Revenues

In our CS segment we recognize revenues based on the quantity delivered or resources utilized, and the period in which 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.

In our IADS segment we recognize revenues 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.

Our MIS segment derives its revenues primarily from subscription arrangements.arrangements and the provision of enriched media analysis services. 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. Revenues from enriched media analysis services are recognized when the services are performed and delivered to clients.

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 consolidated statements of operations and comprehensive income (loss).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, data center hosting fees, content acquisition costs, depreciation and amortization, travel, telecommunications, computer services and supplies, realized gain (loss) on forward contracts, foreign currency revaluation gain (loss), and other direct expenses that are incurred in providing services to our clients.

Selling and Administrative Expenses

Selling and administrative expenses consist of management and administrative salaries, sales and marketing costs including commissions, new services research and related software development, third party software, advertising and trade conferences, professional fees and consultant costs, and other administrative overhead costs.

Adjusted EBITDA Performance Metric

In addition to measures of financial performance presented in our consolidated financial statements, we monitor “Adjusted EBITDA” to help us evaluate our ongoing operating performance, including our ability to operate the business effectively.

We define Adjusted EBITDA as net income (loss) attributable to Innodata Inc. and Subsidiaries in accordance with 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 should be considered as a supplement to, and not as a substitute for, or superior to, GAAP net income.

The following table shows a reconciliation from net income (loss)loss to Adjusted EBITDA for the periods presented (in thousands):

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 December 31, 2014. We acquired Bulldog Reporter on December 23, 2014. The Results of Operations reflect the operations of Bulldog Reporter only for the period beginning on December 24, 2014.

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014 and ending on

Revenues

Total revenues were $58.5 million for the year ended December 31, 2015, a 1% decline from $59.1 million for the year ended December 31, 2014.

Revenues from the CS segment were $51.7 million and $56.8 million for the years ended December 31, 2015 and 2014, respectively, a decline of $5.1 million or approximately 9%. This decline is primarily attributable to a decline in e-book related services from one client, lower volumes in several projects and project completions. The decline was partially offset by an increase in revenues from other clients including ramp-up on a new project for a European publisher.

Revenues from the IADS segment were $2.1 million and $0.6 million for the years ended December 31, 2015 and 2014, respectively, an increase of $1.5 million or approximately 250%. The increase is primarily attributable to an increase in the volume of work from Synodex clients.

Revenues from the MIS segment were $4.7 million and $1.7 million for the year ended December 31, 2015 and for the period from the date of acquisition through December 31, 2014, respectively, an increase of $3.0 million or approximately 176%. The increase is primarily due to the recognition of revenue for a full year in 2015 compared to the recognition of revenue for 2014 from the date of acquisition to December 31, 2014, in 2014. The increase also reflects the addition in 2015 of 21 net new subscriber customers for MediaMiser’s Enterprise products and services, and $0.5 million in 2015 from sales of Bulldog Reporter products.

Two clients in our CS segment generated approximately 33%, 31% and 26% of the Company’s total revenues in the fiscal years ended December 31, 2015, 2014 and 2013, respectively. Another client in our CS segment accounted for less than 10% of the Company’s total revenues for the year ended December 31, 2015 but accounted for 10% and 11% of the Company’s total revenues for the years ended December 31, 2014 and 2013, respectively. A fourth client in our CS segment accounted for less than 10% of the Company’s total revenues for the years ended December 31, 2015 and 2014 but accounted for 15% of the Company’s total revenues for the year ended December 31, 2013. No other client accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 2015, 2014 and 2013, revenues from non-US clients accounted for 51%, 47% and 35%, respectively, of the Company's revenues.

Direct Operating Costs

Direct operating costs were approximately $43.9 million for each of the years ended December 31, 2015 and 2014.

Direct operating costs for the CS segment were $37.0 million and $38.4 million for the years ended December 31, 2015 and 2014, respectively, a decrease of $1.4 million or approximately 4%. The decline reflects efficiencies of approximately $1.8 million in technology and facility costs, favorable foreign exchange benefits of $0.3 million, a reduction in labor costs as a result of the decrease in 2015 CS revenues, offset in part by approximately $0.9 million in ramp-up costs on a new project for a European publisher and a $0.4 million expense accrual for retroactive bonuses required to be paid in India under recent legislation.

Direct operating costs for the IADS segment were approximately $4.3 million and $4.5 million for the respective periods, net of intersegment profits.

Direct operating costs for the MIS segment were approximately $2.6 million and $1.0 million, net of intersegment profit, for the years ended December 31, 2015 and 2014, respectively.The increase is because costs in 2015 were recorded for the full year while costs for 2014 were recorded only from the date of acquisition. The increase also reflects additional overhead costs incurred in 2015.

Direct operating costs as a percentage of total revenues increased to 75% for the year ended December 31, 2015 from 74% for the year ended December 31, 2014. Direct operating costs for the CS segment as a percentage of CS segment revenues were 72% for the year ended December 31, 2015 compared to 68% for the year ended December 31, 2014. The increase in direct operating costs for the CS segment as a percentage of CS segment revenues was principally attributable to the increase in expenses referred to above and the fixed costs-of-sales being apportioned over lower revenues.

Direct operating costs for the IADS segment as a percentage of IADS segment revenues were approximately 200% and 725% for the year ended December 31, 2015 and 2014, respectively.

Direct operating costs for the MIS segment as a percentage of MIS segment revenues were 55% for the year ended December 31, 2015 compared to 60% for the period from the date of acquisition to December 31, 2014. The decrease in direct operating costs for the MIS segment as a percentage of MIS segment revenues was primarily attributable to the fixed costs-of-sales being apportioned over higher revenues.

Selling and Administrative Expenses

Selling and administrative expenses were $16.8 million for the year ended December 31, 2015 compared to $16.4 million for the year ended December 31, 2014, an increase of $0.4 million or approximately 2%. Selling and administrative expenses as a percentage of total revenues increased to 29% for the year ended December 31, 2015 compared to 28% for the year ended December 31, 2014.

Selling and administrative expenses for the CS segment were $11.9 million and $13.8 million in these respective periods. Selling and administrative expenses for the IADS segment for both the periods were $1.6 million, net of intersegment profits. Selling and administrative expenses for the MIS segment were $3.3 million and $1.0 million, net of intersegment profits.

