services and solutions we provide to our clients, or if we contribute to our
clients’ internal control deficiencies.
Our clients may perform audits or require us to perform audits, provide audit reports or obtain
certifications with respect to the controls and procedures that we use in the performance of services for such
clients, especially when we process data or information belonging to them. Our ability to acquire new clients
and retain existing clients may be adversely affected and our reputation could be harmed if we receive a
qualified opinion, or if we cannot obtain an appropriate certification or opinion with respect to our controls
and procedures in connection with any such audit in a timely manner. Additionally, our profitability could
suffer if our controls and procedures were to fail or to impair our client’s ability to comply with its own
internal control requirements.
New and changing corporate governance and public disclosure requirements add uncertainty to our
compliance policies and increase our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, other SEC regulations, and the NASDAQ Stock Market
rules, are creating uncertainty for companies like ours. These laws, regulations and standards may lack
specificity and are subject to varying interpretations. Their application in practice may evolve over time, as new
guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance
standards.
Although we are committed to maintaining high standards of corporate governance and public
disclosure, and complying with evolving laws, regulations and standards, if we fail to comply with new or
changed laws, regulations or standards of corporate governance, our business and reputation may be harmed.
It is unlikely that we will pay dividends.
We have not paid any cash dividends since our inception and do not anticipate paying any cash
dividends in the foreseeable future. We expect that our earnings, if any, will be used to finance our growth.
Item 1B. Unresolved Staff Comments.
None.
23
Item 2. Properties.
Our services are primarily performed from our Ridgefield, New Jersey headquarters and ten overseas
delivery centers in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel, all of
which are leased. The square footage of all our leased properties totals approximately 246,000.
In addition, we may need to lease additional property in the future. We believe that we will be able to
obtain suitable additional facilities on commercially reasonable terms on an “as needed” basis.
Item 3. Legal Proceedings.
In 2008, a judgment was rendered in the Philippines against a Philippines subsidiary of the Company
that is no longer active and purportedly also against Innodata Inc., in favor of certain former employees of the
Philippines subsidiary. The payment amount aggregates approximately $6.2 million, plus legal interest that
accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued and continues to
accrue at 6% per annum. The payment amount as expressed in U.S. dollars varies with the Philippine peso to
U.S. dollar exchange rate. In December 2017, a group of 97 of the former employees indicated that they
proposed to record the judgment as to them in New Jersey. In January 2018, in response to an action initiated
by Innodata Inc., the United States District Court for the District of New Jersey (the “USDC”) entered a
preliminary injunction that enjoins these former employees from pursuing or seeking recognition or
enforcement of the judgment against Innodata Inc. in the United States during the pendency of the action and
until further order of the Court. In June 2018, the USDC entered a consent order administratively closing the
action subject to return of the action to the active docket upon the written request of Innodata Inc. or the
former employees, with the USDC retaining jurisdiction over the matter and the preliminary injunction
remaining in full force and effect. The principal relevant cases in the Philippines are Court of Appeals Case
Nos. CA-G.R. SP No. 93295 Innodata Employees Association (IDEA), Eleanor Tolentino, et al. vs. Innodata
Philippines, Inc., et al., and CA-G.R. SP No. 90538 Innodata Philippines, Inc. vs. Honorable Acting Secretary
Manuel G. Imson, et al. (28 June 2007), the Department of Labor and Employment National Labor Relations
Commission, Republic of the Philippines (NLRC-NCR-Case No.07-04713-2002, et al., Innodata Employees
Association (IDEA) and Eleanor A. Tolentino, et al. vs. Innodata Philippines, Inc., et al), and the Department
of Labor and Employment Office of the Secretary of Labor and Employment, Republic of the Philippines
(Case No. OS-AJ-0015-2001, In Re: Labor Dispute at Innodata Philippines, Inc.). The U.S. District Court
action is Civil Action No.: 2:17-cv-13268-SDW-LDW Innodata Inc. v. Myrna C. Augustin-Simon; et al.
We are also subject to various other legal proceedings and claims which arise in the ordinary course
of business. While we believe that we have adequate reserves for those losses we believe are probable and
can be reasonably estimated, the ultimate results of legal proceedings and claims cannot be predicted with
certainty.
While management currently believes that the ultimate outcome of these proceedings will not have a
material adverse effect on our consolidated financial position or overall trends in our consolidated results of
operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above
referenced Philippines action could have a material adverse impact on us, and unfavorable rulings or
recoveries in the other proceedings could have a material adverse impact on the consolidated operating results
of the period in which the ruling or recovery occurs.
Item 4. Mine Safety Disclosures.
None.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Innodata Inc. (the “Company”) Common Stock is quoted on The Nasdaq Stock Market LLC under the
symbol “INOD.” On February 22, 2019, there were 69 stockholders of record of the Company’s Common
Stock based on information provided by the Company's transfer agent. Virtually all of the Company’s
publicly held shares are held in “street name” and the Company believes the actual number of beneficial
holders of its Common Stock to be 2,848.
Purchase of Equity Securities
In September 2011, our Board of Directors authorized the repurchase of up to $2.0 million of our
common stock in open market or private transactions. There is no expiration date associated with the program.
We did not repurchase any shares of our common stock during 2018.
We did not have any sales of unregistered equity securities during the three months ended December 31,
2018.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and
the related notes included elsewhere in this report. In addition to historical information, this discussion includes
forward-looking information that involves risks and assumptions which could cause actual results to differ
materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this
report.
Executive Overview
We are a global digital services and solution company. We operate in three reporting segments: Digital
Data Solutions (DDS), Synodex and Agility.
The following table sets forth, for the period indicated, certain financial data expressed for the two years
ended December 31, 2018:
25
(Dollars in millions)
Years Ended December 31,
2018
% of revenue
2017
% of revenue
Revenues
Direct operating costs
Selling and administrative expenses
Goodwill impairment
Income (loss) from operations
Other income
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Income (loss) attributable to non-controlling interest
$
57.4
39.0
15.8
0.7
1.9
0.0
1.8
1.8
0.0
-
100.0%
68.0%
27.6%
1.2%
3.2%
$
60.9
45.8
20.2
-
(5.1)
-
(5.1)
0.3
(5.4)
0.3
Net income (loss) attributable to non-controlling interest
$
-
(5.1)
100.0%
75.2%
33.2%
0.0%
-8.4%
Revenues
Revenue is recognized when control of the promised services is transferred to a customer, in an
amount that reflects the consideration that we expect to receive in exchange for those services as per the
agreement with the customer. We generate all our revenue from agreements with customers. In case there are
agreements with multiple performance obligations, we identify each performance obligation and evaluate
whether the performance obligations are distinct within the context of the agreement at the agreement’s
inception. Performance obligations that are not distinct at agreement inception are combined. We allocate the
transaction price to each distinct performance obligation proportionately based on the estimated standalone
selling price for each performance obligation, if any, and then evaluates how the services are transferred to the
customer to determine the timing of revenue recognition.
For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources
utilized in the period in which services are performed and performance conditions are satisfied as per the
agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are
performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are
recognized based on the proportional performance method of accounting, as services are performed, or
milestones are achieved.
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period
in which services are performed and performance conditions are satisfied as per the agreement. A portion of our
Synodex segment revenue is derived from licensing our functional software and providing access to our hosted
software platform. Revenue from such services is recognized monthly when access to the service is provided to
the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the
payment terms are identifiable; the agreement has commercial substance; and collection is probable.
The Agility segment derives its revenue primarily from subscription arrangements and provision of
enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions.
Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all
parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms
are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched
media analysis services is recognized when the services are performed, and performance conditions are
satisfied. Revenues from the reseller agreements, which are not significant to the overall revenues, are
recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the
26
primary obligor in the sales transaction; assume the credit risk, set the price; can select suppliers; and are
involved in the execution of the services, including after sales service.
Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket
expenses included in direct operating costs.
We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus
net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of
ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances
where the above criteria are not met and therefore, we are not the principal in providing services, amounts
received from clients are presented net of payments in the condensed consolidated statements of operations
and comprehensive loss.
Contract acquisition cost for our Agility segment is amortized over the term of the subscription
agreement which normally has a duration of 12 months or less. We review these costs on a periodic basis to
determine the need to adjust the carrying values for pre-terminated contracts.
Direct Operating Costs
Direct operating costs consist of direct payroll, occupancy costs, data center hosting fees, 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 clients.
Selling and Administrative Expenses
Selling and administrative expenses consist of management and administrative salaries, sales and
marketing costs including commissions, new services research and related software development, third-party
software, advertising and trade conferences, professional fees and consultant costs, and other administrative
overhead costs.
Valuation of Goodwill and Intangible Assets
We perform a valuation of assets acquired and liabilities assumed on each acquisition accounted for as a
business combination and allocate the purchase price of each acquired business to its respective net tangible and
intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer
relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor
contracts. We determine the appropriate useful life by performing an analysis of expected cash flows based on
projected financial information of the acquired businesses. Intangible assets are amortized over their estimated
useful lives using the straight-line method, which approximates the pattern in which the majority of the
economic benefits are expected to be consumed. Intangible liabilities are amortized into direct operating costs
ratably over their expected related revenue streams over their useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net
assets. We do not amortize goodwill but evaluate it for impairment at the reporting unit level annually during the
third quarter of each fiscal year (as of September 30th of that quarter) or when an event occurs, or circumstances
change, that indicates the carrying value may not be recoverable. In 2018, we adopted ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. Under the newly
adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the
quantitative assessment (“Step 1”) remained unchanged versus the prior guidance. However, the requirement to
complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and
comparing it to the carrying value of that goodwill to measure the impairment loss, was eliminated. As a result,
Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will
27
be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed
the carrying value of goodwill in that reporting unit.
We periodically analyze whether any indicators of impairment have occurred. As part of these periodic
analyses, we compare the Company’s estimated fair value, as determined based on our stock price, to the
Company’s net book value. During 2018, due to a continuing decline in its stock price and other indicators of
impairment that arose during the second quarter of 2018, we deemed it appropriate to assess goodwill
impairment as of June 30, 2018, rather than the historical testing date of September 30. Based on its assessment,
we concluded that the goodwill of the DDS segment, amounting to $675,000, was fully impaired.
We conducted our annual goodwill impairment test for the Agility segment as of September 30, 2018.
The estimated fair value of the reporting unit exceeded its carrying value, including goodwill, and we
concluded that there is no impairment of the goodwill of the Agility segment.
Adjusted EBITDA
In addition to measures of financial performance presented in our consolidated financial statements, we
monitor “Adjusted EBITDA” to help us evaluate our ongoing operating performance including our ability to
operate the business effectively.
We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and Subsidiaries in
accordance with U.S. GAAP before income taxes, depreciation, amortization of intangible assets, impairment
charges, changes in fair value of contingent consideration, stock-based compensation, loss attributable to non-
controlling interests and interest income (expense).
We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating
performance and for financial and operational decision-making purposes. In particular, it facilitates comparisons
of the core operating performance of our Company from period to period on a consistent basis and helps us
identify underlying trends in our business. We believe it provides useful information about our operating results,
enhances the overall understanding of our past performance and future prospects and allows for greater
transparency with respect to key metrics used by management in our financial and operational decision-making.
We use this measure to establish operational goals for managing our business and evaluating our performance.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a
substitute for results reported under U.S. GAAP. Some of these limitations are:
• Adjusted EBITDA does not reflect tax payments, and such payments reflect a reduction in cash
available to us;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs
and for our cash expenditures or future requirements for capital expenditures or contractual
commitments;
• Adjusted EBITDA excludes the potential dilutive impact of stock-based compensation expense
related to our workforce, interest income (expense) and net loss attributable to non-controlling
interests, and these items may represent a reduction or increase in cash available to us;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements or for new capital expenditure requirements; and
• Other companies, including companies in our own industry, may calculate Adjusted EBITDA
differently from our calculation, limiting its usefulness as a comparative measure.
Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to,
U.S. GAAP net income.
28
The results below for the year ended December 31, 2017 are presented on a reclassified basis as if for
the full year 2017 docGenix had been included in the DDS segment and the Synodex segment had solely
included the results of Synodex. docGenix revenue was $531,000 and $1,087,000 for the years ended
December 31, 2018 and 2017, respectively.
The following table shows the reconciliation from net income (loss) to Adjusted EBITDA for the
periods presented (in thousands):
29
Results of Operations
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
The results below for the year ended December 31, 2017 are presented on a reclassified basis as if for
the full year 2017 docGenix had been included in the DDS segment and the Synodex segment had solely
included the results of Synodex. docGenix revenue was $531,000 and $1,087,000 in the years ended
December 31, 2018 and 2017, respectively.
Revenues
Total revenues were $57.4 million for the year ended December 31, 2018, a 6% decrease from $60.9
million for the year ended December 31, 2017.
Revenues from the DDS segment were $43.5 million and $47.8 million for the years ended December
31, 2018 and 2017, respectively, a decline of $4.3 million or approximately 9%. Approximately $2.3 million
of the decrease is attributable to one large project that ended in 2017 and the balance is attributable to volume
fluctuations from other clients.
Revenues from the Synodex segment were $4.1 million and $3.7 million for the years ended
December 31, 2018 and 2017, respectively, an increase of $0.4 million or approximately 11%. The increase is
primarily due to additional volume from two existing clients partially offset by a reduction in volume from
another client whose project ended in the first quarter of 2018.
Revenues from the Agility segment were $9.8 million and $9.4 million for the year ended December
31, 2018 and 2017, respectively, an increase of $0.4 million or approximately 4%.
Two clients in the DDS segment generated approximately 30% of the Company’s total revenues in the
30
fiscal years ended December 31, 2018 and 2017, respectively. No other client accounted for 10% or more of
total revenues during these periods. Further, in the years ended December 31, 2018 and 2017, revenues from
non-US clients accounted for 56% and 51%, respectively, of the Company's revenues.
Direct Operating Costs
Direct operating costs were approximately $39.0 million and $45.8 million for the years ended
December 31, 2018 and 2017, respectively, a decrease of $6.8 million or approximately 15%.
Direct operating costs for the DDS segment were $29.7 million and $36.2 million for the years ended
December 31, 2018 and 2017, respectively, a decrease of $6.5 million or approximately 18%. Direct operating
costs for the DDS segment as a percentage of DDS segment revenues were 68% and 76% for the years ended
December 31, 2018 and 2017, respectively. The decrease in direct operating costs is primarily attributable to
labor cost savings arising from headcount reductions in the second half of 2017.
Direct operating costs for the Synodex segment were approximately $3.0 million and $3.5 million for
the respective periods, net of intersegment profit, a decrease of $0.5 million or 14%. The decline in direct
operating costs reflects efficiencies in the production headcount. Direct operating costs for the Synodex
segment as a percentage of Synodex segment revenues were 73% and 95% for the years ended December 31,
2018 and 2017, respectively.
