10-Q 1 tv478621_10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  | For the quarterly period ended September 30, 2017
|  | OR
¨ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  | For the transition period from ________________ to ________________

Commission file number: 0-22196

INNODATA INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 13-3475943
(State or other jurisdiction of |  | (I.R.S. Employer
incorporation or organization) |  | Identification No.)
55 Challenger Road |  | 07660
Ridgefield Park, New Jersey |  | (Zip Code)
(Address of principal executive offices) |  |

(201) 371-8000

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company þ
Emerging growth company ¨ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

The number of outstanding shares of the registrant’s common stock, $.01 par value, as of October 31, 2017 was 25,877,454.

INNODATA INC. AND SUBSIDIARIES

For the Quarter Ended September 30, 2017

INDEX

|  | Page No.
| Part I – Financial Information |
Item 1. | Condensed Consolidated Financial Statements (Unaudited): |
| Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 | 1
| Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2017 and 2016 | 2
| Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2017 and 2016 | 3
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 | 4
| Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2017 and 2016 | 5
| Notes to Condensed Consolidated Financial Statements | 6
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 41
Item 4. | Controls and Procedures | 42
| Part II – Other Information |
Item 1. | Legal Proceedings | 43
Item 1A. | Risk Factors | 43
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43
Item 3. | Defaults Upon Senior Securities | 43
Item 4. | Mine Safety Disclosures | 43
Item 5. | Other Information | 43
Item 6. | Exhibits | 44
Signatures |  | 45

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 12,468 |  |  | $ | 14,172 |
Accounts receivable, net |  |  | 9,577 |  |  |  | 9,952 |
Prepaid expenses and other current assets |  |  | 3,761 |  |  |  | 3,124 |
Total current assets |  |  | 25,806 |  |  |  | 27,248 |
Property and equipment, net |  |  | 7,322 |  |  |  | 5,397 |
Other assets |  |  | 3,136 |  |  |  | 2,377 |
Deferred income taxes |  |  | 1,909 |  |  |  | 1,641 |
Intangibles, net |  |  | 7,884 |  |  |  | 8,191 |
Goodwill |  |  | 2,839 |  |  |  | 2,734 |
Total assets |  | $ | 48,896 |  |  | $ | 47,588 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 856 |  |  | $ | 1,018 |
Accrued expenses |  |  | 4,492 |  |  |  | 4,333 |
Accrued salaries, wages and related benefits |  |  | 5,418 |  |  |  | 5,040 |
Income and other taxes |  |  | 1,764 |  |  |  | 1,330 |
Current portion of long-term obligations |  |  | 2,124 |  |  |  | 1,120 |
Total current liabilities |  |  | 14,654 |  |  |  | 12,841 |
Deferred income taxes |  |  | 694 |  |  |  | 680 |
Long-term obligations, net of current portion |  |  | 4,733 |  |  |  | 3,917 |
Non-controlling interests |  |  | (3,888 | ) |  |  | (3,634 | )
Commitments and contingencies |  |  | - |  |  |  | - |
STOCKHOLDERS’ EQUITY: |  |  |  |  |  |  |  |
Serial preferred stock; 5,000,000 shares authorized, none outstanding |  |  |  |  |  |  |  |
Common stock, $.01 par value; 75,000,000 shares authorized; 27,559,000 shares issued and 25,878,000 outstanding at September 30, 2017 and 27,305,000 shares issued and 25,624,000 outstanding at December 31, 2016 |  |  | 275 |  |  |  | 273 |
Additional paid-in capital |  |  | 27,242 |  |  |  | 26,057 |
Retained earnings |  |  | 9,436 |  |  |  | 12,400 |
Accumulated other comprehensive income (loss) |  |  | 372 |  |  |  | (324 | )
|  |  | 37,325 |  |  |  | 38,406 |
Less: treasury stock, 1,681,000 shares at September 30, 2017 and December 31, 2016, at cost |  |  | (4,622 | ) |  |  | (4,622 | )
Total stockholders’ equity |  |  | 32,703 |  |  |  | 33,784 |
Total liabilities and stockholders’ equity |  | $ | 48,896 |  |  | $ | 47,588 |

See notes to condensed consolidated financial statements.

| 1 |

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

|  | Three Months Ended |
|  | September 30, |
|  | 2017 |  |  | 2016 |
Revenues |  | $ | 15,018 |  |  | $ | 16,060 |
Operating costs and expenses: |  |  |  |  |  |  |  |
Direct operating costs |  |  | 11,463 |  |  |  | 12,422 |
Selling and administrative expenses |  |  | 4,438 |  |  |  | 5,105 |
Interest expense, net |  |  | 2 |  |  |  | 15 |
Change in fair value of contingent consideration |  |  | - |  |  |  | 1,038 |
|  |  | 15,903 |  |  |  | 18,580 |
Loss before provision for income taxes |  |  | (885 | ) |  |  | (2,520 | )
Provision for income taxes |  |  | 268 |  |  |  | 352 |
Net loss |  |  | (1,153 | ) |  |  | (2,872 | )
Loss attributable to non-controlling interests |  |  | 85 |  |  |  | 106 |
Net loss attributable to Innodata Inc. and Subsidiaries |  | $ | (1,068 | ) |  | $ | (2,766 | )
Loss per share attributable to Innodata Inc. and Subsidiaries: |  |  |  |  |  |  |  |
Basic and diluted |  | $ | (0.04 | ) |  | $ | (0.11 | )
Weighted average shares outstanding: |  |  |  |  |  |  |  |
Basic and diluted |  |  | 25,877 |  |  |  | 25,651 |
Comprehensive loss: |  |  |  |  |  |  |  |
Net loss |  | $ | (1,153 | ) |  | $ | (2,872 | )
Pension liability adjustment, net of taxes |  |  | (60 | ) |  |  | (83 | )
Change in fair value of derivatives, net of taxes |  |  | (37 | ) |  |  | (39 | )
Foreign currency translation adjustment |  |  | 482 |  |  |  | (118 | )
Other comprehensive income (loss) |  |  | 385 |  |  |  | (240 | )
Total comprehensive loss |  |  | (768 | ) |  |  | (3,112 | )
Comprehensive loss attributed to non-controlling interest |  |  | 85 |  |  |  | 106 |
Comprehensive loss attributable to Innodata Inc. and Subsidiaries |  | $ | (683 | ) |  | $ | (3,006 | )

See notes to condensed consolidated financial statements.

| 2 |

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

|  | Nine Months Ended |
|  | September 30, |
|  | 2017 |  |  | 2016 |
Revenues |  | $ | 45,271 |  |  | $ | 47,400 |
Operating costs and expenses: |  |  |  |  |  |  |  |
Direct operating costs |  |  | 34,585 |  |  |  | 35,572 |
Selling and administrative expenses |  |  | 13,106 |  |  |  | 14,469 |
Interest expense (income), net |  |  | (9 | ) |  |  | 44 |
Change in fair value of contingent consideration |  |  | - |  |  |  | 1,038 |
|  |  | 47,682 |  |  |  | 51,123 |
Loss before provision for income taxes |  |  | (2,411 | ) |  |  | (3,723 | )
Provision for income taxes |  |  | 807 |  |  |  | 1,128 |
Net loss |  |  | (3,218 | ) |  |  | (4,851 | )
Loss attributable to non-controlling interests |  |  | 254 |  |  |  | 310 |
Net loss attributable to Innodata Inc. and Subsidiaries |  | $ | (2,964 | ) |  | $ | (4,541 | )
Loss per share attributable to Innodata Inc. and Subsidiaries: |  |  |  |  |  |  |  |
Basic and diluted |  | $ | (0.11 | ) |  | $ | (0.18 | )
Weighted average shares outstanding: |  |  |  |  |  |  |  |
Basic and diluted |  |  | 25,795 |  |  |  | 25,514 |
Comprehensive loss: |  |  |  |  |  |  |  |
Net loss |  | $ | (3,218 | ) |  | $ | (4,851 | )
Pension liability adjustment, net of taxes |  |  | (183 | ) |  |  | (247 | )
Change in fair value of derivatives, net of taxes |  |  | 99 |  |  |  | 207 |
Foreign currency translation adjustment |  |  | 780 |  |  |  | 246 |
Other comprehensive income |  |  | 696 |  |  |  | 206 |
Total comprehensive loss |  |  | (2,522 | ) |  |  | (4,645 | )
Comprehensive loss attributed to non-controlling interest |  |  | 254 |  |  |  | 310 |
Comprehensive loss attributable to Innodata Inc. and Subsidiaries |  | $ | (2,268 | ) |  | $ | (4,335 | )

See notes to condensed consolidated financial statements.

| 3 |

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

|  | Nine Months Ended |
|  | September 30, |
|  | 2017 |  |  | 2016 |
Cash flow from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (3,218 | ) |  | $ | (4,851 | )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 2,771 |  |  |  | 2,200 |
Stock-based compensation |  |  | 662 |  |  |  | 729 |
Deferred income taxes |  |  | (287 | ) |  |  | (289 | )
Pension cost |  |  | 208 |  |  |  | 100 |
Change in fair value of contingent consideration |  |  | - |  |  |  | 1,038 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 713 |  |  |  | 487 |
Prepaid expenses and other current assets |  |  | (150 | ) |  |  | (78 | )
Other assets |  |  | (110 | ) |  |  | (272 | )
Accounts payable and accrued expenses |  |  | (183 | ) |  |  | (1,092 | )
Accrued salaries, wages and related benefits |  |  | 363 |  |  |  | 985 |
Income and other taxes |  |  | 395 |  |  |  | (80 | )
Net cash provided by (used in) operating activities |  |  | 1,164 |  |  |  | (1,123 | )
Cash flow from investing activities: |  |  |  |  |  |  |  |
Capital expenditures |  |  | (2,887 | ) |  |  | (2,051 | )
Acquisition of business |  |  | - |  |  |  | (4,052 | )
Net cash used in investing activities |  |  | (2,887 | ) |  |  | (6,103 | )
Cash flow from financing activities: |  |  |  |  |  |  |  |
Proceeds from equipment financing |  |  | 951 |  |  |  | - |
Payment of long-term obligations |  |  | (1,030 | ) |  |  | (419 | )
Purchase of treasury stock |  |  | - |  |  |  | (134 | )
Net cash used in financing activities |  |  | (79 | ) |  |  | (553 | )
Effect of exchange rate changes on cash and cash equivalents |  |  | 98 |  |  |  | 148 |
Net decrease in cash and cash equivalents |  |  | (1,704 | ) |  |  | (7,631 | )
Cash and cash equivalents, beginning of period |  |  | 14,172 |  |  |  | 24,908 |
Cash and cash equivalents, end of period |  | $ | 12,468 |  |  | $ | 17,277 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |
Cash paid for income taxes |  | $ | 811 |  |  | $ | 928 |
Vendor financed software licenses acquired |  | $ | 1,213 |  |  | $ | - |
Common stock issued for MediaMiser acquisition |  | $ | 525 |  |  | $ | 569 |

See notes to condensed consolidated financial statements.

| 4 |

INNODATA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited)

