INNODATA INC

During the three months ended March 31, 2021, a total of 689,616 options were exercised at an average price of $2.17 for an aggregate value of $1,497,382. 186,816 of the exercised stock options were surrendered to the Company as payment of the exercise price and minimum tax withholdings resulting from the stock options exercised.

Direct operating costs were $10.1 million and $9.7 million for the three months ended March 31, 2021 and 2020, respectively, an increase of $0.4 million. The increase was primarily due to higher labor related costs of $0.8 million, offset in part by $0.2 million of foreign exchange gain, $0.1 million decrease in occupancy and related costs and $0.1 million decrease in other direct operating expenses. Direct operating costs as a percentage of total revenues were 63% and 67% for the three months ended March 31, 2021 and 2020, respectively. The decrease in direct operating costs as a percentage of revenues was attributable to higher revenues, partially offset by an increase in direct operating costs.

Selling and administrative expenses were $5.5 million for the three months ended March 31, 2021, compared to $4.6 million for the three months ended March 31, 2020, an increase of $0.9 million. The increase was primarily due to new hires, labor related incentives, recruitment, and other professional fees to support revenue growth plan across all business segments. Selling and administrative expenses as a percentage of total revenues were 34% and 32% for the three months ended March 31, 2021 and 2020, respectively. The increase in selling and administrative expenses as a percentage of revenues was attributable to higher selling and administrative expenses offset by increased revenues.

Selling and administrative expenses for the DDS segment were $3.5 million and $3.0 million for the three months ended March 31, 2021 and 2020, respectively, an increase of $0.5 million. The increase in selling and administrative expenses for the DDS segment was primarily due to new hires, labor related incentives, recruitment, and other professional fees. Selling and administrative expenses for the DDS segment as a percentage of DDS revenues were 30% and 29% for the three months ended March 31, 2021 and March 31, 2020, respectively. The increase in selling and administrative expenses as a percentage of revenues was attributable to higher selling and administrative expenses offset by increased revenues.

Cash provided by our operating activities for the three months ended March 31, 2021 was $0.8 million primarily on account of the following factors: our net income for the period of $0.4 million; a source of $1.1 million from non-cash expenses consisting of depreciation and amortization of $0.7 million, stock-based compensation of $0.3 million and pension cost of $0.1 million, offset by net changes from working capital accounts for a use of $0.7 million. Refer to the condensed consolidated statements of cash flows for further details.