Direct operating costs for the Agility segment were approximately $6.3 million and $6.1 million, net
of intersegment profit, for the years ended December 31, 2018 and 2017, respectively, an increase of $0.2
million, or 3%. Direct operating costs for the Agility segment as a percentage of Agility segment revenues
were 64% and 65% for the years ended December 31, 2018 and 2017, respectively. The increase is primarily
due to higher content related costs.
Correction of Immaterial Error
The 2018 DDS direct operating costs referred to above include an out-of-period adjustment of
$269,000 relating to under-recorded pension liabilities relating to the period from 2008 to 2013. See note 1 to
the consolidated financial statements for further information.
Selling and Administrative Expenses
Selling and administrative expenses were $15.8 million for the year ended December 31, 2018
compared to $20.2 million for the year ended December 31, 2017, a decrease of $4.4 million or 22% due to cost
rationalization implemented in the later part of 2017. Selling and administrative expenses as a percentage of
total revenues were 28% and 33% for the years ended December 31, 2018 and 2017, respectively.
Selling and administrative expenses for the DDS segment were $9.3 million and $13.1 million for the
years ended December 31, 2018 and 2017, respectively, a decrease of $3.8 million or 29%. As a percentage of
DDS revenues, DDS selling and administrative expenses were 21% and 27% for each of the years ended
December 31, 2018 and 2017, respectively. The decline in selling and administrative expenses is attributable
to labor cost savings arising from headcount reductions in the second half of 2017.
Selling and administrative expenses for the Synodex segment were $0.7 million and $1.1 million for
each of the years ended December 31, 2018 and 2017, respectively, a decrease of $0.4 million or 36%. Selling
and administrative expenses for the Synodex segment as a percentage of Synodex segment revenues were 17%
and 30% for the years ended December 31, 2018 and 2017, respectively.
Selling and administrative expenses for the Agility segment were $5.8 million and $6.0 million for each
of the years ended December 31, 2018 and 2017, respectively, a decrease of $0.2 million or 3%. Selling and
31
administrative expenses for the Agility segment as a percentage of Agility segment revenues were 59% and 64%
for the years ended December 31, 2018 and 2017, respectively.
Goodwill Impairment
During the year ended December 31, 2018, we recorded a full goodwill impairment of $675,000 for
the DDS segment. There was no goodwill impairment recorded during the year ended December 31, 2017.
We periodically analyze whether any indicators of impairment have occurred. As part of these periodic
analyses, we compare the Company’s estimated fair value, as determined based on our stock price, to our net
book value. The continued decline in our stock price was viewed as a triggering event under ASU 2017-04
which required an assessment for possible goodwill impairment as of June 30, 2018. Under the provisions of
ASU 2017-04, which we opted to early adopt, goodwill impairment is recognized based on Step 1 of the current
guidance, which calculates the carrying value in excess of the reporting unit’s fair value.
We performed this assessment as of June 30, 2018 and determined that the fair value of the Agility
segment exceeded its carrying value, but that the fair value of the DDS segment was below its carrying value. As
a result, we recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit as of June 30,
2018.
We conducted our annual goodwill impairment test for the Agility segment as of September 30, 2018.
The estimated fair value of the reporting unit exceeded its carrying value, including goodwill, and we
concluded that there is no impairment of the goodwill of the Agility segment.
Taxes
We recorded a provision for income taxes of approximately $1.8 million and $0.3 million for the years
ended December 31, 2018 and 2017, 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 primarily due to the valuation allowance recorded on the deferred taxes on the U.S. and
Canadian entities. See Notes to Consolidated Financial Statements, Footnote 4. “Taxes” for additional
information.
In December 2017, the President signed the U.S. Tax Cuts and Jobs Act (2017 Tax Act), which includes
a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law.
Changes in tax law are accounted for in the period of enactment. As such, the 2017 consolidated financial
statements reflect the immediate tax effect of the 2017 Tax Act, which was enacted on December 22, 2017
(Enactment Date). The 2017 Tax Act contains several key provisions including, among other things:
•
•
•
•
A one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits
(E&P), referred to as the toll charge;
A reduction in the maximum Corporate tax rate from 35% to 21% for tax years beginning after December
31, 2017;
The introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-
Taxed Income (GILTI) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by applicable
foreign tax credits; and
The introduction of a quasi-territorial tax system for tax years beginning after December 31, 2017 by
providing a dividend received deduction under the participation exemption system.
32
Pursuant to the 2017 Tax Act, we recorded the following adjustments to income tax expense during the
fourth quarter of 2017:
• A one-time deemed repatriation of E&P amounting to $25.8 million. No toll charge liability was
recorded due to the available net operating loss carryforwards; and
• A reduction of deferred tax assets and a corresponding reduction of the valuation allowance of $2.3
million, primarily for the remeasurement of our deferred tax assets at the enacted tax rate of 21%.
Beginning January 1, 2018, we performed a calculation of the GILTI provisions and concluded that it
has no impact on account of the net losses of our foreign subsidiaries.
Despite access to overseas earnings and the resulting toll charge, we intend to indefinitely reinvest
foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding taxes that we
would have to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to
approximately $21.0 million at December 31, 2018. If such earnings are repatriated in the future, or are no
longer deemed to be indefinitely reinvested, we would have to accrue the applicable amount of foreign
jurisdiction withholding taxes associated with such remittances.
We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses
incurred by our U.S. entity. In addition, we also have a valuation allowance on the deferred tax assets of our
Canadian subsidiaries. Our Canadian subsidiaries also have research and development expenditures available
to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits
from these balances have not been recognized for financial statement purposes.
Tax Assessments
In October 2010, our Indian subsidiary received an assessment from the Indian Income Tax
Department for the fiscal year ended March 31, 2006. We disagree with the basis of this tax assessment, have
filed an appeal against the assessment and are contesting it. We believe that our recorded tax liability of
$329,000 for this matter, which includes interest, is adequate.
In January 2012, our Indian subsidiary received an assessment from the Indian Income Tax
Department for the fiscal year ended March 31, 2008. We disagree with the basis of this tax assessment and
successfully appealed the assessment. The income tax assessing officer has filed an appeal against the
decision entered in favor of the subsidiary. We are contesting the appeal filed by the assessing officer. We
believe that our recorded tax liability of $343,000 for this matter, which includes interest, is adequate.
In September 2015, our Indian subsidiary was subject to an inquiry by the Service Tax Department in
India regarding the classification of services provided by this subsidiary, asserting that the services provided
by this subsidiary fall under the category of online information and database access or retrieval services (OID
Services), and not under the category of business support services (BS Services) that are exempt from service
tax as historically indicated in the subsidiary’s service tax filings. We disagree with the Service Tax
Department’s position and are vigorously contesting these assertions. In the event the Service Tax
Department is successful in proving that the services fall under the category of OID Services, the revenues
earned by our Indian subsidiary for the period July 2012 through November 2016 would be subject to a
service tax of between 12.36% and 15%. The revenue of our Indian subsidiary during this period was
approximately $67.0 million. In accordance with new rules promulgated by the Service Tax Department, as of
December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on our counsel’s
assessment, we have not recorded any tax liability for this case.
In October 2016, our Indian subsidiary received notices of appeal from the Indian Service Tax
Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to
33
our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall
under the category of OID Services and not BS Services. The appeal was determined in favor of the Service
Tax Department. We disagree with the basis of this decision and are contesting it vigorously. We expect
delays in our Indian subsidiary receiving further service tax refunds until this matter is adjudicated with
finality, and currently have service tax credits of approximately $1.0 million recorded as a receivable. Based
on our counsel’s assessment, we have not recorded any tax liability for this case.
We have recorded a tax provision amounting to $181,000, which includes interest, for several
ongoing tax proceedings in the Philippines. Although the ultimate outcome cannot be determined at this time,
we continue to contest these claims vigorously.
Net Income (Loss)
We had a net income of $4,000 during the year ended December 31, 2018 compared to a net loss of $5.1
million during the year ended December 31, 2017.
Net income for the DDS segment was $1.9 million for the year ended December 31, 2018, compared to
a net loss of $1.8 million for the year ended December 31, 2017, net of intersegment profits. The change is due
to a decline in revenues offset by a decline in direct operating costs and selling and administrative expenses
attributable to our cost rationalization initiatives.
Net income for the Synodex segment was $0.4 million for the year ended December 31, 2018, compared
to net loss of $0.6 million for the year ended December 31, 2017, net of intersegment profits. The change is
primarily due to an increase in revenues and a decline in direct operating costs and selling and administrative
expense.
Net loss for the Agility segment was $2.3 million for the year ended December 31, 2018, compared to a
net loss of $2.7 million for the year ended December 31, 2017.
Adjusted EBITDA
Adjusted EBITDA for the year ended December 31, 2018 was $6.7 million compared to an Adjusted
EBITDA loss of $0.7 million for the year ended December 31, 2017, an increase of $7.4 million. Adjusted
EBITDA for the DDS segment was $6.9 million and $1.5 million for the years ended December 31, 2018 and
2017, respectively, an increase of $5.4 million or approximately 360%. Adjusted EBITDA for the Synodex
segment was $0.5 million and an Adjusted EBITDA loss of $0.9 million for the years ended December 31, 2018
and 2017, respectively, an increase of $1.4 million. Adjusted EBITDA loss for the Agility segment was $0.7
million compared to an Adjusted EBITDA loss of $1.3 million for the years ended December 31, 2018 and
2017, respectively, an improvement of $0.6 million or approximately 46%.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in thousands, are as follows:
Cash and cash equivalents
Working capital
December 31,
2018
$
10,869
12,981
2017
$
11,407
9,729
At December 31, 2018, we had cash and cash equivalents of $10.9 million, of which $5.6 million was
held by our foreign subsidiaries, and $5.3 million was held in the United States. Despite the passage of the new
34
tax law under which we may repatriate funds from overseas after paying the toll charge, it is our intent as of
December 31, 2018, to permanently reinvest the overseas funds in our foreign subsidiaries on account of the
withholding tax that we would have to incur on the actual remittances.
We have used, and plan to use, our cash and cash equivalents for (i) investments in the Agility
Segment; (ii) the expansion of our other operations; (iii) technology innovation; (iv) product management and
strategic marketing; (v) general corporate purposes, including working capital; and (vi) possible business
acquisitions. As of December 31, 2018, we had working capital of approximately $13.0 million, as compared to
working capital of approximately $9.7 million as of December 31, 2017.
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 the next 12 months. However, we have no bank
facilities or lines of credit, and reductions in our cash and cash equivalents from operating losses, capital
expenditures, adverse legal decisions, acquisitions or otherwise could materially and adversely affect the
Company.
Net Cash Provided by Operating Activities
Cash provided by our operating activities for the year ended December 31, 2018 was $3.6 million,
resulting from a net income of $11,000 and adjustments for non-cash items of $5.6 million and uses of working
capital of $2.0 million. Adjustments for non-cash items primarily consisted of $3.4 million for depreciation and
amortization, stock option expense of $0.8 million, goodwill impairment of $0.7 million, pension cost of $0.5
million and deferred tax provisions of $0.2 million. Working capital activities primarily consisted of a use of
cash of $1.0 million due to a decrease in accrued salaries, wages and related benefits, $0.8 million due to a
decrease in accounts payable and accrued expenses and $0.2 million due to a decrease in other working capital
accounts.
Cash provided by our operating activities for the year ended December 31, 2017 was $0.7 million,
resulting from a net loss of $5.4 million and adjustments for non-cash items of $4.2 million and uses of working
capital of $1.9 million. Adjustments for non-cash items primarily consisted of $3.7 million for depreciation and
amortization, and stock-based compensation expense of $0.7 million.
At December 31, 2018, our days’ sales outstanding were 66 days as compared to 61 days as of
December 31, 2017. We calculate DSO by first dividing the total revenues for the period by average net
accounts receivable, which is the sum of net accounts receivable at the beginning of the period and net accounts
receivable at the end of the period, to yield an amount we refer to as the “accounts receivable turnover.” Then
we divide the total number of days within the period reported by the accounts receivable turnover to yield DSO
expressed in number of days.
Net Cash Used in Investing Activities
Cash used in our investing activities was $2.0 million and $3.4 million for the years ended December
31, 2018 and 2017, respectively. These capital expenditures were principally for the purchase of technology
equipment including servers, network infrastructure and workstations, and expenditures for internally developed
software. Capital expenditures of $2.0 million consisted of $0.4 million for the DDS segment and $1.6 million
for the Agility segment.
For the year 2019, we anticipate that capital expenditures for ongoing technology, equipment and
infrastructure upgrades will approximate $1.0 to $2.0 million, a portion of which we may finance.
Net Cash Used in Financing Activities
Payment of long-term obligations approximated $2.0 million and $1.1 million for 2018 and 2017,
35
respectively. Cash from financing activities represents the net proceeds from a capital lease transaction we
entered into in 2017 amounting to $0.8 million. There were no stock option exercises during the years ended
December 31, 2018 and 2017, respectively.
Although most of our revenues are denominated in U.S. dollars, a significant portion of our revenues is
denominated in Canadian dollars, Pound Sterling and Euros. In addition, a significant portion of our expenses,
primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada and Israel, is incurred in the
local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S.
denominated transactions into U.S. dollars in accordance with accounting principles generally accepted in the
United States. Thus, we are exposed to the risk that fluctuations in the value of these currencies relative to the
U.S. dollar could have a direct impact on our revenues and our results of operations.
The Philippines and India have at times experienced high rates of inflation as well as major fluctuations
in the exchange rate between the Philippine peso and the U.S. dollar and the Indian rupee and the U.S. dollar.
Fluctuations in exchange rates also affect the value of funds held by our foreign subsidiaries. We do not
currently intend to hedge these assets.
Inflation, Seasonality and Prevailing Economic Conditions
Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed
to higher inflation in wage rates in the countries in which we operate. We generally perform work for our clients
under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately
anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be
able to recover cost increases through increases in the prices that we charge for our services to our clients.
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.
Critical Accounting Policies and Estimates
Basis of Presentation and Use of Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources is based on our
consolidated financial statements which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of these 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
36
estimates and could have a significant adverse effect on our consolidated results of operations and financial
position. We believe the following critical accounting policies affect our more significant estimates and
judgments in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We establish credit terms for new clients based upon management’s review of their credit information
and project terms, and perform ongoing credit evaluations of our clients, adjusting credit terms when
management believes appropriate, based upon payment history and an assessment of the client’s current credit
worthiness. We record an allowance for doubtful accounts for estimated losses resulting from the inability of
our clients to make required payments. We determine this allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, our previous loss history, our estimate of the
client’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a
whole. We cannot guarantee that credit loss rates in the future will not be greater that those experienced in the
past. In addition, we would have credit exposure if the financial condition of one of our major clients were to
deteriorate. In the event that the financial condition of our clients was to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances might be necessary. Our allowance for doubtful
accounts as of December 31, 2018 and 2017 was approximately $1.0 million and $1.2 million, respectively.
