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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL(Edgar Glimpses Via Acquire Media NewsEdge) CONDITION AND RESULTS OF OPERATIONS Disclosures in this Form 10-Q 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" 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; our Innodata Advanced Data Solutions segment ("IADS") is a venture with minimal revenues that has incurred losses since inception and has recorded impairment charges for all of its fixed assets; we currently intend to continue to invest in IADS; the primarily at-will nature of contracts with our Content Services clients and the ability of these clients to reduce, delay or cancel projects; continuing Content Services segment revenue concentration in a limited number of clients; continuing Content Services segment reliance on project-based work; inability to replace projects that are completed, canceled or reduced; difficulty in integrating and deriving synergies from MediaMiser and any other acquisitions, joint venture and strategic investments; potential undiscovered liabilities of MediaMiser and other companies that we may acquire; 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-Q 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. We take a "technology-first" approach, applying advanced technologies in innovative ways. Founded in 1988, we comprise a team of 5,000 diverse people in 8 countries who are dedicated to delivering services and solutions that help the world make better decisions. We operate in three reporting segments: Content Services (CS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS). Our CS 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. 24 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 simultaneously for the web, tablets and smartphones. By blending consulting, technology and operations sourcing, along with deep domain expertise, we provide measurable outcomes for publishing companies, information services companies and enterprises through business transformation, accelerating innovation and efficient operations. We are one of the largest producers of e-books, serving four of the five leading digital retailers of e-books as well as 80 leading trade, education and professional publishers that sell e-books. We manufacture both standard e-books and interactive e-books in a variety of formats (including EPUB, Mobi and Kindle) and in 12 major languages (including Japanese and Chinese). In addition, we distribute e-books on behalf of publishers and authors to more than 25 e-book retailers across North America, the United Kingdom, Australia and 24 countries in the European Union. Since the fall of 2011, we have produced over 1 million e-book titles. We help our clients develop high-value information products and knowledge repositories. Our clients include four of the ten largest information industry companies in the world, spanning financial, legal, healthcare and scientific information. 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. 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. 25 Our IADS segment operates through our Synodex LLC and docGenix LLC subsidiaries. As of September 30, 2014 we owned 90% 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 piloted its APS.Extract® product for specific use with life, disability and long-term care insurance underwriting and claims and has cultivated a large number of interested clients in both the U.S. and the U.K. Most recently, Synodex launched its Synodex.Connect® platform to facilitate digital data exchange for underwriting workflows between independent brokers and insurance carriers, including delivery of Synodex's APS.Extract data and reports. 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. The IADS subsidiaries have incurred losses and have reported minimal revenues from inception in 2011 through 2014. Our cumulative investment, net of revenues in these subsidiaries was approximately $26 million as of September 30, 2014, consisting of $19 million in operating expenses and $7 million in capital expenditures. As of September 30, 2014, the Company wrote off all of the fixed assets of IADS, and has expensed all investments in IADS since that date. In the immediate future we intend to continue to invest in these subsidiaries at the combined rate of $1.1 to $1.3 million per quarter. Our MIS segment operates through our MediaMiser subsidiary. MediaMiser is a leading provider of media monitoring and analysis software and professional services for organizations of all sizes. Through innovative web-based and mobile solutions, MediaMiser reduces the time and effort it takes to gather, analyze and distribute valuable business intelligence extracted from traditional and social media sources. For organizations that prefer to outsource, MediaMiser also provides detailed analysis reports and daily media briefings through an expert client services team. MediaMiser uses proprietary technology to monitor, aggregate, analyze and share content from more than 200,000 sources across social, traditional and digital media to provide detailed analysis reports and daily briefings to its customers, which include several Fortune 500 companies and Canadian government institutions as well as small- and medium-sized businesses. MediaMiser empowers decision makers within an organization to make timely and informed decisions by providing accurate media intelligence through technology and workflows. Enterprises are increasingly looking for a unified tool to understand the discussions across all media channels in real-time. Through its patented and unique sentiment technology and its software-as-a-service platform MediaMiser provides accurate and actionable information to its customers. We believe that our technology will provide a base from which MediaMiser will expand into new geographical markets as well as penetrate further into its existing market. We also believe that MediaMiser will enable us to expand in areas of Big Data and user-generated content. 