The decline in selling and administrative expenses for the CS segment for the year ended December 31, 2015 compared to the same period in 2014 is primarily due to the following; approximately $1.3 million of cost optimization; a provision for doubtful accounts and professional fees for the acquisition of MediaMiser and Bulldog Reporter businesses amounting to $0.2 million recorded in the year ended December 31, 2014; a reversal in 2015 of an accrual for incentive compensation payments to executive officers and other key employees; and a decline in other administrative costs.

Selling and administrative expenses for the CS segment as a percentage of CS segment revenues were approximately 23% and 24% for the year ended December 31, 2015 and 2014, respectively.

Selling and administrative expenses for the IADS segment as a percentage of IADS segment revenues were approximately 73% and 262% for the years ended December 31, 2015 and 2014, respectively.

Theselling and administrative expenses for the MIS segment increased because costs for 2015 were recorded for the full year while costs for 2014 were recorded only from the date of acquisition, and also because of approximately $0.7 million increase in sales and marketing spend to drive growth of customer acquisition.Selling and administrative expenses for the MIS segment as a percentage of MIS segment revenues were approximately 71% and 58% for the year ended December 31, 2015 and for the period from the date of acquisition to December 31, 2014, respectively.

Taxes

We recorded a provision for income taxes of approximately $1.2 million and $0.4 million for the years ended December 31, 2015 and 2014, respectively. Taxes primarily consist of a provision for foreign taxes recorded in accordance with the local tax regulations by our foreign subsidiaries. Effective income tax rates are disproportionate due to the losses incurred by our U.S. entity and our Canadian subsidiary and a valuation allowance recorded on deferred taxes on these entities. Some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduce 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.

For the year ended December 31, 2015, 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 two of the tax proceedings of our Indian subsidiary. For the year ended December 31, 2014, 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.

Our U.S. entity incurred losses primarily on account of the losses of Synodex.In assessing the realization of deferred tax assets, we 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 could not be predicted with certainty, in the third quarter of 2013 we created a $7.1 million valuation allowance against all of the U.S. deferred tax assets then outstanding. As a result of losses incurred thereafter through December 31, 2015 and the resulting increase in our deferred tax assets, as of December 31, 2015 we maintained a valuation allowance of $10.9 million against all of our U.S. deferred tax assets.

At December 31, 2015, MediaMiser had available net operating loss carryforwards in Canada which will begin to expire in 2028. In addition, MediaMiser also has research and development expenditures available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes.

Beginning in 2002, 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. Unremitted earnings aggregated $35.4 million at December 31, 2015. While as of December 31, 2015 we have no plans to repatriate the earnings except for $3 million in projected deemed dividend described below, if such earnings were to be remitted, we could be subject to United States income taxes that may not be fully offset by foreign tax credits.

In order to preserve cash in the United States, in the fourth quarter of 2015 the U.S. entity deferred $4.0 million in payments due to its Asian operating subsidiaries, which resulted in a deemed dividend of approximately $1.0 million that is taxable income for U.S. tax purposes under Section 956 of the Internal Revenue Code. The taxable income was setoff against thenet operating loss carryforwards of the U.S. entity. We adjusted the2015 tax provision, deferred tax assets and the corresponding valuation allowance as of December 31, 2015 to reflect this transaction.

We project that during the period from 2016 through 2018 the U.S. entity may not have sufficient cash to pay in full amounts that will be payable by it to our Asian operating subsidiaries and that the cash deficit will amount to approximately $3.0 million. The resulting deferral in payments would result in a deemed dividend that would be taxable income to the U.S. entity and would beset off against its net operating loss carryforwards. We adjusted our deferred tax assets and the corresponding valuation allowance as of December 31, 2015 to reflect the projected deferral in payments.

Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, our Indian subsidiary received a tax assessment approximating $260,000, including interest, through December 31, 2015, for the fiscal tax year ended March 31, 2003. We disagreed with the basis of the tax assessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with a judgment in the Company’s favor. 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 December 2010, the income tax assessing officer exercised this right. In June 2015, the Indian Bureau of Taxation completed the audit, and the ultimate outcome was favorable. There was no tax assessment imposed for the fiscal tax year ended March 31, 2003. We had previously recorded a tax provision amounting to $260,000 including interest through June 30, 2015. As the ultimate outcome was favorable, we reversed this amount in the second quarter of 2015. In 2008 and 2009, our Indian subsidiary received a final tax assessment for the fiscal years ended March 31, 2005 and 2006 from the Indian Bureau of Taxation. The tax assessment amounted to $284,000 and $300,000, including interest, through December 31, 2015, for the fiscal years ended March 31, 2005 and 2006, respectively. We disagree with the basis of these tax assessments, have filed an appeal against the assessments and are contesting them vigorously. In June 2015, the Indian Bureau of Taxation completed the audit for the fiscal tax year ended March 31, 2005 and the ultimate outcome was favorable. There was no tax assessment imposed for the fiscal tax year ended March 31, 2005. We had previously recorded a tax provision amounting to $284,000 including interest through June 30, 2015. As the ultimate outcome was favorable, we reversed this amount in the second quarter of 2015. In January 2012, our 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. We disagree with the basis of this tax assessment, and have filed an appeal against it. Due to this assessment, we recorded a tax provision amounting to $477,000 including interest through December 31, 2015. In April 2015, we 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, we believe that the tax provision of $477,000 including interest is adequate. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for the fiscal year ended March 31, 2012. The ultimate outcome for the fiscal year ended March 31, 2012 cannot be determined at this time. As we are continually subject to tax audits by the Indian Bureau of Taxation, we continuously assesses the likelihood of an unfavorable assessment for all fiscal years for which we have not been audited and, as of December 31, 2015, we recorded a tax provision amounting to $152,000 including interest for such year.

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 our Indian subsidiary would be subject to a service tax of approximately 14.5% of revenues and this would increase our operating costs. The revenues of our Indian subsidiary in 2015 were $16.5 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.

From time to time we are also subject to various tax proceedings and claims for our Philippines subsidiaries. We have recorded a tax provision amounting to $0.3 million including interest through December 31, 2015, for several ongoing tax proceedings in the Philippines. Although the ultimate outcome cannot be determined at this time, we continue to contest these claims vigorously.

We had unrecognized tax benefits in India and the Philippines totaling $1.2 million and $1.8 million at December 31, 2015 and 2014, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.5 million and $0.6 million at December 31, 2015 and 2014, respectively. The unrecognized tax benefits as of December 31, 2015 and 2014, if recognized, would have an impact on our effective tax rate.