Foreign Currency Translation
The functional currency of our production operations located in the Philippines, India, Sri Lanka and
Israel is the U.S. dollar. Transactions denominated in the Philippine pesos, Indian and Sri Lankan rupees or
Israeli shekels are translated to U.S. dollars at rates which approximate those in effect on the transaction dates.
Monetary assets and liabilities denominated in foreign currencies at December 31, 2018 and 2017 are translated
at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and stockholders’ equity were
translated at the appropriate historical rates. Included in direct operating costs are exchange losses (gains)
resulting from such transactions of approximately ($201,000) and $466,000 for the years ended December 31,
2018 and 2017, respectively.
The functional currency for our subsidiaries in Germany, the United Kingdom and Canada are the
Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries
are reported in these respective currencies. Financial information is translated from the applicable functional
currency to the U.S. dollar (the reporting currency) for inclusion in our consolidated financial statements.
Income, expenses and cash flows are translated at weighted average exchange rates prevailing during the
fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation
adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders'
equity. Foreign exchange transaction gains or losses are included in direct operating costs in the
accompanying consolidated statements of operations and comprehensive loss. The amount of foreign currency
translation adjustment was ($779,000) and $706,000 for the years ended December 31, 2018 and 2017,
respectively.
Revenue Recognition
Revenue is recognized when control of the promised services is transferred to a customer, in an
amount that reflects the consideration that we expect to receive in exchange for those services as per the
agreement with the customer. We generate all our revenue from agreements with customers. In case there are
agreements with multiple performance obligations, we identify each performance obligation and evaluate
whether the performance obligations are distinct within the context of the agreement at the agreement’s
inception. Performance obligations that are not distinct at agreement inception are combined. We allocate the
transaction price to each distinct performance obligation proportionately based on the estimated standalone
selling price for each performance obligation, if any, and then evaluate how the services are transferred to the
customer to determine the timing of revenue recognition.
37
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) and
all related Accounting Standards Updates by applying the modified retrospective method to all contracts that
were not completed on January 1, 2018. The modified retrospective approach required us to recognize the
cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained
earnings on January 1, 2018. Comparative information has not been restated and continues to be reported
under the historical accounting standards in effect for those periods. The adoption of the new revenue standard
did not result in a cumulative effect adjustment to our retained earnings since there was no significant impact
upon adoption of the new standard. There was also no material impact to revenues, or any other financial
statement line items for the year ended December 31, 2018 as a result of applying ASC 606. We expect the
impact of the adoption of ASC 606 to remain insignificant to the Company’s results of operations on an
ongoing basis.
For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources
utilized in the period in which services are performed and performance conditions are satisfied as per the
agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are
performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are
recognized on the percentage of completion method of accounting, as services are performed, or milestones
are achieved.
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period
in which services are performed and performance conditions are satisfied as per the agreement. A portion of our
Synodex segment revenue is derived from licensing our functional software and providing access to our hosted
software platform. Revenue from such services is recognized monthly when access to the service is provided to
the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the
payment terms are identifiable; the agreement has commercial substance; and collection is probable.
The Agility segment derives its revenue primarily from subscription arrangements and provision of
enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions.
Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all
parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms
are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched
media analysis services is recognized when the services are performed, and performance conditions are
satisfied. Revenues from the reseller agreements, which are not significant to the overall revenues, are
recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the
primary obligor in the sales transaction; assume the credit risk, set the price; can select suppliers; and are
involved in the execution of the services, including after sales service.
Revenue include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket
expenses included in direct operating costs.
We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus
net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of
ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances
where the above criteria are not met and therefore, we are not the principal in providing services, amounts
received from clients are presented net of payments in the condensed consolidated statements of operations
and comprehensive loss.
Contract acquisition cost for our Agility segment is amortized over the term of the subscription
agreement which normally has a duration of 12 months or less. We review these costs on a periodic basis to
determine the need to adjust the carrying values for pre-terminated contracts.
38
Long-lived Assets
We assess the recoverability of long-lived assets, which consist primarily of fixed assets, whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. The following
factors, if present, may trigger an impairment review: (i) significant underperformance relative to expected
historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) a
significant decline in our stock price for a sustained period; and (iv) a change in our market capitalization
relative to net book value. If the recoverability of these assets is unlikely because of the existence of one or
more of the above-mentioned factors, an impairment analysis is performed, initially using a projected
undiscounted cash flow method. We make assumptions regarding estimated future cash flows and other
factors to determine the fair value of these respective assets. An impairment loss will be recognized only if the
carrying value of a long-lived asset is not recoverable and exceeds its fair value and is measured as the
amount by which the carrying amount of a long-lived asset exceeds its fair value.
Income Taxes
We determine our deferred taxes based on the difference between the financial statement and tax basis
of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards
expected to reduce taxes payable in future years. We provide a valuation allowance when it is more likely than
not that all or some portion of the deferred tax assets will not be realized. While we consider future taxable
income in assessing the need for the valuation allowance, in the event we were to determine that we would be
able to realize the deferred tax assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was made. Similarly, in the event we
were to determine that we would not be able to realize the deferred tax assets in the future considering the future
taxable income, an adjustment to the deferred tax assets would decrease income in the period such determination
was made. Changes in the valuation allowance from period to period are included in our tax provision in the
period of change. As of December 31, 2018, we intend to indefinitely reinvest the foreign earnings in our foreign
subsidiaries. However, if we change our intent and repatriate such earnings, we will have to accrue the
applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
In assessing the realization of deferred tax assets, management considered whether it was more likely
than not that all or some of the U.S. deferred tax assets would not be realizable. As of December 31, 2018, we
continue to maintain a valuation allowance on all U.S. deferred tax assets.
As of December 31, 2018, our Canadian subsidiaries have available net operating loss carryforwards
and research and development expenditures available to reduce taxable income of future years. The potential
benefits from balances have not been recognized for financial statement purposes. As of December 31, 2018, we
continue to maintain a valuation allowance on all Canadian deferred tax assets.
We account for income taxes regarding uncertain tax positions, and recognize interest and penalties
related to uncertain tax positions under “Income Tax Expense” in our consolidated statements of operations
and comprehensive loss.
Goodwill and Other Intangible Assets
We perform a valuation of assets acquired and liabilities assumed on each acquisition accounted for as a
business combination and allocate the purchase price of each acquired business to its respective net tangible and
intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer
relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor
contracts. We determine the appropriate useful life by performing an analysis of expected cash flows based on
projected financial information of the acquired businesses. Intangible assets are amortized over their estimated
useful lives using the straight-line method, which approximates the pattern in which the majority of the
economic benefits are expected to be consumed. Intangible liabilities are amortized into direct operating costs
39
ratably over their expected related revenue streams over their useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net
assets. We do not amortize goodwill but evaluate it for impairment at the reporting unit level annually during the
third quarter of each fiscal year (as of September 30th of that quarter) or when an event occurs, or circumstances
change, that indicates the carrying value may not be recoverable. In 2018, we adopted ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. Under the newly
adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the
quantitative assessment (“Step 1”) remained unchanged versus the prior guidance. However, the requirement to
complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and
comparing it to the carrying value of that goodwill to measure the impairment loss, was eliminated. As a result,
Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will
be recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying value of goodwill in that reporting unit.
We periodically analyze whether any indicators of impairment have occurred. As part of these periodic
analyses, we compare the Company’s estimated fair value, as determined based on our stock price, to the
Company’s net book value. During 2018, due to a continuing decline in our stock price and other indicators of
impairment that arose during the second quarter of 2018, we deemed it appropriate to assess goodwill
impairment as of June 30, 2018, rather than the historical testing date of September 30. Based on our assessment,
we concluded that the goodwill of the DDS segment, amounting to $675,000, was fully impaired.
We conducted our annual goodwill impairment test for the Agility segment as of September 30, 2018.
The estimated fair value of the reporting unit exceeded its carrying value, including goodwill, and we
concluded that there is no impairment of the goodwill of the Agility segment.
Accounting for Stock-Based Compensation
We are authorized to grant stock options and other stock-based awards to officers, directors, employees
and others who render services to us under the 2013 Stock Plan approved by the stockholders.
We measure and recognize stock-based compensation expense for all share-based payment awards
made to employees and directors based on estimated fair value at the grant date and recognized over the
requisite service period. Determining the fair value of stock-based awards at the grant date requires judgment,
including estimating the expected term of stock options and the expected volatility of our stock. The fair value
is determined using the Black-Scholes option-pricing model. We recorded stock-based compensation expense
of approximately $0.8 million and $0.7 million for the years ended December 31, 2018 and 2017,
respectively.
Legal Proceedings
We are subject to various legal proceedings and claims which arise in the ordinary course of business.
Our legal reserves related to these proceedings and claims are based on a determination of whether or not a
loss is probable. We review outstanding claims and proceedings with external counsel to assess probability
and estimates of loss. The reserves are adjusted if necessary. If circumstances change, we may be required to
record adjustments that could be material to our reported financial condition and results of operations.
Pensions
Most of our non-U.S. subsidiaries provide for government mandated defined pension benefits
covering those employees who meet certain eligibility requirements. Pension assumptions are significant
inputs to actuarial models that measure pension benefit obligations and related effects on operations. Two
critical assumptions – discount rate and rate of increase in compensation levels – are important elements of
40
plan expense and asset/liability measurements. These critical assumptions are evaluated at least annually on a
plan and a country-specific basis. Other assumptions involving demographic factors such as retirement age,
mortality and turnover are evaluated periodically and are updated to reflect actual experience and expectations
for the future. Actual results in any given year will often differ from actuarial assumptions because of
economic and other factors, and in accordance with generally accepted accounting principles, the impact of
these differences is accumulated and amortized over future periods.
Recent Accounting Pronouncements
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) and
all related Accounting Standards Updates by applying the modified retrospective method to all contracts that
were not completed on January 1, 2018. The modified retrospective approach required us to recognize the
cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained
earnings on January 1, 2018. Comparative information has not been restated and continues to be reported
under the historical accounting standards in effect for those periods. The adoption of the new revenue standard
did not result in a cumulative effect adjustment to our retained earnings since there was no significant impact
upon adoption of the new standard. There was also no material impact to revenues, or any other financial
statement line items for the year ended December 31, 2018 as a result of applying ASC 606. We expect the
impact of the adoption of ASC 606 to remain insignificant to the Company’s results of operations on an
ongoing basis.
In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to
recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the
lease term, and a lease liability for all leases with terms greater than twelve months. The guidance also
requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash
flows arising from leases. The standard requires the use of a modified retrospective transition approach,
which includes a number of optional practical expedients that entities may elect to apply. This new guidance
is effective for annual periods beginning after December 15, 2018. We adopted this guidance on January 1,
2019 and are electing the package of practical expedients, which, among other things, allows us to carry
forward our prior lease classifications under ASC 840. At adoption, the Company expects to recognize right
of use assets of approximately $8 million and related lease liabilities of $9 million on its consolidated balance
sheet for its operating leases. We do not expect ASU 2016-02 to have a material impact on our annual results
of operations and/or cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-
10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which
updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The
Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified retrospective transition
method. Based on the composition of the Company’s investment portfolio, the adoption of ASU 2016-01 is
not expected to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined
Benefits Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit
Plans” (“ASU 2018-14”) that makes minor changes to the disclosure requirements for employers that sponsor
defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for
certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the
FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for
public entities, early adoption is permitted. We are currently evaluating the early adoption of ASU-2018-14
but do not expect it to have a material impact.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
41
Item 8. Financial Statements and Supplementary Data.
See Financial Statement Index and Financial Statements commencing on page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance
that information required to be disclosed in our Exchange Act reports 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 Chief Executive
Officer and Interim Principal Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Under the supervision, and with the participation of our management, including our Chief Executive
Officer and our interim 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). Based on this evaluation,
our Chief Executive Officer and our Interim Principal Financial Officer concluded that, as of December 31,
2018, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as such term is defined
in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our
financial reporting. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control over financial reporting
includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation of our financial statements;
providing reasonable assurance that receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized acquisition, use or
disposition of company assets that could have a material effect on our financial statements would be
prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a misstatement of our financial statements would
be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control – Integrated Framework (2013) - issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2018.
42
This Annual Report on Form 10-K does not include an attestation report of our independent registered
public accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit us to provide only management’s report in this Annual Report on
Form 10-K.
Item 9B. Other information.
None.
43
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information called for by Item 10 is incorporated by reference from the Company’s definitive
proxy statement for the 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Exchange Act no later than 120 days after the end of the Company’s 2018 fiscal year.
The Company has a code of ethics that applies to all of its employees, officers, and directors,
including its principal executive officer, interim principal financial officer, and corporate controller. The text
of the Company’s code of ethics is posted on its website at www.innodata.com. The Company intends to
disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive
officers and directors in accordance with applicable Nasdaq and SEC requirements.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from the Company’s definitive
proxy statement for the 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Exchange Act no later than 120 days after the end of the Company’s 2018 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information called for under Item 403 Security Ownership of Certain Beneficial Owners and
Management of Regulation S-K by Item 12 is incorporated by reference from the Company’s definitive
proxy statement for the 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Exchange Act no later than 120 days after the end of the Company’s 2018 fiscal year.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information for the Company's equity compensation plans
in effect as of December 31, 2018:
Number of
Securities to be Issued Weighted-Average
Exercise Price of
Upon Exercise of
Outstanding Options, Outstanding Options,
Warrants and Rights Warrants and Rights
(a)
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(c)
4,982,040
$ 2.14
5,351,733
-
-
-
Plan Category
Equity compensation plans
approved by security holders (1)
Equity compensation plans
not approved by security
holders
Total
4,982,040
$ 2.14
5,351,733
(1) 2013 Stock Plan, approved by the stockholders, see Note 9 to Consolidated Financial Statements,
contained elsewhere herein.
44
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by Item 13 is incorporated by reference from the Company’s definitive
proxy statement for the 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Exchange Act no later than 120 days after the end of the Company’s 2018 fiscal year.
Item 14. Principal Accounting Fees and Services.
The information called for by Item 14 is incorporated by reference from the Company’s definitive
proxy statement for the 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Exchange Act no later than 120 days after the end of the Company’s 2018 fiscal year.
45
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)
1. Financial Statements. See Item 8. Index to Financial Statements.
2. Exhibits – See Exhibit Index attached hereto and incorporated by reference herein.
Item 16. Form 10K Summary.
None.
46
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INNODATA INC.
By
/s/ Jack Abuhoff
Jack Abuhoff
Chairman of the Board,
Chief Executive Officer and President
March 25, 2019
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Jack Abuhoff
Jack Abuhoff
/s/ David B. Atkinson
David B. Atkinson
/s/ Louise C. Forlenza
Louise C. Forlenza
/s/ Brian E. Kardon
Brian E. Kardon
/s/ Douglas J. Manoni
Douglas J. Manoni
/s/ Stewart R. Massey
Stewart R. Massey
/s/ Michael J. Opat
Michael J. Opat
Date
March 25, 2019
March 25, 2019
March 25, 2019
March 25, 2019
March 25, 2019
March 25, 2019
March 25, 2019
Title
Chairman of the Board,
Chief Executive Officer, President and
Interim Principal Financial Officer
Director
Director
Director
Director
Director
Director
47
Item 8. Financial Statements.