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. 26 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, India, the Philippines, Sri Lanka, Israel, 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. Revenues We price our services based on the quantity delivered or resources utilized, and we recognize revenue in the period in which the services are performed and delivered. 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. MediaMiser derives its revenues from subscription arrangements. Revenue from subscriptions 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. We consider standard accounting criteria for determining whether to report revenue gross as a principal versus net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances where the above criteria are not met and therefore we are not the principal in providing services, amounts received from clients are presented net of payments in the condensed consolidated statements of operations and comprehensive loss. Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs. Direct Operating Costs Direct operating costs consist of direct payroll, occupancy costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients. 27 Selling and Administrative Expenses Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, professional fees and consultant costs, and other administrative overhead costs. Adjusted EBITDA Performance Metric In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor "Adjusted EBITDA" to help us evaluate our ongoing operating performance and including our ability to operate the business effectively. We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and Subsidiaries in accordance with GAAP before income taxes, depreciation, amortization of intangible assets, impairment charges, stock-based compensation, loss attributable to non-controlling interests and interest income (expense). We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes. In particular, it facilitates comparisons of the core operating performance of our company from period to period on a consistent basis and helps us to identify underlying trends in our business. We believe it provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making. We use this measure to establish operational goals for managing our business and evaluating our performance.Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under GAAP. Some of these limitations are: · Adjusted EBITDA does not reflect tax payments and such payments reflect a reduction in cash available to us; · Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs and for our cash expenditures or future requirements for capital expenditures or contractual commitments; · Adjusted EBITDA excludes the potential dilutive impact of stock-based compensation expense related to our workforce, interest income (expense) and net loss attributable to noncontrolling interests, and these items may represent a reduction or increase in cash available to us; · Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and · Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently from our calculation, limiting its usefulness as a comparative measure. Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income. 28 The following table shows a reconciliation from net loss to Adjusted EBITDA for the periods presented (in thousands): Three Months Ended Nine Months Ended September 30 September 30 2014 2013 2014 2013 Adjusted EBITDA: Net loss attributable to Innodata Inc. and Subsidiaries $ (219 ) $ (11,692 ) $ (693 ) $ (11,496 ) Depreciation and amortization 759 1,017 2,150 2,930 Stock-based compensation 302 236 846 725 Impairment charges - 5,524 - 5,524 Provision for income taxes 306 7,297 513 5,809 Interest income, net (33 ) (57 ) (64 ) (314 ) Loss attributed to non-controlling interests (207 ) (1,291 ) (790 ) (1,869 ) Adjusted EBITDA $ 908 $ 1,034 $ 1,962 $ 1,309 Results of Operations We acquired MediaMiser on July 28, 2014. The Results of Operations reflect the operations of MediaMiser only for the period beginning on July 29, 2014 and ending on September 30, 2014. Three Months Ended September 30, 2014 and 2013 Revenues Total revenues were $14.8 million for the three months ended September 30, 2014 compared to $15.7 million for the three months ended September 30, 2013, a decline of $0.9 million or approximately 6%. Revenues from the CS segment were $14.0 million and $15.6 million for the three months ended September 30, 2014 and 2013, respectively, a decline of $1.6 million or approximately 10%. This decline is primarily attributable to a decline in non e-book related services from one client. Revenues from the IADS segment were $0.1 million for both the three months ended September 30, 2014 and 2013. Revenues from the MIS segment were $0.7 million for the three months ended September 30, 2014. Three clients generated approximately 41% of our total revenues for the three months ended September 30, 2014 and 37% of our total revenues for the three months ended September 30, 2013. One client accounted for less than 10% of our total revenues for the three months ended September 30, 2014 but accounted for 15% of total revenues for the three months ended September 30, 2013. No other client accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2014 and 2013, revenues from non-U.S. clients accounted for 48% and 39%, respectively, of our total revenues. Direct Operating Costs Direct operating costs were $10.7 million and $12.0 million