We are subject to various tax audits and claims which arise in the ordinary course of business.  Management currently believes that the ultimate outcome of these audits and claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Net Loss

We generated a net loss of $2.8 million in the year December 31, 2015 compared to a net loss of $1.0 millionin the year ended December 31, 2014.

Net income for the CS segment was $2.1 million for the year ended December 31, 2015, compared to net income of $4.9 million for the year ended December 31, 2014, net of intersegment profits. Of the total decline in net income for the CS segment, $1.6 million is on account of the decline in revenues, offset in part by the above mentioned decrease in direct operating costs and selling and administrative expenses; a $0.8 million increase in the provision for foreign income taxes and a $0.4 million decline in losses attributable to non-controlling interests.

Net loss for the IADS segment was $3.7 million for the year ended December 31, 2015 compared to $5.6 million for the year ended December 31, 2014, net of intersegment profits. The decline in net loss is primarily due to an increase in revenues.

Net loss for the MIS segment was $1.2 million for the year ended December 31, 2015 and $0.3 million for the period from the date of acquisition to December 31, 2014in, in 2014. The net loss was higher primarily due to an increased spend on sales and marketing partially offset by margins from higher revenues.

Adjusted EBITDA

Adjusted EBITDA for the year ended December 31, 2015 was $1.9 million compared to $3.0 million for the year ended December 31, 2014, a decrease of $1.1 million or 36%. Adjusted EBITDA for the CS segment was $6.2 million and $8.5 million for the years ended December 31, 2015 and 2014, respectively, a decrease of $2.3 million or approximately 27%. Adjusted EBITDA was a loss of $3.7 million and $5.4 million for the IADS segment for the years ended December 31, 2015 and 2014, respectively. Adjusted EBITDA was a loss of $0.6 million and $0.1 million for the MIS segment for the year ended December 31, 2015 and the period from the date of acquisition to December 31, 2014, respectively.

Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

Revenues

Total revenues were $59.1 million for the year ended December 31, 2014, an 8% decline from $64.2 million for the year ended December 31, 2013. Revenues from the CS segment were $56.8 million and $63.1 million for the years ended December 31, 2014 and 2013, respectively. Revenues from the IADS segment were $0.6 million and $1.1 million for the years ended December 31, 2014 and 2013, respectively. Revenues from the MIS segment were $1.7 million for the year ended December 31, 2014.

The $6.3 million revenue decrease in the CS segment is principally attributable to a $5.4 million decline in revenues from non e-book related services that we perform for one of our significant clients and by a $0.9 million decrease in revenues from our e-book related services.

Two clients generated approximately 27%, 26% and 41% of our total revenues in the fiscal years ended December 31, 2014, 2013 and 2012, respectively. Another client accounted for 14% and 15% of our total revenues for the yearyears ended December 31, 2014 and 2013, respectively, but accounted for less than 10% for the yearsyear ended December 31, 2012. One other client accounted for less than 10% of ourthe Company’s total revenues for the years ended December 31, 20142015 and 20122014 but accounted for 15% of ourthe Company’s total revenues for the year ended December 31, 2013. No other client accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 2014, 2013 and 2012, revenues from non-US clients accounted for 47%, 35% and 24%, respectively, of our revenues.

Direct Operating Costs

Direct operating costs were approximately $43.9 million and $49.1 million for the years ended December 31, 2014 and 2013, respectively, a decrease of $5.2 million or approximately 11%. Direct operating costs for the CS segment were $38.4 million and $43.9 million for the years ended December 31, 2014 and 2013, respectively, a decrease of $5.5 million or approximately 13%. Direct operating costs for the IADS segment were approximately $4.5 million and $5.2 million for the respective periods, net of intersegment profits. Direct operating costs for the MIS segment waswere $1.0 million for the year ended December 31, 2014.

Direct operating costs as a percentage of total revenues decreased to 74% for the year ended December 31, 2014 compared to 76% for the year ended December 31, 2013. Direct operating costs for the CS segment as a percentage of CS segment revenues were 68% for the year ended December 31, 2014 compared to 70% for the year ended December 31, 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. Favorable foreign exchange rates also contributed to the decline in direct operating costs in 2014 compared to 2013.

Direct operating costs for the IADS segment represent certain production costs for initial engagements, including pilot engagements, and facility overhead costs for our delivery center in Asia. A reduction inSynodex personnel led to a decline in direct operating costs for the IADS segment for the year ended December 31, 2014 compared to December 31, 2013.

Impairment Charge

During the fourth quarter of 2014 we recorded an impairment charge of $0.4 million representing the write-off of certain long lived assets primarily on account of the consolidation of two India-based production facilities.delivery centers.

The Synodex subsidiary of the IADS segment has not achieved significant revenue to date and has incurred losses since inception. As a result, inIn the third quarter of 2013, we evaluated the carrying value of the fixed assets of itsour 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 year ended December 31, 2013. We have expensed all capital expenditures incurred by IADS since the third quarter of 2013.

Selling and Administrative Expenses

Selling and administrative expenses were $16.4 million, or approximately 28% as a percentage of total revenues and $17.3 million, or 27% as a percentage of total revenues for the years ended December 31, 2014 and 2013, respectively, a decrease of $1.0 million, or approximately 6%.

Selling and administrative expenses for the CS segment were $13.8 million and $15.2 million in these respective periods. Selling and administrative expenses for the IADS segment for the respective periods were $1.6 million and $2.1 million, net of intersegment profits. Selling and administrative expenses for the MIS segment was $1.0 for the year ended December 31, 2014.

We continued to restructure our operations in 2014 which resulted in cost savings. This led to a decline in selling and administrative expenses for the CS segment during the year ended December 31, 2014 compared to the year ended December 31, 2013.

Selling and administrative expenses for the CS segment, as a percentage of CS segment revenues was 24% for the years ended December 31, 2014 and 2013. A significant portion of our selling and administrative expenses is fixed in nature.

The decline in selling and administrative expenses for the IADS segment is primarily on account of a reduction in Synodex personnel in 2014.

Income Taxes

For the years ended December 31, 2014 and 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 reduce 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. For the year ended December 31, 2014, 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.

The Synodex subsidiary of our IADS segment has not achieved significant revenue to date and has incurred losses since inception. Our U.S. entity incurred losses primarily on account of the losses ofin Synodex.In assessing the realization of deferred tax assets, we 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, in the third quarter of 2103 we created a $7.1 million valuation allowance against all of the U.S. deferred tax assets then outstanding. As a result of losses incurred thereafter through December 31, 2014 and the resulting increase in our deferred tax assets, as of December 31 2014, we maintained a valuation allowance of $9.2 million against all of our U.S. deferred tax assets.