(In thousands)

|  | Common Stock |  |  | Additional Paid-in |  |  | Retained |  |  | Accumulated Other Comprehensive |  |  | Treasury |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Earnings |  |  | Income (Loss) |  |  | Stock |  |  | Total |
January 1, 2017 |  |  | 25,624 |  |  | $ | 273 |  |  | $ | 26,057 |  |  | $ | 12,400 |  |  | $ | (324 | ) |  | $ | (4,622 | ) |  | $ | 33,784 |
Net loss attributable to Innodata Inc. and subsidiaries |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,964 | ) |  |  | - |  |  |  | - |  |  |  | (2,964 | )
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | 662 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 662 |
Issuance of common stock in connection with MediaMiser acquisition |  |  | 254 |  |  |  | 2 |  |  |  | 523 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 525 |
Pension liability adjustments, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (183 | ) |  |  | - |  |  |  | (183 | )
Foreign currency translation adjustment, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 780 |  |  |  | - |  |  |  | 780 |
Change in fair value of derivatives, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 99 |  |  |  | - |  |  |  | 99 |
September 30, 2017 |  |  | 25,878 |  |  | $ | 275 |  |  | $ | 27,242 |  |  | $ | 9,436 |  |  | $ | 372 |  |  | $ | (4,622 | ) |  | $ | 32,703 |
January 1, 2016 |  |  | 25,445 |  |  | $ | 270 |  |  | $ | 24,590 |  |  | $ | 17,924 |  |  | $ | (84 | ) |  | $ | (4,488 | ) |  | $ | 38,212 |
Net loss attributable to Innodata Inc. and subsidiaries |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,541 | ) |  |  | - |  |  |  | - |  |  |  | (4,541 | )
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | 729 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 729 |
Issuance of common stock in connection with MediaMiser acquisition |  |  | 236 |  |  |  | 3 |  |  |  | 566 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 569 |
Acquisition of non-controlling interest |  |  | - |  |  |  | - |  |  |  | (261 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (261 | )
Pension liability adjustments, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (247 | ) |  |  | - |  |  |  | (247 | )
Foreign currency translation adjustment, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 246 |  |  |  | - |  |  |  | 246 |
Change in fair value of derivatives, net of taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 207 |  |  |  | - |  |  |  | 207 |
Purchase of treasury stock |  |  | (57 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (134 | ) |  |  | (134 | )
September 30, 2016 |  |  | 25,624 |  |  | $ | 273 |  |  | $ | 25,624 |  |  | $ | 13,383 |  |  | $ | 122 |  |  | $ | (4,622 | ) |  | $ | 34,780 |

See notes to condensed consolidated financial statements.

| 5 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

| 1. | Description of Business and Summary of Significant Accounting Policies

Description of Business - Innodata Inc. and Subsidiaries (the “Company”) is a global digital services and solutions company. Our technology and services power leading information products and online retail destinations around the world. Our solutions help prestigious enterprises harness the power of digital data to re-imagine how they operate and drive performance. We serve publishers, media and information companies, digital retailers, banks, insurance companies, government agencies and many other industries. Founded in 1988, we comprise a team of over 4,000 diverse people in eight countries who are dedicated to delivering services and solutions that help the world embrace digital data as a means of enhancing our lives and transforming our businesses.

The Company operates in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).

The Company’s DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products; and operational support of existing digital information products and systems.

The Company’s IADS segment designs and develops new capabilities to enable clients in the financial services, insurance and healthcare sectors to improve decision-support through digital technologies. IADS operates through two subsidiaries. Synodex offers a range of services for healthcare and insurance companies, and docGenix provides services to financial services institutions. As of September 30, 2017, Innodata owned 91% of Synodex and 94% of docGenix, both limited liability companies.

The Company’s MIS segment operates through our Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, the Company rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions, and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Limited.

Agility PR Solutions offers full and self-service solutions, consisting of Agility Enterprise, Agility and Agility Plus, that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact. Agility PR Solutions, through its Agility Enterprise product, provides media monitoring and analysis solutions and professional services to several Fortune 500 companies and Canadian government institutions, as well as small- and medium-sized businesses. Agility Enterprise enables companies to reduce the time and effort required to extract, analyze and share valuable business intelligence from traditional and online media sources. Agility is a global media contact database and email distribution platform and Agility Plus provides additional self-service media monitoring and analytics capabilities. The solution is offered as software-as-a-service (SaaS).

Bulldog Reporter is a news aggregation service for public relations and corporate communications professionals. Bulldog Reporter publishes a well-known daily e-newsletter, the Daily Dog. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital and social marketing, not-for-profit activity and overall outstanding PR performance.

| 6 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Basis of Presentation - The condensed consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of September 30, 2017, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2016, and cash flows and stockholders’ equity for the nine months ended September 30, 2017 and 2016. The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K. Unless otherwise noted, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the December 31, 2016 consolidated financial statements.

Principles of Consolidation - The consolidated financial statements include the accounts of Innodata Inc. and its wholly-owned subsidiaries, Agility PR Solutions Canada, a corporation in which the Company owns substantially all of the economic interest, and the Synodex and docGenix limited liability companies that are majority-owned by the Company. The non-controlling interests in the Synodex and docGenix limited liability companies are accounted for in accordance with Financial Accounting Standards Board (FASB) non-controlling interest guidance. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, valuation of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of the net assets acquired in the acquisition of Agility, valuation of derivative instruments and estimated accruals for various tax exposures.

Foreign Currency Translation - The functional currency of the Company’s production operations located in the Philippines, India, Sri Lanka and Israel is the U.S. dollar. Transactions denominated in 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.

The functional currency for the Company’s subsidiaries in Germany, the United Kingdom and Canada are the Euro, the Pound Sterling and the Canadian dollar, respectively. The financial statements of these subsidiaries are reported in these respective currencies. Financial information is translated from the applicable functional currency to the U.S. dollar (the reporting currency) for inclusion in its consolidated financial statements. Income, expenses and cash flows are translated at weighted average exchange rates prevailing during the fiscal period, and assets and liabilities are translated at fiscal period-end exchange rates. Resulting translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders' equity. Foreign exchange transaction gains or losses are included in direct operating costs in the accompanying consolidated statements of operations and comprehensive loss.

| 7 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Revenue Recognition - For the DDS segment, revenue is recognized based on the quantity delivered or resources utilized and in the period in which services are performed and delivery has occurred. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts, which are not significant to the overall revenues, are recognized on the percentage of completion method of accounting, as services are performed or milestones are achieved.

For the IADS segment, revenue is recognized primarily based on the quantity delivered and the period in which services are performed and deliverables are made as per contracts. A portion of the Company’s IADS segment revenue is derived from licensing its software and providing access to its hosted software platform. Revenue from such services are recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured.

The MIS segment derives its revenue primarily from subscription arrangements and provision of enriched media analysis services. Revenue from subscriptions is recognized monthly when access to the service is provided to the end user and there are no significant remaining obligations, persuasive evidence of an arrangement exists, the fees are fixed or determinable and collection is reasonably assured. Revenue from enriched media analysis services is recognized when the services are performed and delivered to the client.

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

Recent Accounting Pronouncements - In May 2014, the FASB issued guidance on revenue from contracts with clients. This update is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This accounting guidance is effective prospectively for annual reporting periods, and interim periods within those periods, beginning after December 15, 2017 and early adoption is permitted starting from the first quarter of 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the new standard when it takes effect. The Company will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption. The Company has undertaken an initial impact analysis, which includes reviewing the terms and conditions of the Company’s existing customer contracts and applying the five discrete criteria required for recognizing revenues as set forth in ASU 2014-09. Based upon its preliminary analysis undertaken through September 30, 2017, the Company currently does not expect the new revenue recognition guidance to have a material impact on its consolidated condensed financial statements, and expects to conclude such analysis by December 31, 2017. The Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may, in conjunction with the completion of the Company’s overall assessment of the new guidance, impact the Company’s current conclusions.

In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This new guidance is effective for annual periods beginning after December 15, 2018. Early application is permitted. The Company is in the process of evaluating the effect the guidance will have on its existing accounting policies and condensed consolidated financial statements, but expects there will be an increase in assets and liabilities on the condensed consolidated balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material.

| 8 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

In March 2016, the FASB issued guidance relating to share-based compensation. This new guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016. The Company adopted this standard in 2017 and there was no material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued guidance on Compensation - Retirement Benefits relating to improvements in the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing U.S. GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in the guidance require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in the guidance will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.

In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.

| 9 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

| 2. | Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization (in thousands), and consist of the following:

|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
Equipment |  | $ | 14,332 |  |  | $ | 14,558 |
Software |  |  | 6,911 |  |  |  | 5,685 |
Furniture and equipment |  |  | 2,452 |  |  |  | 2,119 |
Leasehold improvements |  |  | 5,342 |  |  |  | 4,929 |
Total |  |  | 29,037 |  |  |  | 27,291 |
Less: accumulated depreciation and amortization |  |  | (21,715 | ) |  |  | (21,894 | )
|  | $ | 7,322 |  |  | $ | 5,397 |

Depreciation and amortization expense of property and equipment was approximately $0.6 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. Depreciation and amortization expense of property and equipment was approximately $1.9 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.

| 3. | Acquisitions

On July 14, 2016, Innodata’s MediaMiser subsidiary completed the acquisition of the Agility business from PR Newswire under an asset purchase agreement for cash consideration of $4.2 million.

The Agility business consists of two products – Agility, a global media contact database and email distribution platform and Agility Plus that provides additional self-service media monitoring and analytics capabilities. The acquisition helped the Company’s MIS segment foster growth in North America and Europe by bolstering its media intelligence solutions and media databases, improving its media outreach capabilities, and delivering stronger, more data-powered media intelligence to clients. With this acquisition, Agility PR Solutions can now offer self and full-service solutions that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.

The transaction has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was recorded as goodwill.

| 10 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

The Company has obtained third party valuations of certain intangible assets. The following table summarizes (in thousands) the final purchase price allocation for the acquisition:

|  | Amount |
Accounts receivable |  | $ | 771 |
Media contact database |  |  | 3,610 |
Developed technology |  |  | 994 |
Tradenames and trademarks |  |  | 310 |
Total identifiable assets acquired |  |  | 5,685 |
Accrued salaries, wages and related benefits |  |  | 63 |
Deferred revenues |  |  | 2,560 |
Income and other taxes |  |  | 97 |
Total liabilities assumed |  |  | 2,720 |
Net identifiable assets acquired |  |  | 2,965 |
Goodwill |  |  | 1,263 |
Net assets acquired |  | $ | 4,228 |

The estimated fair value of the media contacts database and tradenames and trademarks intangible assets was determined using the “relief from royalty method” under the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on the cost savings that are available through ownership of the asset by the avoidance of paying royalties to license the use of the asset from another owner. The estimated fair value of the developed technology was determined based on the cost approach, which measures the value by the cost to reconstruct or replace the platform with another of like utility. Some of the more significant assumptions inherent in the development of these asset valuations include the projected revenue associated with the asset, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, as well as other factors. The discount rate used to arrive at the present value of the media contact database and tradenames and trademarks at the acquisition date, was 13.5%. The remaining useful lives of the media contact database, developed technology, and tradenames and trademarks were based on historical product development cycles, the projected rate of technology migration, a market participant’s use of these intangible assets and the pattern of projected economic benefit of these intangible assets.

The amounts assigned to the media contact database, developed technology, tradenames and trademarks are amortized over the estimated useful life of 10 years.

The Company funded the purchase price from its available cash on hand. Transaction expenses amounted to $0.1 million and have been expensed.

