Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted 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 and post such files). Yes
þ
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
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,
2017) was $43,073,987.
The number of outstanding shares of the
registrant’s common stock, $.01 par value, as of March 9, 2018 was 25,877,454.
Portions of the Registrant’s definitive
proxy statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Items 10,11,12,13 and 14 of Part III
of this Form 10-K.
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” 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 Media Intelligence Solutions 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.
Business Overview
Innodata (NASDAQ: INOD)
is a global digital services and solutions company. Our technology and services power leading information products and online retail
destinations around the world. Our solutions help prestigious enterprises harness the power of digital data to re-imagine how they
operate and drive performance. We serve publishers, media and information companies, digital retailers, banks, insurance companies,
government agencies and many other industries. Founded in 1988, we comprise a team of 5,000 diverse people in eight countries who
are dedicated to delivering services and solutions that help the world embrace digital data as a means of enhancing our lives and
transforming our businesses.
The Company operates
in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions
(MIS).
Digital Data Solutions (DDS) Segment
Our DDS segment provides
solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following
broad business requirements: development of digital content (including e-books); development of new digital information products;
and operational support of existing digital information products and systems.
Many of our clients
are driving or are responding to rapid and fundamental changes in the way end users discover, consume and create published information.
For some of our publishing and information services clients, this means transforming information products from print to digital;
for others, it means migrating already-digital products from web-only distribution to multiple-channel distribution that includes
mobile and tablet devices and incorporates mobility, social platform and semantic search; and for others still, it means re-tooling
pure search-based information products into workflow-embedded analytical tools that combine content with software to enable context-aware
decision-making; and for a select number of our information services clients, it means embracing the content-as-a-service model
to integrate content with other tools, applications and data. Each of these transformations requires shifts in products, as well
as the technology and the operations that support them.
For our enterprise
publishing clients, changes in the way end users discover, consume and create published information often necessitates replacing
old processes and technologies that generated static, whole documents with new processes and technologies that enable content to
reside as modular components which are re-combined dynamically to create up-to-date, product-specific assembly guides, engineering
diagrams/schematics, compliance documentation, field operations guides and clinical documentation destined for simultaneous access
on the web, from PCs, tablets and smartphones.
By blending consulting,
technology and operations sourcing with deep domain expertise, we provide measurable outcomes for publishing companies, information
services companies and enterprises through business transformation, accelerating innovation and efficient operations.
Information Product Development
We help our clients
develop high-value information products. Our clients include four of the ten largest information industry companies in the world,
spanning financial, legal, healthcare and scientific information. Information and publishing is a $1.6 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 medical (STM) area (estimated revenues of $137.4 billion) and the legal and regulatory (L&R) area
(estimated revenues of $22.7 billion)
1
.
1
Outsell Inc. (October 4, 2017). “Information Industry Outlook 2018 – All Data, Nothing But Data.”
Both STM and L&R
publishers make some or all of their revenues from the sale of information products created from the primary and secondary data
produced by professionals and researchers (in the case of STM) or courts, legislatures, administrative bodies and rule-making institutions
(in the case of L&R).
We enable our clients
to rapidly develop new digital products without direct investments in staff, facilities and technology. We embrace agile development
methodologies that provide the benefits of early solution visualization and an iterative development process that spans content,
technology and user interface development. We use a combination of onsite project management, onshore solutions architecture and
offshore globally distributed teams of developers, analysts and subject-matter experts.
For example, a leading
legal publisher sought to develop a new digital product that would provide lawyers and compliance officers a workflow tool for
rule checking, rapid research and fact checking. The new digital tool needed to be accessible via laptops, smart phones and tablet
devices. Moreover, it needed to be updated daily to maintain pace with rapid regulatory developments (it was destined to replace
a printed loose-leaf series that was updated only monthly). Our technology architects, developers and content analysts designed
and implemented the new digital tool within budget and on schedule. Using the new digital tool, lawyers and compliance officers
can now confidently react faster to their clients’ increased regulatory burdens with up-to-date information.
For another leading
global publisher, we developed an eReader application designed specifically for complex professional reference material. The publisher
saw an opportunity to increase sales by re-publishing its printed reference works as e-books, but was unable to market them as
e-books because existing eReader applications were built for simple fiction and trade books. We developed an eReader application
for the client that changed this – it enabled advanced search, linking and cross-references to external sources, subscriber
annotations, frequent textual updates and a host of other functions the publisher required in order to distribute its complex reference
books as e-books over the iPad
®
as well as Android
®
and Windows-enabled mobile devices.
Operational Support
We help our clients
significantly lower the cost of maintaining their high-value information products, applications and systems. Clients for which
we perform such services include five of the top ten leading legal, tax and regulatory information providers, three of the top
ten credit and financial information providers, and four of the top ten scientific, technical and medical information providers.
Relative to information products, our focus is on the underlying “content supply chain” activities that are necessary
to maintain the product. These activities often include content aggregation; extraction; encoding; indexing and abstracting; fabrication;
and distribution. We deliver these activities on an outsourced basis.
For example, for an
$8 billion leading provider of financial and news information, we aggregate public source documentation from a variety of government
agencies, which we transform, analyze and extract in order to support a real-time, high-value information product.
For a leading wholesale
textbook distributor, we provided support and maintenance for its digital book platform, including its customizable bookshelf and
eReader applications and its conversion and fulfillment processes.
Digital Content Supply Chain Strategy
We work with clients
at a strategic business and technology level to address business process and technology challenges related to digital content supply
chain optimization and strategy. By aligning operations and technology with business goals, we help businesses accelerate new product
development and introduction; control cost; consolidate and leverage technology investment; and obtain benefits of scale.
For a multinational
information services company, we worked in conjunction with the client’s internal teams to design new content architectures
and implement new content technologies that enabled the client to migrate its operations away from process and technologies designed
primarily for print output to new processes and technologies that were designed around the nature of the content itself and supported
multiple simultaneous delivery channels.
A global information
company had acquired two businesses that each collected, processed and managed some of the same public law content. The company
recognized the opportunity to reduce cost by consolidating the processing of this overlapping content. To accomplish this cost
savings, we implemented a new, consolidated workflow system using Alfresco and jBPM which provided a common framework for content
reuse, while enabling content enrichment processes to be performed by external and internal resources in a fully managed environment.
For a publisher of
legal treatises and practice guides and provider of on-demand learning, we created a future-state vision of operational workflows
required to support an increasing array of technologies and online products. This future-state vision included recommendations
regarding process improvements and new technologies.
Innodata Advanced Data Solutions (IADS)
Segment
Many enterprises are
embracing new digital information technologies and workflow processes within their operations in order to improve internal decision-support
systems. We formed our IADS segment in mid-2011 to design and develop new capabilities to enable clients in the financial services,
insurance, medical and healthcare sectors to improve decision-support through digital technologies. We believe that by creating
and commercializing innovative business strategies and technology solutions we will be able to accelerate our growth and reduce
our revenue volatility.
IADS operates through
two subsidiaries: Synodex and docGenix. As of December 31, 2017, we owned 91% of Synodex and 94% of docGenix.
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 and clinical trial
support services. Synodex has developed and deployed its APS.Extract
®
product for specific use with life insurance
underwriting and claims.
At the end of 2017,
Synodex had 11 clients, including RGA Reinsurance Company, the principal operating subsidiary of Reinsurance Group of America,
Incorporated (NYSE: RGA), one of the top 10 largest providers of life reinsurance in the world according to A.M. Best, and John
Hancock Insurance, the insurance operating unit of John Hancock Financial (a division of Manulife) and one of the largest life
insurers in the United States. Synodex is engaged in business discussions with other reinsurance companies and insurance carriers
that have expressed interest in utilizing its services.
The main focus of the
docGenix business is the extraction and classification of data from unstructured legal documents in order to improve an organization’s
ability to analyze documentation and feed actionable data to downstream applications.
We offer docGenix services
to banks and hedge funds. One of our clients, a large New York-based global investments company party to more than 5,000 derivative
contracts, utilizes the docGenix service and software platforms to monitor and react to market changes and counterparty and collateral
changes and to comply with increasing regulatory requirements. Prior to utilizing docGenix, these were slow and resource-intensive
activities because contract creation, storage and retrieval processes were all still paper or image based. Using docGenix’s
system, complex derivative contracts are transformed into machine readable, computer-addressable data that is down-streamed to
risk collateral and other mission-critical systems, and users can perform multi-dimensional, complex queries instantaneously.
Media Intelligence Solutions (MIS) Segment
Our MIS segment operates
through our Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, we rebranded the MediaMiser and Agility PR
Solutions products under the name Agility PR Solutions.
Agility Illuminate
(formerly known as Agility Enterprise) provides media monitoring and analysis solutions and professional services to several Fortune
500 companies and Canadian government institutions, as well as small- and medium-sized businesses. Agility Enterprise enables companies
to reduce the time and effort required to extract, analyze and share valuable business intelligence from traditional and online
media sources.
Agility Illuminates’s
proprietary technology platform monitors, aggregates, analyzes and distributes summaries of coverage from more than 200,000 content
sources including traditional and digital media. The platform includes a powerful sentiment analysis engine that identifies whether
opinions expressed in a particular document are positive, negative or neutral.
Increasingly, organizations
seek to quantify the impact of public relations (PR) and communications activities and to understand what is being said about them
across traditional and digital media. Social media has also dramatically changed how organizations manage and respond to crisis.