At December 31, 2014, MediaMiser hashad available net operating loss carryforwards in Canada which will begin to expire in 2028. In addition, MediaMiser also has research and development expenditures available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes.

Beginning in 2002, 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. Unremitted earnings aggregated $34.7 million at December 31, 2014. While as of December 31, 2014 we have no plans to remit the funds, but if such earnings were to be remitted, we could be subject to United States income taxes that may not be fully offset by foreign tax credits. It is not practicable at this time to determine the amount of unrecognized deferred tax liability related to these earnings.

Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, our Indian subsidiary received a tax assessment approximating $257,000, including interest, through December 31, 2014, for the fiscal tax year ended March 31, 2003. We disagreed with the basis of the tax assessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with a judgment in our favor. 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 December 2010, the income tax assessing officer exercised this right, against which we have filed an application to defend the case, and we intend to contest it vigorously. The Indian Bureau of Taxation has also completed an audit of our Indian subsidiary’s income tax return for the fiscal tax year ended March 31, 2004. The ultimate outcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2004. In 2008 and 2009, the Indian subsidiary received a final tax assessment for the fiscal years ended March 31, 2005 and 2006 from the Indian Bureau of Taxation. The tax assessments amounted to $281,000 and $301,000, including interest through December 31, 2014, for the fiscal years ended March 31, 2005 and 2006, respectively. We disagree with the basis of these tax assessments, have filed an appeal against the assessments and are contesting them 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. We disagree with the basis of this tax assessment, and have filed an appeal against it. Due to this assessment, we recorded a tax provision amounting to $476,000 including interest through December 31, 2014. Based on recent experience and the current regulatory environment, we believe that the tax provision of $476,000 including interest is adequate. In February 2014, the Indian Bureau of Taxation also completed an audit of our Indian subsidiary’s income tax return for the fiscal tax year ended March 31, 2009. The ultimate outcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2009. We had previously recorded a tax provision amounting to $722,000 including interest for the fiscal tax year ended March 31, 2009. As the ultimate outcome was favorable, we reversed this amount in the first quarter of 2014. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for the fiscal years ended March 31, 2010 and 2011. We received a favorable outcome for the fiscal year ended March 31, 2010; however, the ultimate outcome for the fiscal year ended March 31, 2011 cannot be determined at this time. As we are continually subject to tax audits by the Indian Bureau of Taxation, we continuously assesses the likelihood of an unfavorable assessment for all fiscal years for we have not been audited, and as of December 31, 2014, we recorded a tax provision amounting to $146,000 including interest for such year.

From time to time we are also subject to various other tax proceedings and claims for our Philippines subsidiaries. We have recorded a tax provision amounting to $300,000 including interest through December 31, 2014, for several ongoing tax proceedings in the Philippines. Although the ultimate outcome cannot be determined at this time, we continue to contest these claims vigorously.

We had unrecognized tax benefits of $1.8 million and $2.2 million at December 31, 2014 and 2013, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.6 million and $0.8 million at December 31, 2014 and 2013, respectively. The unrecognized tax benefits as of December 31, 2014 and 2013, if recognized, would have an impact on our effective tax rate.

We are subject to various tax audits and claims which arise in the ordinary course of business.  Management currently believes that the ultimate outcome of these audits and claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Net Loss

We generated a net loss of $1.0 million in the year December 31, 2014 compared to net loss of $10.6 millionin the year ended December 31, 2013. The decline in net loss in 2014 is primarily attributable to the $7.1 million valuation allowance referred to in “Income Taxes” recorded during the year ended December 31, 2013, and all of which we allocated to the CS segment, and the $5.5 million impairment charge referred to in “Impairment Charge” that we recorded in 2013, and all of which we allocated to the IADS segment. In addition, losses attributable to non-controlling interests in IADS declined by $1.3 million for the year ended December 31, 2014 compared to the year ended December 31, 2013.

Net income for the CS segment was $4.9 million for the year ended December 31, 2014, compared to net income of $1.2 million for the year ended December 31, 2013, net of intersegment profits. Net loss for the IADS segment was $5.6 million for the year ended December 31, 2014 compared to $11.8 million for the year ended December 31, 2013, net of intersegment profits. Net loss for the MIS segment was $0.3 million for the year ended December 31, 2014.

Adjusted EBITDA

Adjusted EBITDA for the year ended December 31, 2014 was $3.0 million compared to $2.4 million for the year ended December 31, 2013, an increase of $0.6 million or 25%. Adjusted EBITDA for the CS segment was $8.5 million and $8.0 million for the years ended December 31, 2014 and 2013, respectively, an increase of $0.5 million or approximately 6%. Adjusted EBITDA was a loss of $5.4 million and $5.6 million for the IADS segment for the years ended December 31, 2014 and 2013, respectively. Adjusted EBITDA was a loss of $0.1 million for the MIS segment for the year ended December 31, 2014.

Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Revenues

Total revenues were $64.2 million for the year ended December 31, 2013, a 26% decrease from $86.6 million for the year ended December 31, 2012. Revenues from the CS segment were $63.1 million and $85.4 million for the years ended December 31, 2013 and 2012, respectively. Revenues from the IADS segment were $1.1 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively.

The $22.3 million decrease in the CS segment is principally attributable to an $18.9 million decline in revenues from e-book related services that we perform for one of our significant clients, partly offset by a $3.4 million increase in revenues from our non-e-book related services.

Two clients generated approximately 26%, 41% and 30% of our total revenues in the fiscal years ended December 31, 2013, 2012 and 2011, respectively. Another client accounted for 15% of our total revenues for the year ended December 31, 2013, but accounted for less than 10% for the years ended December 31, 2012 and 2011. One other client accounted for 11% of our total revenues for the year ended December 31, 2013 but accounted for less than 10% for the year ended December 31, 2012 and 14% for the year ended December 31, 2011. No other client accounted for 10% or more of total revenues during these periods. Further, in the years ended December 31, 2013, 2012 and 2011, revenues from non-US clients accounted for 35%, 24% and 30%, respectively, of our revenues.