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2016 (amounts in thousands, except per share amounts). The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time or that may result in the future.

| 11 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2016 |  |  | September 30, 2016 |
Revenues: |  |  |  |  |  |  |  |
As reported |  | $ | 16,060 |  |  | $ | 47,400 |
Proforma |  | $ | 16,280 |  |  | $ | 50,900 |
Net loss attributable to Innodata Inc. and Subsidiaries: |  |  |  |  |  |  |  |
As reported |  | $ | (2,766 | ) |  | $ | (4,541 | )
Proforma |  | $ | (2,721 | ) |  | $ | (4,205 | )
Basic and diluted net loss per share: |  |  |  |  |  |  |  |
As reported |  | $ | (0.11 | ) |  | $ | (0.18 | )
Proforma |  | $ | (0.11 | ) |  | $ | (0.16 | )

| 4. | Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 and 2016 were as follows (in thousands):

Goodwill |  |  |
Balance as of January 1, 2017 |  | $ | 2,734 |
Foreign currency translation adjustment |  |  | 105 |
Balance as of September 30, 2017 |  | $ | 2,839 |
Balance as of January 1, 2016 |  | $ | 1,476 |
Goodwill recorded in connection with an acquisition |  |  | 1,239 |
Foreign currency translation adjustment |  |  | 33 |
Balance as of September 30, 2016 |  | $ | 2,748 |

Information regarding the Company’s acquisition-related intangible assets is as follows (in thousands):

|  | Developed technology |  |  | Customer relationships |  |  | Trademarks and tradenames |  |  | Patents |  |  | Media Contact Database |  |  | Total |
Gross carrying amounts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance as of January 1, 2017 |  | $ | 3,019 |  |  | $ | 2,112 |  |  | $ | 865 |  |  | $ | 43 |  |  | $ | 3,510 |  |  | $ | 9,549 |
Foreign currency translation |  |  | 204 |  |  |  | 170 |  |  |  | 22 |  |  |  | 3 |  |  |  | 137 |  |  |  | 536 |
Balance as of September 30, 2017 |  | $ | 3,223 |  |  | $ | 2,282 |  |  | $ | 887 |  |  | $ | 46 |  |  | $ | 3,647 |  |  | $ | 10,085 |

|  | Developed technology |  |  | Customer relationships |  |  | Trademarks and tradenames |  |  | Patents |  |  | Media Contact Database |  |  | Total |
Gross carrying amounts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance as of January 1, 2016 |  | $ | 1,978 |  |  | $ | 2,036 |  |  | $ | 555 |  |  | $ | 41 |  |  | $ | - |  |  | $ | 4,610 |
Additions |  | $ | 994 |  |  | $ | - |  |  | $ | 310 |  |  | $ | - |  |  | $ | 3,610 |  |  |  | 4,914 |
Foreign currency translation |  |  | 98 |  |  |  | 108 |  |  |  | 10 |  |  |  | 3 |  |  |  | (25 | ) |  |  | 194 |
Balance as of September 30, 2016 |  | $ | 3,070 |  |  | $ | 2,144 |  |  | $ | 875 |  |  | $ | 44 |  |  | $ | 3,585 |  |  | $ | 9,718 |

| 12 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

|  | Developed technology |  |  | Customer relationships |  |  | Trademarks and tradenames |  |  | Patents |  |  | Media Contact Database |  |  | Total |
Accumulated amortization: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance as of January 1, 2017 |  | $ | 545 |  |  | $ | 425 |  |  | $ | 203 |  |  | $ | 10 |  |  | $ | 175 |  |  | $ | 1,358 |
Amortization expense |  |  | 233 |  |  |  | 135 |  |  |  | 90 |  |  |  | 3 |  |  |  | 271 |  |  |  | 732 |
Foreign currency translation |  |  | 50 |  |  |  | 42 |  |  |  | 7 |  |  |  | 2 |  |  |  | 10 |  |  |  | 111 |
Balance as of September 30, 2017 |  | $ | 828 |  |  | $ | 602 |  |  | $ | 300 |  |  | $ | 15 |  |  | $ | 456 |  |  | $ | 2,201 |

|  | Developed technology |  |  | Customer relationships |  |  | Trademarks and tradenames |  |  | Patents |  |  | Media Contact Database |  |  | Total |
Accumulated amortization: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance as of January 1, 2016 |  | $ | 280 |  |  | $ | 240 |  |  | $ | 98 |  |  | $ | 5 |  |  | $ | - |  |  | $ | 623 |
Amortization expense |  |  | 180 |  |  |  | 133 |  |  |  | 75 |  |  |  | 3 |  |  |  | 90 |  |  |  | 481 |
Foreign currency translation |  |  | 16 |  |  |  | 14 |  |  |  | 1 |  |  |  | 2 |  |  |  | (1 | ) |  |  | 32 |
Balance as of September 30, 2016 |  | $ | 476 |  |  | $ | 387 |  |  | $ | 174 |  |  | $ | 10 |  |  | $ | 89 |  |  | $ | 1,136 |

Amortization expense relating to acquisition-related intangible assets was $0.2 million for each of the three months ended September 30, 2017 and 2016.

Amortization expense relating to acquisition-related intangible assets was $0.7 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.

Estimated amortization expense for intangible assets after September 30, 2017 is as follows (in thousands):

Year |  | Amortization |
2017 |  | $ | 251 |
2018 |  |  | 1,004 |
2019 |  |  | 1,004 |
2020 |  |  | 939 |
2021 |  |  | 939 |
Thereafter |  |  | 3,747 |
|  | $ | 7,884 |

| 5. | Income Taxes

The Company had unrecognized tax benefits of approximately $1.3 million and $1.2 million as of September 30, 2017 and December 31, 2016, respectively. The portion of unrecognized tax benefits relating to interest and penalties was approximately $0.6 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively. The unrecognized tax benefits as of September 30, 2017 and December 31, 2016, if recognized, would have an impact on the Company’s effective tax rate.

| 13 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

The following presents a roll-forward of the Company’s unrecognized tax benefits and associated interest for the nine months ended September 30, 2017 (amounts in thousands):

|  | Unrecognized tax benefits |
Balance - January 1, 2017 |  | $ | 1,184 |
Interest accrual |  |  | 34 |
Foreign currency revaluation |  |  | 62 |
Balance - September 30, 2017 |  | $ | 1,280 |

The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company is no longer subject to examination by Federal tax authorities for years prior to 2006 and by New Jersey tax authorities for years prior to 2012. Various foreign subsidiaries currently have open tax years from 2003 through 2016.

Pursuant to an income tax audit by the Indian Bureau of Taxation in 2009, the Company’s Indian subsidiary received a tax assessment approximating $339,000 including interest, through September 30, 2017 for the fiscal year ended March 31, 2006. Management disagrees with the basis of this tax assessment, has filed an appeal against the assessment and is contesting it vigorously. In January 2012, the Indian subsidiary received a final tax assessment of approximately $1.0 million, including interest, for the fiscal year ended March 31, 2008, from the Indian Bureau of Taxation. Management disagrees with the basis of this tax assessment, and has filed an appeal against it. Due to this assessment, the Company recorded a tax provision amounting to $543,000 including interest through September 30, 2017. In April 2015, the Company received a favorable judgment whereby the Appeal Officer reduced the tax assessment to $0.3 million. Under the Indian Income Tax Act, however, the income tax assessing officer has the right to appeal against the judgment passed by the Appeal Officer. In the third quarter of 2015, the income tax assessing officer exercised this right and filed an appeal. Based on recent experience, management believes that the tax provision of $543,000 including interest is adequate. As the Company is continually subject to tax audits by the Indian Bureau of Taxation, the Company continuously assesses the likelihood of an unfavorable assessment for all fiscal years for which the Company has not been audited and, as of September 30, 2017, the Company recorded a tax provision amounting to $213,000 including interest, through September 30, 2017.

In 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Bureau in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. In the event the Service Tax Bureau is successful in proving that the services fall under the category of OID Services the revenues earned by the Company’s Indian subsidiary would be subject to a service tax of approximately 14.5% of the subsidiary’s revenues and this would increase the operating costs of the Company by an equivalent amount. The revenues of the Company’s Indian subsidiary for the year ended December 31, 2016 were $16.8 million. The Company disagrees with the Service Tax Bureau’s position and is vigorously contesting these assertions.

In 2017, the U.S. entity deferred $4.7 million in payments due to its Asian operating subsidiaries. The deferral in payments resulted in a deemed dividend that is taxable income to the U.S. entity and is set off against its net operating loss carryforwards. The Company projects that during the balance of 2017 through 2018 the U.S. entity will not have sufficient cash to pay in full amounts that will be payable by it to the Company’s Asian operating subsidiaries and that the cash deficit will amount to approximately $7.0 million. The resulting deferral in payments would similarly result in a deemed dividend that would be taxable income to the U.S. entity and would be set off against its net operating loss carryforwards. The Company adjusted its deferred tax assets and the corresponding valuation allowance as of September 30, 2017 to reflect the projected deferral in payments.

| 14 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

The Company from time to time is also subject to various other tax proceedings and claims for its Philippines subsidiaries. The Company has recorded a tax provision amounting to $185,000 including interest through September 30, 2017, for several ongoing tax proceedings in the Philippines. Although the ultimate outcome cannot be determined at this time, the Company continues to contest these claims vigorously.

| 6. | Commitments and Contingencies

Litigation – In 2008, the Supreme Court of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against a Philippines subsidiary of the Company that is inactive and has no material assets, and purportedly also against Innodata Inc., that orders the reinstatement of certain former employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $7.0 million. The payment ordered by the Philippine courts accrued legal interest at the rate of 12% per annum from August 13, 2008 to September 30, 2013, and has thereafter accrued and continues to accrue legal interest at the rate of 6% per annum. The amount of the payment as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. Based on consultation with legal counsel, the Company believes that financial recovery against the Company is unlikely.

The Company is also subject to various legal proceedings and claims which arise in the ordinary course of business.

While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. Substantial recovery against the Company in the above-referenced Philippines action could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the operating results of the period in which the ruling or recovery occurs. In addition, the Company’s estimate of potential impact on the Company’s consolidated financial position or overall consolidated results of operations for the above legal proceedings could change in the future.

The Company’s legal reserves related to legal proceedings and claims are based on a determination of whether or not a loss is probable. The Company reviews outstanding proceedings and claims with external counsel to assess probability and estimates of loss. The reserves are adjusted if necessary. While the Company intends to defend these matters vigorously, adverse outcomes that it estimates could reach approximately $0.3 million in the aggregate beyond recorded amounts are reasonably possible. If circumstances change, the Company may be required to record adjustments that could be material to its reported consolidated financial condition and results of operations.