Organizations need to respond quickly to negative customer feedback or coverage and track ongoing conversations in order to protect
their brand and reputation. Agility Illuminate, with its powerful analytics and human augmented analysis and reporting, is designed
to fit these needs.
Agility Connect is
a global media contact database and email distribution platform, and Agility Capture provides additional self-service media monitoring
and analytics capabilities. We acquired these two Agility products from PR Newswire in July 2016. Together with Agility Illuminate,
these products enable Agility to offer self and full-service solutions that address the entire communications life cycle –
from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.
Bulldog Reporter is
a news aggregation service for the PR and corporate communications professionals. Bulldog Reporter publishes a well-known daily
e-newsletter, the Daily Dog. In addition, it offers a paid subscription service focused specifically on the health industry, a
daily e-newsletter—Inside Health Media—that provides a health-related media list and media intelligence services by
leveraging the data from Agility platform. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which
recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital
and social marketing, not-for-profit activity and overall outstanding PR performance.
With considerable consolidation
and slowing growth in the overall media intelligence market, Agility PR Solutions is carving out a niche with a focus on influencer
targeting, advanced media analytics and editorially enriched full-service options that provide context and clarity that automated
solutions alone cannot provide. This focus on technology as well as customer service differentiates Agility PR Solutions from the
clippings-origin and self-service monitoring competitors in the market.
Our Global Operations
We provide our services
using a globally distributed workforce utilizing advanced technologies that automate portions of our process and help ensure that
our work product is highly accurate and consistent.
Our delivery centers
in Asia are ISO 27001 certified. In addition, 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 1998 (DPA), as applicable. Innodata is certified to the
EU-U.S. Privacy Shield framework, which certification includes Synodex, docGenix, Agility PR Solutions and Bulldog Reporter as
covered entities. 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 monitored firewalls and intrusion detection devices.
For our data extraction
services, we maintain staff in a wide spectrum of disciplines, including medicine, law, engineering, management, finance, science
and the humanities.
Our services are organized
and managed around three vectors: a vertical industry focus, a horizontal service/process focus, and a supportive operations focus.
The vertically-aligned
groups understand our clients’ businesses and strategic initiatives. The vertical group for each particular industry includes
experts hired from that industry.
Our service/process-aligned
groups include engineering personnel and delivery personnel. Our engineering teams are responsible for creating secure and efficient
custom workflows and integrating proprietary and third-party technologies to automate manual processes and improve the consistency
and quality of our work product. These tools include categorization engines that utilize pattern recognition algorithms based on
comprehensive rule sets and related heuristics, data extraction tools that automatically retrieve specific types of information
from large data sources, and workflow systems that enable various tasks and activities to be performed across our multiple facilities.
Our globally distributed
delivery personnel are responsible for executing our client engagements in accordance with service-level agreements. We deliver
services from facilities in the United States, the Philippines, India, Sri Lanka, Israel, United Kingdom, Germany and Canada.
Other support groups
are responsible for managing diverse enabling functions including human resources, organizational development, network and communications
technology infrastructure support and physical infrastructure and facilities management.
Our sales staff, program
managers and consultants operate primarily from our North American and European locations, as well as from client sites.
Our Opportunity
Rapid changes in digital
content technologies have created the need for all sorts of companies to refashion their product offerings and their operations.
Media, publishing and information services companies contend with new monetization models, delivery platforms, and channels. They
seek to develop new digital products as print product revenue wanes; to broaden their markets by distributing content over the
iPad®, iPhone®, Android and other portable devices; and to monetize existing content in new, highly targeted custom products
through flexible reuse and repurposing.
Meanwhile, for enterprises
that rely on content to support operations, this shift to digital technology offers opportunities to improve internal decision
support and risk mitigation in complex data operations by harnessing the power of machine-readable, digital data to drive improved
decision support. For enterprises that rely on content to support products, this shift to digital technology offers opportunities
to create and manage content more efficiently, while at the same time distributing content through an increased number of channels.
As a result, media,
publishing and information services companies, and content-intensive enterprises, are increasingly relying on service providers,
such as Innodata, to provide digital content-related services. These services increasingly involve using advanced technologies
such as machine learning and artificial intelligence (AI) to extract meaningful data from unstructured data in cost efficient ways.
Clients
Two clients in our
DDS segment each generated more than 10% of our total revenues in the 2017 and 2016 fiscal years. In 2017, revenues from Wolters
Kluwer affiliated companies (the “WK Clients”) were approximately $11.5 million or 19% of total revenues, and revenues
from Reed Elsevier affiliated companies (the “RE Clients”) were approximately $6.7 million, or 11% of total revenues.
No other client generated more than 10% of our total revenues in 2017. These two clients together generated approximately 31% of
our total revenues in each of the fiscal years ended December 31, 2017 and 2016. Revenues from clients located in foreign countries
(principally in Europe) accounted for 51% of our total revenues for the year ended December 31, 2017 and 49% of our total revenues
for the year ended December 31, 2016.
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 2017 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 2017 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, 2019 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.
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 enhancing decision-support
systems. We also help clients build new information or data products.
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
model.
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 focus on technology
and engineering innovation.
Our engineering and IT teams integrate proprietary and best-in-class third party tools
into our workflows to drive as much automation as possible. In addition, our engineering and IT teams provide services directly
to our clients, helping them achieve improved efficiencies within their own operations.
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.
Sales and Marketing
For our DDS and IADS
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 MIS 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. Our corporate headquarters is located at Ridgefield
Park, New Jersey, just outside New York City. During 2017, we had four executive-level business development and marketing professionals
and approximately 45 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.
Research and Development
We incurred $0.5 million
and $0.1 million in research and development costs in our DDS segment for the years ended December 31, 2017 and 2016, respectively.
We did not incur any research and development costs for our IADS segment in either of the years ended December 31, 2017 and 2016.
Our MIS segment incurred research and development costs of $0.6 million and $0.9 million for the years ended December 31, 2017
and 2016, respectively.
Competition
Our Digital Data Solutions
segment operates in a highly competitive, fragmented and intense market. Major competitors include Apex CoVantage, Aptara, Cenveo,
Infosys, HCL Technologies, Macmillan India, SPI Technologies, JSI S.A.S. Groupe Jouve and Thomson Digital.
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 subsidiary
of our IADS 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 MIS 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 MIS business is headquartered in Ottawa, Canada and we have an
additional location in London, United Kingdom. We have ten delivery centers in the Philippines, India, Sri Lanka, Canada, Germany,
United Kingdom and Israel.
Employees
As of December 31,
2017, we employed approximately 144 persons in the United States, Canada and United Kingdom, and over 3,800 persons in ten global
delivery centers in the Philippines, India, Sri Lanka, Canada, Germany, United Kingdom and Israel. As of December 31, 2017, approximately
234 of our employees were dedicated to the IADS segment, and approximately 236 of our employees were dedicated to the MIS 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.
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 31% of our total revenues in each of the fiscal years ended December 31, 2017 and 2016, respectively.
No other client accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 2017
and 2016, revenues from non-US clients accounted for 51% and 49%, 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.
Our liquidity could be affected if our
losses continue.
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 continuing material 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 information on (i) our cash and cash equivalents that declined to $11.4 million at December 31, 2017 from $14.2 million at
December 31, 2016, (ii) the portion of our cash and cash equivalents that at December 31, 2017 was held by our foreign subsidiaries
and that can be repatriated to the United States and is subject to applicable withholding taxes in the foreign jurisdictions where
we operate, (iii) the cash used in our operating activities as a result of our net loss in 2017, (iv) the cash used in 2017 in
our investing activities for the acquisition and integration of Agility and capital expenditures and (v) our current plans for
the use of our cash and cash equivalents.
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 MIS 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.
Our MIS 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.
The Synodex and docGenix subsidiaries
in our IADS segment have incurred significant losses since their inception in 2011
.
We have invested significant
amounts in the Synodex and docGenix subsidiaries of our IADS segment. Our cumulative investment net of revenues in these subsidiaries
as of December 31, 2017 was $33.6 million, consisting of $26.6 million in operating expenses and $7.0 million in capital expenditures.
In the third quarter of 2013 we wrote off all the fixed assets of IADS, and we have expensed all investments in IADS since that
date. During 2017, these subsidiaries generated approximately $4.8 million in revenues and incurred a net loss of $0.6 million
net of inter-segment profits. Our operations and financial condition will be adversely affected if IADS fails to generate meaningful
revenues and margins.
New acquisitions, joint ventures or
strategic investments or partnerships could harm our operating results.
In July 2016, we acquired
the Agility business from PR Newswire, comprised of what we now refer to as the Agility Connect and Agility Capture products, pursuant
to an asset purchase agreement. Agility is a global media contact database and email distribution platform and Agility Plus provides
additional self-service media monitoring and analytics capabilities. In July 2014, we acquired MediaMiser Ltd., a Canada-based
provider of automated, real-time traditional and social media monitoring services, and in December 2014, we acquired intellectual
property and related assets of Bulldog Reporter from Sirius Information, Inc.
We may pursue additional
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,
2017, 51% or $5.2 million, of our accounts receivable was due from three clients. See “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 $3,000 in the first quarter of 2016 to a loss of approximately
$2.8 million in the third quarter of 2016.
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.
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 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, for our Synodex and docGenix
subsidiaries of our IADS segment, we utilize 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 MIS 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 MIS 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 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 Media Intelligence Solutions business is headquartered in Ottawa,
Canada and has an additional location in London, United Kingdom. We have ten delivery centers in the Philippines, India, Sri Lanka,
Canada, Germany, 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.
