Innodata(INOD) - 2018 Q4 - Annual Report

Part I Business Innodata Inc. is a global services and technology company leveraging human expertise and AI across three segments with concentrated client revenue Business Overview Innodata provides global services and technology, combining human expertise with AI and machine learning across three core segments - The company's core services include data acquisition and transformation, digital operations management, and content applications, which are reported under the Digital Data Solutions (DDS) segment[18] - Innodata operates two venture businesses as separate segments: Synodex, which offers a SaaS platform for transforming medical data, and Agility PR Solutions, which provides a SaaS platform for media intelligence and monitoring[19] Digital Data Solutions (DDS) Segment The DDS segment, Innodata's core, transforms unstructured information into usable digital data for AI and products using deep learning and human expertise - The DDS segment's primary function is to process unstructured content into usable digital data for business information companies and enterprise AI applications, serving clients in financial services, technology, and digital retail[21][25] - The company employs a hybrid technology-and-human approach, using deep learning machines to automate tasks and routing low-confidence results to domain experts for review, creating a continuous learning loop[23][24][39] - Services offered include data acquisition from sources like websites, digital data transformation into structured formats (e.g., XML), and semantic enrichment such as entity tagging and text categorization[26][28][29] Venture Businesses Innodata's venture businesses, Synodex and Agility, offer industry-specific SaaS solutions for medical data and media intelligence - The Synodex segment focuses on extracting and classifying data from unstructured medical records for insurance underwriting and claims, serving 11 clients as of year-end 2018[45][46][48] - The Agility PR Solutions segment provides a SaaS platform for media and influencer targeting, content distribution, and media monitoring, competing in a $3.2 billion market[50] Clients The company has significant client concentration in its DDS segment, with two major clients contributing 30% of total revenues under short-notice contracts Major Client Revenue Contribution (2018) | Client Group | Revenue (Approx.) | % of Total Revenue | | :--- | :--- | :--- | | Wolters Kluwer (WK Clients) | $10.6 million | 19% | | Reed Elsevier (RE Clients) | $6.4 million | 11% | | Total | $17.0 million | 30% | - Contracts with major clients consist of Master Services Agreements (MSAs) and specific Statements of Work (SOWs), which can be terminated by the clients on notice periods ranging from zero to six months[58][59][60] Competition Innodata faces intense competition across its DDS, Synodex, and Agility segments from various data service and media intelligence firms - DDS Segment: Competes with data service firms (Apex CoVantage, Aptara) and operations management companies (Cognizant, Infosys)[78] - Synodex Segment: Competes with firms like Risk Righter and EMSI, as well as in-house client operations[80] - Agility Segment: Competes with established media intelligence providers like Meltwater, Cision, and Kantar[82] Risk Factors The company faces significant risks from client concentration, lack of credit, potential delisting, international operations, and a $6.2 million Philippines litigation - The company has historically relied on a very limited number of clients, with two clients in the DDS segment accounting for approximately 30% of total revenues in both 2018 and 2017[86] - The company has no bank facilities or lines of credit, relying on existing cash and internally generated funds for liquidity, which could be adversely affected by operating losses or other expenditures[88] - The company's Indian subsidiary is involved in a service tax dispute where authorities claim services should be classified as OID Services, potentially subjecting approximately $67.0 million of revenue from July 2012 to November 2016 to a service tax of 12.36% to 15%[131] - A judgment was rendered in the Philippines against a subsidiary and purportedly Innodata Inc. for approximately $6.2 million plus accruing interest, related to former employees. The company is contesting the enforcement of this judgment in the U.S[146] Unresolved Staff Comments The company reports no unresolved staff comments - None[155] Properties The company's services are performed from its headquarters in Ridgefield, New Jersey, and ten overseas delivery centers, all of which are leased. The total leased space is approximately 246,000 square feet - All of the company's properties, including its New Jersey headquarters and ten global delivery centers, are leased, totaling approximately 246,000 square feet[156] Legal Proceedings The company is involved in a significant legal proceeding originating from a 2008 judgment in the Philippines against a former subsidiary, purportedly also against Innodata Inc., in favor of former employees. The judgment amounts to approximately $6.2 million plus significant accruing interest. Innodata has obtained a preliminary injunction in a U.S. court to prevent enforcement of the judgment in the United States while the matter is pending - A 2008 judgment in the Philippines against a former subsidiary and purportedly Innodata Inc. totals approximately $6.2 million plus interest, which accrued at 12% per annum until June 2013 and 6% thereafter[158] - In January 2018, a U.S. District Court granted Innodata a preliminary injunction, preventing the former employees from seeking enforcement of the judgment in the United States[158] Mine Safety Disclosures The company reports no mine safety disclosures - None[161] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Innodata Inc.'s common stock is traded on The Nasdaq Stock Market under the symbol "INOD". As of February 22, 2019, there were 69 stockholders of record, with an estimated 2,848 beneficial holders. The company has a $2.0 million stock repurchase program authorized in September 2011, but no shares were repurchased during 2018 - The company's common stock is listed on The Nasdaq Stock Market under the symbol "INOD"[164] - A $2.0 million stock repurchase program was authorized in 2011 with no expiration date. No shares were repurchased in 2018[165][166] Selected Financial Data This item is not applicable as the company is a smaller reporting company - Not applicable[168] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, revenues