INNODATA INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Loss for the years
ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended
ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018
and 2017
Notes to Consolidated Financial Statements
PAGE
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Innodata Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innodata Inc. and Subsidiaries (the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and its results of operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick LLP
Roseland, New Jersey
March 25, 2019
We have served as the Company’s auditor since 2008.
F-2
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other assets
Deferred income taxes
Intangibles, net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Accrued salaries, wages and related benefits
Income and other taxes
Current portion of long-term obligations
Total current liabilities
Deferred income taxes
Long-term obligations, net of current portion
Non-controlling interests
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
2018
2017
$ 10,869
10,626
5,778
27,273
6,813
2,436
1,204
6,275
2,050
$ 46,051
$ 11,407
10,291
3,630
25,328
7,189
3,159
1,757
7,606
2,832
$ 47,871
$ 1,834
2,903
4,494
3,532
1,529
14,292
$ 1,870
3,759
5,539
1,098
3,333
15,599
571
4,062
614
4,477
(3,440)
(3,938)
-
-
Serial preferred stock; 5,000,000 shares authorized, none outstanding
-
-
Common stock, $.01 par value; 75,000,000 shares authorized;
27,559,000 shares issued and 25,878,000 outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: treasury stock, 1,681,000 shares at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
275
275
27,579
7,349
(15)
35,188
(4,622)
30,566
$ 46,051
27,275
7,345
846
35,741
(4,622)
31,119
$ 47,871
See notes to consolidated financial statements.
F-3
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2018 AND 2017
(In thousands, except per share amounts)
Revenues
Operating costs and expenses:
Direct operating costs
Selling and administrative expenses
Goodwill impairment
Interest expense (income), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Income (loss) attributable to non-controlling interests
2018
2017
$
57,418
$
60,929
39,045
15,846
675
33
55,599
1,819
1,808
11
7
45,826
20,200
-
(23)
66,003
(5,074)
285
(5,359)
(304)
Net income (loss) attributable to Innodata Inc. and Subsidiaries
$
4
$
(5,055)
Income (loss) per share attributable to Innodata Inc. and Subsidiaries:
Basic and diluted
$
0.00
$
(0.20)
Weighted average shares outstanding:
Basic and diluted
Comprehensive loss:
Net income (loss)
Pension liability adjustment, net of taxes
Change in fair value of derivatives, net of taxes
Foreign currency translation adjustment
Other comprehensive income (loss)
Total comprehensive loss
Comprehensive income (loss) attributed to non-controlling interest
25,878
25,816
$
11
260
(342)
(779)
(861)
(850)
7
$
(5,359)
(196)
660
706
1,170
(4,189)
(304)
Comprehensive loss attributable to Innodata Inc. and Subsidiaries
$
(857)
$
(3,885)
See notes to consolidated financial statements.
F-4
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018 AND 2017
(In thousands)
F-5
INNODATA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018 AND 2017
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization
Goodwill impairment
Provision for doubtful accounts
Stock-based compensation
Deferred income taxes
Pension cost
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Accrued salaries, wages and related benefits
Income and other taxes
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from equipment financing
Redemption of shares from non-controlling interest
Payment of long-term obligations
Net cash used in financing activities
2018
2017
$
11
$
(5,359)
3,374
675
-
796
175
477
(533)
(327)
521
(779)
(1,020)
234
3,604
(2,033)
(2,033)
-
(2)
(2,025)
(2,027)
3,674
-
(139)
695
(354)
245
(40)
284
(188)
1,595
484
(258)
639
(3,410)
(3,410)
793
-
(1,077)
(284)
Effect of exchange rate changes on cash and cash equivalents
(82)
290
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
(538)
11,407
(2,765)
14,172
Cash and cash equivalents, end of year
$
10,869
$
11,407
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Vendor financed software licenses acquired
Common stock issued for MediaMiser acquisition
Non cash redemption of non-controlling interest
$
680
$
-
$
-
$
(490)
$
$
1,090
1,213
$
525
$
-
See notes to consolidated financial statements.
F-6
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business - Innodata Inc. and Subsidiaries (“we”, the “Company”, or “Innodata”) is a
global services and technology company. We combine human expertise with deep learning technologies to
power leading information products and enterprise artificial intelligence (AI)/digital transformation.
The Company, founded in 1988 and headquartered in northern New Jersey, features a 3,500-strong
global delivery and technology team spanning ten offices globally and a research and technology incubator,
Innodata Labs, which focuses on applied machine learning and emerging artificial intelligence.
The Company’s core services are (i) data acquisition, transformation, and enrichment at scale; (ii)
digital operations management and analytics; and (iii) content applications. We report our core business as the
Digital Data Solutions (DDS) segment.
The Company also has venture businesses that leverage its core capabilities to provide specific
industry solutions. The Company’s Synodex venture business delivers a SaaS platform and managed services
for digital transformation of medical data. The Company’s Agility PR Solutions (Agility) venture business
delivers a SaaS platform and managed service for delivering news, information, and content to targeted
journalists and influencers as well as monitoring and analyzing coverage across traditional and social media
sources. Each venture business is reported as a separate segment.
Prior to the first quarter of 2018, the Company referred to the Agility segment as Media Intelligence
Solutions (MIS) and the Synodex segment as Innodata Advanced Data Solutions (IADS), and reported the
results of the Innodata docGenix, LLC subsidiary (docGenix) within the IADS segment. Effective with the
first quarter of 2018, the results for docGenix are reported within the DDS segment. As of December 31,
2018, Innodata Inc. owned 94% of docGenix.
The Company’s DDS segment specializes in combining deep neural networks and human expertise in
multiple domains (including health, science, and law) to make “unstructured information” (sometimes referred
to as “content”) useable. For business information companies, “useable” means that the content can be sold
via subscription to a digital product. For enterprises, “useable” means that the content can drive digital
process transformation and AI. The Company works with all classes of data, including sensitive and protected
data.
We also develop digital products for business information companies and digital systems which
replace legacy systems and processes.
In 2018, we continued to implement a strategy we initiated in 2017 focused on technology
differentiation, increasingly taking an innovation-led approach to create value for clients while driving leaner,
more cost-effective operations.
The Company’s Synodex segment enables clients in the insurance and healthcare sectors to transform
medical records into useable digital data and to apply technologies to the digital data to augment decision
support.
The main focus of the Synodex business is the extraction and classification of data from unstructured
medical records in an innovative way to provide improved data service capabilities for insurance
underwriting, insurance claims, medical records management, life settlement claims, and clinical trial support
F-7
services.
The Company’s Synodex segment operates through the Company’s Innodata Synodex, LLC
subsidiary. As of December 31, 2018, Innodata Inc. owned 92.5% of Innodata Synodex, LLC, an increase of
1.5% from June 30, 2018. As a result, the Company reduced the carrying value of the non-controlling interest
in Innodata Synodex, LLC by approximately $492,000, which was charged against the Company’s additional
paid-in capital.
The Company’s Agility segment provides tools and related professional services that enable public
relations (PR) and communications professionals to discover influencers, amplify messages, monitor
coverage, and measure the impact of campaigns.
Agility’s software-as-a-service (SaaS) tools include:
• An influencer targeting solution to help PR professionals identify influencers. The Agility media
database includes detailed contact information for over 840,000 unique influencers globally including
journalists, outlets, and bloggers. Live social media streams to allow users to research influencers by
tracking activity and keywords across multiple social media channels.
• An outreach and content amplification solution enabling PR professionals to distribute news,
information, and content to targeted influencers.
Integrated newswire services.
•
• A media monitoring solution to help PR professionals track what is being said about their brand,
industry or competitors and track engagement. Users can monitor and report on coverage across print,
broadcast, online and social media sources, including AI-powered image monitoring. The self-serve
monitoring tool enables users to create alerts, compile and share coverage briefings and clipbooks.
• A media analysis solution to help PR professionals analyze coverage, determine PR campaign reach
and effectiveness, and create and distribute reports.
Agility’s professional services include:
• Media monitoring and PR measurement services delivered by a team of media analysts who use the
Company’s SaaS monitoring solution to pull coverage and curate daily news briefs. This powerful
media monitoring solution is for clients with complex monitoring or reporting requirements.
• Advanced PR reporting and measurement services including custom reports, PR measurement and
social media / influencer analysis.
Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and the Bulldog Awards, a
PR awards program that recognizes outstanding performance among PR and communications professionals
and agencies, are properties of Agility.
Principles of Consolidation - The consolidated financial statements include the accounts of Innodata
Inc. and its wholly-owned subsidiaries, Agility PR Solutions Canada, a corporation in which the Company owns
substantially all of the economic interest, and the Synodex and docGenix limited liability companies that are
majority-owned by the Company. The non-controlling interests in the Synodex and docGenix limited liability
companies are accounted for in accordance with Financial Accounting Standards Board (FASB) non-controlling
interest guidance. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates - In preparing financial statements in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP), management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates include those related to
F-8
allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill,
valuation of deferred tax assets, valuation of securities underlying stock-based compensation, litigation
accruals, valuation of derivative instruments and estimated accruals for various tax exposures.
Revenue Recognition – Revenue is recognized when control of the promised services is transferred to
a customer, in an amount that reflects the consideration that we expect to receive in exchange for those
services as per the agreement with the customer. We generate all our revenue from agreements with
customers. In case there are agreements with multiple performance obligations, we identify each performance
obligation and evaluate whether the performance obligations are distinct within the context of the agreement
at the agreement’s inception. Performance obligations that are not distinct at agreement inception are
combined. We allocate the transaction price to each distinct performance obligation proportionately based on
the estimated standalone selling price for each performance obligation, if any, and then evaluates how the
services are transferred to the customer to determine the timing of revenue recognition.
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC
606”) and all related Accounting Standards Updates by applying the modified retrospective method to all
contracts that were not completed on January 1, 2018. The modified retrospective approach requires us to
recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of
retained earnings on January 1, 2018. Comparative information has not been restated and continues to be
reported under the historical accounting standards in effect for those periods. The adoption of the new revenue
standard did not result in a cumulative effect adjustment to our retained earnings since there was no significant
impact upon adoption of the new standard. There was also no material impact to revenues, or any other financial
statement line items for the year ended December 31, 2018 as a result of applying ASC 606. We expect the
impact of the adoption of ASC 606 to remain significant to the Company’s results of operations on an ongoing
basis.
For the DDS segment, revenue is recognized primarily based on the quantity delivered or resources
utilized in the period in which services are performed and performance conditions are satisfied as per the
agreement. Revenues for agreements billed on a time-and-materials basis are recognized as services are
performed. Revenues under fixed-fee agreements, which are not significant to the overall revenues, are
recognized based on the proportional performance method of accounting, as services are performed, or
milestones are achieved.
For the Synodex segment, revenue is recognized primarily based on the quantity delivered in the period
in which services are performed and performance conditions are satisfied as per the agreement. A portion of our
Synodex segment revenue is derived from licensing our functional software and providing access to our hosted
software platform. Revenue from such services is recognized monthly when access to the service is provided to
the end user; all parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the
payment terms are identifiable; the agreement has commercial substance; and collection is probable.
The Agility segment derives its revenue primarily from subscription arrangements and provision of
enriched media analysis services. It also derives revenue as a reseller of corporate communication solutions.
Revenue from subscriptions is recognized monthly when access to the service is provided to the end user; all
parties to the agreement have agreed to the agreement; each party’s rights are identifiable; the payment terms
are identifiable; the agreement has commercial substance; and collection is probable. Revenue from enriched
media analysis services is recognized when the services are performed, and performance conditions are
satisfied. Revenues from the reseller agreements, which are not significant to the overall revenues, are
recognized at gross with our functioning as a principal due to our meeting the following criteria. We act as the
primary obligor in the sales transaction; assume the credit risk, set the price; can select suppliers; and are
involved in the execution of the services, including after sales service.
Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket
expenses included in direct operating costs.
F-9
We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus
net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of
ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances
where the above criteria are not met and therefore, we are not the principal in providing services, amounts
received from clients are presented net of payments in the condensed consolidated statements of operations
and comprehensive loss.
Contract acquisition cost for our Agility segment is amortized over the term of the subscription
agreement which normally has a duration of 12 months or less. We review these costs on a periodic basis to
determine the need to adjust the carrying values for pre-terminated contracts.
Foreign Currency Translation - The functional currency of our production operations located in the
Philippines, India, Sri Lanka and Israel is the U.S. dollar. Transactions denominated in the Philippine pesos,
Indian and Sri Lankan rupees or Israeli shekels are translated to U.S. dollars at rates which approximate those in
effect on the transaction dates. Monetary assets and liabilities denominated in foreign currencies at December
31, 2018 and 2017 are translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities,
and stockholders’ equity were translated at the appropriate historical rates. Included in direct operating costs are
exchange losses (gains) resulting from such transactions of approximately ($201,000) and $466,000 for the years
ended December 31, 2018 and 2017, respectively.
The functional currency for our subsidiaries in Germany, the United Kingdom and Canada are the
Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries
are reported in these respective currencies. Financial information is translated from the applicable functional
currency to the U.S. dollar (the reporting currency) for inclusion in our consolidated financial statements.
Income, expenses and cash flows are translated at weighted average exchange rates prevailing during the
fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation
adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders'
equity. Foreign exchange transaction gains or losses are included in direct operating costs in the
accompanying consolidated statements of operations and comprehensive loss. The amount of foreign currency
translation adjustment was ($779,000) and $706,000 for the years ended December 31, 2018 and 2017,
respectively.
Derivative Instruments - The Company has designated its derivatives (foreign currency forward
contracts) as a cash flow hedge. Accordingly, the effective portion of the derivative’s gain or loss is initially
reported as a component of accumulated other comprehensive income or loss and is subsequently reclassified
to earnings when the hedge exposure affects earnings. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk management objective and strategy for
undertaking various hedging activities. There were no outstanding foreign currency forward contracts at
December 31, 2018.
Cash Equivalents - For financial statement purposes (including cash flows), the Company considers all
highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives of the related assets, which is generally two to five years.
Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or
the lives of the leases. Certain assets under capital leases are amortized over the lives of the respective leases or
the estimated useful lives of the assets, whichever is shorter.
Leases - The Company uses its incremental borrowing rate in the assessment of lease classification as
capital or operating and defines the initial lease term to include renewal options determined to be reasonably
assured. The majority of our leases are operating leases. See “Recent Accounting Pronouncement on Leases.”