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, 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.
The major part of our
operations is carried on in the Philippines, India, Sri Lanka, Israel, 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:
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difficulties in staffing international projects and managing
international operations, including overcoming logistical and communications challenges;
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local competition, particularly in the Philippines, India
and Sri Lanka;
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imposition of public sector controls;
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trade and tariff restrictions;
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price or exchange controls;
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currency control regulations;
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foreign tax consequences;
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data privacy laws and regulation;
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labor disputes and related litigation and liability;
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intellectual property laws and enforcement practices;
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limitations on repatriation of earnings; and
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changing laws and regulations, occasionally with retroactive
effect.
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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.
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, 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. 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.
Similarly, 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. Although we selectively undertake hedging activities to mitigate
certain of these risks, our hedging activities may not be effective and may result in losses.
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, our Indian
subsidiary was subject to an inquiry by the Service Tax Bureau 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 our service tax filings. In the event the Service Tax Bureau is successful in proving
that our services fall under the category of OID Services, the revenue earned by our Indian subsidiary would be subject to a service
tax of approximately 14.5% and this would increase our operating costs. The revenues of our Indian subsidiary in 2017 were $15.6
million. We disagree with the Service Tax Bureau’s position and contest these assertions vigorously.
In 2016, our Indian
subsidiary received notices of appeal from the Commissioner, Service Tax, seeking to reverse service tax refunds previously granted
to us for certain quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services
and not BS Services. We disagree with the basis of these appeals and are contesting them vigorously. We expect delays in receiving
service tax refunds until the appeals are adjudicated with finality.
Our operating results may be adversely
affected by our use of derivative financial instruments.
We have entered into
a series of foreign currency forward contracts that are designated as cash flow hedges. These contracts are intended to partially
offset the impact of the movement of the exchange rates on future operating costs of our Asian subsidiaries. The hedging strategies
that we have implemented or may implement to mitigate foreign currency exchange rate risks may not reduce or completely offset
our exposure to foreign exchange rate fluctuations and may expose our business to unexpected market, operational and counterparty
credit risks. Accordingly, we may incur losses from our use of derivative financial instruments that could have a material adverse
effect on our business, results of operations and financial condition.
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.
Certain of our foreign
subsidiaries are subject to preferential tax rates or enjoy tax subsidies from the government. In addition, one of our foreign
subsidiaries enjoys a tax holiday. 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 withholding tax that the Company has to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted
to approximately $24.8 million at December 31, 2017. 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 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 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 as recalculated in November
2017 by the Philippines Department of Labor and Employment National Labor Relations Commission 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 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.
We are also subject
to various other legal proceedings and claims which arise in the ordinary course of business.
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.
Our services are primarily
performed from our Ridgefield, New Jersey headquarters and ten overseas delivery centers in the Philippines, India, Sri Lanka,
Canada, Germany, United Kingdom and Israel, all of which are leased. The square footage of all our leased properties totals approximately
293,000.
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 as recalculated in November
2017 by the Philippines Department of Labor and Employment National Labor Relations Commission 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 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.
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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of Business and Summary of Significant Accounting Policies
|
Description of Business
-
Innodata Inc. and Subsidiaries (the “Company”) is a global digital services and solutions company. Our technology
and services power leading information products and online retail destinations around the world. Our solutions help prestigious
enterprises harness the power of digital data to re-imagine how they operate and drive performance. We serve publishers, media
and information companies, digital retailers, banks, insurance companies, government agencies and many other industries. Founded
in 1988, we comprise a team of 4,000 diverse people in eight countries who are dedicated to delivering services and solutions that
help the world embrace digital data as a means of enhancing our lives and transforming our businesses.
The Company operates
in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions
(MIS).
The Company’s
DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or
more of the following broad business requirements: development of digital content (including e-books); development of new digital
information products; and operational support of existing digital information products and systems.
The Company’s
IADS segment designs and develops new capabilities to enable clients in the financial services, insurance and healthcare sectors
to improve decision-support through digital technologies. IADS operates through two subsidiaries. Synodex offers a range of services
for healthcare and insurance companies, and docGenix provides services to financial services institutions. As of December 31, 2017,
Innodata owned 91% of Synodex and 94% of docGenix, both limited liability companies.
The Company’s
MIS segment operates through our Agility PR Solutions and Bulldog Reporter subsidiaries.
Agility PR Solutions
offers full and self-service solutions, consisting of Agility Illuminate, Agility Connect and Agility Capture, that address the
entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.
Agility PR Solutions, through its Agility Illuminate product, provides media monitoring and analysis solutions and professional
services to several Fortune 500 companies and Canadian government institutions, as well as small- and medium-sized businesses.
Agility Illuminate enables companies to reduce the time and effort required to extract, analyze and share valuable business intelligence
from traditional and online media sources. Agility Connect is a global media contact database and email distribution platform and
Agility Capture provides additional self-service media monitoring and analytics capabilities. The solution is offered as software-as-a-service
(SaaS).
Bulldog Reporter is
a news aggregation service for public relations and corporate communications professionals. Bulldog Reporter publishes a well-known
daily e-newsletter, the Daily Dog. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which
recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital
and social marketing, not-for-profit activity and overall outstanding PR performance.
Principles of Consolidation
- The consolidated financial statements include the accounts of Innodata Inc. and its wholly-owned subsidiaries, Agility PR
Solutions, 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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Use of Estimates
- In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities 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 revenue recognition, 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, pension benefits, purchase price allocation of the net assets acquired in the acquisition
of Agility, valuation of derivative instruments and estimated accruals for various tax exposures.
Revenue Recognition
- For the DDS segment, revenue is recognized based on the quantity delivered or resources utilized and in the period in which
services are performed and delivery has occurred. Revenues for contracts billed on a time-and-materials basis are recognized as
services are performed. Revenues under fixed-fee contracts, 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 IADS segment,
revenue is recognized primarily based on the quantity delivered and the period in which services are performed and deliverables
are made as per contracts. A portion of our IADS segment revenue is derived from licensing our software and providing access to
our hosted software platform. Revenue from such services are recognized monthly when access to the service is provided to the end
user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable
and collection is reasonably assured.
The MIS segment derives
its revenues primarily from subscription arrangements and provision of enriched media analysis services. Revenue from subscriptions
is recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations,
persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured. Revenue
from enriched media analysis services is recognized when the services are performed and delivered to the client.
Revenues include reimbursement
of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.
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, 2017 and 2016 were 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 $466,000 and $486,000 for the years ended December
31, 2017 and 2016, respectively.
The functional currency
for our subsidiaries in Germany, 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 ($687,000) and $1,393,000 as of December 31, 2017 and 2016, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
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.
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 recoverable. The following factors, if present, may trigger
an impairment review: (i) significant underperformance relative to expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii) significant decline in the Company’s
stock price for a sustained period; and (iv) a change in the Company’s market
capitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of
one or more of the above-mentioned factors, an impairment analysis is performed, 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.
Goodwill and Other
Intangible Assets -
Goodwill represents the excess purchase price paid over the fair value of net assets acquired. The Company
tests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used
to identify potential impairment, compares the fair value of a reporting unit, with its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed
to measure the amount of the impairment loss, if any. If impairment is determined, the Company will recognize additional charges
to operating expenses in the period in which they are identified, which would result in a reduction of operating results and a
reduction in the amount of goodwill.
In the annual impairment
test conducted by the Company as of September 30, 2017 and 2016, the estimated fair value of the reporting unit exceeded its carrying
amount, including goodwill. As such, no impairment was identified or recorded.
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 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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
In assessing the realization
of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. deferred
tax assets will not be realizable. As the expectation of future taxable income resulting from Synodex 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 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 various stock option plans was allocated as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
$
|
260
|
|
|
$
|
330
|
|
Selling and adminstrative expenses
|
|
|
435
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
695
|
|
|
$
|
1,162
|
|
Fair Value of 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, 2017 and 2016, because of the relative short maturity of these instruments.
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.
|
|
·
|
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 that 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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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, 2017, the Company had cash and cash equivalents of $11.4
million, of which $5.7 million was held by its foreign subsidiaries with local banks located mainly in Asia and $5.7 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.
Loss per Share
-
Loss per share is computed using the weighted-average number of common shares outstanding during the year. Diluted 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 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, 2017 and 2016 is deferred revenue amounting to $1.9 million and $2.0 million, respectively.
Recent
Accounting Pronouncements
- In May 2014, the FASB issued guidance on revenue from contracts with clients. This update
is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods
or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. This accounting guidance is effective prospectively for annual reporting
periods, and interim periods within those periods, beginning after December 15, 2017 and early adoption is permitted starting
from the first quarter of 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt
the new standard when it takes effect. The Company will adopt the new standard and related updates effective January 1, 2018
using the modified retrospective method of adoption. The new standard further requires new disclosures about contracts
with customers, including the significant judgments the Company has made when applying the guidance. The Company has
finalized its analysis and the adoption of this guidance will not have a material impact on its consolidated financial
statements and internal controls over financial reporting.
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 12 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. Early application is permitted. The Company
is in the process of evaluating the effect the guidance will have on its existing accounting policies and consolidated financial
statements but expects there will be an increase in assets and liabilities on the consolidated balance sheets at adoption due to
the recording of right-of-use assets and corresponding lease liabilities, which may be material.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
In March 2016, the
FASB issued guidance relating to share-based compensation. This new guidance is intended to simplify several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after
December 15, 2016. The Company adopted this standard in 2017 and there was no material impact on its consolidated financial
statements.