Direct Operating Costs

Direct operating costs were approximately $49.1 million and $57.4 million for the years ended December 31, 2013 and 2012, respectively, a decrease of $8.3 million or approximately 14%. Direct operating costs for the CS segment were $43.9 million and $53.3 million for the years ended December 31, 2013 and 2012, respectively, a decrease of $9.4 million or approximately 18%. Direct operating costs for the IADS segment were approximately $5.2 million and $4.1 million for the respective periods, net of intersegment profits.

Direct operating costs as a percentage of total revenues increased to 76% for the year ended December 31, 2013 compared to 66% for the year ended December 31, 2012. Direct operating costs for the CS segment as a percentage of CS segment revenues were 70% for the year ended December 31, 2013 compared to 62% for the year ended December 31, 2012.

The decline in direct operating costs for the CS segment was principally attributable to a decrease in production headcount due to a decline in CS revenues. However, direct operating costs as a percentage of CS segment revenues have increased since our direct operating costs are comprised of both fixed and variable costs and fixed costs do not change proportionately to changes in revenues.

Direct operating costs for the IADS segment consist primarily of certain production costs for pilot and other initial engagements, as well as facility overhead costs for our delivery center in Asia.

As of December 31, 2013, all fixed assets of IADS have been written off. As of the start of the fourth quarter of 2013, all capital expenditures incurred for IADS are expensed as direct operating costs.

Impairment Charge

The Synodex subsidiary of our IADS segment has not achieved significant revenue to date and has incurred losses since inception. 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 year ended December 31, 2013.

In the fourth quarter of 2012, we evaluated the carrying value of the fixed assets of our docGenix subsidiary compared to its fair value and concluded that the carrying value exceeds its fair value. This resulted in an impairment charge of $0.5 million for the year ended December 31, 2012.

Selling and Administrative Expenses

Selling and administrative expenses were $17.3 million and $22.2 million for the years ended December 31, 2013 and 2012, respectively, a decrease of $4.9 million, or approximately 22%. Selling and administrative costs for the CS segment were $15.2 million and $19.3 million in these respective periods. Selling and administrative expenses for the IADS segment for the respective periods were $2.1 million and $2.9 million, net of intersegment profits.

We restructured our operations during the fourth quarter of 2012 and the first half of 2013, resulting in cost savings in the second half of 2013. This led to a decline in selling and administrative expenses for the CS segment during the year ended December 31, 2013 compared to the year ended December 31, 2012.

Selling and administrative expenses for the CS segment, as a percentage of CS segment revenues, increased to 24% for the year ended December 31, 2013, from 23% for the year ended 2012, primarily as a result of lower revenues and the fixed component of our selling and administrative expenses. A significant portion of our selling and administrative expenses is fixed in nature.

The decline in selling and administrative expenses for the IADS segment is primarily on account of restructuring our docGenix operations in the fourth quarter of 2012.

Income Taxes

For the year ended December 31, 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 reduce 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 Synodex subsidiary of our IADS segment has not achieved significant revenue to date and has incurred losses since inception. Our U.S. entity incurred losses primarily on account of the losses of Synodex.In assessing the realization of deferred tax assets, we 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 could not be predicted with certainty, we created a valuation allowance against all the U.S. deferred tax assets starting in the third quarter of 2013. As of December 31, 2013, we maintained a valuation allowance of $8.1 million against all of our U.S. deferred tax assets.

For the year ended December 31, 2012, our U.S. entity recorded a benefit from income tax on account of losses incurred by our U.S. entity. With respect to our foreign subsidiaries, we recorded a provision for income taxes in accordance with the local tax regulations. As some of our foreign subsidiaries are subject to tax holidays or preferential tax rates, our overall effective tax rate was lower 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.

Beginning in 2002, 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. If such earnings were to be distributed, we could be subject to United States income taxes that may not be fully offset by foreign tax credits. It is not practicable at this time to determine the amount of unrecognized deferred tax liability related to these earnings.

In January 2013, one of our Philippine subsidiaries received an informal tax assessment from the Internal Revenue Service of the Philippines for an amount totaling $3.8 million for the year ended December 31, 2009. We disagreed with the basis of the informal tax assessment and contested it vigorously. The ultimate outcome was favorable, and, accordingly, we did not record any tax provision.

We had unrecognized tax benefits of $2.5 million and $2.4 million at December 31, 2013 and 2012, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.8 million and $0.7 million at December 31, 2013 and 2012, respectively. The unrecognized tax benefits as of December 31, 2013 and 2012, if recognized, would have an impact on our effective tax rate.

We are subject to various tax audits and claims which arise in the ordinary course of business.  Management currently believes that the ultimate outcome of these audits and claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Net Loss

We generated a net loss of $10.6 million in the year ended December 31, 2013, compared to net income of $7.5 million in the year ended December 31, 2012. The loss is primarily attributable to the $7.1 million valuation allowance referred to in “Income Taxes,” the $5.0 million impairment charge referred to in “Impairment Charge,” a decline in gross margins of the CS segment resulting from lower revenues offset in part by a decline in selling and administrative expenses, and continuing losses from operations of the IADS segment.

Net income for the CS segment was $1.2 million for the year ended December 31, 2013 compared to $13.8 million for the year ended December 31, 2012. Net loss for the IADS segment was $11.8 million for the year ended December 31, 2013 compared to $6.3 million for the year ended December 31, 2012, net of intersegment profits.

Adjusted EBITDA

Adjusted EBITDA for the year ended December 31, 2013 was $2.4 million compared to $11.9 million for the year ended December 31, 2012, a decline of $9.5 million or 80%. Adjusted EBITDA for the CS segment was $8.0 million and $17.2 million for the years ended December 31, 2013 and 2012, respectively, a decrease of $9.2 million or 53%. Adjusted EBITDA was a loss of $5.6 million and $5.3 million for the IADS segment for the years ended December 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

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

At December 31, 20142015 we had cash and cash equivalents of $24.2$24.9 million, of which $22.5$20.8 million was held by our foreign subsidiaries, and the $1.7$4.1 million balance was held in the United States. If needed, amounts held by foreign subsidiaries could be repatriated to the United States to satisfy working capital needs of the U.S. entity, but under current law, they would be subject to United States federal income taxes. As of December 31, 2014,2015, 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 acquired intellectual property and related assets of Bulldog Reporter in December 2014States, except for approximately $0.2 million.

In March 2014 we borrowed $0.9$3 million in a three year sale-leaseback transaction at an effective interest rate of 6%.projected deemed dividend described below.