Foreign Currency - To the extent that the currencies of the Company’s production facilities located in the Philippines, India, Sri Lanka and Israel fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain client projects. In addition, the Company is exposed to the risk on foreign currency fluctuation on the non-U.S. dollar denominated revenues, and on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in local currency.

| 15 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Indemnifications - The Company is obligated under certain circumstances to indemnify directors, certain officers and employees against costs and liabilities incurred in actions or threatened actions brought against such individuals because such individuals acted in the capacity of director, officer and/or fiduciary of the Company. In addition, the Company has contracts with certain clients pursuant to whom the Company has agreed to indemnify the client for certain specified and limited claims. These indemnification obligations occur in the ordinary course of business and, in many cases, do not include a limit on potential maximum future payments. As of September 30, 2017, the Company has not recorded a liability for any obligations arising as a result of these indemnifications.

| 7. | Stock Options

On June 7, 2016, stockholders of the Company approved amendments to the Innodata Inc. 2013 Stock Plan. The Innodata Inc. 2013 Stock Plan as amended and restated effective June 7, 2016 is referred to herein as the “Plan.” The number of shares of common stock of Innodata Inc. (“Stock”) that may be delivered, purchased or used for reference purposes (with respect to stock appreciation rights or stock units) for awards granted under the Plan after June 7, 2016 is 5,858,892 (the “Share Reserve”). Shares subject to an option or stock appreciation right granted under the Plan after June 7, 2016 shall count against the Share Reserve as one share for every share granted, and shares subject to any other type of award granted under the Plan after June 7, 2016 shall count against the Share Reserve as two shares for every share granted. Any award, or portion of an award, under the Plan or under the 2009 Stock Plan (as amended and restated (the “Prior Plan”)) that expires or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or canceled as to any shares without delivery of shares or other consideration shall be added back to the Share Reserve as one share for each such share that was subject to an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was subject to an award other than an option or stock appreciation right granted under the Plan or the Prior Plan. If any shares are withheld, tendered or exchanged by a participant in the Plan as full or partial payment to Innodata of the exercise price under an option under the Plan or the Prior Plan or in satisfaction of a participant’s tax withholding obligations with respect to any award under the Plan or the Prior Plan, there shall be added back to the Share Reserve one share for each such share that was withheld, tendered or exchanged in respect of an option or stock appreciation right granted under the Plan or the Prior Plan, and two shares for each such share that was withheld, tendered or exchanged in respect of an award other than an option or stock appreciation right granted under the Plan or the Prior Plan.

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values of the options granted and weighted average assumptions are as follows:

|  | Number of Options |  |  | Weighted - Average Exercise Price |  |  | Weighted-Average Remaining Contractual Term (years) |  |  | Aggregate Intrinsic Value |
Outstanding at January 1, 2017 |  |  | 5,169,169 |  |  | $ | 2.88 |  |  |  |  |  |  |  |  |
Granted |  |  | 40,000 |  |  |  | 1.50 |  |  |  |  |  |  |  |  |
Exercised |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |
Forfeited/Expired |  |  | (75,237 | ) |  |  | 2.93 |  |  |  |  |  |  |  |  |
Outstanding at September 30, 2017 |  |  | 5,133,932 |  |  | $ | 2.87 |  |  |  | 5.08 |  |  | $ | - |
Exercisable at September 30, 2017 |  |  | 4,116,869 |  |  | $ | 2.95 |  |  |  | 4.18 |  |  | $ | - |
Vested and Expected to Vest at September 30, 2017 |  |  | 5,133,932 |  |  | $ | 2.87 |  |  |  | 5.08 |  |  | $ | - |

| 16 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values of the options granted and weighted average assumptions are as follows:

|  | Nine Months Ended |
|  | September 30, |
|  | 2017 |  |  | 2016 |
Weighted average fair value of options granted |  | $ | 0.72 |  |  | $ | 1.08 |
Risk-free interest rate |  |  | 1.91 | % |  |  | 1.26% - 1.49 | %
Expected life (years) |  |  | 6 |  |  |  | 5-6 |
Expected volatility factor |  |  | 49.62 | % |  |  | 49 | %
Expected dividends |  |  | - |  |  |  | - |

The total compensation cost related to non-vested stock awards not yet recognized as of September 30, 2017 totaled approximately $1.2 million. The weighted-average period over which these costs will be recognized is twenty-one months.

The stock-based compensation expense related to the Company’s various stock awards was allocated as follows (in thousands):

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Direct operating costs |  | $ | 55 |  |  | $ | 81 |  |  | $ | 204 |  |  | $ | 245 |
Selling and administrative expenses |  |  | 130 |  |  |  | 126 |  |  |  | 458 |  |  |  | 484 |
Total stock-based compensation |  | $ | 185 |  |  | $ | 207 |  |  | $ | 662 |  |  | $ | 729 |

| 17 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

| 8. | Long-term obligations

Total long-term obligations as of September 30, 2017 and December 31, 2016 consist of the following (in thousands):

|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
Capital lease obligations |  | $ | 955 |  |  | $ | 224 |
Deferred lease payments (1) |  |  | 787 |  |  |  | 705 |
Microsoft licenses (2) |  |  | 751 |  |  |  | - |
Acquisition related liability (3) |  |  | 806 |  |  |  | 1,492 |
Lease incentive liability (4) |  |  | 684 |  |  |  | - |
Pension obligations - accrued pension liability |  |  | 2,874 |  |  |  | 2,616 |
|  |  | 6,857 |  |  |  | 5,037 |
Less: Current portion of long-term obligations |  |  | 2,124 |  |  |  | 1,120 |
Totals |  | $ | 4,733 |  |  | $ | 3,917 |

(1) Deferred lease payments represent the effect of straight-lining operating lease payments over the respective lease terms.

(2) In March 2017, the Company renewed a vendor agreement to acquire certain additional software licenses and to receive support and subsequent software upgrades on these and other currently owned software licenses through February 2020. Pursuant to this agreement, the Company is obligated to pay approximately $0.4 million annually over the term of the agreement. The total cost, net of deferred interest (in thousands), was allocated to the following asset accounts in 2017:

Prepaid expenses and other current assets |  | $ | 404 |
Other assets |  |  | 809 |
|  | $ | 1,213 |

(3) On September 30, 2016 the Company and the other parties to the transaction in which the Company acquired MediaMiser amended the terms on which a subsidiary of the Company is required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments on March 31, 2017 and 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. The Company has the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. stock. In March 2017, the Company paid 70% of the first installment by issuing 253,622 shares of Innodata Inc.’s common stock and paid 30% of the first installment in cash in April 2017.

(4) In the second quarter of 2017, the Company moved both its U.S. and Canadian headquarters to new premises. As an incentive for the Company to lease in their respective office spaces, the lessors for each of the properties offered to partially defray the construction cost by offering a tenant improvement allowance. Under the terms of the lease contracts the Company is liable to refund any unamortized portion of this allowance should it decide to terminate the lease before the expiry of the specified lock-in period. This amount will be amortized based on the contractual liability and recognized as a reduction in rent expense for the period covered.

| 18 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

| 9. | Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), as reflected in the condensed consolidated balance sheets, consists of pension liability adjustments, net of taxes, foreign currency translation adjustment, net of taxes and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive income (loss) as of September 30, 2017, and reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016, were as follows (net of tax):

|  | Pension Liability Adjustment |  |  | Fair Value of Derivatives |  |  | Foreign Currency Translation Adjustment |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance at July 1, 2017 |  | $ | 1,264 |  |  | $ | (182 | ) |  | $ | (1,095 | ) |  | $ | (13 | )
Other comprehensive income (loss) before reclassifications, net of taxes |  |  | - |  |  |  | (119 | ) |  |  | 482 |  |  |  | 363 |
Total other comprehensive income (loss) before reclassifications, net of taxes |  |  | 1,264 |  |  |  | (301 | ) |  |  | (613 | ) |  |  | 350 |
Net amount reclassified to earnings |  |  | (60 | ) |  |  | 82 |  |  |  | - |  |  |  | 22 |
Balance at September 30, 2017 |  | $ | 1,204 |  |  | $ | (219 | ) |  | $ | (613 | ) |  | $ | 372 |

|  | Pension Liability Adjustment |  |  | Fair Value of Derivatives |  |  | Foreign Currency Translation Adjustment |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance at July 1, 2016 |  | $ | 1,359 |  |  | $ | 81 |  |  | $ | (1,078 | ) |  | $ | 362 |
Other comprehensive loss before reclassifications, net of taxes |  |  | - |  |  |  | (11 | ) |  |  | (118 | ) |  |  | (129 | )
Total other comprehensive income (loss) before reclassifications, net of taxes |  |  | 1,359 |  |  |  | 70 |  |  |  | (1,196 | ) |  |  | 233 |
Net amount reclassified to earnings |  |  | (83 | ) |  |  | (28 | ) |  |  | - |  |  |  | (111 | )
Balance at September 30, 2016 |  | $ | 1,276 |  |  | $ | 42 |  |  | $ | (1,196 | ) |  | $ | 122 |

|  | Pension Liability Adjustment |  |  | Fair Value of Derivatives |  |  | Foreign Currency Translation Adjustment |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2017 |  | $ | 1,387 |  |  | $ | (318 | ) |  | $ | (1,393 | ) |  | $ | (324 | )
Other comprehensive income before reclassifications, net of taxes |  |  | - |  |  |  | 42 |  |  |  | 780 |  |  |  | 822 |
Total other comprehensive income (loss) before reclassifications, net of taxes |  |  | 1,387 |  |  |  | (276 | ) |  |  | (613 | ) |  |  | 498 |
Net amount reclassified to earnings |  |  | (183 | ) |  |  | 57 |  |  |  | - |  |  |  | (126 | )
Balance at September 30, 2017 |  | $ | 1,204 |  |  | $ | (219 | ) |  | $ | (613 | ) |  | $ | 372 |

|  | Pension Liability Adjustment |  |  | Fair Value of Derivatives |  |  | Foreign Currency Translation Adjustment |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2016 |  | $ | 1,523 |  |  | $ | (165 | ) |  | $ | (1,442 | ) |  | $ | (84 | )
Other comprehensive income before reclassifications, net of taxes |  |  | - |  |  |  | 223 |  |  |  | 246 |  |  |  | 469 |
Total other comprehensive income (loss) before reclassifications, net of taxes |  |  | 1,523 |  |  |  | 58 |  |  |  | (1,196 | ) |  |  | 385 |
Net amount reclassified to earnings |  |  | (247 | ) |  |  | (16 | ) |  |  | - |  |  |  | (263 | )
Balance at September 30, 2016 |  | $ | 1,276 |  |  | $ | 42 |  |  | $ | (1,196 | ) |  | $ | 122 |

All reclassifications out of accumulated other comprehensive income (loss) had an impact on direct operating costs in the condensed consolidated statements of operations and comprehensive loss.

| 19 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

| 10. | Segment Reporting and Concentrations

The Company’s operations are classified into three reportable segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).

The DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products; and operational support of existing digital information products and systems.

The IADS segment performs advanced data analysis. IADS operates through two subsidiaries: Synodex and docGenix. Synodex offers a range of data analysis services in the healthcare, medical and insurance areas. docGenix provides services to financial services institutions.

The Company’s MIS segment operates through its Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, the Company rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Ltd. Agility PR Solutions offers self and full-service solutions that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact.