In March 2017, the
FASB issued guidance on Compensation - Retirement Benefits relating to improvements in the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. Under existing U.S. GAAP, an entity is required to present all components of net
periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this
net amount may be capitalized as part of an asset where appropriate. The amendments in the guidance require that an employer report
the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent
employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit
cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations,
if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments
in the guidance will be applied retrospectively for the presentation of the service cost component and the other components of
net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization
of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance will
be effective for the Company for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The
Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.
In January 2017, the
FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under
current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the
same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all
of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill
impairment. Under the new standard, 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 new standard is effective beginning in January 2020,
with early adoption permitted.
In August 2017, the
FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial
reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements. The amendments will be effective for the Company for interim and annual periods beginning after December
15, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material
impact on its consolidated financial statements.
|
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:
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Equipment
|
|
$
|
13,574
|
|
|
$
|
14,558
|
|
Software
|
|
|
7,291
|
|
|
|
5,685
|
|
Furniture and equipment
|
|
|
2,276
|
|
|
|
2,119
|
|
Leasehold improvements
|
|
|
5,342
|
|
|
|
4,929
|
|
Total
|
|
|
28,483
|
|
|
|
27,291
|
|
Less: accumulated depreciation and amortization
|
|
|
(21,294
|
)
|
|
|
(21,894
|
)
|
|
|
$
|
7,189
|
|
|
$
|
5,397
|
|
Depreciation and amortization
expense of property and equipment was approximately $2.5 million and $2.1 million for the years ended December 31, 2017 and 2016,
respectively.
Total assets financed
under capital leases for 2017 were $0.8 million. There were no acquisitions financed under capital leases in 2016.
On July 14, 2016, Innodata’s
MediaMiser subsidiary completed the acquisition of the Agility business from PR Newswire under an asset purchase agreement for
cash consideration of $4.2 million.
The Agility business
that was acquired consists of two products – Agility Connect, a global media contact database and email distribution platform
and Agility Capture that provides additional self-service media monitoring and analytics capabilities. The acquisition helped the
Company’s MIS segment foster growth in North America and Europe by bolstering its media intelligence solutions and media
databases, improving its media outreach capabilities, and delivering stronger, more data-powered media intelligence to clients.
With this acquisition, Agility PR Solutions can now offer self and full-service solutions that address the entire communications
life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.
The transaction has
been accounted for using the acquisition method of accounting. This method requires that assets acquired, and liabilities assumed
in a business combination be recognized at their fair values as of the acquisition date. The excess of the purchase price over
the net assets acquired was recorded as goodwill.
The Company has obtained
third party valuations of certain intangible assets. The following table summarizes (in thousands) the final purchase price allocation
for the acquisition:
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Amount
|
|
Accounts receivable
|
|
$
|
771
|
|
Media contact database
|
|
|
3,610
|
|
Developed technology
|
|
|
994
|
|
Tradenames and trademarks
|
|
|
310
|
|
Total identifiable assets acquired
|
|
|
5,685
|
|
|
|
|
|
|
Accrued salaries, wages and related benefits
|
|
|
63
|
|
Deferred revenues
|
|
|
2,560
|
|
Income and other taxes
|
|
|
97
|
|
Total liabilities assumed
|
|
|
2,720
|
|
Net identifiable assets acquired
|
|
|
2,965
|
|
Goodwill
|
|
|
1,263
|
|
Net assets acquired
|
|
$
|
4,228
|
|
The estimated fair
value of the media contacts database and tradenames and trademarks intangible assets was determined using the “relief from
royalty method” under the income approach, which is a valuation technique that provides an estimate of the fair value of
an asset based on the cost savings that are available through ownership of the asset by the avoidance of paying royalties to license
the use of the asset from another owner. The estimated fair value of the developed technology was determined based on the cost
approach, which measures the value by the cost to reconstruct or replace the platform with another of like utility. Some of the
more significant assumptions inherent in the development of these asset valuations include the projected revenue associated with
the asset, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment
of each asset’s life cycle, as well as other factors. The discount rate used to arrive at the present value of the media
contact database and tradenames and trademarks at the acquisition date, was 13.5%. The remaining useful lives of the media contact
database, developed technology, and tradenames and trademarks were based on historical product development cycles, the projected
rate of technology migration, a market participant’s use of these intangible assets and the pattern of projected economic
benefit of these intangible assets.
The amounts assigned
to the media contact database, developed technology, tradenames and trademarks are amortized over the estimated useful life of
10 years.
The following unaudited
pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2016
(amounts in thousands, except per share amounts). The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of
that time or that may result in the future.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
December 31,
|
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
As reported
|
|
$
|
63,074
|
|
Proforma
|
|
$
|
66,574
|
|
|
|
|
|
|
Net loss attributable to Innodata Inc. and Subsidiaries:
|
|
|
|
|
As reported
|
|
$
|
(5,524
|
)
|
Proforma
|
|
$
|
(5,188
|
)
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
As reported
|
|
$
|
(0.22
|
)
|
Proforma
|
|
$
|
(0.20
|
)
|
|
4.
|
Goodwill and Intangible Assets
|
The changes in the
carrying amount of goodwill as of December 31, 2017 and 2016 were as follows (in thousands):
Balance as of January 1, 2016
|
|
$
|
1,476
|
|
Goodwill recorded in connection with an acquisition
|
|
|
1,263
|
|
Foreign currency translation adjustment
|
|
|
(5
|
)
|
Balance as of December 31, 2016
|
|
|
2,734
|
|
Foreign currency translation adjustment
|
|
|
98
|
|
Balance as of December 31, 2017
|
|
$
|
2,832
|
|
The goodwill recorded
in connection with the acquisition is not deductible for tax purposes.
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, 2016
|
|
$
|
1,978
|
|
|
$
|
2,036
|
|
|
$
|
555
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
4,610
|
|
Additions
|
|
|
994
|
|
|
|
-
|
|
|
|
310
|
|
|
|
-
|
|
|
|
3,610
|
|
|
|
4,914
|
|
Foreign currency translation
|
|
|
47
|
|
|
|
76
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(100
|
)
|
|
|
25
|
|
Balance as of December 31, 2016
|
|
|
3,019
|
|
|
|
2,112
|
|
|
|
865
|
|
|
|
43
|
|
|
|
3,510
|
|
|
|
9,549
|
|
Foreign currency translation
|
|
|
185
|
|
|
|
152
|
|
|
|
19
|
|
|
|
3
|
|
|
|
137
|
|
|
|
496
|
|
Balance as of December 31, 2017
|
|
$
|
3,204
|
|
|
$
|
2,264
|
|
|
$
|
884
|
|
|
$
|
46
|
|
|
$
|
3,647
|
|
|
$
|
10,045
|
|
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Developed
technology
|
|
|
Customer
relationships
|
|
|
Trademarks
and
tradenames
|
|
|
Patents
|
|
|
Media
Contact
Database
|
|
|
Total
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
$
|
280
|
|
|
$
|
240
|
|
|
$
|
98
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
623
|
|
Amortization expense
|
|
|
257
|
|
|
|
178
|
|
|
|
105
|
|
|
|
4
|
|
|
|
181
|
|
|
|
725
|
|
Foreign currency translation
|
|
|
8
|
|
|
|
7
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
10
|
|
Balance as of December 31, 2016
|
|
|
545
|
|
|
|
425
|
|
|
|
203
|
|
|
|
10
|
|
|
|
175
|
|
|
|
1,358
|
|
Amortization expense
|
|
|
312
|
|
|
|
182
|
|
|
|
121
|
|
|
|
4
|
|
|
|
361
|
|
|
|
980
|
|
Foreign currency translation
|
|
|
45
|
|
|
|
38
|
|
|
|
6
|
|
|
|
1
|
|
|
|
11
|
|
|
|
101
|
|
Balance as of December 31, 2017
|
|
$
|
902
|
|
|
$
|
645
|
|
|
$
|
330
|
|
|
$
|
15
|
|
|
$
|
547
|
|
|
$
|
2,439
|
|
Amortization expense
relating to acquisition-related intangible assets was $1.0 million and $0.7 million for the years ended December 31, 2017 and 2016,
respectively.
Estimated annual amortization
expense for intangible assets subsequent to December 31, 2017 is as follows (in thousands):
Year
|
|
Amortization
|
|
2018
|
|
$
|
1,000
|
|
2019
|
|
|
1,000
|
|
2020
|
|
|
935
|
|
2021
|
|
|
935
|
|
2022
|
|
|
935
|
|
Thereafter
|
|
|
2,801
|
|
|
|
$
|
7,606
|
|
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;
|
|
•
|
An 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
|
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
•
|
A introduction of a quasi-territorial tax system for tax years beginning after December 31, 2017
by providing dividends received deduction under the participation exemption system.
|
The Company continues
to evaluate the impacts of the 2017 Tax Act. The Company is evaluating the GILTI provisions of the 2017 Tax Act and its impact,
if any, on the consolidated financial statements as of December 31, 2017. The FASB allows companies to adopt an accounting policy
to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. The Company has not yet determined
the accounting policy and as such did not record a deferred income tax expense or benefit related to the GILTI provisions in the
consolidated statement of operations for the year ended December 31, 2017 and will finalize this during the measurement period.