F-10
factors,
following
recoverable. The
if present, may
industry or economic trends; (iii) significant decline
Long-lived Assets - Management assesses the recoverability of its long-lived assets, which consist
primarily of fixed assets, whenever events or changes in circumstances indicate that the carrying value may
not be
impairment review:
(i) significant underperformance relative to expected historical or projected future operating results; (ii)
the Company’s stock
significant negative
price for a sustained period; and (iv) a change in the Company’s market capitalization relative to net book
value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-
mentioned factors, an impairment analysis is performed, initially using a projected undiscounted cash
flow method. Management makes assumptions regarding estimated future cash flows and other factors to
determine the fair value of these respective assets. An impairment loss will be recognized only if the carrying
value of a long-lived asset is not recoverable, exceeds its fair value, and is measured as the amount by which
the carrying amount of a long-lived asset exceeds its fair value.
trigger an
in
Goodwill and Other Intangible Assets – The Company performs valuations of assets acquired and
liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price
of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible
assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to
intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful
life by performing an analysis of expected cash flows based on projected financial information of the acquired
businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which
approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible
liabilities are amortized into direct operating costs ratably over their expected related revenue streams over their
useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net
assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level
annually during the third quarter of each fiscal year (as of September 30th of that quarter) or when an event
occurs, or circumstance changes, that indicate the carrying value may not be recoverable. In 2018, the Company
adopted Accounting Standard Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Accounting for Goodwill Impairment. Under the newly adopted guidance, the optional
qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”)
remained unchanged compared to the prior guidance. However, the requirement to complete the second step
(“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying value
of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine
both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount
by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill
in that reporting unit.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of
these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price,
to its net book value. Due to a continuing decline in its stock price and other indicators of impairment that arose
during the second quarter of 2018, the Company deemed it appropriate to assess goodwill impairment as of June
30, 2018, rather than the historical testing date of September 30. Based on its assessment the Company
concluded that the goodwill of the DDS segment, amounting to $675,000, was fully impaired. Refer to Note 3,
“Goodwill and Intangible Assets”.
The Company conducted its annual goodwill impairment test for the Agility segment as of September
30, 2018. The estimated fair value of the reporting unit exceeded its carrying value, including goodwill, and
the Company concluded that there is no impairment of the goodwill of the Agility segment.
Income Taxes - Deferred taxes are determined based on the difference between the financial statement
and tax basis of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit
F-11
carryforwards expected to reduce taxes payable in future years. A valuation allowance is provided when it is
more likely than not that all or some portion of the deferred tax assets will not be realized. While the Company
considers future taxable income in assessing the need for the valuation allowance, in the event that the Company
determines that it would be able to realize the deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax assets would increase income in the period such determination was
made. Similarly, in the event that the Company determines that it would not be able to realize the deferred tax
assets in the future considering future taxable income, an adjustment to the deferred tax assets would decrease
income in the period such determination was made. Changes in the valuation allowance from period to period
are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the
foreign earnings in its foreign subsidiaries. Unremitted earnings of foreign subsidiaries have been included in the
consolidated financial statements without giving effect to the United States taxes that may be payable on
distribution to the United States, because such earnings are not anticipated to be remitted to the United States.
In assessing the realization of deferred tax assets, management considered whether it is more likely
than not that all or some portion of the U.S. and Canadian deferred tax assets will not be realizable. As the
expectation of future taxable income resulting from Synodex and Agility segments cannot be predicted with
certainty, the Company maintains a valuation allowance against all the U.S. and Canadian deferred tax assets.
The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest
and penalties related to uncertain tax positions in income tax expense in the consolidated statements of
operations and comprehensive loss.
Accounting for Stock-Based Compensation - The Company measures and recognizes stock-based
compensation expense for all share-based payment awards made to employees and directors based on the
estimated fair value at the grant date. The stock-based compensation expense is recognized over the requisite
service period. The fair value is determined using the Black-Scholes option-pricing model.
The stock-based compensation expense related to the Company’s stock plan was allocated as follows
(in thousands):
Year Ended December 31,
2018
2017
Direct operating costs
Selling and adminstrative expenses
$
264
532
$
260
435
Total stock-based compensation
$
796
$
695
Fair Value of Financial Instruments - The carrying amounts of financial instruments approximated
their fair value as of December 31, 2018 and 2017, because of the relative short maturity of these instruments.
See Note 14.
Fair value measurements and disclosures define fair value as the price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value into three levels. The three levels are defined as follows:
• Level 1: Unadjusted quoted price in active market for identical assets and liabilities.
• Level 2: Observable inputs other than those included in Level 1.
F-12
• Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in
pricing the asset or liability.
Accounts Receivable - The Company establishes credit terms for new clients based upon
management’s review of their credit information and project terms, and performs ongoing credit evaluations of
its clients, adjusting credit terms when management believes appropriate based upon payment history and an
assessment of the client’s current creditworthiness. The Company records an allowance for doubtful accounts
for estimated losses resulting from the inability of its clients to make required payments. The Company
determines its allowance by considering a number of factors, including the length of time trade accounts
receivable are past due (accounts outstanding longer than the payment terms are considered past due), the
Company’s previous loss history, the client’s current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. This cannot guarantee that credit loss rates in the
future will not be greater than those experienced in the past. In addition, there is credit exposure if the financial
condition of one of the Company’s major clients were to deteriorate. In the event that the financial condition of
one of the Company’s clients were to deteriorate resulting in an impairment of their ability to make payments,
additional allowances may be necessary. Our allowance for doubtful accounts as of December 31, 2018 and
2017 was approximately $1.0 million and $1.2 million, respectively.
Concentration of Credit Risk - The Company maintains its cash with highly rated financial
institutions, located in the United States and in foreign locations where the Company has its operations. At
December 31, 2018, the Company had cash and cash equivalents of $10.9 million, of which $5.6 million was
held by its foreign subsidiaries with local banks located mainly in Asia and $5.3 million was held in the United
States. To the extent that such cash exceeds the maximum insurance levels, the Company would be
uninsured. The Company has not experienced any losses in such accounts.
Income (loss) per Share – Income (loss) per share is computed using the weighted-average number
of common shares outstanding during the year. Diluted income (loss) per share is computed by considering
the impact of the potential issuance of common shares, using the treasury stock method, on the weighted
average number of shares outstanding. For those securities that are not convertible into a class of common
stock, the “two class” method of computing income (loss) per share is used.
Pension - The Company records annual pension costs based on calculations, which include various
actuarial assumptions including discount rates, compensation increases and other assumptions involving
demographic factors. The Company reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends. The Company believes that the
assumptions used in recording its pension obligations are reasonable based on its experience, market
conditions and inputs from its actuaries.
Deferred Revenue - Deferred revenue represents payments received from clients in advance of
providing services and amounts deferred if conditions for revenue recognition have not been met. Included in
accrued expenses on the accompanying consolidated balance sheets as of December 31, 2018 and 2017 is
deferred revenue amounting to $1.1 million and $1.3 million, respectively. Certain amounts in the 2017
consolidated financial statements have been reclassified to conform to the 2018 presentation.
Recent Accounting Pronouncements – On January 1, 2018 the company adopted ASC 606,
Revenue from Contracts with Customers (“ASC 606”) and all related Accounting Standards Updates by
applying the modified retrospective method to all contracts that were not completed on January 1, 2018. The
modified retrospective approach required us to recognize the cumulative effect of initially applying the new
standard as an adjustment to the opening balance of retained earnings on January 1, 2018. Comparative
information has not been restated and continues to be reported under the historical accounting standards in
effect for those periods. The adoption of the new revenue standard did not result in a cumulative effect
adjustment to our retained earnings since there was no significant impact upon adoption of the new standard.
There was also no material impact to revenues, or any other financial statement line items for the year ended
F-13
December 31, 2018 as a result of applying ASC 606. We expect the impact of the adoption of ASC 606 to
remain insignificant to the Company’s results of operations on an ongoing basis.
In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to
recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the
lease term, and a lease liability for all leases with terms greater than twelve months. The guidance also
requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash
flows arising from leases. The standard requires the use of a modified retrospective transition approach,
which includes a number of optional practical expedients that entities may elect to apply. This new guidance
is effective for annual periods beginning after December 15, 2018. We adopted this guidance on January 1,
2019 and are electing the package of practical expedients, which, among other things, allows us to carry
forward our prior lease classifications under ASC 840. At adoption, the Company expects to recognize right
of use assets of approximately $8 million and related lease liabilities of $9 million on its consolidated balance
sheet for its operating leases. We do not expect ASU 2016-02 to have a material impact on our annual results
of operations and/or cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (“Subtopic
825-10”): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”),
which updates certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. The Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified
retrospective transition method. Based on the composition of the Company’s investment portfolio, the
adoption of ASU 2016-01 is not expected to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined
Benefits Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit
Plans” (“ASU 2018-14”) that makes minor changes to the disclosure requirements for employers that sponsor
defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for
certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the
FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for
public entities, early adoption is permitted. We are currently evaluating the early adoption of ASU-2018-14
but do not expect it to have a material impact.
Correction of Immaterial Error - During the preparation of the 2018 consolidated financial
statements, the Company identified a cumulative error in accounting for pension expense under ASC 715,
resulting in an immaterial understatement of pension liabilities and overstatement of retained earnings. The
cumulative error resulted from the cumulative effect of under-recorded pension expense from December 31,
2008 through December 31, 2013 with respect to the Company’s DDS segment. On a year to year basis, the
under-recorded pension expense did not have a significant impact on the consolidated balance sheets and
statements of operations and comprehensive loss. The cumulative error resulted in an understatement of
pension liabilities and an overstatement of retained earnings, each by an aggregate amount of $269,000.
In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, management evaluated the materiality of the cumulative error on the current year and
affected prior year financial statements from both a qualitative and quantitative perspective. Based on this
analysis, the Company concluded that correcting the cumulative error would be immaterial to the current year
financial statements and that such cumulative error does not have a material impact on the periods in which
the pension expenses were under-recorded or the intervening periods. The correction of the cumulative error
was recorded in the 2018 consolidated financial statements. The $700,000 in recorded pension expense for
2018 includes the $269,000 of prior under-recorded pension expense and the $2.5 million of pension liability
as of December 31, 2018 includes the $269,000 of prior under-recorded pension liability. The aggregate effect
of the out-of-period correction was a reduction of net income of $269,000.
F-14
2.
Property and equipment
Property and equipment, which include amounts recorded under capital leases, are stated at cost less
accumulated depreciation and amortization (in thousands), and consist of the following:
December 31,
2018
2017
Equipment
Software
Furniture and equipment
Leasehold improvements
Total
Less: accumulated depreciation and amortization
$
$
13,165
8,868
2,153
4,604
28,790
(21,977)
6,813
13,574
7,291
2,276
5,342
28,483
(21,294)
7,189
$
$
Depreciation and amortization expense of property and equipment was approximately $2.2 million and
$2.5 million for the years ended December 31, 2018 and 2017, respectively.
Total assets financed under capital leases for the years ended December 31, 2018 and 2017 were $0.2
million and $0.8 million, respectively.
3.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill as of December 31, 2018 and 2017 were as follows (in
thousands):
Balance as of January 1, 2017
Foreign currency translation adjustment
Balance as of December 31, 2017
Foreign currency translation adjustment
Goodwill impairment
Balance as of December 31, 2018
$
$
2,734
98
2,832
(107)
(675)
2,050
The Company recorded a full goodwill impairment of $675,000 for its DDS segment as of June 30,
2018.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of
these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price,
to its net book value. The continued decline in the Company’s stock price was viewed by the Company as a
triggering event under ASU 2017-04 which required an assessment for possible goodwill impairment as of June
30, 2018. Under the provisions of ASU 2017-04, which the Company opted to early adopt, goodwill impairment
is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the
reporting unit’s fair value.
The Company performed this assessment as of June 30, 2018 and determined that the fair value of the
Agility segment exceeded its carrying value, but the fair value of the DDS segment was below its carrying value.
As a result, the Company recorded a full goodwill impairment of $675,000 for the DDS segment reporting unit
as of June 30, 2018.
F-15
The Company performed its annual goodwill assessment for the Agility segment as of September 30,
2018 and reached the conclusion that there is no goodwill impairment because the Agility segment’s fair value
exceeded its carrying value.
The fair value measurement of goodwill was classified within Level 3 of the fair value hierarchy
because the income approach was used, which utilizes significant inputs that are unobservable in the market. The
Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit
as of the impairment test measurement date.
Information regarding our acquisition-related intangible assets is as follows (in thousands):
Developed
technology
Customer
relationships
Trademarks
and
tradenames
Patents
Media
Contact
Database
Total
$
$
$
$
$
$
Gross carrying amounts:
Balance as of January 1, 2017
Foreign currency translation
Balance as of December 31, 2017
Foreign currency translation
Balance as of December 31, 2018
Accumulated amortization:
Balance as of January 1, 2017
Amortization expense
Foreign currency translation
Balance as of December 31, 2017
Amortization expense
Foreign currency translation
Balance as of December 31, 2018
$
$
$
$
$
$
Developed
technology
Customer
relationships
Trademarks
and
tradenames
Patents
Media
Contact
Database
Total
$
$
$
$
$
$
3,019
185
3,204
(205)
2,999
545
312
45
902
317
(82)
1,137
2,112
152
2,264
(183)
2,081
425
182
38
645
185
(64)
766
865
19
884
(29)
855
203
121
6
330
122
(12)
440
43
3
46
(4)
42
10
4
1
15
5
(1)
19
3,510
137
3,647
(101)
3,546
9,549
496
10,045
(522)
9,523
175
361
11
547
367
(28)
886
1,358
980
101
2,439
996
(187)
3,248
$
$
$
$
$
$
Amortization expense relating to acquisition-related intangible assets was approximately $1.0 million
for both years ended December 31, 2018 and 2017.
F-16
Estimated annual amortization expense for intangible assets subsequent to December 31, 2018 is as
follows (in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Amortization
951
$
886
886
886
886
1,780
6,275
$
4.
Taxes
In December 2017, the President signed the U.S. Tax Cuts and Jobs Act (2017 Tax Act), which includes
a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law.
Changes in tax law are accounted for in the period of enactment. As such, the 2017 consolidated financial
statements reflect the immediate tax effect of the 2017 Tax Act, which was enacted on December 22, 2017
(Enactment Date). The 2017 Tax Act contains several key provisions including, among other things:
•
•
•
•
A one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits
(E&P), referred to as the toll charge;
A reduction in the maximum Corporate tax rate from 35% to 21% for tax years beginning after December
31, 2017;
The introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-
Taxed Income (GILTI) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by applicable
foreign tax credits; and
The introduction of a quasi-territorial tax system for tax years beginning after December 31, 2017 by
providing a dividend received deduction under the participation exemption system.
Pursuant to the 2017 Tax Act, we recorded the following adjustments to income tax expense during the
fourth quarter of 2017:
• A one-time deemed repatriation of E&P on the Company’s post-1986 untaxed foreign E&P amounting
to $25.8 million. No toll tax charge was recorded due to the available net operating loss carryforwards;
and
• A reduction of deferred tax assets and a corresponding reduction of the valuation allowance of $2.3
million, primarily for the remeasurement of our deferred tax assets at the enacted tax rate of 21%.