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 $1.1-1.4$0.8-1.0 million per quarter in the immediate future,future; (ii) investment of $0.7 million in our MIS segment: (iii) the expansion of our other operations; (iii)(iv) general corporate purposes, including working capital; and (iv)(v) possible business acquisitions. As of December 31, 2014,2015, we had working capital of approximately $25.8$25.0 million, as compared to working capital of approximately $28.9$25.8 million as of December 31, 2013.2014.

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 may curtail or lessen our continuing investments in our IADS segment and other segments, or reduce our operating expenses, if these funds are insufficient and outside financing is not available on terms we find attractive.

In order to preserve cash in the secondUnited States, in the fourth quarter of 2012,2015 the U.S. entity deferred $4.0 million in payments due to its Asian operating subsidiaries, which resulted in a deemed dividend of approximately $1.0 million that is taxable income for U.S. tax purposes under Section 956 of the Internal Revenue Code. The taxable income was setoff against thenet operating loss carryforwards of the U.S. entity.

We project that during the period from 2016 through 2018 the U.S. entity may not have sufficient cash to pay in full amounts that will be payable by it to our Asian operating subsidiaries and that the cash deficit will amount to approximately $3.0 million. The resulting deferral in payments would result in a deemed dividend that would be taxable income to the U.S. entity and would beset off against its net operating loss carryforwards.

In October 2015, we filed a shelf registration statement on Form S-3, towhich will 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.

Net Cash Provided by Operating Activities

Cash provided by our operating activities in 2015 was $2.7 million, resulting from a net loss of $3.4 million, adjustments for non-cash items of $4.4 million, and $1.7 million from working capital. Adjustments for non-cash items principally consisted of $2.8 million for depreciation and amortization, stock compensation expense of $1.3 million and pension costs of $0.4 million. Working capital activities primarily consisted of a source of cash of $1.0 million as a result of a decrease in accounts receivable and $0.7 million provided by other working capital accounts.

Cash provided by our operating activities in 2014 was $4.6 million, resulting from a net loss of $1.9 million, adjustments for non-cash items of $4.9 million, and $1.6 million from working capital. Adjustments for non-cash items principally consisted of $3.0 million for depreciation and amortization, stock compensation expense of $1.2 million, pension costs of $0.7 million and an impairment charge of approximately $0.4 million. Working capital activities primarily consisted of a source of cash of $1.9 million as a result of a decrease in accounts receivable and $0.7 million used for other working capital accounts.

Cash provided by our operating activities in 2013 was $0.6 million, resulting from a net loss of $12.8 million, adjustments for non-cash items of $15.2 million, and $1.8 million used for working capital. Adjustments for non-cash items principally consisted of $3.7 million for depreciation and amortization, stock compensation expense of $1.0 million and an impairment charge of approximately $5.5 million relating to the IADS segment. Working capital activities primarily consisted of a source of cash of $2.4 million as a result of a decrease in accounts receivable, use of cash of $1.9 million from a decrease in accrued salaries, wages and related benefits, use of cash of $1.2 million from a decrease in income and other taxes and use of cash of $1 million from a decrease in accounts payable and accrued expenses.

Cash provided by our operating activities in 2012 was $17.8 million, resulting from net income of $5.7 million, adjustments for non-cash items of $5.3 million, and $6.8 million provided for working capital. Adjustments for non-cash items principally consisted of $3.9 million for depreciation and amortization, stock compensation expense of $1.0 million and an impairment charge of approximately $0.5 million relating to the IADS segment. Working capital activities primarily consisted of a source of cash of $7.4 million as a result of a decrease in accounts receivable, use of cash of $0.7 million from an increase in other assets, use of cash of $0.4 million from an decrease in income and other taxes, partially offset by a source of cash of $0.5 million for prepaid expenses and other current assets.

At December 31, 2014,2015, our days’ sales outstanding were 6961 days as compared to 69 days as of December 31, 2014 and 74 days as of December 31, 2013 and 76 days as of December 31, 2012.2013. We calculate DSO by first dividing the total revenues for the period by average net accounts receivable, which is the sum of net accounts receivable at the beginning of the period and net accounts receivable at the end of the period, to yield an amount we refer to as the “accounts receivable turnover”.turnover.” Then we divide the total number of days within the period reported by the accounts receivable turnover to yield DSO expressed in number of days.

Net Cash Used in Investing Activities

During 2014, 2013 and 2012, cash used in our investing activities for capital expenditures were $2.0 million, $3.8 million and $6.8 million, respectively. Capital expenditures in 2014 amounting2015 amounted to $2.0$0.7 million represented spendingconsisting of $0.5 million for the CS segment and $0.2 million for the MIS segment. Capital expenditures for the IADS segment amounted to $0.2$0.3 million in 2015 which has been expensed. Weexpensed, as we continue to expense all capital expenditures for the IADS segment.segment since we recorded the impairment in 2013. A significant portion of the capital expenditures incurred during the year was for the purchase of new servers, storage and software upgrades.

WeCapital expenditures in 2014 for the CS segment amounted to $2.0 million primarily for the purchase of technology equipment and computer software. Capital expenditures for the IADS segment amounted to $0.2 million in 2014 which has been expensed. In addition, we paid $3.2 million to acquire MediaMiser in July 2014 and approximately $0.2 million to acquire intellectual property and related assets of Bulldog Reporter in December 2014.

Capital spendingexpenditures in 2013 for the CS segment waswere $2.8 million that principally consisted 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 $1.0 million.

Capital spending in 2012 for the CS segment was $3.0 million that principally consisted of purchases of technology equipment, including workstations, computer software and leasehold improvements, and to establish a new delivery center in Asia. Capital spending in 2012 for the IADS segment was $3.8 million that included costs incurred to develop our proprietary software platform, tools and technology.

Also, included in the investing activities during the yearsyear ended December 31, 2013 and 2012 iswas the sale of short-term and long-term investments primarily representing proceeds on the maturity of certificates of deposit in amounts of $3.0 million and $2.7 million, respectively.$3.1 million.

For the year 2015,2016, we anticipate that capital expenditures for ongoing technology, equipment and infrastructure upgrades will approximate $3.0$2.5 to $4.0$3.5 million, a portion of which we may finance.

Net Cash Provided by (Used in) Financing Activities

Payment of long term obligations approximated $0.9 million, $0.8 million and $0.7 million for 2015, 2014 and 2013, respectively.Cash provided byfrom 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. Payment of long term obligations approximated $0.8 million, $0.7 million and $0.2 million for 2014, 2013 and 2012, respectively. Proceeds from the exercise of stock options for the years ended December 31, 2014 2013 and 20122013 were $0.4 million and $0.1 million, and $0.6 million, respectively. There were no stock option exercises during the year ended December 31, 2015.