Pursuant to the 2017
Tax Act, the Company recorded the following adjustments to income tax expense during the fourth quarter of 2017:
|
•
|
A one-time deemed repatriation of E&P amounting to $6.4 million. No toll tax liability was
recorded due to the available net operating loss carryforwards. This resulted in a reduction of deferred tax assets and a corresponding
reduction in the valuation allowance of $2.2 million; and
|
|
•
|
A reduction of deferred tax assets and a corresponding reduction of the valuation allowance of
$4.8 million, primarily for the remeasurement of our deferred tax assets at the enacted tax rate of 21%. An income tax benefit
of $0.1 million, primarily for the remeasurement of our deferred tax liabilities at the enacted tax rate of 21%.
|
Due to the complexities
involved in accounting for the enactment of the 2017 Tax Act, SEC Staff Accounting Bulletin 118 (SAB 118) allows companies to record
provisional estimates of the impacts of the 2017 Tax Act during a measurement period which is similar to the measurement period
of up to one year from the enactment which is similar to the measurement period used when accounting for business combinations.
The Company will continue to assess the impact of the recently enacted tax law on its consolidated financial statements.
The significant components
of the provision for income taxes for each of the two years in the period ended December 31, 2017 are as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
594
|
|
|
$
|
1,301
|
|
Federal
|
|
|
176
|
|
|
|
-
|
|
State and local
|
|
|
5
|
|
|
|
1
|
|
|
|
|
775
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(97
|
)
|
|
|
(176
|
)
|
Federal
|
|
|
(393
|
)
|
|
|
-
|
|
|
|
|
(490
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
285
|
|
|
$
|
1,126
|
|
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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, 2017 is summarized
as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Effect of:
|
|
|
|
|
|
|
|
|
State income taxes (net of federal tax benefit)
|
|
|
(0.5
|
)
|
|
|
(2.7
|
)
|
Taxes on foreign income at rates that differ from U.S. statutory rate
|
|
|
28.0
|
|
|
|
17.3
|
|
Change in valuation allowance on deferred tax assets
|
|
|
(90.1
|
)
|
|
|
(34.5
|
)
|
2017 Tax Act
|
|
|
136.9
|
|
|
|
-
|
|
Deemed dividend under Section 956 of the Internal Revenue Code
|
|
|
(35.4
|
)
|
|
|
75.9
|
|
Increase (decrease) in unrecognized tax benefits
|
|
|
0.7
|
|
|
|
1.6
|
|
Other
|
|
|
-
|
|
|
|
0.1
|
|
Effective tax rate
|
|
|
5.6
|
%
|
|
|
23.7
|
%
|
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, 2017 and 2016 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowances not currently deductible
|
|
$
|
226
|
|
|
$
|
546
|
|
Depreciation and amortization
|
|
|
1,222
|
|
|
|
1,654
|
|
Equity compensation not currently deductible
|
|
|
853
|
|
|
|
1,836
|
|
Net operating loss carryforwards
|
|
|
4,542
|
|
|
|
6,718
|
|
Expenses not deductible until paid
|
|
|
1,142
|
|
|
|
1,079
|
|
Tax credit carryforwards
|
|
|
-
|
|
|
|
176
|
|
Other
|
|
|
297
|
|
|
|
188
|
|
Total gross deferred income tax assets before valuation allowance
|
|
|
8,282
|
|
|
|
12,197
|
|
Valuation allowance
|
|
|
(6,525
|
)
|
|
|
(10,556
|
)
|
Deferred income tax assets, net
|
|
|
1,757
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Acquisition of MediaMiser
|
|
|
(446
|
)
|
|
|
(471
|
)
|
Other
|
|
|
(168
|
)
|
|
|
(209
|
)
|
Total deferred income tax liabilities
|
|
|
(614
|
)
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
1,143
|
|
|
$
|
961
|
|
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, 2017, the Company continues to maintain a valuation allowance on all U.S. and Canadian deferred tax assets.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
A significant portion
of the Company’s operations are conducted outside the United States. As a result of the 2017 Tax Act, the toll charge amounted
to $6.4 million. The charge was offset by the available net operating loss carryforwards. 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 withholding tax that the Company would have to incur on the actual remittances. Unremitted earnings of foreign subsidiaries
amounted to approximately $24.8 million at December 31, 2017. 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 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 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.
In 2017 the U.S. entity
deferred $5.2 million in payments due to its Asian operating subsidiaries, which resulted in a deemed dividend that is taxable
income for U.S. tax purposes under Section 956 of the Internal Revenue Code. The taxable income was offset against the net operating
loss carryforwards of the U.S. entity.
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:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(2,243
|
)
|
|
$
|
(5,401
|
)
|
Foreign
|
|
|
(2,831
|
)
|
|
|
616
|
|
Total
|
|
$
|
(5,074
|
)
|
|
$
|
(4,785
|
)
|
Certain of the Company’s
foreign subsidiaries are subject to preferential tax rates. In addition, one of the foreign subsidiaries enjoys a tax holiday.
Due to the tax holiday and the preferential tax rates, the income tax rate for the Company was substantially reduced, the tax benefit
from which was approximately $0.2 million for both 2017 and 2016.
The Company’s
Canadian subsidiaries claims 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 and $0.2 million for the years ended
December 31, 2017 and 2016, respectively. Such amounts have been recorded as a reduction in selling and administrative expenses.
At December 31, 2017,
the Company has available U.S. federal and New Jersey state net operating loss carryforwards of approximately $15.5 million and
$16.9 million, respectively. These net operating loss carryforwards expire at various times through the year 2035. Stock option
exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a
“windfall”). The Company adopted the provisions of ASU 2016-9 whereby these benefits were reflected in the net operating
losses and resulting deferred tax assets in 2016. Windfalls included in net operating losses were approximately $5.2 million.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
At December 31, 2017,
the Company’s Canadian subsidiaries have available net operating loss carryforwards of approximately $8.2 million in Canada
which begin to expire in 2028. In addition, these subsidiaries also have research and development expenditures of approximately
$1.8 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 $0.9 million and $1.2 million as of December 31, 2017 and 2016. The portion of unrecognized tax benefits relating
to interest and penalties was $0.4 million and $0.5 million as of December 31, 2017 and 2016, respectively. The unrecognized tax
benefits as of December 31, 2017 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at January 1
|
|
$
|
1,184
|
|
|
$
|
1,207
|
|
Increase for tax position
|
|
|
-
|
|
|
|
40
|
|
Decrease for tax position on account of settlement
|
|
|
(402
|
)
|
|
|
(108
|
)
|
Interest accrual
|
|
|
44
|
|
|
|
51
|
|
Foreign currency revaluation
|
|
|
85
|
|
|
|
(6
|
)
|
Balance at December 31
|
|
$
|
911
|
|
|
$
|
1,184
|
|
The Company is subject
to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company is no longer subject to examination
by Federal tax authorities for years prior to 2006 and by New Jersey tax authorities for years prior to 2012. Various foreign subsidiaries
currently have open tax years from 2003 through 2017.
Pursuant to an income
tax audit by the Indian Bureau of Taxation in 2009, the Company’s Indian subsidiary received a tax assessment approximating
$356,000 including interest, through December 31, 2017 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 vigorously. In January 2012,
the Indian subsidiary received a final tax assessment of approximately $1.0 million, including interest, for the fiscal year ended
March 31, 2008, from the Indian Bureau of Taxation. Management disagrees with the basis of this tax assessment and has filed an
appeal against it. Due to this assessment, the Company recorded a tax provision amounting to $371,000 including interest through
December 31, 2017. In April 2015, the Company received a favorable judgment whereby the Appeal Officer reduced the tax assessment
to $0.3 million. Under the Indian Income Tax Act, however, the income tax assessing officer has the right to appeal against the
judgment passed by the Appeal Officer. In the third quarter of 2015, the income tax assessing officer exercised this right and
filed an appeal. Based on recent experience, management believes that the tax provision of $371,000 including interest is adequate.
In 2015, the Company’s
Indian subsidiary was subject to an inquiry by the Service Tax Bureau 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. In the event the Service Tax Bureau is
successful in proving that the services fall under the category of OID Services the revenues earned by the Company’s Indian
subsidiary would be subject to a service tax of approximately 14.5% of the subsidiary’s revenues and this would increase
the operating costs of the Company by an equivalent amount. The
revenues of the Company’s Indian
subsidiary for the year ended December 31, 2017 were $15.6 million.
The Company disagrees with the Service Tax Bureau’s
position and is vigorously contesting these assertions.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The Company established
a valuation allowance of approximately $6.5 million and $10.6 million at December 31, 2017 and 2016, 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 a decrease of $4.1 million for the years ended December 31, 2017 compared to an increase of $0.7 million in December
31, 2016. The decrease in the valuation allowance in 2017 is primarily the result of the 2017 Tax Act. The adoption of the provisions
of ASU 2016-9 resulted in a $1.8 million increase in the valuation allowance in 2016.
The Company from time
to time is also subject to various other tax proceedings and claims for its Philippines subsidiaries. The Company has recorded
a tax provision amounting to $184,000 including interest through December 31, 2017, 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.