Beginning January 1, 2018, the Company performed a calculation of the GILTI provisions and
concluded that it has no impact on account of the net losses of the Company’s foreign subsidiaries.
The significant components of the provision for income taxes for the two years ended December 31,
2018 are as follows (in thousands):
F-17
The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the two
years in the period ended December 31, 2018 is summarized as follows:
Federal income tax expense (benefit) at statutory rate
Effect of:
2017 Tax Act
Foreign tax differential
Tax effects of foreign operations
Tax effects of foreign operations permanent- FX gains and losses
Increase in unrecognized tax benefits (FIN48)
Withholding tax
State income tax, net of federal
Change in valuation allowance
Permanent items
Effective tax rate
2018
2017
21.0
%
(34.0)
%
(96.7)
23.0
46.6
23.8
19.1
6.7
2.0
58.6
(4.7)
99.4
%
101.5
5.8
33.8
(11.6)
0.7
-
0.1
(90.7)
-
5.6
%
Deferred tax assets and liabilities are classified as non-current. Significant components of the
Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows (in thousands):
F-18
Deferred income tax assets:
Allowances not currently deductible
Depreciation and amortization
Equity compensation not currently deductible
Net operating loss carryforwards
Expenses not deductible until paid
Other
Total gross deferred income tax assets before valuation allowance
Valuation allowance
Deferred income tax assets, net
Deferred income tax liabilities:
Acquisition of MediaMiser
Other
Total deferred income tax liabilities
December 31,
2018
2017
$
232
338
775
5,089
769
99
7,302
(6,098)
1,204
$
226
555
441
4,597
1,142
233
7,194
(5,437)
1,757
(356)
(215)
(571)
(446)
(168)
(614)
Net deferred income tax assets
$
633
$
1,143
Net deferred income tax asset
Net deferred income tax liability
Net deferred income tax assets
1,204
(571)
1,757
(614)
$
633
$
1,143
In assessing the realization of deferred tax assets, management considers whether it is more likely than
not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income during the periods in which
temporary differences are deductible and net operating losses are available. As of December 31, 2018, the
Company continues to maintain a valuation allowance on all U.S. and Canadian deferred tax assets.
The Company established a valuation allowance of approximately $6.1 million and $5.4 million at
December 31, 2018 and 2017, respectively. The valuation allowance relates to U.S. deferred tax assets and the
Company’s Canadian subsidiaries. The net change in the total valuation allowance was an increase of $0.7
million for the year ended December 31, 2018 compared to a decrease of $5.1 million in December 31, 2017.
The decrease in the valuation allowance in 2017 is primarily the result of the 2017 Tax Act.
Despite the access to the overseas earnings and the resulting toll charge, the Company intends to
indefinitely reinvest the foreign earnings in its foreign subsidiaries on account of the foreign jurisdiction
withholding tax that the Company would have to incur on the actual remittances. Unremitted earnings of
foreign subsidiaries amounted to approximately $20.0 million at December 31, 2018. If such earnings are
repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to
accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.
The 2017 Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates
U.S. taxes on foreign subsidiary distribution. Due to the one-time transition tax on the deemed repatriation of
F-19
post-1986 undistributed foreign subsidiary earnings and profits, all previously unremitted earnings for which no
U.S. deferred tax liability had been accrued have now been subjected to U.S. federal income tax. As a result,
earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes. To the
extent the Company repatriates these earnings to the United States, it estimates that it will not incur significant
additional taxes related to such amounts, however the estimates are provisional and subject to further analysis.
United States and foreign components of income (loss) before provision for income taxes for each of
the two years ended December 31, (in thousands) are as follows:
The Company’s Canadian subsidiaries claim deductions of eligible research and development
expenses within the Scientific Research and Experimental Development (SR&ED) Program, a federal tax
incentive program, administered by the Canada Revenue Agency. Amounts recorded for the federal and
provincial research and development tax credits aggregated $0.1 million for the years ended December 31,
2018 and 2017, respectively. Such amounts have been recorded as a reduction in selling and administrative
expenses.
At December 31, 2018, the Company has available U.S. federal net operating loss carryforwards of
approximately $14.8 million. These net operating loss carryforwards expire at various times through the year
2035.
At December 31, 2018, the Company’s Canadian subsidiaries have available net operating loss
carryforwards of approximately $9.3 million in Canada which begin to expire in 2028. In addition, these
subsidiaries also have research and development expenditures of approximately $1.5 million available to
reduce taxable income in future years which may be carried forward indefinitely. The potential benefits from
these balances have not been recognized for financial statement purposes.
The Company had unrecognized tax benefits of $2.4 million and $2.2 million as of December 31, 2018
and 2017, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.1
million and $0.3 million for the years ended December 31, 2018 and 2017, respectively. The unrecognized tax
benefits as of December 31, 2018 and 2017, if recognized, would have an impact on the Company’s effective tax
rate.
The following table represents a roll forward of the Company’s unrecognized tax benefits and
associated interest for the years ended (amounts in thousands):
December 31,
2018
2017
Balance at January 1
Increase for tax position
Decrease for tax position on account of settlement
Interest accrual
Foreign currency revaluation
Balance at December 31
F-20
$
$
2,177
285
-
63
(101)
2,424
2,063
389
(661)
313
73
2,177
$
$
The Company is subject to Federal income tax, as well as income tax in various states and foreign
jurisdictions. The Company has open periods for US Federal and state taxes from 2014 through 2018.
Various foreign subsidiaries currently have open tax years from 2003 through 2018.
Tax Assessments
In October 2010, the Company’s Indian subsidiary received an assessment from the Indian Income
Tax Department for the fiscal year ended March 31, 2006. Management disagrees with the basis of this tax
assessment, has filed an appeal against the assessment and is contesting it. Management believes that its
recorded tax liability of $329,000 for this matter, which includes interest, is adequate.
In January 2012, the Company’s Indian subsidiary received an assessment from the Indian Income
Tax Department for the fiscal year ended March 31, 2008. Management disagrees with the basis of this tax
assessment and successfully appealed the assessment. The income tax assessing officer has filed an appeal
against the decision entered in favor of the subsidiary. Management is contesting the appeal filed by the
assessing officer. Management believes that its recorded tax liability of $343,000 for this matter, which
includes interest, is adequate.
In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax
Department in India regarding the classification of services provided by this subsidiary, asserting that the
services provided by this subsidiary fall under the category of online information and database access or
retrieval services (OID Services), and not under the category of business support services (BS Services) that
are exempt from service tax as historically indicated in the subsidiary’s service tax filings. Management
disagrees with the Service Tax Department’s position and is vigorously contesting these assertions. In the
event the Service Tax Department is successful in proving that the services fall under the category of OID
Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through
November 2016 would be subject to a service tax of between 12.36% and 15%. The revenue of our Indian
subsidiary during this period was approximately $67.0 million. In accordance with new rules promulgated by
the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS
Services. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability
for this case.
In October 2016, the Company’s Indian subsidiary received notices of appeal from the Indian Service
Tax Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted
to our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall
under the category of OID Services and not BS Services. The appeal was determined in favor of the Service
Tax Department. Management disagrees with the basis of this decision and is contesting it vigorously. The
Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is
adjudicated with finality, and currently has service tax credits of approximately $1.0 million recorded as a
receivable. Based on the assessment of the Company’s counsel, the Company as not recorded any tax liability
for this case.
The Company has recorded a tax provision amounting to $181,000, which includes interest, for
several ongoing tax proceedings in the Philippines. Although the ultimate outcome cannot be determined at
this time, the Company continues to contest these claims vigorously.
Certain amounts in the 2017 income tax disclosures were reclassified to conform to the 2018
presentation. There was no effect on the Company’s current income tax expense or net deferred tax assets.
5. Long term obligations
Total long-term obligations as of December 31, 2018 and 2017 consist of the following (in thousands):
F-21
(1) Deferred lease payments represent the effect of straight-lining operating lease payments over the
respective lease terms.
(2) In March 2017, the Company renewed a vendor agreement to acquire certain additional software
licenses and to receive support and subsequent software upgrades on these and other currently owned software
licenses through February 2020. Pursuant to this agreement, the Company is obligated to pay approximately
$0.4 million annually over the term of the agreement. The total cost, net of deferred interest (in thousands), was
allocated to the following asset accounts in 2017:
Prepaid expenses and other current assets
Other assets
$ 404
809
$ 1,213
(3) On September 30, 2016, the Company and the other parties to the transaction in which the Company
acquired MediaMiser Ltd. amended the terms on which a subsidiary of the Company is required to make a
supplemental purchase price payment for MediaMiser Ltd. MediaMiser Ltd. is now known as Agility PR
Solutions Canada Ltd. Prior to the amendment, the amount of the supplemental purchase price payment was to
be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million
(C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million
(C$2 million) payable in two equal installments on March 31, 2017 and 2018 to designated recipients, except
that no payments will be made to designated recipients who fail to satisfy specified conditions. The Company
had the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. stock. In March 2017, the
Company paid 70% of the first installment by issuing 253,622 shares of Innodata Inc.’s common stock and paid
30% of the first installment in cash in April 2017. The Company paid the entire second installment in cash in
April 2018.
(4) In the second quarter of 2017, the Company relocated its U.S. and Canadian headquarters to new
premises. As a financial incentive for the Company to lease office space in each of the new locations, the
respective lessor for each of the locations offered to partially defray the construction cost for the new office
space by offering tenant improvement allowances, subject to the Company refunding any unamortized
portion of the allowance under specified circumstances as set forth in each lease. These amounts will be
amortized based on the contractual lease term and recognized as a reduction in rent expense for the periods
covered.
(5) Represents payment to be made pursuant to a settlement agreement entered into between a
subsidiary of the Company and 19 former employees of such subsidiary in December of 2018. $168,000 was
paid in January 2019 and $842,000 will be paid in 48 monthly installments commencing April 2019.
F-22
6. Commitments and contingencies
Leases - The Company is obligated under various operating lease agreements for office and production
space. Certain agreements contain escalation clauses and requirements that the Company pay taxes, insurance
and maintenance costs. Company leases that include escalated lease payments are expensed on a straight-line
basis over the lease period.
Lease agreements for production space in most overseas facilities, which expire through 2030, contain
provisions pursuant to which the Company may cancel the leases subject to a notice period, and generally
subject to forfeiture of the security deposit. Rent expense, principally for office and production space totaled
approximately $2.3 million and $2.7 million for the years ended December 31, 2018 and 2017, respectively.
Future minimum lease payments under non-cancelable leases, by year and in the aggregate, as of
December 31, 2018 (in thousands) are as follows:
Litigation – In 2008, a judgment was rendered in the Philippines against a Philippines subsidiary of
the Company that is no longer active and purportedly also against Innodata Inc., in favor of certain former
employees of the Philippines subsidiary. The payment amount aggregates approximately $6.2 million, plus
legal interest that accrued at 12% per annum from August 13, 2008 to June 30, 2013, and thereafter accrued
and continues to accrue at 6% per annum. The payment amount as expressed in U.S. dollars varies with the
Philippine peso to U.S. dollar exchange rate. In December 2017 a group of 97 of the former employees
indicated that they proposed to record the judgment as to them in New Jersey. In January 2018, in response to
an action initiated by Innodata Inc., the United States District Court for the District of New Jersey (the
“USDC”) entered a preliminary injunction that enjoins these former employees from pursuing or seeking
recognition or enforcement of the judgment against Innodata Inc. in the United States during the pendency of
the action and until further order of the Court. In June 2018, the USDC entered a consent order
administratively closing the action subject to return of the action to the active docket upon the written request
of Innodata Inc. or the former employees, with the USDC retaining jurisdiction over the matter and the
preliminary injunction remaining in full force and effect.
The Company is also subject to various other legal proceedings and claims which arise in the ordinary
course of business.
While management currently believes that the ultimate outcome of these proceedings will not have a
material adverse effect on the Company’s consolidated financial position or overall trends in consolidated
results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company
in the above-referenced Philippines action could have a material adverse impact on the Company, and
unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the
consolidated operating results of the period in which the ruling or recovery occurs. In addition, the
Company’s estimate of potential impact on the Company’s consolidated financial position or overall
consolidated results of operations for the above referenced legal proceedings could change in the future.
F-23
The Company’s legal reserves related to legal proceedings and claims are based on a determination of
whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external
counsel to assess probability and estimates of loss. The reserves are adjusted if necessary. While the Company
intends to defend these matters vigorously, adverse outcomes that it estimates could reach approximately
$275,000 in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the
Company may be required to record adjustments that could be material to its reported consolidated financial
condition and results of operations.
Foreign Currency - To the extent that the currencies of the Company’s production facilities located in
the Philippines, India, Sri Lanka and Israel fluctuate, the Company is subject to risks of changing costs of
production after pricing is established for certain client projects. In addition, the Company is exposed to the risk
of foreign currency fluctuation on the non-U.S. dollar denominated revenues, and on the monetary assets and
liabilities held by its foreign subsidiaries that are denominated in local currency.
Indemnifications - The Company is obligated under certain circumstances to indemnify directors,
certain officers and employees against costs and liabilities incurred in actions or threatened actions brought
against such individuals because such individuals acted in the capacity of director, officer or fiduciary of the
Company. In addition, the Company has contracts with certain clients pursuant to which the Company has
agreed to indemnify the client for certain specified and limited claims. These indemnification obligations occur
in the ordinary course of business and, in many cases, do not include a limit on potential maximum future
payments. As of December 31, 2018, the Company has not recorded a liability for any obligations arising as a
result of these indemnifications.
7. Pension benefits
U.S. Defined Contribution Pension Plan - The Company has a defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code, pursuant to which substantially all of its U.S. employees are
eligible to participate after completing six months of service. Participants may elect to contribute a portion of
their compensation to the plan. Under the plan, the Company has the discretion to match a portion of
participants’ contributions. The Company intends to match approximately $0.1 million to the plan for the year
ended December 31, 2019. For the year ended December 31, 2018, the Company did not make any matching
contributions.
Non-U.S. Pension benefits - The accounting standard for pensions requires an employer to recognize
a net liability or asset and an offsetting adjustment to accumulated other comprehensive loss to report the
funded status of defined benefit pension and other post-retirement benefit plans.
Most of the non-U.S. subsidiaries provide for government-mandated defined pension benefits. For
certain of these subsidiaries, vested eligible employees are provided a lump sum payment upon retiring from
the Company at a defined age. The lump sum amount is based on the salary and tenure as of retirement date.
Other non-U.S. subsidiaries provide for a lump sum payment to vested employees on retirement, death,
incapacitation or termination of employment, based upon the salary and tenure as of the date employment
ceases. The liability for such defined benefit obligations is determined and provided on the basis of actuarial
valuations. As of December 31, 2018, these plans are unfunded. Pension expense for foreign subsidiaries
totaled approximately $0.7 million and $0.2 for the years ended December 31, 2018 and 2017, respectively.