Although the majority of our revenues is denominated in U.S. dollars, a significant portion of our revenues is denominated in Canadian dollars and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada and Israel, is incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S. denominated transactions into U.S. dollars in accordance with accounting principles generally accepted in the United States. As a result, 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.

By way of example, theThe value of the Euro and the Canadian dollar against the U.S. dollar declined significantly induring the fourth quarter of 2014.2014 and in 2015. 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.

Contractual Obligations

The table below summarizes our contractual obligations (in thousands) at December 31, 2014,2015, and the effect that those obligations are expected to have on our liquidity and cash flows in future periods.

Future expected obligations under our pension benefit plans have not been included in the contractual cash obligations 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.

Critical Accounting Policies and Estimates

Basis of Presentation and Use of Estimates

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures 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, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant adverse effect on our consolidated results of operations and financial position. We believe the following critical accounting policies affect our more significant estimates and judgments in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts

We establish credit terms for new clients based upon management’s review of their credit information and project terms, and perform ongoing credit evaluations of our clients, adjusting credit terms when management believes appropriate, based upon payment history and an assessment of the client’s current credit worthiness. We record an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We determine this allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, our estimate of the client’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. While credit losses have generally been within expectations and the provisions established, we cannot guarantee that credit loss rates in the future will be consistent with those experienced in the past. In addition, we would have credit exposure if the financial condition of one of our major clients were to deteriorate. In the event that the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be necessary.

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, 20142015 and 20132014 are translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and stockholders’ equity were translated at the appropriate historical rates. Included in direct operating costs are exchange losses (gains) resulting from such transactions of approximately $(134,000), $246,000 $645,000 and $431,000$645,000 for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively.

The functional currency for our subsidiaries in Germany and Canada are the Euro 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 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 income (loss). The amount of foreign currency translation adjustment was $1,442,000 and $447,000 as of December 31, 2015 and 2014, was $447,000.respectively. There was no foreign currency translation adjustment as of December 31, 2013 and 2012 as these subsidiaries were either acquired or formed in 2014.

Revenue Recognition

For our CS segment revenues are recognized based on the quantity delivered or resources utilized and in the period in which the services are performed, once delivery has occurred and when all the criteria of Staff Accounting Bulletin 104 have been met. 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.

In our IADS segment ourwe recognize revenues are recognized primarily based on the quantity delivered, and in the period in which the 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.

Our MIS segment derives its revenues primarily from subscription arrangements.arrangements and provision of enriched media analysis services. 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. Revenues from enriched media analysis services are recognized when the services are performed and delivered to the clients.

Revenues include reimbursement of out-of-pocket expenses, with the corresponding out-of-pocket expenses included in direct operating costs.

Long-lived Assets

We assess the recoverability of long-lived assets, which consist primarily of fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following factors, if present, may trigger an impairment review: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) a significant decline in our stock price for a sustained period; and (iv) a change in our market capitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-mentioned factors, an impairment analysis is performed, initially using a projected undiscounted cash flow method.  We make assumptions regarding estimated future cash flows and other factors to determine the fair value of these respective assets. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair value, and is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

During the fourth quarter of 2014 we recorded an impairment charge of $0.4 million representing the write-off of certain long lived assets on account of the consolidation of two India-based production facilities.delivery centers.

In an impairment review conducted by us in 2013, the carrying value of the fixed assets of our Synodex subsidiary exceeded its fair value. We recorded an impairment charge of $5.5 million for the year ended December 31, 2013. For the year ended December 31, 2012 we did a similar impairment review for our docGenix subsidiary and recorded an impairment charge of $0.5 million.

Income Taxes

We determine our deferred taxes based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. We provide a valuation allowance when it is more likely than not that all or some portion of the deferred tax assets will not be realized. While we consider future taxable income in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Similarly, in the event we were to determine that we would not be able to realize the deferred tax assets in the future considering the future taxable income, an adjustment to the deferred tax assets would decrease income in the period such determination was made. Changes in the valuation allowance from period to period are included in our tax provision in the period of change. As of December 31, 2014,2015, we intend to indefinitely reinvest the foreign earnings in our 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. However, if we change our intent and repatriate such earnings, we will have to accrue the applicable amount of taxes associated with such earnings.

The Synodex subsidiary of the IADS segment has not achieved significant revenue to date and has incurred losses since inception. Our U.S. entity has incurred losses primarily on account of Synodex’s losses. In assessing the realization of deferred tax assets in 2013, management considered whether it was more likely than not that all or some of the U.S. deferred tax assets would not be realizable. As the expectation of future taxable income resulting from Synodex could not be predicted with certainty, we created a valuation allowance against all of the U.S. deferred tax assets in the third quarter of 2013. As of December 31, 2014,2015, we continue to maintain a valuation allowance on all U.S. deferred tax assets.

As of December 31, 2014,2015, MediaMiser has available net operating loss carryforwards and research and development expenditures available to reduce taxable income of future years. The potential benefits from balances have not been recognized for financial statement purposes.

We account for income taxes regarding uncertain tax positions, and recognize interest and penalties related to uncertain tax positions under “Income Tax Expense” in our consolidated statement of operations and comprehensive income (loss).loss.

Goodwill and Other Intangible Assets

Goodwill represents the excess purchase price paid over the fair value of net assets acquired. We test our 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, we 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 us as of September 30, 2015, 2014 2013 and 2012,2013, the estimated fair value of the reporting unit exceeded its carrying amount, including goodwill. As such, no impairment was identified or recorded.

Accounting for Stock-Based Compensation

We are authorized to grant stock options to officers, directors, employees and others who render services to us under the 2013 Stock Plan approved by the stockholders.

We measure and recognize stock-based compensation expense for all share-based payment awards made to employees and directors based on estimated fair value at the grant date and recognized over the requisite service period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options and the expected volatility of our stock. The fair value is determined using the Black-Scholes option-pricing model. We recorded stock-based compensation expense of approximately $1.3 million, $1.2 million $0.9 million and $1.0$0.9 million for the years ended December 31, 2015, 2014 2013 and 2012,2013, respectively.