for the three months ended September 30, 2014 and 2013, respectively, a decline of $1.3 million or 11%. Direct operating costs for the CS segment were $9.2 million and $10.6 million for the three months ended September 30, 2014 and 2013, respectively, a decline of $1.4 million or 13%. Direct operating costs for the IADS segment were $1.1 million and $1.4 million for the respective periods, net of intersegment profits, a decrease of $0.3 million. Direct operating costs for the MIS segment were $0.4 million for the three months ended September 30, 2014. Direct operating costs as a percentage of total revenues decreased to 72% for the three months ended September 30, 2014 compared to 76% for the three months ended September 30, 2013. Direct operating costs for the CS segment as a percentage of CS segment revenues were 66% for the three months ended September 30, 2014 compared to 68% for the three months ended September 30, 2013. 29 The decline in direct operating costs for the CS segment and as a percentage of CS segment revenues was principally attributable to a decrease in production headcount due to a decline in CS revenues and a restructuring of our operations, and achieving productivity gains. The productivity gains were principally the result of increased efficiency and improvements in our processes and technology. Direct operating costs for the IADS segment represents certain production costs for initial engagements, including pilot engagements, and facility overhead costs for our delivery center in Asia. A reduction in Synodex personnel in July 2014 led to a decline in direct operating costs for the IADS segment for the three months ended September 30, 2014 compared to September 30, 2013. Impairment Charge in 2013 In the third quarter of 2013, we evaluated the carrying value of the fixed assets of our Synodex subsidiary compared to its fair value and concluded that that the carrying value exceeds its fair value. This resulted in an impairment charge of $5.5 million for the three months ended September 30, 2013. There were no impairment charges recorded in the three months ended September 30, 2014. Selling and Administrative Expenses Selling and administrative expenses were $4.3 million, or 29% as a percentage of total revenues during the three months ended September 30, 2014, and $4.0 million, or approximately 25% as a percentage of total revenues for the three months ended September 30, 2013, and represents an increase of $0.3 millionor approximately 7%. Selling and administrative expenses for the CS segment were $3.4 million and $3.6 million in these respective periods. Selling and administrative expenses for the IADS segment for the respective periods were $0.5 million and $0.4 million, net of intersegment profits. Selling and administrative expenses for the MIS segment were $0.4 million for the three months ended September 30, 2014. We restructured our operations over the past few quarters which resulted in cost savings. This led to a decline in selling and administrative expenses for the CS segment in the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Selling and administrative expenses for the CS segment as a percentage of CS segment revenues were 24% for the three months ended September 30, 2014 and 23% for the three months ended 2013. Income Taxes For the three months ended September 30, 2014, we recorded a provision for income taxes in accordance with local tax regulations for our foreign subsidiaries. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduces our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earningsare repatriated. We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. We have also created a valuation allowance on deferred tax assets of the MIS segment. 30 In the third quarter of 2013, in assessing the realization of deferred tax assets, we considered whether it was more likely than not that all or some portion of the U.S. deferred tax assets would not be realizable. As the expectation of future taxable income resulting from Synodex could not be predicted with certainty, we created a $7.1 million valuation allowance against all U.S. deferred tax assets. We also recorded a valuation allowance of $0.7 million on all deferred tax assets arising from unrealized losses on foreign currency forward contracts. The $0.7 million additional allowance had no impact on the condensed consolidated statement of operations and comprehensive loss. For the three months ended September 30, 2013, we recorded a provision for income taxes in accordance with local tax regulations for our foreign subsidiaries. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduces our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earningsare repatriated. Net Loss We generated a net loss of $0.2 million during the three months ended September 30, 2014 compared to net loss of $11.7 million during the three months ended September30, 2013. Net income for the CS segment was $1.4 million for the three months ended September 30, 2014, compared to a net loss of $4.6 million for the three months ended September30, 2013, net of intersegment profits. The change was primarily attributable to the $7.1 million valuation allowance referred to in "Income Taxes" recorded during the three months ended September 30, 2013. Losses attributable to non-controlling interests declined by $1.1 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Net loss for the IADS segment was $1.5 million for the three months ended September 30, 2014 compared to $7.1 million for the three months ended September 30, 2013, net of intersegment profits. The decline in net loss primarily reflects the $5.5 million impairment charge for our Synodex subsidiary referred to in "Impairment Charge" that we