Included in the $0.7 million pension expense for the year ended 2018 is $269,000 representing the correction
of an understatement of pension liabilities from prior years.
The following table summarizes the amounts recognized in accumulated other comprehensive income
(loss), net of taxes (in thousands):
F-24
Amortization of transition obligation
Actuarial gain (loss)
Totals
Amounts in accumulated other comprehensive loss not yet
reflected in net periodic pension cost, net of taxes:
Actuarial gain
Transition obligation
Totals
Years Ended December 31,
2018
2017
$
$
$
$
41
416
457
1,747
(91)
1,656
$
$
$
$
38
(226)
(188)
1,331
(132)
1,199
Amounts in accumulated other comprehensive loss expected to
be amortized in 2019 net periodic pension cost, net of taxes:
Actuarial gain
Transition obligation
$
$
(195)
36
(159)
Totals
The following table sets out the status of the non-U.S. pension benefits and the amounts (in thousands)
recognized in the Company’s consolidated financial statements as of and for each of the two years in the
period ended December 31, 2018:
Benefit Obligations:
2018
2017
$
$
3,121
344
198
14
(622)
(251)
(213)
2,591
2,896
333
187
(69)
(107)
51
(170)
3,121
$
$
Projected benefit obligation at beginning of the year
Service cost
Interest cost
Curtailment and other adjustments
Actuarial gain
Foreign currency exchange rates changes
Benefits paid
Projected benefit obligation at end of the year
F-25
Components of Net Periodic Pension Cost:
2018
2017
Service cost
Interest cost
Past service cost
Curtailment
Actuarial gain recognized
Net periodic pension cost
$
$
344
198
34
-
133
709
333
187
-
(69)
(249)
202
$
$
The accumulated benefit obligation, which represents benefits earned to date, was approximately
$1.7 million and $2.0 million as of December 31, 2018 and 2017, respectively.
Amounts recognized in the consolidated balance sheets for the years ended December 31 consist of
the following:
Current accrued benefit cost
Non-current accrued benefit cost
Net amount recognized
2018
2017
320
2,271
2,591
249
2,586
2,835
Current accrued benefit cost for pension benefits is included in the current portion of long-term
obligations in the consolidated balance sheets. Non-current accrued benefit cost for pension benefits is
included in long-term obligations, net of current portion, in the consolidated balance sheets.
Actuarial assumptions for all non-U.S. plans are described below. The discount rates are used to
measure the year end benefit obligations and the earnings effects for the subsequent year. The assumptions for
each of the two years in the period ended December 31, 2018 are as follows:
Discount rate
Rate of increase in compensation level
Estimated Future Benefit Payments:
2018
2017
7.25%-12.17% 5.78%-10.6%
5%-7%
5%-7%
The following benefit payments, which reflect expected future service, as appropriate, are expected to
be paid (in thousands):
Years Ending December 31,
2019
2020
2021
2022
2023
2024 to 2028
$ 320
310
168
134
159
1,736
$ 2,827
F-26
8. Capital Stock
Common Stock - The Company is authorized to issue 75,000,000 shares of common stock. Each
share of common stock has one vote. Subject to preferences that may be applicable to any outstanding shares
of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors. No common stock dividends have been declared to date.
Preferred Stock - The Company is authorized to issue 5,000,000 shares of preferred stock. The Board
of Directors is authorized to fix the terms, rights, preferences and limitations of the preferred stock and to issue
the preferred stock in series which differ as to their relative terms, rights, preferences and limitations.
Stockholders Rights Agreement - On February 1, 2019, the Board of Directors declared a dividend
of one preferred share purchase right (each, a “Right,” and collectively, the “Rights”) for each outstanding
share of the Company’s common stock on February 15, 2019. The description and terms of the Rights are set
forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as rights agent,
dated as of February 1, 2019 (the “Rights Agreement”). Each Right entitles its holder to purchase, under
certain conditions, one one-thousandth of a share of Series C Participating Preferred Stock (“Preferred
Stock”). Each one one-thousandth of a share of Preferred Stock has substantially the same rights as one share
of the Company’s common stock. Subject to the terms and conditions of the Rights Agreement, Rights
become exercisable ten days after the public announcement that a “Person” has become an “Acquiring
Person” (as each such term is defined in the Rights Agreement) by obtaining beneficial ownership of 20% or
more of the Company’s outstanding common stock, or, if earlier, ten business days (or a later date determined
by the Board of Directors before any Person becomes an Acquiring Person) after a Person begins a tender or
exchange offer which, if completed, would result in that Person becoming an Acquiring Person. Any Rights
held by an Acquiring Person are void and may not be exercised.
If a Person becomes an Acquiring Person, all holders of Rights, except the Acquiring Person, may
purchase at the Right’s then-current exercise price, the Company’s common stock having a market value
equal to twice the exercise price. Moreover, at any time after a Person becomes an Acquiring Person (unless
such Person acquires 50 percent or more of the common stock of the Company then outstanding, as more fully
described in the Rights Agreement), the Board of Directors may exchange one share of the Company’s
common stock for each outstanding Right (other than rights owned by such Person, which would have
become void). In addition, if the Company is acquired in a merger or other business combination transaction
after a Person becomes an Acquiring Person, all holders of Rights, except the Acquiring Person, may purchase
at the Right’s then-current exercise price, a number of the acquiring Company’s common stock having a
market value of twice the exercise price. If the Company receives a “qualifying offer” (which includes certain
all-cash fully financed tender offers or exchange offers for all of the Company’s outstanding common stock),
under certain circumstances, holders of 10 percent of the Company’s outstanding common stock (excluding
stock held by the offeror and its affiliates and associates) may direct the Board of Directors to call a special
meeting of stockholders to consider a resolution exempting such “qualifying offer” from the Rights
Agreement. The Rights themselves have no voting power. The Board of Directors may redeem the Rights at
an initial redemption price of $0.001 per Right under certain circumstances set forth in the Rights Agreement.
If the Rights Agreement is approved by the Company’s stockholders at the 2019 annual meeting, the
Rights will expire on January 31, 2022 unless earlier redeemed or exchanged. If the Company’s stockholders
do not approve the Rights Agreement, the Rights will expire immediately following certification of the vote at
the 2019 annual meeting.
Common Stock Reserved - As of December 31, 2018, the Company had reserved for issuance
approximately 5,352,000 shares of common stock pursuant to the Company’s stock option plans.
Treasury Stock - In September 2011, the Company’s Board of Directors authorized the repurchase of
up to $2.0 million of its common stock in open market or private transactions. There is no expiration date
F-27
associated with the program. There were no share repurchases in the years ended December 31, 2018 and 2017.
As of December 31, 2018, the Company repurchased 137,000 shares of its common stock under the September
2011 authorization.
9. Stock Options
On June 7, 2016, stockholders of the Company approved amendments to the Innodata Inc. 2013 Stock
Plan. The Innodata Inc. 2013 Stock Plan as amended and restated effective June 7, 2016 is referred to herein
as the “Plan.” The number of shares of common stock of Innodata Inc. that may be delivered, purchased or
used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under
the Plan after June 7, 2016 is 5,858,892 (the “Share Reserve”). Shares subject to an option or stock
appreciation right granted under the Plan after June 7, 2016 shall count against the Share Reserve as one share
for every share granted, and shares subject to any other type of award granted under the Plan after June 7,
2016 shall count against the Share Reserve as two shares for every share granted. Any award, or portion of an
award, under the Plan or under the 2009 Stock Plan (as amended and restated (the “Prior Plan”)) that expires
or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or
canceled as to any shares without delivery of shares or other consideration shall be added back to the Share
Reserve as one share for each such share that was subject to an option or stock appreciation right granted
under the Plan or the Prior Plan, and two shares for each such share that was subject to an award other than an
option or stock appreciation right granted under the Plan or the Prior Plan. If any shares are withheld, tendered
or exchanged by a participant in the Plan as full or partial payment to Innodata of the exercise price under an
option under the Plan or the Prior Plan or in satisfaction of a participant’s tax withholding obligations with
respect to any award under the Plan or the Prior Plan, there shall be added back to the Share Reserve one share
for each such share that was withheld, tendered or exchanged in respect of an option or stock appreciation
right granted under the Plan or the Prior Plan, and two shares for each such share that was withheld, tendered
or exchanged in respect of an award other than an option or stock appreciation right granted under the Plan or
the Prior Plan.
The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing
model. The weighted average fair values of the options granted and weighted average assumptions are as
follows:
Weighted average fair value of options granted
$
0.54
$
0.73
For the Years Ended December 31,
2018
2017
Risk-free interest rate
Expected life (years)
Expected volatility factor
Expected dividends
2.73%
5-6
44.16%-48.82%
None
1.91%
6
49.62%
None
The Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods
equal to the expected term of the options in effect at the time of grant. The expected term of options granted is
based on a combination of vesting schedules, term of the options and historical experience. Expected volatility
is based on historical volatility of the Company’s common stock. The Company uses an expected dividend
yield of zero since it has never declared or paid any dividends on its capital stock.
A summary of option activity under the Plans as of December 31, 2018, and changes during the year
then ended, are presented below:
F-28
Outstanding at January 1, 2018
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2018
Number of
Options
4,241,799
1,997,500
-
(1,257,259)
4,982,040
Weighted -
Average Exercise
Price
Weighted-Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value
$
2.82
1.09
-
2.76
2.14
$
6.62
$
811,025
Exercisable at December 31, 2018
3,272,477
$
2.62
5.19
$
200,524
Vested and Expected to Vest at
December 31, 2018
4,982,040
$
2.14
6.62
$
811,025
The total compensation cost related to non-vested stock options not yet recognized as of December
31, 2018 totaled approximately $1 million. The weighted-average period over which these costs will be
recognized is twenty-seven months.
There were no option exercises during the years ended December 31, 2018 and 2017.
10.
Comprehensive loss
Accumulated other comprehensive income (loss), as reflected in the consolidated balance sheets,
consists of pension liability adjustments, net of taxes, foreign currency translation adjustment and changes in
fair value of derivatives, net of taxes. The components of accumulated other comprehensive income (loss) as
of December 31, 2018 and 2017, and reclassifications out of other comprehensive income (loss) for the years
then ended, are presented below (in thousands):
Balance at January 1, 2018
Other comprehensive loss before
reclassifications, net of taxes
Total other comprehensive income (loss)
before reclassifications, net of taxes
Net amount reclassified to earnings
Balance at December 31, 2018
Pension Liability
Adjustment
$
1,191
Fair Value of
Derivatives
$
342
Foreign Currency
Translation
Adjustment
$
(687)
Accumulated Other
Comprehensive
Income (Loss)
$
846
-
(695)
(779)
(1,474)
1,191
260
1,451
$
(353)
353
$
-
(1,466)
-
(1,466)
$
(628)
613
(15)
$
Balance at January 1, 2017
Other comprehensive income before
reclassifications, net of taxes
Total other comprehensive income (loss)
before reclassifications, net of taxes
Net amount reclassified to earnings
Balance at December 31, 2017
Pension Liability
Adjustment
Fair Value of
Derivatives
Foreign Currency
Translation
Adjustment
$
1,387
$
(318)
$
(1,393)
Accumulated Other
Comprehensive
Income (Loss)
$
(324)
-
574
706
1,280
1,387
(196)
1,191
$
256
86
342
$
(687)
-
(687)
$
956
(110)
846
$
All reclassifications out of accumulated other comprehensive income (loss) had an impact on direct
operating costs in the consolidated statements of operations and comprehensive loss.
F-29
11. Segment reporting and concentrations
The Company’s operations are classified in three reporting segments: Digital Data Solutions (DDS),
Synodex and Agility PR Solutions (Agility).
Prior to the first quarter of 2018, the Company referred to the Agility segment as Media Intelligence
Solutions (MIS) and the Synodex segment as Innodata Advanced Data Solutions (IADS), and reported the
results of the Innodata docGenix, LLC subsidiary (docGenix) within the IADS segment. Effective with the
first quarter of 2018, the results for docGenix are reported within the DDS segment.
The DDS segment specializes in combining deep neural networks and human expertise in multiple
domains (including health, science, and law) to make “unstructured information” (sometimes referred to as
“content”) useable. For business information companies, “useable” means that the content can be sold via
subscription to a digital product. For enterprises, “useable” means that the content can drive digital process
transformation and AI. The Company works with all classes of data, including sensitive and protected data.
The Synodex segment enables clients in the insurance and healthcare sectors to transform medical
records into useable digital data and to apply technologies to the digital data to augment decision support.
The Agility segment provides tools and related professional services that enable public relations (PR)
and communications professionals to discover influencers, amplify messages, monitor coverage, and measure
the impact of campaigns. Bulldog Reporter, a publisher of PR-related news and a popular e-newsletter, and
the Bulldog Awards, a PR awards program that recognizes outstanding performance among PR and
communications professionals and agencies, are properties of Agility.
A significant portion of the Company’s revenues is generated from its production facilities in the
Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.
Revenues from external clients and segment operating profit (loss), and other reportable segment
information are as follows (in thousands):
The results below for the year ended December 31, 2017 are presented on a reclassified basis as if for
the full year 2017 docGenix had been included in the DDS segment and the Synodex segment had solely
included the results of Synodex. docGenix revenue was $531,000 and $1,087,000 for years ended December
31, 2018 and 2017, respectively.
F-30
Long-lived assets as of December 31, 2018 and 2017 by geographic region are comprised of:
United States
Foreign countries:
Canada
United Kingdom
Philippines
India
Sri Lanka
Israel
Germany
Total foreign
Total
2018
2017
(in thousands)
$ 4,383
$ 5,321
7,023
2,045
900
475
280
30
2
10,755
$ 15,138
6,888
2,388
1,446
1,042
504
36
2
12,306
$ 17,627
Two clients in the DDS segment generated approximately 30% of the Company’s total revenues in the
fiscal years ended December 31, 2018 and 2017, respectively. No other client accounted for 10% or more of
total revenues during these periods. Further, in the years ended December 31, 2018 and 2017, revenues from
non-US clients accounted for 56% and 51%, respectively, of the Company's revenues.
Revenues for each of the two years in the period ended December 31, 2018 by geographic region
(determined based upon client’s domicile), are as follows:
2018
2017
(in thousands)
$ 25,403
10,874
7,488
5,985
7,668
$ 57,418
$ 30,135
10,514
6,871
5,636
7,773
$ 60,929
United States
United Kingdom
The Netherlands
Canada
Others - principally Europe
Total
F-31
As of December 31, 2018, approximately 57% of the Company's accounts receivable was due from
foreign (principally European) clients and 48% of accounts receivable was due from three clients. As of
December 31, 2017, approximately 61% of the Company's accounts receivable was due from foreign
(principally European) clients and 52% of accounts receivable was due from three clients. No other client
accounts for 10% or more of the receivables as of December 31, 2018.
12.