A significant portion of the Company’s revenues is generated from its production facilities in the Philippines, India, Sri Lanka, Canada, Germany, the United Kingdom and Israel.

| 20 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Revenues from external clients and segment operating profit (loss), and other reportable segment information are as follows (in thousands):

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
DDS |  | $ | 11,617 |  |  | $ | 12,052 |  |  | $ | 34,772 |  |  | $ | 38,928 |
IADS |  |  | 1,193 |  |  |  | 1,028 |  |  |  | 3,406 |  |  |  | 3,090 |
MIS |  |  | 2,208 |  |  |  | 2,980 |  |  |  | 7,093 |  |  |  | 5,382 |
Total Consolidated |  | $ | 15,018 |  |  | $ | 16,060 |  |  | $ | 45,271 |  |  | $ | 47,400 |
Income (loss) before provision for income taxes(1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
DDS |  | $ | 1,077 |  |  | $ | (1,132 | ) |  | $ | 2,230 |  |  | $ | 1,195 |
IADS |  |  | (1,016 | ) |  |  | (1,296 | ) |  |  | (2,978 | ) |  |  | (3,754 | )
MIS |  |  | (946 | ) |  |  | (92 | ) |  |  | (1,663 | ) |  |  | (1,164 | )
Total Consolidated |  | $ | (885 | ) |  | $ | (2,520 | ) |  | $ | (2,411 | ) |  | $ | (3,723 | )
Income (loss) before provision for income taxes(2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
DDS |  | $ | 297 |  |  | $ | (1,882 | ) |  | $ | (46 | ) |  | $ | (980 | )
IADS |  |  | (257 | ) |  |  | (553 | ) |  |  | (750 | ) |  |  | (1,598 | )
MIS |  |  | (925 | ) |  |  | (85 | ) |  |  | (1,615 | ) |  |  | (1,145 | )
Total Consolidated |  | $ | (885 | ) |  | $ | (2,520 | ) |  | $ | (2,411 | ) |  | $ | (3,723 | )
|  |  |  |  |  |  |  |  |  | September 30, 2017 |  |  | December 31, 2016 |
Total assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
DDS |  |  |  |  |  |  |  |  |  | $ | 26,190 |  |  | $ | 29,804 |
IADS |  |  |  |  |  |  |  |  |  |  | 1,567 |  |  |  | 1,282 |
MIS |  |  |  |  |  |  |  |  |  |  | 21,139 |  |  |  | 16,502 |
Total Consolidated |  |  |  |  |  |  |  |  |  | $ | 48,896 |  |  | $ | 47,588 |
|  |  |  |  |  |  |  |  |  | September 30, 2017 |  |  | December 31, 2016 |
Goodwill: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
DDS |  |  |  |  |  |  |  |  |  | $ | 675 |  |  | $ | 675 |
MIS |  |  |  |  |  |  |  |  |  |  | 2,164 |  |  |  | 2,059 |
Total Consolidated |  |  |  |  |  |  |  |  |  | $ | 2,839 |  |  | $ | 2,734 |

(1) Before elimination of any inter-segment profits

(2) After elimination of any inter-segment profits

The following table summarizes revenues by geographic region (determined and based upon customer’s domicile) (in thousands):

|  | Three months ended |  |  | Nine months ended |
|  | September 30, |  |  | September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
United States |  | $ | 7,637 |  |  | $ | 8,263 |  |  | $ | 22,630 |  |  | $ | 24,614 |
United Kingdom |  |  | 2,320 |  |  |  | 2,006 |  |  |  | 7,767 |  |  |  | 7,096 |
The Netherlands |  |  | 1,704 |  |  |  | 2,417 |  |  |  | 5,187 |  |  |  | 6,397 |
Canada |  |  | 1,367 |  |  |  | 1,491 |  |  |  | 4,212 |  |  |  | 4,465 |
Other - principally Europe |  |  | 1,990 |  |  |  | 1,883 |  |  |  | 5,475 |  |  |  | 4,828 |
|  | $ | 15,018 |  |  | $ | 16,060 |  |  | $ | 45,271 |  |  | $ | 47,400 |

| 21 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Long-lived assets as of September 30, 2017 and December 31, 2016, respectively, by geographic region, are comprised of (in thousands):

|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
United States |  | $ | 5,419 |  |  | $ | 4,669 |
Foreign countries: |  |  |  |  |  |  |  |
Canada |  |  | 6,760 |  |  |  | 5,085 |
United Kingdom |  |  | 2,440 |  |  |  | 2,376 |
Philippines |  |  | 1,629 |  |  |  | 1,940 |
India |  |  | 1,189 |  |  |  | 1,520 |
Sri Lanka |  |  | 569 |  |  |  | 683 |
Israel |  |  | 37 |  |  |  | 47 |
Germany |  |  | 2 |  |  |  | 2 |
Total foreign |  |  | 12,626 |  |  |  | 11,653 |
|  | $ | 18,045 |  |  | $ | 16,322 |

Two clients in the DDS segment generated approximately 30% of the Company’s total revenues for the three months ended September 30, 2017 and 27% of the Company’s total revenues for the three months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 49% and 48%, respectively, of the Company’s total revenues.

Two clients in the DDS segment generated approximately 29% of the Company’s total revenues for the nine months ended September 30, 2017 and 30% of the Company’s total revenues for the nine months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 50% and 48%, respectively, of the Company’s total revenues.

As of September 30, 2017, approximately 56% of the Company's accounts receivable was from foreign (principally European) clients and 50% of accounts receivable was due from four clients. As of December 31, 2016, approximately 73% of the Company's accounts receivable was from foreign (principally European) clients and 52% of accounts receivable was due from three clients.

| 11. | Loss Per Share

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
|  | (in thousands) |  |  | (in thousands) |
Net loss attributable to Innodata Inc. and Subsidiaries |  | $ | (1,068 | ) |  | $ | (2,766 | ) |  | $ | (2,964 | ) |  | $ | (4,541 | )
Weighted average common shares outstanding |  |  | 25,877 |  |  |  | 25,651 |  |  |  | 25,795 |  |  |  | 25,514 |
Dilutive effect of outstanding options |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Adjusted for dilutive computation |  |  | 25,877 |  |  |  | 25,651 |  |  |  | 25,795 |  |  |  | 25,514 |

| 22 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two-class” method of computing income (loss) per share is used.

Options to purchase 5.1 million shares and 4.2 million shares of common stock for the three months ended September 30, 2017 and 2016, respectively, were outstanding but not included in the computation of diluted net loss per share, because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.

Options to purchase 5.1 million shares and 4.2 million shares of common stock for the nine months ended September 30, 2017 and 2016, respectively, were outstanding but not included in the computation of diluted net loss per share, because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.

| 12. | Derivatives

The Company conducts a large portion of its operations in international markets that subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.

In addition, although most of the Company’s revenues are denominated in U.S. dollars, a significant portion of the total revenues is denominated in Canadian dollars, Pound Sterling and Euros.

To manage its exposure to fluctuations in foreign currency exchange rates, the Company entered into foreign currency forward contracts, authorized under Company policies, with counterparties that were highly rated financial institutions. The Company utilized non-deliverable forward contracts expiring within twelve months to reduce its foreign currency risk.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. The total notional amount for outstanding derivatives as of September 30, 2017 and December 31, 2016 was $20 million and $19.3 million, respectively, which is comprised of cash flow hedges denominated in U.S. dollars.

The following table presents the fair value of derivative instruments included within the consolidated balance sheets as of September 30, 2017 and December 31, 2016 (in thousands):

|  | Balance Sheet Location |  | Fair Value |
|  |  |  | 2017 |  |  | 2016 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Accrued expenses |  | $ | 219 |  |  | $ | 318 |

| 23 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

The effects of foreign currency forward contracts designated as cash flow hedges on the Company’s condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2016, respectively, were as follows (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Net gain (loss) recognized in OCI(1) |  | $ | (119 | ) |  | $ | (11 | ) |  | $ | 42 |  |  | $ | 223 |
Net gain (loss) reclassified from accumulated OCI into income(2) |  | $ | (82 | ) |  | $ | 28 |  |  | $ | (57 | ) |  | $ | 16 |
Net gain recognized in income(3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |

(1)Net change in fair value of the effective portion classified into other comprehensive income (loss) ("OCI")

(2)Effective portion classified within direct operating costs

(3)There were no ineffective portions for the periods presented.

| 13. | Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of September 30, 2017 and December 31, 2016, because of the relative short maturity of these instruments.

“Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three levels. The three levels are defined as follows:

· Level 1: Unadjusted quoted price in active market for identical assets and liabilities.

· Level 2: Observable inputs other than those included in Level 1.

· Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

The following tables set forth the liabilities as of September 30, 2017 and December 31, 2016 that the Company measured at fair value, on a recurring basis by level, within the fair value hierarchy (in thousands). As required by the standard, liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

| 24 |

INNODATA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

September 30, 2017 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | - |  |  | $ | 219 |  |  | $ | - |

December 31, 2016 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | - |  |  | $ | 318 |  |  | $ | - |

The Level 2 liabilities contain foreign currency forward contracts. Fair value is determined based on the observable market transactions of spot and forward rates. The fair value of these contracts as of September 30, 2017 and December 31, 2016 are included in accrued expenses in the accompanying condensed consolidated balance sheets.

| 25 |

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Disclosures in this Form 10-Q contain certain forward-looking statements, including without limitation, statements concerning our operations, economic performance, and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “project,” “head start,” "believe," "expect," “should,” "anticipate," "indicate," "point to," “forecast,” “likely,” “goals,” “optimistic,” “foster,” “estimate” and other similar expressions generally identify forward-looking statements, which speak only as of their dates.

These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including without limitation, that contracts may be terminated by clients; projected or committed volumes of work may not materialize; our Innodata Advanced Data Solutions ("IADS") segment is a venture formed in 2011 that has incurred losses since inception and has recorded impairment charges for all of its fixed assets; we currently intend to continue to invest in IADS; the primarily at-will nature of contracts with our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects; continuing Digital Data Solutions segment revenue concentration in a limited number of clients; continuing Digital Data Solutions segment reliance on project-based work; inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Media Intelligence Solutions segment; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for our services; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

Our actual results could differ materially from the results referred to in the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the results referred to in the forward-looking statements contained in this Form 10-Q will occur.

We undertake no obligation to update or review any guidance or other forward-looking information, whether as a result of new information, future developments or otherwise.

Business Overview

Innodata (NASDAQ: INOD) is a global digital services and solutions company. Our technology and services power leading information products and online retail destinations around the world. Our solutions help prestigious enterprises harness the power of digital data to re-imagine how they operate and drive performance. We serve publishers, media and information companies, digital retailers, banks, insurance companies, government agencies and many other industries. Founded in 1988, we comprise a team of 4,000 diverse people in eight countries who are dedicated to delivering services and solutions that help the world embrace digital data as a means of enhancing our lives and transforming our businesses. ​​

The Company operates in three reporting segments: Digital Data Solutions (DDS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).

Our DDS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the following broad business requirements: development of digital content (including e-books); development of new digital information products; and operational support of existing digital information products and systems.

| 26 |

Many of our clients are driving or are responding to rapid and fundamental changes in the way end users discover, consume and create published information. For some of our publishing and information services clients, this means transforming information products from print to digital; for others, it means migrating already-digital products from web-only distribution to multiple-channel distribution that includes mobile and tablet devices and incorporates mobility, social platform and semantic search; and for others still, it means re-tooling pure search-based information products into workflow-embedded analytical tools that combine content with software to enable context-aware decision-making; and for a select number of our information services clients, it means embracing the content-as-a-service model to integrate content with other tools, applications and data. Each of these transformations requires shifts in products, as well as the technology and the operations that support them.

For our enterprise publishing clients, changes in the way end users discover, consume and create published information often necessitates replacing old processes and technologies that generated static, whole documents with new processes and technologies that enable content to reside as modular components which are re-combined dynamically to create up-to-date, product-specific assembly guides, engineering diagrams/schematics, compliance documentation, field operations guides and clinical documentation destined for simultaneous access on the web, from PCs, tablets and smartphones.

By blending consulting, technology and operations sourcing with deep domain expertise, we provide measurable outcomes for publishing companies, information services companies and enterprises through business transformation, accelerating innovation and efficient operations.

We help our clients develop high-value information products. Our clients include four of the ten largest information industry companies in the world, spanning financial, legal, healthcare and scientific information.

We work with clients at a strategic business and technology level to address business process and technology challenges related to digital content supply chain optimization and strategy. By aligning operations and technology with business goals, we help businesses accelerate new product development and introduction; control cost; consolidate and leverage technology investment; and obtain benefits of scale.