recorded during the three months ended September 30, 2013. Net loss for the MIS segment was $0.1 million for the three months ended September 30, 2014. Adjusted EBITDA Adjusted EBITDA for the three months ended September 30, 2014 was $0.9 million compared to $1.0 million for the three months ended September 30, 2013, a decline of $0.1 million or 10%. Adjusted EBITDA for the CS segment was $2.4 million and $2.5 million for the three months ended September 30, 2014 and 2013, respectively, a decline of $0.1 million or 4%. Adjusted EBITDA was a loss of $1.4 million for the IADS segment for both the three months ended September 30, 2014 and 2013. The MIS segment was break-even at the Adjusted EBITDA level.Nine Months Ended September 30, 2014 and 2013 Revenues Total revenues were $43.2 million for the nine months ended September 30, 2014 compared to $48.8 million for the nine months ended September 30, 2013, a decline of $5.6 million or approximately 12%. Revenues from the CS segment were $42.2 million and $47.9 million for the nine months ended September 30, 2014 and 2013, respectively, a decline of $5.7 million or approximately 12%. This decline is primarily attributable to a $2.0 million decline in e-book-related services from one client and a $4.0 million decline in other services from another client. Revenues from the IADS segment were $0.3 million and $0.9 million for the nine months ended September 30, 2014 and 2013, respectively. Revenues from the MIS segment were $0.7 million for the nine months ended September 30, 2014. 31 Two clients generated approximately 32% and 25% of our total revenues for the nine months ended September 30, 2014 and 2013, respectively. Two other clients accounted for less than 10% of our total revenues for the nine months ended September 30, 2014 but accounted for 27% of our total revenues for the nine months ended September 30, 2013. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2014 and 2013, revenues from non-U.S. clients accounted for 46% and 36%, respectively, of our total revenues. Direct Operating Costs Direct operating costs were $32.3 million and $38.2 million for the nine months ended September 30, 2014 and 2013, respectively, a decline of $5.9 million or approximately 15%. Direct operating costs for the CS segment were $28.6 million and $34.2 million for the nine months ended September 30, 2014 and 2013, respectively, a decline of $5.6 million or approximately 16%. Direct operating costs for the IADS segment were $3.3 million and $4.0 million for the respective periods, net of intersegment profits. Direct operating costs for the MIS segment were $0.4 million for the nine months ended September 30, 2014. Direct operating costs as a percentage of total revenues decreased to 75% for the nine months ended September 30, 2014 compared to 78% for the nine months ended September 30, 2013. Direct operating costs for the CS segment as a percentage of CS segment revenues were 68% for the nine months ended September 30, 2014 compared to 71% for the nine months ended September 30, 2013. The decline in direct operating costs for the CS segment and as a percentage of CS segment revenues was principally attributable to a decrease in production headcount due to a decline in CS revenues and a restructuring of our operations, and achieving productivity gains. The productivity gains were principally the result of increased efficiency and improvements in our processes and technology. Direct operating costs for the IADS segment represent certain production costs for initial engagements, including pilot engagements, and facility overhead costs for our new delivery center in Asia. A reduction in Synodex personnel led to a decline in direct operating costs for the IADS segment for the nine months ended September 30, 2014 compared to September 30, 2013. Impairment Charge in 2013 In the third quarter of 2013, we evaluated the carrying value of the fixed assets of our Synodex subsidiary compared to its fair value and concluded that that the carrying value exceeds its fair value. This resulted in an impairment charge of $5.5 million for the nine months ended September 30, 2013. There were no impairment charges recorded in the nine months ended September 30, 2014.Selling and Administrative Expenses Selling and administrative expenses were $12.0 million, or approximately 28% as a percentage of total revenues during the nine months ended September 30, 2014, and $13.0 million, or 27% as a percentage of total revenues for the nine months ended September 30, 2013, and represents a decrease of $1.0 million or approximately 8%. Selling and administrative expenses for the CS segment were $10.3 million and $11.3 million in these respective periods. Selling and administrative expenses for the IADS segment for the respective periods were $1.3 million and $1.7 million, net of intersegment profits. Selling and administrative expenses for the MIS segment were $0.4 million for the nine months ended September 30, 2014. 32 We restructured our operations over the past few quarters which resulted in cost savings. This led to a decline in selling and administrative expenses for the CS segment in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Selling and administrative expenses for the CS segment as a percentage of CS segment revenues was 24% for both the nine months ended September 30, 2014 and 2013. Income Taxes For the nine months ended September30, 2014, we recorded a provision for income taxes in accordance with local tax regulations for our foreign subsidiaries. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduces our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earnings are repatriated. The provision for income taxes recorded by our foreign subsidiaries was partially offset by a reversal of a tax provision on account of a favorable outcome in one of the tax proceedings of our Indian subsidiary. We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. We have also created a valuation allowance on deferred tax assets of the MIS segment. In the third quarter of 2013, in assessing the realization of deferred tax assets, we considered whether it was more likely than not that all or some portion of the U.S. deferred tax assets would not be realizable. As the expectation of future taxable income resulting from Synodex could not be predicted with certainty, we created a $7.1 million valuation allowance against all the U.S. deferred tax assets. We also recorded a valuation allowance of $0.7 million on all deferred tax assets arising from unrealized losses on foreign currency forward contracts. The $0.7 million additional allowance had no impact on the condensed consolidated statement of operations and comprehensive loss. For the nine months ended September 30, 2013, we recorded a provision for income taxes in accordance with local tax regulations for our foreign subsidiaries. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduces our overall effective tax rate when compared to the U.S. statutory tax rate. In addition, the earnings of our foreign subsidiaries are not subject to tax in the U.S. unless the earnings are repatriated. Net Loss We generated a net loss of $0.7 million in the nine months ended September 30, 2014 compared to net loss of $11.5 million in the nine months ended September 30, 2013. Net income for the CS segment was $3.6 million for the nine months ended September 30, 2014, compared to a net loss of $1.2 million for the nine months ended September 30, 2013, net of intersegment profits. The change was primarily attributable to the $7.1 million valuation allowance referred to in "Income Taxes" recorded during the nine months ended September 30, 2013. Selling and administrative expenses for the CS segment decline by $1.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. In addition, losses attributable to non-controlling interests declined by $1.1 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Net loss for the IADS segment was $4.2 million for the nine months ended September 30, 2014 compared to $10.3 million for the nine months ended September 30, 2013, net of intersegment profits. The decline in net loss primarily reflects the $5.5 million impairment charge for our Synodex subsidiary referred to in "Impairment Charge" that we recorded during the nine months ended September 30, 2013. 33 Net loss for the MIS segment was $0.1 million for the nine months ended September 30, 2014. Adjusted EBITDA Adjusted EBITDA for the nine months ended September 30, 2014 was $2.0 million compared to $1.3 million for the nine months ended September 30, 2013, an increase of $0.7 million or 54%. Adjusted EBITDA for the CS segment was $6.2 million and $5.4 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of $0.8 million or 15%. Adjusted EBITDA was a loss of $4.2 million and $4.1 million for the IADS segment for the nine months ended September 30, 2014 and 2013, respectively. The MIS segment was break-even at the Adjusted EBITDA level. Liquidity and Capital Resources Selected measures of liquidity and capital resources, expressed in thousands, are as follows: September 30, 2014 December 31, 2013 Cash and cash equivalents $ 26,032 $ 24,752 Working Capital 25,550 28,844 At September 30, 2014 we had cash and cash equivalents of $26 million, of which $21.7 million was held by our foreign subsidiaries located in Asia and $4.3 million was held in the United States. If needed, amounts held by foreign subsidiaries can be repatriated to the United States to satisfy working capital needs of the U.S. entity, but under current law such amounts would be subject to United States federal income taxes. As of September 30, 2014 our intent is to permanently reinvest these funds outside the United States. In July 2014 we acquired MediaMiser and paid $4.1 million towards the purchase price at closing. We funded this payment from our overseas cash on hand. We have used, and plan to use, our cash and cash equivalents for (i) investments in IADS, which are expected to be at the rate of $1.1 million to $1.3 million per quarter in the immediate future, (ii) the expansion of our other operations; (iii) general corporate purposes, including working capital; and (iv) possible business acquisitions. As of September 30, 2014, we had working capital of approximately $25.6 million, as compared to working capital of approximately $28.9 million as of December 31, 2013. 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. We have curtailed some of our ongoing investments in IADS and may curtail these investments further if internally generated funds are insufficient and outside financing is not available on terms we find attractive. In the second quarter of 2012, we filed a shelf registration statement on Form S-3 to give us the ability to offer from time to time up to an aggregate of $70 million of securities, which may consist of common stock, preferred stock, debt securities, warrants, or units consisting of any of the foregoing. The registration is intended to give us flexibility should financing opportunities arise. 