Income (Loss) per Share
Basic income (loss) per share is computed using the weighted-average number of common shares
outstanding during the year. Diluted income (loss) per share is computed by considering the impact of the
potential issuance of common shares, using the treasury stock method, on the weighted average number of
shares outstanding. For those securities that are not convertible into a class of common stock, the two-class
method of computing income (loss) per share is used.
Options to purchase 3.0 million shares of common stock in 2018 were outstanding but not included
in the computation of diluted income per share because the options’ exercise price was greater than the
average market price of the common shares and therefore, the effect would have been antidilutive.
Options to purchase 4.2 million shares of common stock in 2017 were outstanding but not included
in the computation of diluted loss per share due to the net loss incurred for the year, and the effect would
have been antidilutive.
13.
Derivatives
The Company conducts a large portion of its operations in international markets that subject it to
foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and
associated accounts receivable are collected in one currency and expenses to generate that revenue are
incurred in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll
costs and operating expenses in the Philippines, India, Sri Lanka and Israel.
In addition, although most of the Company’s revenues are denominated in U.S. dollars, a significant
portion of the total revenues is denominated in Canadian dollars, Pound Sterling and Euros.
The Company formally documents all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking hedge transactions. The Company does not
hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified
based on the instrument’s maturity date. As of December 31, 2018, we had no outstanding forward contracts.
The total notional amount for outstanding derivatives as of December 31, 2017 was $15.9 million.
F-32
The following table presents the fair value of derivative instruments included within the consolidated
balance sheets as of December 31, 2018 and 2017 (in thousands):
Derivatives designated as hedging instruments:
Balance Sheet Location
Fair Value
2018
2017
Foreign currency forward contracts
Prepaid expenses and other
current assets
$
-
$
342
The effect of foreign currency forward contracts designated as cash flow hedges on the consolidated
statements of operations for the years ended December 31, 2018 and 2017 were as follows (in thousands):
14.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable approximated their fair value as of December 31, 2018 and 2017, because of
the relative short maturity of these instruments.
“Fair Value Measurements and Disclosures” defines fair value as the price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value into three levels. The three levels are defined as follows:
(cid:0) Level 1: Unadjusted quoted price in active market for identical assets and liabilities.
(cid:0) Level 2: Observable inputs other than those included in Level 1.
(cid:0) Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in
pricing the asset or liability.
F-33
Exhibits which are indicated as being included in previous filings are incorporated herein by reference.
Exhibit Description
Filed as Exhibit
2.1 (a)
Share Purchase Agreement, dated as of July 28,
2014 among Innodata Inc., Media Miser Ltd. and
certain other parties
Filed as Exhibit 2.1 to our Form 8-K dated July 28, 2014
2.1 (b)
Amendment No. 1 to Share Purchase Agreement
dated as of September 30, 2016
Filed as Exhibit 2.1 to our Form 8-K dated September 30, 2016
2.2 (a)
2.2 (b)
3.1 (a)
3.1 (b)
3.1 (c)
Asset Purchase Agreement dated as of May 11,
2016 among Innodata Inc., MediaMiser LLC,
MediaMiser Ltd. and PWW Acquisition LLC
Amendment No. 1 to Asset Purchase Agreement
dated as of July 14, 2016 among PWW Acquisition
LLC, MediaMiser LLC and MediaMiser Ltd
Filed as Exhibit 2.1 to our Form 8-K dated May 11, 2016
Filed as Exhibit 2.1 to our Form 8-K dated July 14, 2016
Restated Certificate of Incorporation filed on
April 29, 1993
Filed as Exhibit 3.1(a) to our Form 10-K for the year ended
December 31, 2003
Certificate of Amendment of Certificate of
Incorporation of Innodata Corporation filed on
March 1, 2001
Certificate of Amendment of Certificate of
Incorporation of Innodata Corporation
Filed on November 14, 2003
Filed as Exhibit 3.1(b) to our Form 10-K for the year ended
December 31, 2003
Filed as Exhibit 3.1(c) to our Form 10-K for the year ended
December 31, 2003
3.1 (d)
Certificate of Amendment of Certificate of
Incorporation of Innodata Isogen, Inc.
Filed as Exhibit 3.1 to our Form 10Q for the quarter ended
June 30, 2012
3.2
3.3
4.2
4.3
4.4
4.5
4.6
4.7
Form of Amended and Restated By-Laws
Exhibit 3.1 to Form 8-K dated December 16, 2002
Form of Certificate of Designation of
Series C Participating Preferred Stock
Filed as Exhibit A to Exhibit 4.1 to Form 8-K dated
December 16, 2002
Specimen of Common Stock certificate
Exhibit 4.2 to Form SB-2 Registration Statement No. 33-62012
Form of Rights Agreement, dated as of
December 16, 2002 between Innodata Corporation
and American Stock Transfer and Trust Co., as
Rights Agent
Form of Rights Agreement, as of December 27,
2012 between Innodata Inc. and American Stock
Transfer and Trust Co., as Rights Agent
Form of Rights Agreement, as of January 14, 2016
between Innodata Inc. and American Stock
Transfer and Trust Co., as Rights agent
Exhibit 4.1 to Form 8-K dated December 16, 2002
Exhibit 4.1 to Form 8-K dated December 27, 2012
Exhibit 4.1 to Form 8-K dated January 14, 2016
Specimen of Common Stock certificate
Exhibit 4.1 to Form 10-Q dated August 7, 2015
Form of Rights Agreement, as of February 1, 2019
between Innodata Inc. and American Stock
Transfer and Trust Co., as Rights Agent
Exhibit 4.1 to Form 8-K dated February 4, 2019
10.1
1994 Stock Option Plan
Exhibit A to Definitive Proxy dated August 9, 1994
F-34
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
1993 Stock Option Plan
Exhibit 10.4 to Form SB-2 Registration Statement No. 33-62012
Form of Indemnification Agreement
between us and our directors and one of our
Officers
Exhibit 10.3 to Form 10-K for the year ended December 31, 2002
1994 Disinterested Directors Stock Option Plan
Exhibit B to Definitive Proxy dated August 9, 1994
1995 Stock Option Plan
1996 Stock Option Plan
1998 Stock Option Plan
2001 Stock Option Plan
2002 Stock Option Plan
Exhibit A to Definitive Proxy dated August 10, 1995
Exhibit A to Definitive Proxy dated November 7, 1996
Exhibit A to Definitive Proxy dated November 5, 1998
Exhibit A to Definitive Proxy dated June 29, 2001
Exhibit A to Definitive Proxy dated September 3, 2002
10.10
Employment Agreement dated as of
January 1, 2004 with George Kondrach
Filed as Exhibit 10.10 to our Form 10-K for the year ended
December 31, 2003
10.11
Letter Agreement dated as of August 9, 2004, by
Filed as Exhibit 10.2 to Form S-3 Registration statement
and between us and The Bank of New York
No. 333-121844
10.12
10.13
10.14
Employment Agreement dated as of December
22,2005
22, 2005, by and between us and Steven L. Ford
Form of 2001 Stock Option Plan Grant Letter,
dated December 22, 2005Employment Agreement
Dated December 22, 2005
dated as of December 22,2005
Form of 1995 Stock Option Agreement
Exhibit 10.1 to Form 8-K dated December 28, 2005
Exhibit 10.2 to Form 8-K dated December 28, 2005
Exhibit 10.4 to Form 8-K dated December 15, 2005
10.15
Form of 1998 Stock Option Agreement for
Exhibit 10.5 to Form 8-K dated December 15, 2005
Directors
10.16
Form of 1998 Stock Option Agreement for Officers Exhibit 10.6 to Form 8-K dated December 15, 2005
10.17
Form of 2001 Stock Option Agreement
Exhibit 10.7 to Form 8-K dated December 15, 2005
10.18
Form of new vesting and lock-up agreement for
Exhibit 10.8 to Form 8-K dated December 15, 2005
each of Haig Bagerdjian, Louise Forlenza,
John Marozsan and Todd Solomon
10.19
Form of new vesting and lock-up agreement
Exhibit 10.9 to Form 8-K dated December 15, 2005
for Jack Abuhoff
10.20
10.21
Form of new vesting and lock-up agreement
for George Kondrach
Form of new vesting and lock-up agreement
for Stephen Agress
Exhibit 10.10 to Form 8-K dated December 15, 2005
Exhibit 10.11 to Form 8-K dated December 15, 2005
10.22
Form of 2001 Stock Option Plan Grant Letter,
Exhibit 10.2 to Form 8-K dated January 5, 2006
dated December 31, 2005, for Messrs. Abuhoff,
Agress and Kondrach
10.23
Form of 2001 Stock Option Plan Grant Letter,
Exhibit 10.3 to Form 8-K dated January 5, 2006
dated December 31, 2005, for Messrs. Bagerdjian
and Marozsan and Ms. Forlenza
Transition Agreement Dated as of September 29,
2006
2006 with Stephen Agress
Exhibit 10.1 to Form 8-K dated October 3, 2006
Form of Stock Option Modification Agreement
With Stephen Agress
with
Exhibit 10.2 to Form 8-K dated October 3, 2006
10.24
10.25
10.26
Employment Agreement dated as of February 1,
Exhibit 10.2 to Form 8-K dated April 27, 2006
F-35
2006 with Jack Abuhoff
10.27
Employment Agreement dated as of
January 1, 2007 with Ashok Mishra
Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007
10.28
Innodata Incentive Compensation Plan
Exhibit 10.1 to Form 8-K dated February 13, 2008
10.29
10.30
10.31
10.32
Form of 2002 Stock Option Plan Grant Letter,
dated August 13, 2008, for Messrs. Bagerdjian,
Marozsan and Woodward, and Ms. Forlenza
Amended and Restated Employment Agreement
dated as of December 24, 2008 with Jack S.
Abuhoff
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2008
Exhibit 10.1 to Form 8-K dated December 30, 2008
Employment Agreement dated as of March 25,
2009 with Jack Abuhoff
Exhibit 10.1 to Form 8-K dated March 25, 2009
Separation Agreement and General Release dated
as of April 27, 2009 with Steven Ford
Exhibit 10.1 to Form 8-K dated April 27, 2009
10.33
2009 Stock Plan
Annex A to Definitive Proxy dated April 28, 2009
10.34
10.35
10.36
10.37
Employment Agreement dated as of November
9, 2009 with O’Neil Nalavadi
Exhibit 10.1 to Form 8-K dated October 11, 2009
Form of 2009 Stock Option Plan Grant Letter,
dated April 2, 2010 for O’Neil Nalavadi
Form of 2009 Stock Option Plan Grant Letter,
dated March 16, 2010 for O’Neil Nalavadi
Form of 2009 Stock Option Plan Grant Letter,
dated March 16, 2010 for O’Neil Nalavadi
Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2010
Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2010
Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2010
10.38
Amended and Restated 2009 Stock Plan
Annex A to Definitive Proxy dated April 22, 2011
10.39
10.40
10.41
10.42
10.43
10.44
Amendment dated as of July 11, 2011 to
Employment Agreement with Jack S. Abuhoff
Exhibit 10.1 to Form 8-K dated July 12, 2011
Amended dated as of July 11, 2011 to Employment
Agreement with O’Neil Nalavadi
Exhibit 10.2 to Form 8-K dated July 12, 2011
Amendment dated as of November 9, 2012 to
Employment Agreement with O’Neil Nalavadi
Form of Director Stock Option Grant Letter dated
March 8, 2013
Exhibit 10.3 to Form 8-K dated November 8, 2012
Exhibit 10.42 to Form 10-K dated March 15, 2013
Form of Stock Option Grant Letter dated March 8,
2013 for Messrs. Abuhoff, Mishra and Nalavadi
Exhibit 10.43 to Form 10-K dated March 15, 2013
Form of Stock Option Grant Letter dated March 8,
2013 for Jack Abuhoff
Exhibit 10.44 to Form 10-K dated March 15, 2013
10.45
Innodata Inc. 2013 Stock Plan
Annexure B to Definitive Proxy dated April 8, 2013
10.46
Advised Line of Credit Note dated June 25, 2012 in
favor of Chase
Exhibit 99.1 to Form 8-K dated February 7, 2014
10.47
Note Modification Agreement dated June 27, 2013 Exhibit 99.2 to Form 8-K dated February 7, 2014
F-36
between Innodata and Chase
10.48
Continuing Security Agreement dated May 22,
2008 between Innodata and Chase
Exhibit 99.3 to Form 8-K dated February 7, 2014
10.49
Letter dated June 27, 2013 from Chase to Innodata Exhibit 99.4 to Form 8-K dated February 7, 2014
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
16
21
23
31.1
31.2
Letter dated February 7, 2014 from Chase to
Innodata
Exhibit 99.5 to Form 8-K dated February 7, 2014
Innodata Inc. 2013 Stock Plan (as Amended and
Restated effective June 3, 2014)
Annexure A to Definitive Proxy dated April 23, 2014
Form of Stock Option Grant Letter
for December 31, 2015 Grant, for Directors
Exhibit 10.53 to Form 10-K dated March 14, 2016
Form of Stock Option Grant Letter
for December 31, 2015 Grant, for Messrs. Abuhoff,
Mishra and Nalavadi
Exhibit 10.53 to Form 10-K dated March 14, 2016
Innodata Inc. 2013 Stock Plan (as Amended and
Restated effective June 7, 2016)
Annex B to Definitive Proxy dated April 18, 2016
Form of Stock Option Grant Letter for
December 31, 2016 Grant, for Directors
Form of Stock Option Grant Letter
For December 31, 2016 Grant, for Messrs.
Abuhoff, Mishra and Nalavadi
Separation Agreement and General Release
between Innodata Inc. and O’Neil Nalavadi
Amendment Number 1 dated August 24, 2018 to
Agreement dated January 1, 2007 between the
Company and Mr. Mishra
Form of Stock Option Grant Letter for
July 13, 2018 Grant, for Directors
Form of Stock Option Grant Letter
for July 13, 2018 Grant, for Messrs. Abuhoff and
Mishra
Letter of Grant Thornton regarding change in
certifying accountant
Exhibit 10.56 to Form 10-K dated March 15, 2017
Exhibit 10.57 to Form 10-K dated March 15, 2017
Exhibit 10.1 to Form 8-K dated January 17, 2018
Exhibit 10.1 to Form 8-K dated August 28, 2018
Filed herewith
Filed herewith
Exhibit 4.01 to Form 8-K dated September 12, 2008
Significant subsidiaries of the registrant
Filed herewith
Consent of CohnReznick LLP
Filed herewith
Certificate of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certificate of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Filed herewith
Filed herewith
32.1
Certification Pursuant to 18 U.S.C. Section
Filed herewith
F-37
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2
Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Filed herewith
101 Interactive data files pursuant to Rule 405 of Filed herewith
Regulation S-T: (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of
Operations and Comprehensive Loss (iii) the
Consolidated Statements of Stockholders’
Equity, (iv) the Consolidated Statements of
Cash Flows and (v) the Notes to the
Consolidated Financial Statements.
F-38