decreased 6% to $57.4 million, but profitability improved to $4,000 net income from a $5.1 million loss, driven by cost reductions Results of Operations In 2018, total revenues decreased 6% to $57.4 million due to a 9% DDS segment decline, but cost reductions led to positive operating income and near breakeven net income Consolidated Financial Performance (2018 vs. 2017) | Metric | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $57.4M | $60.9M | ($3.5M) | -6% | | DDS Segment | $43.5M | $47.8M | ($4.3M) | -9% | | Synodex Segment | $4.1M | $3.7M | $0.4M | +11% | | Agility Segment | $9.8M | $9.4M | $0.4M | +4% | | Direct Operating Costs | $39.0M | $45.8M | ($6.8M) | -15% | | S&A Expenses | $15.8M | $20.2M | ($4.4M) | -22% | | Net Income (Loss) | $4K | ($5.1M) | $5.1M | N/A | - The improvement in profitability was primarily driven by cost rationalization implemented in late 2017, leading to lower labor costs[204][208][209] Goodwill Impairment In 2018, the company recorded a full goodwill impairment charge of $675,000 related to its DDS segment, triggered by a stock price decline - A full goodwill impairment of $675,000 was recorded for the DDS segment during the year ended December 31, 2018[212] - The impairment was triggered by a decline in the company's stock price, leading to an assessment where the fair value of the DDS segment was determined to be below its carrying value[213][214] Liquidity and Capital Resources As of December 31, 2018, the company had $10.9 million cash and $13.0 million working capital, with $3.6 million cash from operations, relying on existing funds without bank facilities Liquidity and Capital Resources (in thousands) | Metric | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $10,869 | $11,407 | | Working capital | $12,981 | $9,729 | - The company generated $3.6 million in cash from operating activities in 2018, compared to $0.7 million in 2017[236][237] - The company has no bank facilities or lines of credit[235] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates and judgments, including revenue recognition, goodwill impairment, and income taxes with a valuation allowance - The company adopted ASC 606 for revenue recognition on January 1, 2018, using the modified retrospective method, which did not result in a material impact on financial statements[254] - A valuation allowance is maintained against all U.S. and Canadian deferred tax assets due to uncertainty regarding their realization[263][264][265] - Goodwill is evaluated for impairment annually or when triggering events occur. In 2018, the company adopted ASU 2017-04, simplifying the impairment test, which led to the full impairment of the DDS segment's goodwill[269][270] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the company is a smaller reporting company - Not applicable to smaller reporting companies[282] Financial Statements and Supplementary Data This section refers to the full consolidated financial statements and supplementary data, which begin on page F-1 of the report - The full financial statements and supplementary data are located starting on page F-1 of the filing[283] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[284] Controls and Procedures Management concluded that the company's disclosure controls and procedures, and internal control over financial reporting, were effective as of December 31, 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[286] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework (2013)[289] Other Information The company reports no other information - None[291] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 proxy statement - Required information is incorporated by reference from the 2019 Annual Meeting proxy statement[294] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 proxy statement - Required information is incorporated by reference from the 2019 Annual Meeting proxy statement[296] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2019 proxy statement, including details on outstanding options and shares available for future issuance Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 4,982,040 | $2.14 | 5,351,733 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 proxy statement - Required information is incorporated by reference from the 2019 Annual Meeting proxy statement[300] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2019 proxy statement - Required information is incorporated by reference from the 2019 Annual Meeting proxy statement[301] Part IV Exhibits, Financial Statement Schedules This section provides references to the financial statements under Item 8 and the Exhibit Index - This section contains the index to financial statements and exhibits[305] Form 10-K Summary The company reports no Form 10-K summary - None[304] Financial Statements Report of Independent Registered Public Accounting Firm CohnReznick LLP issued an unqualified opinion on Innodata Inc.'s consolidated financial statements for the years ended December 31, 2018 and 2017 - CohnReznick LLP expressed an unqualified opinion on the company's consolidated financial statements for the years ended December 31, 2018 and 2017[314] Consolidated Financial Statements The consolidated financial statements for 2018 and 2017 present the company's financial position, operations, equity, and cash flows, showing $46.1 million assets and $4,000 net income in 2018 Key Balance Sheet Data (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Assets | $46,051 | $47,871 | | Total Current Liabilities | $14,292 | $15,599 | | Total Stockholders' Equity | $30,566 | $31,119 | Key Income Statement Data (in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $57,418 | $60,929 | | Income (loss) from operations | $1,819 | ($5,074) | | Net income (loss) attributable to Innodata | $4 | ($5,055) | Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies and financial results, including segment descriptions, revenue recognition, goodwill impairment, tax assessments, pension obligations, and litigation - Effective in Q1 2018, the results for the docGenix subsidiary are reported within the DDS segment, having previously been in the Synodex (formerly IADS) segment[334] - A cumulative, immaterial error in accounting for pension expense from 2008-2013 was identified, resulting in an understatement of pension liabilities by $269,000. The correction was recorded in the 2018 financial statements[384][385] - On February 1, 2019, the Board of Directors adopted a stockholder rights plan (a "poison pill") that becomes exercisable if a person or group acquires 20% or more of the company's common stock[441]