Many enterprises are embracing new digital information technologies and workflow processes within their operations in order to improve internal decision-support systems. We formed our IADS segment in mid-2011 to design and develop new capabilities to enable clients in the financial services, insurance and healthcare sectors to improve decision-support through digital technologies. We believe that by creating and commercializing innovative business strategies and technology solutions we will be able to accelerate our growth and reduce our revenue volatility.

Our IADS segment operates through our Synodex and docGenix subsidiaries. As of September 30, 2017 we owned 91% of Synodex and 94% of docGenix.

The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way to provide improved data service capabilities for insurance underwriting, insurance claims, medical records management and clinical trial support services. Synodex has developed and deployed its APS.Extract® product for specific use with life insurance underwriting and claims.

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The main focus of the docGenix business is the extraction and classification of data from unstructured legal documents in order to improve an organization’s ability to analyze documentation and feed actionable data to downstream applications.

The IADS subsidiaries have incurred losses since their inception in 2011. Our investment net of revenues in these subsidiaries in the third quarter of 2017 was approximately $0.3 million (consisting mainly of operating expenses). We wrote off all of the fixed assets of IADS in the third quarter of 2013 and have expensed all investments in IADS since that time. In the immediate future we intend to continue to invest in these subsidiaries net of revenues at the combined rate of $0.1 to $0.4 million per quarter.

Our MIS segment operates through our Agility PR Solutions and Bulldog Reporter subsidiaries. In December 2016, we rebranded the MediaMiser and Agility PR Solutions products under the name Agility PR Solutions, and in March 2017 MediaMiser Ltd. in Canada changed its name to Agility PR Solutions Canada Limited.

Agility PR Solutions offers full and self-service solutions, consisting of Agility Enterprise, Agility and Agility Plus, that address the entire communications life cycle – from identifying influencers, amplifying messages, monitoring coverage, to measuring impact. Agility PR Solutions, through its Agility Enterprise product, provides media monitoring and analysis solutions and professional services to several Fortune 500 companies and Canadian government institutions, as well as small- and medium-sized businesses. Agility Enterprise enables companies to reduce the time and effort required to extract, analyze and share valuable business intelligence from traditional and online media sources.

Agility Enterprise’s proprietary technology platform monitors, aggregates, analyzes and distributes summaries of coverage from more than 200,000 content sources including traditional and digital media. The platform includes a powerful sentiment analysis engine that identifies whether opinions expressed in a particular document are positive, negative or neutral.

Increasingly, organizations seek to quantify the impact of public relations (PR) and communications activities and to understand what is being said about them across traditional and digital media. Social media has also dramatically changed how organizations manage and respond to crisis. Organizations need to respond quickly to negative customer feedback or coverage and track ongoing conversations to protect their brand and reputation. Agility Enterprise, with its powerful analytics and human augmented analysis and reporting, is designed to fit these needs.

Agility is a global media contact database and email distribution platform and Agility Plus provides additional self-service media monitoring and analytics capabilities. The solution is offered as software-as-a-service (SaaS).

Bulldog Reporter is a news aggregation service for PR and corporate communications professionals. Bulldog Reporter publishes a well-known daily e-newsletter, the Daily Dog. In addition, it offers a paid subscription service focused specifically on the health industry, a daily e-newsletter—Inside Health Media—that provides a health-related media list and media intelligence services by leveraging the data from the Agility platform. Bulldog Reporter also manages a PR industry awards program—the Bulldog Awards—which recognizes PR and communications professionals in categories including corporate social responsibility, media relations, digital and social marketing, not-for-profit activity and overall outstanding PR performance.

Our services are organized and managed around three vectors: a vertical industry focus, a horizontal service/process focus, and a supportive operations focus.

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The vertically-aligned groups understand our clients’ businesses and strategic initiatives. The vertical group for each particular industry includes experts hired from that industry.

Our service/process-aligned groups include engineering personnel and delivery personnel. Our engineering teams are responsible for creating secure and efficient custom workflows and integrating proprietary and third-party technologies to automate manual processes and improve the consistency and quality of our work product. These tools include categorization engines that utilize pattern recognition algorithms based on comprehensive rule sets and related heuristics, data extraction tools that automatically retrieve specific types of information from large data sources, and workflow systems that enable various tasks and activities to be performed across our multiple facilities.

Our globally distributed delivery personnel are responsible for executing our client engagements in accordance with service-level agreements. We deliver services from facilities in the United States, the Philippines, India, Sri Lanka, Israel, the United Kingdom, Germany and Canada.

Other support groups are responsible for managing diverse enabling functions including human resources, organizational development, network and communications technology infrastructure support and physical infrastructure and facilities management.

Our sales staff, program managers and consultants operate primarily from our North American and European locations, as well as from client sites.

Revenues

In our DDS segment, we recognize revenues based on the quantity delivered or resources utilized and in the period in which the services are performed and delivery has occurred. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts, which are not significant to the overall revenues, are recognized on the percentage of completion method of accounting, as services are performed or milestones are achieved.

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 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 client.

We consider U.S. GAAP criteria for determining whether to report revenue gross as a principal versus net as an agent. Factors considered include whether we are the primary obligor, have risks and rewards of ownership, and bear the risk that a client may not pay for the services performed. If there are circumstances where the above criteria are not met and therefore we are not the principal in providing services, amounts received from clients are presented net of payments in the condensed consolidated statements of operations and comprehensive loss.

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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 U.S. GAAP before income taxes, depreciation, amortization of intangible assets, impairment charges, changes in fair value of contingent consideration, stock-based compensation, loss attributable to non-controlling interests and interest income (expense).

We believe Adjusted EBITDA is useful to our management and investors in evaluating our operating performance and for financial and operational decision-making purposes. In particular, it facilitates comparisons of the core operating performance of our Company from period to period on a consistent basis and helps us 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 U.S. GAAP. Some of these limitations are:

| · | Adjusted EBITDA does not reflect tax payments, and such payments reflect a reduction in cash available to us;

| · | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs and for our cash expenditures or future requirements for capital expenditures or contractual commitments;

| · | Adjusted EBITDA excludes the potential dilutive impact of stock-based compensation expense related to our workforce, interest income (expense) and net loss attributable to non-controlling interests, and these items may represent a reduction or increase in cash available to us;

| · | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and

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| · | Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently from our calculation, limiting its usefulness as a comparative measure.

Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, U.S. GAAP net income.

The following table reconciles net income (loss) to Adjusted EBITDA for the periods presented (in thousands):

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Adjusted EBITDA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net loss attributable to Innodata Inc. and Subsidiaries |  | $ | (1,068 | ) |  | $ | (2,766 | ) |  | $ | (2,964 | ) |  | $ | (4,541 | )
Depreciation and amortization |  |  | 919 |  |  |  | 876 |  |  |  | 2,771 |  |  |  | 2,200 |
Stock-based compensation |  |  | 185 |  |  |  | 207 |  |  |  | 662 |  |  |  | 729 |
Provision for income taxes |  |  | 268 |  |  |  | 352 |  |  |  | 807 |  |  |  | 1,128 |
Change in fair value of contingent consideration |  |  | - |  |  |  | 1,038 |  |  |  | - |  |  |  | 1,038 |
Interest expense (income), net |  |  | 2 |  |  |  | 15 |  |  |  | (9 | ) |  |  | 44 |
Non-controlling interests |  |  | (85 | ) |  |  | (106 | ) |  |  | (254 | ) |  |  | (310 | )
Adjusted EBITDA |  | $ | 221 |  |  | $ | (384 | ) |  | $ | 1,013 |  |  | $ | 288 |

DDS Segment |  |  |  |  |  |
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Adjusted EBITDA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income (loss) attributable to DDS Segment |  | $ | 107 |  |  | $ | (2,147 | ) |  | $ | (615 | ) |  | $ | (1,842 | )
Depreciation and amortization |  |  | 546 |  |  |  | 585 |  |  |  | 1,732 |  |  |  | 1,618 |
Stock-based compensation |  |  | 183 |  |  |  | 205 |  |  |  | 658 |  |  |  | 741 |
Provision for income taxes |  |  | 278 |  |  |  | 370 |  |  |  | 829 |  |  |  | 1,173 |
Change in fair value of contingent consideration |  |  | - |  |  |  | 1,038 |  |  |  | - |  |  |  | 1,038 |
Interest expense (income), net |  |  | (2 | ) |  |  | 15 |  |  |  | (16 | ) |  |  | 44 |
Non-controlling interests |  |  | (85 | ) |  |  | (106 | ) |  |  | (254 | ) |  |  | (310 | )
Adjusted EBITDA - DDS Segment |  | $ | 1,027 |  |  | $ | (40 | ) |  | $ | 2,334 |  |  | $ | 2,462 |

IADS Segment |  |  |  |  |  |
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Adjusted EBITDA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net loss attributable to IADS Segment |  | $ | (256 | ) |  | $ | (553 | ) |  | $ | (749 | ) |  | $ | (1,598 | )
Stock-based compensation |  |  | - |  |  |  | 2 |  |  |  | 2 |  |  |  | (12 | )
Adjusted EBITDA - IADS Segment |  | $ | (256 | ) |  | $ | (551 | ) |  | $ | (747 | ) |  | $ | (1,610 | )

MIS Segment |  |  |  |  |  |
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Adjusted EBITDA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net loss attributable to MIS Segment |  | $ | (919 | ) |  | $ | (66 | ) |  | $ | (1,600 | ) |  | $ | (1,101 | )
Depreciation and amortization |  |  | 373 |  |  |  | 291 |  |  |  | 1,039 |  |  |  | 582 |
Stock-based compensation |  |  | 2 |  |  |  | - |  |  |  | 2 |  |  |  | - |
Benefit from income taxes |  |  | (10 | ) |  |  | (18 | ) |  |  | (22 | ) |  |  | (45 | )
Interest expense, net |  |  | 4 |  |  |  | - |  |  |  | 7 |  |  |  | - |
Adjusted EBITDA - MIS Segment |  | $ | (550 | ) |  | $ | 207 |  |  | $ | (574 | ) |  | $ | (564 | )

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Results of Operations

Three Months Ended September 30, 2017 and 2016

Revenues

Total revenues were $15.0 million for the three months ended September 30, 2017 compared to $16.1 million for the three months ended September 30, 2016, a decrease of approximately $1.1 million or approximately 7%.

Revenues from the DDS segment were $11.6 million and $12.1 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of approximately $0.5 million or approximately 4%. The decline was on account of lower volume from clients.

Revenues from the IADS segment were $1.2 million and $1.0 million for the three months ended September 30, 2017 and September 30, 2016. The increase reflects additional volume from Synodex clients.

Revenues from the MIS segment were $2.2 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.8 million or approximately 27% during the period following the acquisition of Agility in July 2016.

Two clients in the DDS segment generated approximately 30% of the Company’s total revenues for the three months ended September 30, 2017 and 27% of the Company’s total revenues for the three months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the three months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 49% and 48%, respectively, of the Company’s total revenues.

Direct Operating Costs

Direct operating costs were $11.5 million and $12.4 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.9 million or 7%. Direct operating costs as a percentage of total revenues was 77% for each of the three months ended September 30, 2017 and September 30, 2016.

Direct operating costs for the DDS segment were approximately $8.7 million and $9.6 million for the three months ended September 30, 2017 and 2016, respectively, a decrease of $0.9 million or 9%. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 75% and 80% for the three months ended September 30, 2017 and 2016, respectively. The decline in direct operating costs and as a percentage of revenues reflects the decline in revenues as well as cost rationalization.