Total long-term obligations
as of December 31, 2017 and 2016 consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
829
|
|
|
$
|
224
|
|
Deferred lease payments
(1)
|
|
|
731
|
|
|
|
705
|
|
Microsoft licenses
(2)
|
|
|
751
|
|
|
|
-
|
|
Acquisition related liability
(3)
|
|
|
800
|
|
|
|
1,492
|
|
Lease incentive liability
(4)
|
|
|
664
|
|
|
|
-
|
|
Pension obligations - accrued pension liability
|
|
|
2,835
|
|
|
|
2,616
|
|
|
|
|
6,610
|
|
|
|
5,037
|
|
Less: Current portion of long-term obligations
|
|
|
2,133
|
|
|
|
1,120
|
|
Totals
|
|
$
|
4,477
|
|
|
$
|
3,917
|
|
(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
|
|
$
|
404
|
|
Other assets
|
|
|
809
|
|
|
|
$
|
1,213
|
|
(3)
On September
30, 2016 the Company and the other parties to the transaction in which the Company acquired MediaMiser amended the terms on which
a subsidiary of the Company is required to make a supplemental purchase price payment for MediaMiser. 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 has 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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(4)
In the
second quarter of 2017, the Company moved both its U.S. and Canadian headquarters to new premises. As an incentive for the Company
to lease in their respective office spaces, the lessors for each of the properties offered to partially defray the construction
cost by offering a tenant improvement allowance. Under the terms of the lease contracts the Company is liable to refund any unamortized
portion of this allowance should it decide to terminate the lease before the expiry of the specified lock-in period. This amount
will be amortized based on the contractual liability and recognized as a reduction in rent expense for the period covered.
|
7.
|
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 $2.7 million for each of the years ended December 31, 2017 and 2016.
Future minimum lease
payments under non-cancelable leases, by year and in the aggregate, as of December 31, 2017 (in thousands) are as follows:
Years Ending December 31,
|
|
|
|
|
2018
|
|
$
|
687
|
|
2019
|
|
|
500
|
|
2020
|
|
|
464
|
|
2021
|
|
|
478
|
|
2022
|
|
|
242
|
|
Thereafter
|
|
|
884
|
|
Total minimum lease payments
|
|
$
|
3,255
|
|
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
as recalculated in November 2017 by the Philippines Department of Labor and Employment National Labor Relations Commission 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 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.
The Company is also
subject to various other legal proceedings and claims which arise in the ordinary course of business.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
While management currently
believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated
financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial
recovery against the Company in the above-referenced 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.
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 $100,000 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 on 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 and/or officer or fiduciary of the Company. In addition, the Company has contracts with certain clients pursuant
to whom 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, 2017, the Company has not recorded a liability for any obligations arising as a result of these indemnifications.
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, 2017. For the year ended December 31, 2017, 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, 2017, these
plans are unfunded. Pension expense for foreign subsidiaries totaled approximately $0.2 million and $0.3 for the years ended December
31, 2017 and 2016, respectively.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The following table summarizes the
amounts recognized in accumulated other comprehensive income (loss), net of taxes (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
$
|
38
|
|
|
$
|
43
|
|
Actuarial loss
|
|
|
(226
|
)
|
|
|
(179
|
)
|
Totals
|
|
$
|
(188
|
)
|
|
$
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
Amounts in accumulated other comprehensive loss not yet reflected in net periodic
pension cost, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
$
|
1,331
|
|
|
$
|
1,557
|
|
Transition obligation
|
|
|
(132
|
)
|
|
|
(170
|
)
|
Totals
|
|
$
|
1,199
|
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
|
Amounts in accumulated other comprehensive loss expected to be amortized in 2018
net periodic pension cost, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
$
|
(157
|
)
|
|
|
|
|
Transition obligation
|
|
|
38
|
|
|
|
|
|
Totals
|
|
$
|
(119
|
)
|
|
|
|
|
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, 2017:
Benefit Obligations:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of the year
|
|
$
|
2,896
|
|
|
$
|
2,840
|
|
Service cost
|
|
|
333
|
|
|
|
368
|
|
Interest cost
|
|
|
187
|
|
|
|
170
|
|
Curtailment
|
|
|
(69
|
)
|
|
|
-
|
|
Actuarial gain
|
|
|
(107
|
)
|
|
|
(197
|
)
|
Foreign currency exchange rates changes
|
|
|
51
|
|
|
|
(142
|
)
|
Benefits paid
|
|
|
(170
|
)
|
|
|
(143
|
)
|
Projected benefit obligation at end of the year
|
|
$
|
3,121
|
|
|
$
|
2,896
|
|
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Components of Net Periodic Pension Cost:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
333
|
|
|
$
|
368
|
|
Interest cost
|
|
|
187
|
|
|
|
170
|
|
Curtailment
|
|
|
(69
|
)
|
|
|
-
|
|
Actuarial gain recognized
|
|
|
(249
|
)
|
|
|
(315
|
)
|
Net periodic pension cost
|
|
$
|
202
|
|
|
$
|
223
|
|
The accumulated benefit
obligation, which represents benefits earned to date, was approximately $2.0 million and $1.5 million as of December 31, 2017
and 2016, respectively.
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, 2017 are as follows:
|
|
2017
|
|
2016
|
Discount rate
|
|
5.78%-10.6%
|
|
5.4%-12.5%
|
Rate of increase in compensation level
|
|
5%-7%
|
|
5%-8.5%
|
Estimated Future Benefit Payments:
The following benefit
payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
360
|
|
2019
|
|
|
221
|
|
2020
|
|
|
577
|
|
2021
|
|
|
142
|
|
2022
|
|
|
151
|
|
2023 to 2027
|
|
|
1,749
|
|
|
|
$
|
3,200
|
|
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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Stockholders Rights
Agreement -
On January 14, 2016, 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 1, 2016. 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 January 14, 2016 (the “Rights Agreement”). Each Right
entitles its holder to purchase, under certain conditions, one one-thousandth of a share of Series C Participating Preferred Stock
(“Preferred Stock”). Each one one-thousandth of a share of Preferred Stock has substantially the same rights as one
share of the Company’s common stock. Subject to the terms and conditions of the Rights Agreement, Rights become exercisable
ten days after the public announcement that a “Person” has become an “Acquiring Person” (as each such term
is defined in the Rights Agreement) by obtaining beneficial ownership of 20% or more of the Company’s outstanding common
stock, or, if earlier, ten business days (or a later date determined by the Board of Directors before any Person becomes an Acquiring
Person) after a Person begins a tender or exchange offer which, if completed, would result in that Person becoming an Acquiring
Person. Any Rights held by an Acquiring Person are void and may not be exercised.
If a Person becomes
an Acquiring Person, all holders of Rights, except the Acquiring Person, may purchase at the Right’s then-current exercise
price, the Company’s common stock having a market value equal to twice the exercise price. Moreover, at any time after a
Person becomes an Acquiring Person (unless such Person acquires 50 percent or more of the common stock of the Company then outstanding,
as more fully described in the Rights Agreement), the Board of Directors may exchange one share of the Company’s common stock
for each outstanding Right (other than rights owned by such Person, which would have become void). In addition, if the Company
is acquired in a merger or other business combination transaction after a Person becomes an Acquiring Person, all holders of Rights,
except the Acquiring Person, may purchase at the Right’s then-current exercise price, a number of the acquiring Company’s
common stock having a market value of twice the exercise price. If the Company receives a “qualifying offer” (which
includes certain all-cash fully financed tender offers or exchange offers for all of the Company’s outstanding common stock),
under certain circumstances, holders of 10 percent of the Company’s outstanding common stock (excluding stock held by the
offeror and its affiliates and associates) may direct the Board of Directors to call a special meeting of stockholders to consider
a resolution exempting such “qualifying offer” from the Rights Agreement. The Rights themselves have no voting power.
The Board of Directors may redeem the Rights at an initial redemption price of $0.001 per Right under certain circumstances set
forth in the Rights Agreement.
The Rights Agreement
was approved by the Company’s stockholders at the 2016 annual meeting. The Rights will expire on January 13, 2019 unless
earlier redeemed or exchanged.
Common Stock Reserved
-
As of December 31, 2017, the Company had reserved for issuance approximately 6,143,000 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 associated with the program. There were no share repurchases in
2017. As of December 31, 2017, the Company repurchased 137,000 shares of its common stock under the September 2011 authorization.
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. (“Stock”)
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.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average fair value of options granted
|
|
$
|
0.73
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.91
|
%
|
|
|
1.26%-1.93
|
%
|
Expected life (years)
|
|
|
6
|
|
|
|
5-6
|
|
Expected volatility factor
|
|
|
49.62
|
%
|
|
|
47%-49
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
The Company estimates
the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect
at the time of grant. The expected term of options granted is based on a combination of vesting schedules, term of the options
and historical experience. Expected volatility is based on 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, 2017, and changes during the year then ended, is presented below:
|
|
Number of
Options
|
|
|
Weighted -
Average Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2017
|
|
|
5,169,169
|
|
|
$
|
2.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(967,370
|
)
|
|
|
3.08
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
4,241,799
|
|
|
$
|
2.82
|
|
|
|
4.80
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
3,567,136
|
|
|
$
|
2.89
|
|
|
|
4.08
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at December 31, 2017
|
|
|
4,241,799
|
|
|
$
|
2.82
|
|
|
|
4.80
|
|
|
$
|
-
|
|
The total compensation
cost related to non-vested stock options not yet recognized as of December 31, 2017 totaled approximately $0.8 million. The weighted-average
period over which these costs will be recognized is eighteen months.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
There were no option
exercises during the years ended December 31, 2017 and 2016.
|
11.