34 Net Cash Provided By Operating Activities Cash provided by our operating activities for the nine months ended September 30, 2014 was $5.8 million, resulting from a net loss of $1.5 million, adjustments for non-cash items of $3.3 million, and $4.0 million provided by working capital changes. Adjustments for non-cash items primarily consisted of $2.2 million for depreciation and amortization and stock option expense of $0.8 million. Working capital activities primarily consisted of a source of cash of $3.7 million as a result of net collections of accounts receivable and a source of cash of $0.5 million for a decrease in other assets. Cash provided by our operating activities for the nine months ended September 30, 2013 was $1.5 million, resulting from a net loss of $13.4 million, adjustments for non-cash items of $14.5 million, and $0.4 million provided by working capital changes. Adjustment for non-cash items primarily consisted of a $5.5 million impairment charge for our Synodex subsidiary, $2.9 million for depreciation and amortization and $5.0 million for a deferred income tax provision arising primarily on account of a $7.1 million valuation allowance on all of our U.S. deferred tax assets. Working capital activities primarily consisted of a source of cash of $3.5 million as a result of net collections of accounts receivable, a use of cash of $1.5 million for a decrease in accrued salaries, a use of cash of $0.8 million for a decrease in income and other taxes and use of cash of $0.9 million for a decline in accounts payable and accrued expenses. Our days' sales outstanding (DSO) for the nine months ended September 30, 2014 was approximately 65 days as compared to 74 days for the year ended December 31, 2013. The decrease is on account of the collection of outstanding amounts from one of our significant clients. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the "accounts receivable turnover." Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressedin number of days. Net Cash Used in Investing Activities For the nine months ended September 30, 2014, cash used in our investing activities was $5.0 million. These expenditures consisted of $3.2 million paid to acquire MediaMiser in July 2014 and capital expenditures of $1.8 million principally for of the purchase of technology equipment including servers, network infrastructure and workstations. During the next twelve months, we anticipate that capital expenditures for ongoing technology, equipment, infrastructure upgrades and development of our proprietary software platform, tools and technologies will approximate $3.0 to $4.0 million, a portion ofwhich we may finance. For the nine months ended September 30, 2013, cash used in our investing activities for capital expenditures was $3.5 million consisting of the purchase of technology equipment including servers, network infrastructure and workstations. Also included within capital expenditures are costs incurred to develop our proprietary software platform, tools and technology for the IADS segment amounting to $0.8 million. Also included in investing activities for the nine months ended September 30, 2013 is the sale of short-term investments primarily representing proceeds on maturity of $2.0 million in certificatesof deposit. Net Cash Provided by Financing Activities Cash provided by financing activities represents the net proceeds from a capital lease transaction we entered into during the first quarter of 2014 amounting to $0.9 million. Total payments of long-term obligations approximated $0.7 million and $0.4 million for the nine months ended September 30, 2014 and 2013, respectively. Proceeds from the exercise of stock options amounted to $0.4 million and $0.1 million during the nine months ended September 30, 2014 and 2013, respectively. 35 Contractual Obligations The table below summarizes our contractual obligations (in thousands) at September 30, 2014 and the effects that those obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Less than After 5Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years years Capital lease $ 735 $ 305 $ 430 $ - $ - Vendor obligations 759 391 368 - -Non cancelable operating leases 4,163 793 1,712 378 1,280 Acquisition related liability (1) 1,812 569 1,243 - - Total contractual cash obligations $ 7,469 $ 2,058 $ 3,753 $ 378 $ 1,280 (1) Amount represents portion of the purchase price consideration for acquisition of MediaMiser to be paid by the Company as follows: $0.5 million on July 28, 2015 in shares of Innodata Inc.'s common stock or at the Company's option in cash and $0.7 million on July 28, 2016 in shares of Innodata Inc.'s common stock or at the Company's option in cash. In addition, the Company the Company agreed to pay up to a maximum of $4.6 million of contingent consideration based on MediaMiser achieving certain revenue and EBITDA levels during the period from April 1, 2016 to March 31, 2017. The fair value of the contingent consideration as of September 30, 2014 was $0.6 million Future expected obligations under our pension benefit plan have not been included in the contractual cash obligations in the table above. Inflation, Seasonality and Prevailing Economic Conditions Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higher inflation in wage rates in the countries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients. Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins. 36 Critical Accounting Policies and Estimates Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of MediaMiser, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant, adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2014. Recent Accounting Pronouncements In May 2014, the FASB issued guidance on revenue from contracts with customers. 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 that period, beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt the new standard when it takes effect. We have not yet determined the potential effects of the adoption of this standard on our consolidated financial statements. In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This accounting guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements. |