Direct operating costs for the IADS segment were $1.2 million for the three months ended September 30, 2017 and $1.3 million for the three months ended September 30, 2016, net of intersegment profits. The decline in direct operating costs reflects efficiencies in the production headcount. Direct operating costs for the IADS segment as a percentage of IADS segment revenues were 100% and 127% for the three months ended September 30, 2017 and 2016, respectively.

Direct operating costs for the MIS segment were $1.6 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively. Direct operating costs for the MIS segment as a percentage of MIS segment revenues were 73% and 50% for the three months ended September 30, 2017 and 2016, respectively. The increased percentage reflects the 27% decline in MIS revenues during the period following the acquisition of Agility in July 2016.

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Selling and Administrative Expenses

Selling and administrative expenses were $4.4 million for the three months ended September 30, 2017 compared to $5.1 million for the three months ended September 30, 2016, a decrease of $0.7 million or approximately 14%. Selling and administrative expenses as a percentage of total revenues decreased to 29% for the three months ended September 30, 2017 from 32% for the three months ended September 30, 2016.

Selling and administrative expenses for the DDS segment were $2.7 million and $3.3 million for the three months ended September 30, 2017 and September 30, 2016, respectively, a decline of $0.6 million or 18%. For the three months ended September 30, 2016, the DDS segment incurred $0.25 million of legal, professional and other costs in connection with an internal investigation and there were miscellaneous administrative cost savings during the three months ended September 30, 2017. As a percentage of DDS revenues, DDS selling and administrative expenses were 23% for the three months ended September 30, 2017 and 27% for the three months ended September 30, 2016. The decline as a percentage of revenues was primarily caused by the decline in selling and administrative expenses.

Selling and administrative expenses for the IADS segment were $0.2 million and $0.3 million for each of the three months ended September 30, 2017 and 2016, respectively. Selling and administrative expenses for the IADS segment as a percentage of IADS segment revenues was 17% and 26% for the three months ended September 30, 2017 and 2016, respectively.

Selling and administrative expenses for the MIS segment were $1.5 million for each of the three months ended September 30, 2017 and 2016. Selling and administrative expenses for the MIS segment as a percentage of MIS segment revenues was 68% for the three months ended September 30, 2017 and 56% for the three months ended September 30, 2016. The increased percentage reflects the 27% decline in MIS revenues during the period following the acquisition of Agility in July 2016.

Contingent Consideration

On September 30, 2016, we and the other parties involved in the acquisition of MediaMiser amended the terms on which one of our subsidiaries was required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments. The first instalment was paid on March 31, 2017 and the second instalment is payable on March 31, 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. We have the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. common stock. We recorded a $1.0 million charge in our statement of operations for the third quarter of 2016 to reflect the amendment.

Income Taxes

We recorded a provision for income taxes of $0.3 million and $0.4 million for the three months ended September 30, 2017 and 2016, 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.

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We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on deferred tax assets of our Canadian subsidiary on account of continuing losses.

Net Loss

We incurred a net loss of $1.1 million during the three months ended September 30, 2017 compared to net loss of $2.8 million during the three months ended September 30, 2016.

Net income for the DDS segment was $0.1 million for the three months ended September 30, 2017, compared to net loss of $2.1 million for the three months ended September 30, 2016, net of intersegment profits. The change was due to the decline in revenues offset by a decline in direct operating costs and selling and administrative expenses that were mentioned above, and a charge to our operations referred to under “Contingent Consideration” for the three months ended September 30, 2016.

Net loss for the IADS segment was $0.3 million for the three months ended September 30, 2017 compared to net loss of $0.6 million for the three months ended September 30, 2016, net of intersegment profits. The decline in net loss is primarily due to an increase in revenues and a decline in direct operating costs and selling and administrative expense.

Net loss for the MIS segment was $0.9 million for the three months ended September 30, 2017 compared to net loss of $0.1 million for the three months ended September 30, 2016. The increase in net loss was due to lower revenues.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2017 was $0.2 million compared to a loss of $0.4 million for the three months ended September 30, 2016. Adjusted EBITDA for the DDS segment was $1.0 million for the three months ended September 30, 2017 compared to break-even for the three months ended September 30, 2016. Adjusted EBITDA was a loss of $0.3 million and a loss of $0.6 million for the IADS segment for the three months ended September 30, 2017 and 2016, respectively. Adjusted EBITDA was a loss of $0.5 million for the three months ended September 30, 2017 compared to $0.2 million for the three months ended September 30, 2016 for the MIS segment.

Nine Months Ended September 30, 2017 and 2016

Revenues

Total revenues were $45.3 million for the nine months ended September 30, 2017 compared to $47.4 million for the nine months ended September 30, 2016, a decline of approximately $2.1 million or 4%.

Revenues from the DDS segment were $34.8 million and $38.9 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $4.1 million or 11%. The decline was primarily on account of reduced volume from a key e-book client amounting to $3.1 million and lower volume from other clients. The decline was partially offset by an increase in revenue for one new client for whom services began in the fourth quarter of 2016.

Revenues from the IADS segment were $3.4 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $0.3 million or 10%. The increase primarily reflects additional volume from docGenix clients.

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Revenues from the MIS segment were $7.1 million for the nine months ended September 30, 2017 and $5.4 million for the nine months ended September 30, 2016, an increase of $1.7 million or 31%. The increase is attributable to the acquisition of the Agility business in July 2016.

Two clients in the DDS segment generated approximately 29% of the Company’s total revenues for the nine months ended September 30, 2017 and 30% of the Company’s total revenues for the nine months ended September 30, 2016. No other client accounted for 10% or more of total revenues during these periods. Further, for the nine months ended September 30, 2017 and 2016, revenues from non-U.S. clients accounted for 50% and 48%, respectively, of the Company’s total revenues.

Direct Operating Costs

Direct operating costs were $34.6 million and $35.6 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $1 million or 3%. Direct operating costs as a percentage of total revenues increased to 76% for the nine months ended September 30, 2017 compared to 75% for the nine months ended September 30, 2016.

Direct operating costs for the DDS segment were $26.7 million and $28.8 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $2.1 million or approximately 7%. The decline in direct operating costs is due to a decline in revenues excluding revenues that were previously deferred for one client, and it also reflects cost rationalization. Direct operating costs for the DDS segment as a percentage of DDS segment revenues were 77% and 74% for the nine months ended September 30, 2017 and 2016, respectively. The increase in direct operating costs as a percentage of DDS segment revenues primarily reflects a decline in DDS segment direct operating costs relative to a decline in revenues.

Direct operating costs for the IADS segment were $3.3 million for the nine months ended September 30, 2017 and $3.7 million for the nine months ended September 30, 2016, net of intersegment profits. The decline in direct operating costs reflects efficiencies in the production headcount. Direct operating costs for the IADS segment as a percentage of IADS segment revenues were 97% and 119% for the nine months ended September 30, 2017 and 2016, respectively.

Direct operating costs for the MIS segment were $4.6 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of approximately 48%. The increase in direct operating costs was primarily on account of the acquisition of the Agility business in July 2016. Direct operating costs for the MIS segment as a percentage of MIS segment revenues were 65% and 57% for the nine months ended September 30, 2017 and 2016, respectively.

Selling and Administrative Expenses

Selling and administrative expenses were $13.1 million for the nine months ended September 30, 2017 compared to $14.5 million for the nine months ended September 30, 2016, a decrease of $1.4 million or approximately 10%. Selling and administrative expenses as a percentage of total revenues were 29% for the nine months ended September 30, 2017 and 31% for the nine months ended September 30, 2016.

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Selling and administrative expenses for the DDS segment were $8.2 million and $10.1 million for the nine months ended September 30, 2017 and September 30, 2016, respectively, a decrease of $1.9 million or 19%. For the nine months ended September 30, 2016, the DDS segment incurred $1.5 million of legal, professional and other costs in connection with an internal investigation and for the nine months ended September 30, 2017, DDS selling and administrative expenses were reduced by the recovery of the approximately $0.3 million of accounts receivable from two clients. Selling and administrative expenses for the DDS segment as a percentage of DDS segment revenues decreased to 24% for the nine months ended September 30, 2017 compared to 26% for the nine months ended September 30, 2016. The decline as a percentage of revenues was primarily caused by the decline in selling and administrative expenses.

Selling and administrative expenses for the IADS segment were $0.8 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in selling and administrative expenses is on account of cost optimization. Selling and administrative expenses for the IADS segment as a percentage of IADS segment revenues decreased to 24% for the nine months ended September 30, 2017 compared to 32% for the nine months ended September 30, 2016. The decrease in selling and administrative expenses as a percentage of IADS segment revenues was principally attributable to the increase in IADS revenues and the decline in selling and administrative expenses.

Selling and administrative costs for the MIS segment were $4.1 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $0.7 million or 21%. The increase in selling and administrative costs was primarily on account of the acquisition of the Agility business in July 2016. Selling and administrative expenses for the MIS segment as a percentage of MIS segment revenues declined to 58% for the nine months ended September 30, 2017 from 63% for the nine months ended September 30, 2016.

Contingent Consideration

On September 30, 2016, we and the other parties involved in the acquisition of MediaMiser amended the terms on which one of our subsidiaries was required to make a supplemental purchase price payment for MediaMiser. Prior to the amendment, the amount of the supplemental purchase price payment was to be determined by the achievement of certain financial thresholds and was in no event to exceed $3.8 million (C$5 million). The amendment fixed the amount of the supplemental purchase price payment at $1.5 million (C$2 million) payable in two equal installments. The first instalment was paid on March 31, 2017 and the second instalment is payable on March 31, 2018 to designated recipients, except that no payments will be made to designated recipients who fail to satisfy specified conditions. We have the option to pay up to 70% of the supplemental amount in shares of Innodata Inc. common stock. We recorded a $1.0 million charge in our statement of operations for the third quarter of 2016 to reflect the amendment.

Income Taxes

We recorded a provision for income taxes of $0.8 million and $1.1 million for the nine months ended September 30, 2017 and 2016, 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.

We have a valuation allowance on all of our U.S. deferred tax assets on account of continuing losses incurred by our U.S. entity. In addition, we also have a valuation allowance on deferred tax assets of our Canadian subsidiary on account of continuing losses.

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Net Loss

We incurred a net loss of $3.0 million during the nine months ended September 30, 2017 compared to net loss of $4.5 million during the nine months ended September 30, 2016.

Net loss for the DDS segment was a net loss of $0.6 million for the nine months ended September 30, 2017, compared to a net loss of $1.8 million for the nine months ended September 30, 2016, net of intersegment profits. The change was due to the decline in revenues offset by a decline in direct operating costs and selling and administrative expenses that were mentioned above, and a charge to our operations referred to under “Contingent Consideration” for the nine months ended September 30, 2016.

Net loss for the IADS segment was $0.8 million for the nine months ended September 30, 2017 compared to net loss of $1.6 million for the nine months ended September 30, 2016, net of intersegment profits. The decline in net loss is primarily due to an increase in revenues and a decline in direct operating costs and selling and administrative expense.

Net loss for the MIS segment was $1.6 million for the nine months ended September 30, 2017 compared to net loss of $1.1 million for the nine months ended September 30, 2016. The increased net loss is mainly due to the decline in revenues and an increase in direct operating costs and selling and administrative expenses.

Adjusted EBITDA

Adjusted EBITDA for the nine months ended September 30, 2017 was $1.0 million compared to $0.3 million for the nine months ended September 30, 2016, an increase of $0.7 million. Adjusted EBITDA for the DDS segment was $2.3 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively, a decrease of $0.2 million or approximately 8%. Adjusted EBITDA was a loss of $0.7 million and a loss of $1.6 million for the IADS segment for the nine months ended September 30, 2017 and 2016, respectively. Adjusted EBITDA was a loss of $0.6 million for the MIS segment for each of the nine months ended September 30, 2017 and 2016.