|
Comprehensive income (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, 2017 and 2016, and reclassifications out of other comprehensive income (loss) for the years then
ended, are presented below (in thousands):
|
|
Pension Liability
Adjustment
|
|
|
Fair Value of
Derivatives
|
|
|
Foreign Currency
Translation
Adjustment
|
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance at January 1, 2017
|
|
$
|
1,387
|
|
|
$
|
(318
|
)
|
|
$
|
(1,393
|
)
|
|
$
|
(324
|
)
|
Other comprehensive income before reclassifications, net of taxes
|
|
|
-
|
|
|
|
574
|
|
|
|
706
|
|
|
|
1,280
|
|
Total other comprehensive income (loss) before reclassifications, net of taxes
|
|
|
1,387
|
|
|
|
256
|
|
|
|
(687
|
)
|
|
|
956
|
|
Net amount reclassified to earnings
|
|
|
(196
|
)
|
|
|
86
|
|
|
|
-
|
|
|
|
(110
|
)
|
Balance at December 31, 2017
|
|
$
|
1,191
|
|
|
$
|
342
|
|
|
$
|
(687
|
)
|
|
$
|
846
|
|
|
|
Pension Liability
Adjustment
|
|
|
Fair Value of
Derivatives
|
|
|
Foreign Currency
Translation
Adjustment
|
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance at January 1, 2016
|
|
$
|
1,523
|
|
|
$
|
(165
|
)
|
|
$
|
(1,442
|
)
|
|
$
|
(84
|
)
|
Other comprehensive income (loss) before reclassifications, net of taxes
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
49
|
|
|
|
(41
|
)
|
Total other comprehensive income (loss) before reclassifications, net of taxes
|
|
|
1,523
|
|
|
|
(255
|
)
|
|
|
(1,393
|
)
|
|
|
(125
|
)
|
Net amount reclassified to earnings
|
|
|
(136
|
)
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
(199
|
)
|
Balance at December 31, 2016
|
|
$
|
1,387
|
|
|
$
|
(318
|
)
|
|
$
|
(1,393
|
)
|
|
$
|
(324
|
)
|
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.
|
12.
|
Segment reporting and concentrations
|
The Company’s
operations are classified into three reportable segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS)
and Media Intelligence Solutions (MIS).
The DDS segment provides
solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following
broad business requirements: development of digital content (including e-books); development of new digital information products;
and operational support of existing digital information products and systems.
The IADS segment performs
advanced data analysis. IADS operates through two subsidiaries: Synodex and docGenix. Synodex offers a range of data analysis services
in the healthcare, medical and insurance areas. docGenix provides services to financial services institutions.
The Company’s
MIS segment operates through its Agility PR Solutions and Bulldog Reporter subsidiaries. Agility PR Solutions offers self and full-service
solutions that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring
coverage, to measuring impact.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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):
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
DDS
|
|
$
|
46,753
|
|
|
$
|
50,639
|
|
IADS
|
|
|
4,751
|
|
|
|
4,347
|
|
MIS
|
|
|
9,425
|
|
|
|
8,088
|
|
Total Consolidated
|
|
$
|
60,929
|
|
|
$
|
63,074
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
(1)
:
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
1,327
|
|
|
$
|
1,137
|
|
IADS
|
|
|
(3,588
|
)
|
|
|
(4,664
|
)
|
MIS
|
|
|
(2,813
|
)
|
|
|
(1,258
|
)
|
Total Consolidated
|
|
$
|
(5,074
|
)
|
|
$
|
(4,785
|
)
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
(2)
:
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
(1,729
|
)
|
|
$
|
(1,776
|
)
|
IADS
|
|
|
(596
|
)
|
|
|
(1,778
|
)
|
MIS
|
|
|
(2,749
|
)
|
|
|
(1,231
|
)
|
Total Consolidated
|
|
$
|
(5,074
|
)
|
|
$
|
(4,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Total assets:
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
25,520
|
|
|
$
|
24,432
|
|
IADS
|
|
|
1,331
|
|
|
|
1,282
|
|
MIS
|
|
|
21,020
|
|
|
|
21,874
|
|
Total Consolidated
|
|
$
|
47,871
|
|
|
$
|
47,588
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
675
|
|
|
$
|
675
|
|
MIS
|
|
|
2,157
|
|
|
|
2,059
|
|
Total Consolidated
|
|
$
|
2,832
|
|
|
$
|
2,734
|
|
(1)
Before elimination of any inter-segment profits
(2)
After elimination of any inter-segment profits
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Long-lived assets as
of December 31, 2017 and 2016 by geographic region are comprised of:
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,321
|
|
|
$
|
4,669
|
|
|
|
|
|
|
|
|
|
|
Foreign countries:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
6,888
|
|
|
|
5,085
|
|
United Kingdom
|
|
|
2,388
|
|
|
|
2,376
|
|
Philippines
|
|
|
1,446
|
|
|
|
1,940
|
|
India
|
|
|
1,042
|
|
|
|
1,520
|
|
Sri Lanka
|
|
|
504
|
|
|
|
683
|
|
Israel
|
|
|
36
|
|
|
|
47
|
|
Germany
|
|
|
2
|
|
|
|
2
|
|
Total foreign
|
|
|
12,306
|
|
|
|
11,653
|
|
Total
|
|
$
|
17,627
|
|
|
$
|
16,322
|
|
Two clients in the
DDS segment generated approximately 30% and 31% of the Company’s total revenues in the fiscal years ended December 31, 2017
and 2016, respectively. No other client accounted for 10% or more of total revenues during these periods. Further, in the years
ended December 31, 2017 and 2016, revenues from non-US clients accounted for 51% and 49%, respectively, of the Company's revenues.
Revenues for each of
the two years in the period ended December 31, 2017 by geographic region (determined based upon client’s domicile), are as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
30,135
|
|
|
$
|
32,070
|
|
United Kingdom
|
|
|
10,514
|
|
|
|
8,271
|
|
Others - principally Europe
|
|
|
7,773
|
|
|
|
7,555
|
|
The Netherlands
|
|
|
6,871
|
|
|
|
9,216
|
|
Canada
|
|
|
5,636
|
|
|
|
5,962
|
|
Total
|
|
$
|
60,929
|
|
|
$
|
63,074
|
|
As of December 31,
2017, approximately 61% of the Company's accounts receivable was from foreign (principally European) clients and 51% of accounts
receivable was due from three clients. As of December 31, 2016, approximately 73% of the Company's accounts receivable was 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, 2017.
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net loss attributable to Innodata Inc. and Subsidiaries
|
|
$
|
(5,055
|
)
|
|
$
|
(5,524
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,816
|
|
|
|
25,542
|
|
Dilutive effect of outstanding options
|
|
|
-
|
|
|
|
-
|
|
Adjusted for dilutive computation
|
|
|
25,816
|
|
|
|
25,542
|
|
Basic loss per share
is computed using the weighted-average number of common shares outstanding during the year. Diluted 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
4.2 million and 5.2 million shares of common stock in 2017 and 2016, respectively, were outstanding but not included in the computation
of diluted loss 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.
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.
To manage its exposure
to fluctuations in foreign currency exchange rates, the Company entered into foreign currency forward contracts, authorized under
Company policies, with counterparties that were highly rated financial institutions. The Company utilized non-deliverable forward
contracts expiring within twelve months to reduce its foreign currency risk.
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. The total notional amount for outstanding derivatives
as of December 31, 2017 and 2016 was $15.9 million and $19.3 million, respectively, which is comprised of cash flow hedges denominated
in U.S. dollars.
The following table
presents the fair value of derivative instruments included within the consolidated balance sheets as of December 31, 2017 and 2016
(in thousands):
INNODATA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
342
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses
|
|
$
|
-
|
|
|
$
|
318
|
|
The effect of foreign
currency forward contracts designated as cash flow hedges on the consolidated statements of operations for the years ended December
31, 2017 and 2016 were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI
(1)
|
|
$
|
574
|
|
|
$
|
(90
|
)
|
Net gain (loss) reclassified from accumulated OCI into income
(2)
|
|
$
|
(86
|
)
|
|
$
|
63
|
|
Net gain recognized in income
(3)
|
|
|
|
|
|
$
|
-
|
|
|
(1)
|
Net change in fair value of the effective portion classified into other comprehensive income ("OCI")
|
|
(2)
|
Effective portion classified within direct operating costs
|
|
(3)
|
There were no ineffective portions for the period presented.
|
|
15.
|
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, 2017 and 2016, 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:
|
¨
|
Level 1
: Unadjusted quoted price
in active market for identical assets and liabilities.
|
|
¨
|
Level 2:
Observable inputs other
than those included in Level 1.
|
|
¨
|
Level 3:
Unobservable inputs reflecting
management’s own assumptions about the inputs used in pricing the asset or liability.
|
The following table
sets forth the assets and liabilities as of December 31, 2017 and 2016 that the Company measured at fair value, on a recurring
basis by level, within the fair value hierarchy (in thousands). As required by the standard, assets and liabilities measured at
fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
December 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
-
|
|
|
$
|
342
|
|
|
$
|
-
|
|
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
-
|
|
|
$
|
318
|
|
|
$
|
-
|
|
The Level 2 liabilities
contain foreign currency forward contracts. Fair value is determined based on the observable market transactions of spot and forward
rates. The fair value of these contracts as of December 31, 2017 and 2016 are included in accrued expenses in the accompanying
consolidated balance sheets.