Legal Proceedings

We are subject to various legal proceedings and claims which arise in the ordinary course of business. Our legal reserves related to these proceedings and claims are based on a determination of whether or not a loss is probable. We review outstanding claims and proceedings with external counsel to assess probability and estimates of loss. The reserves are adjusted if necessary. If circumstances change, we may be required to record adjustments that could be material to our reported financial condition and results of operations.

Pensions

Most of our non-U.S. subsidiaries provide for government mandated defined pension benefits covering those employees who meet certain eligibility requirements. Pension assumptions are significant inputs to actuarial models that measure pension benefit obligations and related effects on operations. Two critical assumptions – discount rate and rate of increase in compensation levels – are important elements of plan expense and asset/liability measurements. These critical assumptions are evaluated at least annually on a plan and a country-specific basis. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect actual experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors, and in accordance with generally accepted accounting principles, the impact of these differences are accumulated and amortized over future periods.

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, 20162017 and early adoption is not permitted.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. 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.

In November 2015, the FASB issued guidance related to balance sheet classification of deferred taxes. This new guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We do not anticipate that adoption of this standard will have a material impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest rate risk

Our equipment sales leaseback financing and capital lease transaction carriestransactions carry a fixed interest rate. Thus, as of December 31, 20142015 we are not exposed to any market risk due to interest rate fluctuations.

Foreign currency risk

Although the majority of our revenues is denominated in U.S. dollars, a significant portion of our revenues is denominated in Canadian dollars and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, Germany, Canada and Israel, is incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translate all non-U.S. denominated transactions into U.S. dollars in accordance with accounting principles generally accepted in the United States. As a result, 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.

To mitigate the exposure of fluctuating future cash flows due to changes in foreign exchange rates, we entered into foreign currency forward contracts in 2014.2015. These foreign currency forward contracts were entered into with a maximum term of twelve months and have an aggregate notional amount of approximately $19.4$15.8 million as of December 31, 2014.2015. The total unrealized loss on the outstanding hedges were $0.3$0.2 million as of December 31, 2014.2015.

The impact of foreign currency fluctuations will continue to present economic challenges to us and could negatively impact our overall results of operations. A 10% appreciation in the U.S. dollar’s value relating to the hedged currencies would decrease the forward contracts’ fair value by approximately $1.8$1.5 million as of December 31, 2014.2015. Similarly, a 10% depreciation in the U.S. dollar’s value relative to the hedged currencies would increase the forward contracts’ fair value by approximately $2.2$1.8 million as of December 31, 2014.2015. Any increase or decrease in the fair value of our currency exchange rate sensitive forward contracts, if utilized, would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying cash flows.

We may continue to enter into these, or other such instruments, in the future to reduce foreign currency exposure to appreciation or depreciation in the value of these foreign currencies.

Other than the aforementioned forward contracts, we have not, in 20142015, engaged in any hedging activities, nor have we, in 20142015, entered into off-balance-sheet transactions or arrangements. In addition, as of December 31, 2014,2015, our foreign locations held cash and cash equivalents totaling approximately $22.5$20.8 million. These assets are exposed to foreign exchange risk arising from changes in foreign exchange rates. At present, we do not enter into any hedging instruments to mitigate foreign exchange risk on such assets; however, we may do so in the future.

Item 8. Financial Statements and Supplementary Data.

See Financial Statement Index, Financial Statements and Supplementary Data commencing on page F-1 herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision, and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2014,2015, our disclosure controls and procedures were effective.

Our evaluation excluded MediaMiser which was acquired on July 28, 2014. At December 31, 2014, MediaMiser had $7.6 million of total assets. For the year ended December 31, 2014, our consolidated statement of operations included total revenue associated with MediaMiser of $1.7 million. In accordance with guidance issued by the SEC, companies are allowed to exclude acquisitions from their assessment of internal controls over financial reporting during the first year subsequent to the acquisition while integrating the acquired operations.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Management on Internal Control Overover Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework (2013) - issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014.2015.

The effectiveness of our internal control over financial reporting as of December 31, 2014,2015, was audited by CohnReznick LLP, our independent registered public accounting firm, as stated in their report appearing below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Innodata Inc.:

We have audited Innodata Inc. and Subsidiaries (“Innodata”) internal control over financial reporting as of December 31, 2014,2015, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Innodata’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Innodata’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

As described in the accompanying Management’s Report on Internal Control over Financial Reporting, management has excluded MediaMiser Ltd. from its assessment of internal control over financing reporting as of December 31, 2014, because it was acquired by the Company in a purchase business combination in the third quarter of 2014. We also excluded MediaMiser Ltd. from our audit of internal control over financial reporting.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Innodata Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2015, based on the criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 20142015 and 2013,2014, and the related consolidated statements of operations and comprehensive income (loss),loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014,2015, and the related financial statement schedule of Innodata Inc. and Subsidiaries and our report dated March 13, 2015,14, 2016, expressed an unqualified opinion thereon.

/s/CohnReznick LLP

Roseland, New Jersey

March 13, 201514, 2016

Item 9B. Other information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information called for by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20142015 fiscal year.

The Company has a code of ethics that applies to all of its employees, officers, and directors, including its principal executive officer, principal financial and accounting officer, and controller. The text of the Company’s code of ethics is posted on its website at www.innodata.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors in accordance with applicable Nasdaq and SEC requirements.

Item 11. Executive Compensation.

The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20142015 fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20142015 fiscal year.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20142015 fiscal year.

Item 14. Principal Accounting Fees and Services.

The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 20142015 fiscal year.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

2. Financial Statement Schedules. Schedule II – Valuation and Qualifying Accounts.

3. Exhibits – See Exhibit Index attached hereto and incorporated by reference herein.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Item 8. Financial Statements.

INNODATA INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Innodata Inc.:

We have audited the accompanying consolidated balance sheets of Innodata Inc. and Subsidiaries as of December 31, 20142015 and 2013,2014, and the related consolidated statements of operations and comprehensive income (loss),loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014.2015. Our audits of the consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. Innodata Inc. and Subsidiaries’ management is responsible for these consolidated financial statements and financial statement schedule. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innodata Inc. and Subsidiaries as of December 31, 20142015 and 2013,2014, and their results of operations and cash flows for each of the three years in the period ended December 31, 2014,2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Innodata Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 20142015 based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 13, 2015,14, 2016, expressed an unqualified opinion thereon.

/s/ CohnReznick LLP

Roseland, New Jersey

March 13, 2015

INNODATA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 20142015 AND 20132014

(in thousands, except share and per share data)