Liquidity and Capital Resources

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

|  | September 30, 2017 |  |  | December 31, 2016 |
Cash and cash equivalents |  | $ | 12,468 |  |  | $ | 14,172 |
Working capital |  |  | 11,152 |  |  |  | 14,407 |

At September 30, 2017, we had cash and cash equivalents of $12.5 million, of which $9.2 million was held by our foreign subsidiaries, and the $3.3 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 September 30, 2017, our intent is to permanently reinvest these funds outside the United States, except for $7.0 million in projected deemed dividends 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 $0.1-0.4 million per quarter in the immediate future; (ii) investments in MIS which are expected to be at the rate of $0.4-0.8 million per quarter in the immediate future; (iii) the expansion of our other operations; (iv) general corporate purposes, including working capital; and (v) possible business acquisitions. As of September 30, 2017, we had working capital of approximately $11.2 million, as compared to working capital of approximately $14.4 million as of December 31, 2016.

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We believe that our existing cash and cash equivalents and internally generated funds will provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months. However, we have no bank facilities or lines of credit, and continuing material reductions in our cash and cash equivalents from operating losses, capital expenditures, acquisitions or otherwise could materially and adversely affect us. See the risk factor entitled “Our liquidity could be affected if our losses continue.” in our Report on Form 10K for the year ended December 31, 2016.

During the nine months ended September 30, 2017, our U.S. entity deferred $4.7 million in payments due to its Asian operating subsidiaries. The deferral in payments resulted in a deemed dividend that is taxable income to the U.S. entity and is set off against its net operating loss carryforwards. We project that during the balance of 2017 through 2018 our U.S. entity will not have sufficient cash to pay in full amounts that will be payable by it to its Asian operating subsidiaries and that the cash deficit will amount to approximately $7.0 million. The resulting deferral in payments would similarly result in a deemed dividend that would be taxable income to the U.S. entity and would be set off against its net operating loss carryforwards. We adjusted our deferred tax assets and the corresponding valuation allowance as of September 30, 2017 to reflect the projected deferral in payments.

Net Cash Provided By (Used In) Operating Activities

Cash provided by our operating activities for the nine months ended September 30, 2017 was $1.2 million, resulting from a net loss of $3.2 million and adjustments for non-cash items of $3.4 million and $1.0 million from working capital. Adjustments for non-cash items primarily consisted of $2.8 million for depreciation and amortization, stock option expense of $0.7 million and a reduction in tax provisions of $0.3 million. Working capital activities primarily consisted of a source of cash of $0.7 million due to an increase in accounts receivable and a $0.3 million increase in the other working capital accounts.

Cash used in our operating activities for the nine months ended September 30, 2016 was $1.1 million, resulting from a net loss of $4.9 million and adjustments for non-cash items of $3.8 million. Adjustments for non-cash items primarily consisted of $2.2 million for depreciation and amortization, change in fair value of contingent consideration of $1.0 million, stock option expense of $0.7 million and reduction in tax provisions of $0.3 million.

Our days’ sales outstanding (DSO) for the nine months ended September 30, 2017 was 59 days compared to 55 days for the year ended December 31, 2016. We calculate DSO for a reported period by first dividing the total revenues for the period by the average net accounts receivable for the period (which is the sum of the net accounts receivable at the beginning of the period and the net accounts receivable at the end of the period, divided by two), to yield an amount we refer to as the “accounts receivable turnover.” Then we divide the total number of days within the reported period by the accounts receivable turnover to yield DSO expressed in number of days.

Net Cash Used in Investing Activities

For the nine months ended September 30, 2017 cash used in our investing activities was $2.9 million. These expenditures principally consisted of construction costs related to the relocation of our new corporate offices in the US and Canada and the purchase of technology equipment including servers, network infrastructure and workstations. We continue to expense all capital expenditures for the IADS segment.

For the nine months ended September 30, 2016, cash used in our investing activities was $6.1 million. These expenditures consisted of $4.1 million paid to acquire Agility in July 2016 and capital expenditures of $2.0 million principally for the purchase of technology equipment including servers, network infrastructure and workstations.

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During the next twelve months, we anticipate that capital expenditures for ongoing technology, equipment, infrastructure upgrades and development of our proprietary software platform, tools and technologies will approximate $2.0 to $3.0 million, a portion of which we may finance.

Net Cash Used in Financing Activities

For the nine months ended September 30, 2017, cash used in financing activities consisted of proceeds from equipment financing of $1.0 million and total payments of long-term obligations of $1.1 million. For the nine months ended September 30, 2016, cash used in financing activities was comprised of total payments of long term obligations of $0.6 million.

Contractual Obligations

The table below summarizes our contractual obligations (in thousands) at September 30, 2017 and the effects that those obligations are expected to have on our liquidity and cash flows in future periods.

|  | Payments Due by Period |
Contractual Obligations |  | Total |  |  | Less than 1 year |  |  | 1-3 years |  |  | 4-5 years |  |  | After 5 years |
Capital lease |  | $ | 955 |  |  | $ | 452 |  |  | $ | 503 |  |  | $ | - |  |  | $ | - |
Vendor obligations |  |  | 751 |  |  |  | 406 |  |  |  | 345 |  |  |  | - |  |  |  | - |
Non cancellable operating leases |  |  | 3,692 |  |  |  | 1,006 |  |  |  | 1,391 |  |  |  | 763 |  |  |  | 532 |
Total contractual cash obligations |  | $ | 5,398 |  |  | $ | 1,864 |  |  | $ | 2,239 |  |  | $ | 763 |  |  | $ | 532 |

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

Inflation, Seasonality and Prevailing Economic Conditions

Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higher inflation in wage rates in the countries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts. We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover cost increases through increases in the prices that we charge for our services to our clients.

Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute to fluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, we typically incur higher wages, due to overtime, that reduce our margins.

Our Synodex subsidiary experiences seasonal fluctuations in revenues. Typically, revenue is lowest in the third quarter of the calendar year and highest in the fourth quarter of the calendar year. The seasonality is directly linked to the number of life insurance applications received by the insurance companies.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations, liquidity and capital resources is based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-lived assets, intangible assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, purchase price allocation of Agility, valuation of derivative instruments and estimated accruals for various tax exposures. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and could have a significant, adverse effect on our results of operations and financial position. For a discussion of our critical accounting policies see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued guidance on revenue from contracts with customers. This update is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This accounting guidance is effective prospectively for annual reporting periods, and interim periods within that period, beginning after December 15, 2017, and early adoption is permitted in 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 will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption. We have undertaken an initial impact analysis, which includes reviewing the terms and conditions of our Company’s existing customer contracts and applying the five discrete criteria required for recognizing revenues as set forth in ASU 2014-09. Based upon its preliminary analysis undertaken through September 30, 2017, we currently do not expect the new revenue recognition guidance to have a material impact on our consolidated condensed financial statements, and expects to conclude such analysis by December 31, 2017. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may, in conjunction with the completion of our overall assessment of the new guidance, impact our current conclusions.

In February 2016, the FASB issued guidance related to leases. This new guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This new standard is effective for annual periods beginning after December 15, 2018. Early application is permitted. We are in the process of evaluating the effect the guidance will have on our existing accounting policies and condensed consolidated financial statements, but expect there will be an increase in assets and liabilities on the condensed consolidated balance sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material.

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In March 2016, the FASB issued guidance relating to share-based compensation. This new guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016. Early application is permitted. We adopted this standard and there was no material impact on our condensed consolidated financial statements.

In March 2017, the FASB issued guidance on Compensation - Retirement Benefits relating to improvements in the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing U.S. GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in the guidance require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in the guidance will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance will be effective for us for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We do not anticipate that adoption of this standard will have a material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements.

In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for us for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We do not anticipate that the adoption of this guidance will have a material impact on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our equipment sales leaseback financing and capital lease transactions carry a fixed interest rate. Thus, as of September 30, 2017 we are not exposed to any market risk due to interest rate fluctuations.

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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, Pound Sterling and Euros. In addition, a significant portion of our expenses, primarily labor expenses in the Philippines, India, Sri Lanka, the United Kingdom, 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. These foreign currency forward contracts were entered into with a maximum term of twelve months and have an aggregate notional amount of approximately $20.0 million as of September 30, 2017. The total unrealized loss on the outstanding hedges was $0.2 million as of September 30, 2017.

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 hedged currencies would decrease the forward contracts’ fair value by approximately $1.8 million as of September 30, 2017. Similarly, a 10% depreciation in the U.S. dollar’s value relative to hedged currencies would increase the forward contracts’ fair value by approximately $2.2 million. 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 engaged in any hedging activities nor have we entered into off-balance-sheet transactions or arrangements. In addition, as of September 30, 2017, our foreign locations held cash and cash equivalents totaling approximately $9.2 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 4. Controls and Procedures

As of the end of the period covered by this report, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to the disclosure under “Legal Proceedings” in Part II, Item 1. in our Form 10-Q for the quarterly period ended June 30, 2017.

Item 1A. Risk Factors

The information in the next paragraph is in addition to the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Our common stock may become subject to delisting from The Nasdaq Stock Market. Nasdaq may under Nasdaq Listing Rule 5810 delist the Company’s common stock if the closing bid price for its common stock is less than $1.00 per share for 30 consecutive business days and the Company does not thereafter cure all listing deficiencies during Nasdaq-designated compliance periods.

The information in the following paragraphs replaces the disclosure under “We are the subject of continuing litigation, including litigation by certain of our former employees” in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. Other than the disclosures in this Item 1A. there were no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

In 2008, the Supreme Court of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against a Philippines subsidiary of the Company that is inactive and has no material assets, and purportedly also against Innodata Inc., that orders the reinstatement of certain former employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $7.0 million. The payment ordered by the Philippine courts accrued legal interest at the rate of 12% per annum from August 13, 2008 to September 30, 2013, and has thereafter accrued and continues to accrue legal interest at the rate of 6% per annum. The amount of the payment as expressed in U.S. dollars varies with the Philippine peso to U.S. dollar exchange rate. Based on consultation with legal counsel, the Company believes that financial recovery against the Company is unlikely.

We are also subject to various other legal proceedings and claims which arise in the ordinary course of business.

While we currently believe that the ultimate outcome of these proceedings will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above referenced Philippines action could have a material adverse impact on us, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the operating results of the period in which the ruling or recovery occurs. In addition, our estimate of potential impact on our financial position or overall results of operations for the above legal proceedings could change in the future. See “Legal Proceedings.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the three months ended September 30, 2017.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

| 31.1 | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

| 31.2 | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101. INS XBRL Instance Document

101. SCH XBRL Taxonomy Extension Schema Document

101. CAL XBRL Taxonomy Extension Calculation Link base Document

101. DEF XBRL Taxonomy Extension Definition Link base Document

101. LAB XBRL Taxonomy Extension Label Link base Document

101. PRE XBRL Taxonomy Extension Presentation Link base Document

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INNODATA INC.

Date: | November 9, 2017 | /s/ Jack Abuhoff
|  | Jack Abuhoff
|  | Chairman of the Board,
|  | Chief Executive Officer and President
Date: | November 9, 2017 | /s/ O’Neil Nalavadi
|  | O’Neil Nalavadi
|  | Senior Vice President
|  | Chief Financial Officer
|  | and Principal Accounting Officer

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