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)
|
|
Asset Purchase Agreement dated as of May 11, 2016 among Innodata Inc., MediaMiser LLC, MediaMiser Ltd. and PWW Acquisition LLC
|
|
Filed as Exhibit 2.1 to our Form 8-K dated May 11, 2016
|
2.2 (b)
|
|
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 July 14, 2016
|
3.1 (a)
|
|
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
|
3.1 (b)
|
|
Certificate of Amendment of Certificate of Incorporation of Innodata Corporation filed on March 1, 2001
|
|
Filed as Exhibit 3.1(b) to our Form 10-K for the year ended December 31, 2003
|
3.1 (c)
|
|
Certificate of Amendment of Certificate of Incorporation of Innodata Corporation Filed on November 14, 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 10-Q for the quarter ended June 30, 2012
|
3.2
|
|
Form of Amended and Restated By-Laws
|
|
Exhibit 3.1 to Form 8-K dated December 16, 2002
|
3.3
|
|
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
|
4.2
|
|
Specimen of Common Stock certificate
|
|
Exhibit 4.2 to Form SB-2 Registration Statement No. 33-62012
|
4.3
|
|
Form of Rights Agreement, dated as of December 16, 2002 between Innodata Corporation and American Stock Transfer and Trust Co., as Rights Agent
|
|
Exhibit 4.1 to Form 8-K dated December 16, 2002
|
4.4
|
|
Form of Rights Agreement, as of December 27, 2012 between Innodata Inc. and American Stock Transfer and Trust Co., as Rights Agent
|
|
Exhibit 4.1 to Form 8-K dated December 27, 2012
|
4.5
|
|
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 January 14, 2016
|
4.6
|
|
Specimen of Common Stock certificate
|
|
Exhibit 4.1 to Form 10-Q dated August 7, 2015
|
10.1
|
|
1994 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated August 9, 1994
|
10.2
|
|
1993 Stock Option Plan
|
|
Exhibit 10.4 to Form SB-2 Registration Statement No. 33-62012
|
10.3
|
|
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
|
10.4
|
|
1994 Disinterested Directors Stock Option Plan
|
|
Exhibit B to Definitive Proxy dated August 9, 1994
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10.5
|
|
1995 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated August 10, 1995
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10.6
|
|
1996 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated November 7, 1996
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10.7
|
|
1998 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated November 5, 1998
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10.8
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|
2001 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated June 29, 2001
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10.9
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|
2002 Stock Option Plan
|
|
Exhibit A to Definitive Proxy dated September 3, 2002
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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 and between us and The Bank of New York
|
|
Filed as Exhibit 10.2 to Form S-3 Registration statement No. 333-121844
|
10.12
|
|
Employment Agreement dated as of December 22, 2005, by and between us and Steven L. Ford
|
|
Exhibit 10.1 to Form 8-K dated December 28, 2005
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10.13
|
|
Form of 2001 Stock Option Plan Grant Letter, dated December 22, 2005
|
|
Exhibit 10.2 to Form 8-K dated December 28, 2005
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10.14
|
|
Form of 1995 Stock Option Agreement
|
|
Exhibit 10.4 to Form 8-K dated December 15, 2005
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10.15
|
|
Form of 1998 Stock Option Agreement for Directors
|
|
Exhibit 10.5 to Form 8-K dated December 15, 2005
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10.16
|
|
Form of 1998 Stock Option Agreement for Officers
|
|
Exhibit 10.6 to Form 8-K dated December 15, 2005
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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 each of Haig Bagerdjian, Louise Forlenza, John Marozsan and Todd Solomon
|
|
Exhibit 10.8 to Form 8-K dated December 15, 2005
|
10.19
|
|
Form of new vesting and lock-up agreement for Jack Abuhoff
|
|
Exhibit 10.9 to Form 8-K dated December 15, 2005
|
10.20
|
|
Form of new vesting and lock-up agreement for George Kondrach
|
|
Exhibit 10.10 to Form 8-K dated December 15, 2005
|
10.21
|
|
Form of new vesting and lock-up agreement for Stephen Agress
|
|
Exhibit 10.11 to Form 8-K dated December 15, 2005
|
10.22
|
|
Form of 2001 Stock Option Plan Grant Letter, dated December 31, 2005, for Messrs. Abuhoff, Agress and Kondrach
|
|
Exhibit 10.2 to Form 8-K dated January 5, 2006
|
10.23
|
|
Form of 2001 Stock Option Plan Grant Letter, dated December 31, 2005, for Messrs. Bagerdjian and Marozsan and Ms. Forlenza
|
|
Exhibit 10.3 to Form 8-K dated January 5, 2006
|
10.24
|
|
Transition Agreement Dated as of September 29, 2006 with Stephen Agress
|
|
Exhibit 10.1 to Form 8-K dated October 3, 2006
|
10.25
|
|
Form of Stock Option Modification Agreement with Stephen Agress
|
|
Exhibit 10.2 to Form 8-K dated October 3, 2006
|
10.26
|
|
Employment Agreement dated as of February 1, 2006 with Jack Abuhoff
|
|
Exhibit 10.1 to Form 8-K dated April 27, 2006
|
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
|
|
Form of 2002 Stock Option Plan Grant Letter, dated August 13, 2008, for Messrs. Bagerdjian, Marozsan and Woodward, and Ms. Forlenza
|
|
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2008
|
10.30
|
|
Amended and Restated Employment Agreement dated as of December 24, 2008 with Jack S. Abuhoff
|
|
Exhibit 10.1 to Form 8-K dated December 30, 2008
|
10.31
|
|
Employment Agreement dated as of March 25, 2009 with Jack Abuhoff
|
|
Exhibit 10.1 to Form 8-K dated March 25, 2009
|
10.32
|
|
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
|
|
Employment
Agreement dated as of November 9, 2009 with O’Neil Nalavadi
|
|
Exhibit 10.1 to Form 8-K dated October 11, 2009
|
10.35
|
|
Form of 2009 Stock Option Plan Grant Letter, dated April 2, 2010 for O’Neil Nalavadi
|
|
Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2010
|
10.36
|
|
Form of 2009 Stock Option Plan Grant Letter, dated March 16, 2010 for O’Neil Nalavadi
|
|
Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2010
|
10.37
|
|
Form of 2009 Stock Option Plan Grant Letter, dated March 16, 2010 for O’Neil Nalavadi
|
|
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
|
|
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
|
10.40
|
|
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
|
10.41
|
|
Amendment dated as of November 9, 2012 to Employment Agreement with O’Neil Nalavadi
|
|
Exhibit 10.3 to Form 8-K dated November 8, 2012
|
10.42
|
|
Form of Director Stock Option Grant Letter dated March 8, 2013
|
|
Exhibit 10.42 to Form 10-K dated March 15, 2013
|
10.43
|
|
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
|
10.44
|
|
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
|
|
Form of Rights Agreement as of December 27, 2012 between Innodata Inc. and American Stock Transfer Agent and Trust Co., as Rights Agent
|
|
Annexure A to Definitive Proxy dated April 8, 2013
|
10.46
|
|
Innodata Inc. 2013 Stock Plan
|
|
Annexure B to Definitive Proxy dated April 8, 2013
|
10.47
|
|
Advised Line of Credit Note dated June 25, 2012 in favor of Chase
|
|
Exhibit 99.1 to Form 8-K dated February 7, 2014
|
10.48
|
|
Note Modification Agreement dated June 27, 2013 between Innodata and Chase
|
|
Exhibit 99.2 to Form 8-K dated February 7, 2014
|
10.49
|
|
Continuing Security Agreement dated May 22, 2008 between Innodata and Chase
|
|
Exhibit 99.3 to Form 8-K dated February 7, 2014
|
10.50
|
|
Letter dated June 27, 2013 from Chase to Innodata
|
|
Exhibit 99.4 to Form 8-K dated February 7, 2014
|
10.51
|
|
Letter dated February 7, 2014 from Chase to Innodata
|
|
Exhibit 99.5 to Form 8-K dated February 7, 2014
|
10.52
|
|
Innodata Inc. 2013 Stock Plan (as Amended and Restated effective June 3, 2014)
|
|
Annexure A to Definitive Proxy dated April 23, 2014
|
10.53
|
|
Form of Stock Option Grant Letter for December 31, 2015 Grant, for Directors
|
|
Exhibit 10.53 to Form 10-K dated March 14, 2016
|
10.54
|
|
Form of Stock Option Grant Letter for December 31, 2015 Grant, for Messrs. Abuhoff, Mishra and Nalavadi
|
|
Exhibit 10.54 to Form 10-K dated March 14, 2016
|
10.55
|
|
Innodata Inc. 2013 Stock Plan (as Amended and Restated effective June 7, 2016)
|
|
Annex B to Definitive Proxy dated April 18, 2016
|
10.56
|
|
Form of Stock Option Grant Letter for December 31, 2016 Grant, for Directors
|
|
Exhibit 10.56 to Form 10-K dated March 15, 2017
|
10.57
|
|
Form of Stock Option Grant Letter for December 31, 2016 Grant, for Messrs. Abuhoff, Mishra and Nalavadi
|
|
Exhibit 10.57 to Form 10-K dated March 15, 2017
|
16
|
|
Letter of Grant Thornton regarding change in certifying accountant
|
|
Exhibit 4.01 to Form 8-K dated September 12, 2008
|
21
|
|
Significant subsidiaries of the registrant
|
|
Filed herewith
|
23
|
|
Consent of CohnReznick LLP
|
|
Filed herewith
|
31.1
|
|
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
31.2
|
|
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
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 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.
|
|
Filed herewith
|