GRID DYNAMICS HOLDINGS, INC. Forward-Looking Statements The following discussion of the financial condition and results of operations ofGrid Dynamics Holdings, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year endedDecember 31, 2020 , which has been filed with theSecurities and Exchange Commission ("SEC") onMarch 5, 2021 . The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seek," "intends," "plans," "estimates," "projects," "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the sections titled "Risk Factors" and "Cautionary Note Regarding Forward Looking Statements," included elsewhere in this Quarterly Report on Form 10-Q. OverviewGrid Dynamics Holdings, Inc. ("Grid Dynamics ," "GDH," the "Company," "we," "us," or "our") is an emerging leader in enterprise-level digital transformations in Fortune 1000 companies. For enterprises that create innovative digital products and experiences,Grid Dynamics offers close collaboration to provide digital transformation initiatives that span strategy consulting, development of early prototypes and enterprise-scale delivery of new digital platforms. Since its inception in 2006 inMenlo Park, California , as a grid and cloud consultancy firm,Grid Dynamics has been on the forefront of digital transformation, working on big ideas like cloud computing, NOSQL, DevOps, microservices, big data and AI, and quickly established itself as a provider of choice for technology and digital enterprise companies. As a leading global digital engineering and IT services provider with its headquarters inSilicon Valley and engineering centers inthe United States ,Mexico and multiple European countries,Grid Dynamics' core business is to deliver focused and complex technical consulting, software design, development, testing and internet service operations.Grid Dynamics also helps organizations become more agile and create innovative digital products and experiences through its deep expertise in emerging technology, such as AI, data science, cloud computing, big data and DevOps, lean software development practices and a high-performance product culture.Grid Dynamics believes that the key to its success is a business culture that puts products over projects, client success over contract terms and real business results over pure technical innovation. By leveragingGrid Dynamics' proprietary processes optimized for innovation, emphasis on talent development and technical expertise,Grid Dynamics has been able to achieve significant growth. We are a former blank check company that completed our initial public offering onOctober 4, 2018 . InMarch 2020 ,Grid Dynamics , formerly known asChaSerg Technology Acquisition Corp ("ChaSerg"), completed its acquisition ofGrid Dynamics International, Inc. ("GDI") pursuant to the business combination agreement datedNovember 13, 2019 (the "Business Combination"). In conjunction with the completion of the Business Combination, ChaSerg was renamed asGrid Dynamics Holdings, Inc. The Business Combination was accounted for as a reverse recapitalization for which GDI was determined to be the accounting acquirer. Outstanding shares of GDI were converted into our common shares, presented as a recapitalization, and the net assets of ChaSerg were acquired at historical cost, with no goodwill or other intangible assets recorded. 22 -------------------------------------------------------------------------------- Table of Contents The following table sets forth a summary ofGrid Dynamics' financial results for the periods indicated: Three months ended September 30, (dollars in thousands, except per share data) 2021 2020 % of revenue % of revenue Revenues$ 57,933 100.0 %$ 26,332 100.0 % Gross profit 25,266 43.6 % 11,154 42.4 % Income/(loss) from operations 1,970 3.4 % (1,671) (6.3) % Net loss (549) (0.9) % (1,117) (4.2) % Comprehensive loss (635) (1.1) % (1,117) (4.2) % Diluted loss per share$ (0.01) n/a$ (0.02) n/a Non-GAAP Financial Information(1) Non-GAAP EBITDA(1) 12,503 21.6 % 4,173 15.8 % Non-GAAP Net Income(1) 7,869 13.6 % 2,492 9.5 % Non-GAAP Diluted EPS(1)$ 0.11 n/a$ 0.05 n/a (1)Non-GAAP EBITDA, Non-GAAP Net Income and Non-GAAP Diluted EPS are non-GAAP financial measures. See "Non-GAAP Measures" below for additional information and reconciliations to the most directly comparable GAAP financial measures.
Nine months ended
September 30,
(dollars in thousands, except per share data) 2021 2020
% of revenue % of revenue
Revenues $ 144,743 100.0 % $ 81,157 100.0 %
Gross profit 60,400 41.7 % 29,358 36.2 %
Income/(loss) from operations 1,576 1.1 % (11,892) (14.7) %
Net loss (4,094) (2.8) % (7,879) (9.7) %
Comprehensive loss (4,166) (2.9) % (7,879) (9.7) %
Diluted loss per share $ (0.07) n/a $ (0.18) n/a
Non-GAAP Financial Information(1)
Non-GAAP EBITDA(1) 27,497 19.0 % 8,416 10.4 %
Non-GAAP Net Income(1) 17,024 11.8 % 4,803 5.9 %
Non-GAAP Diluted EPS(1) $ 0.26 n/a $ 0.10 n/a
Recent Developments
In the three months ended September 30, 2021 , our revenues of $57.9 million were
up 10.3 million or 21.5% in comparison to the three months ended June 30, 2021 ,
and up 120.0% from the three months ended September 30, 2020 . Our three months
ended September 30, 2021 revenues included $13.8 million in revenue contribution
from the acquisitions of Daxx and Tacit. Excluding contribution from
acquisitions, in the three months ended September 30, 2021 , our revenues of
$44.1 million were up $5.7 million or 14.8% in comparison to the three months
ended June 30, 2021 , and up $17.8 million or 67.3% from the three months ended
September 30, 2020 and was the highest revenue quarter in the company's history.
Similar to the last three quarters, in the three months ended September 30,
2021 , we witnessed healthy business trends. This is largely reflected in the
double-digit sequential growth over the three months ended June 30, 2021 . The
three months ended September 30, 2021 also marked the fifth consecutive
sequential growth quarter since witnessing a bottom in revenues in the three
months ended September 30, 2020 . During the quarter, we witnessed strong demand
from our customers across our industry verticals as digital transformation
initiatives take center stage.
During the three months ended September 30, 2021 , our largest industry vertical
was Retail. At 31.5% of revenue, our Retail vertical was up 43.5% in comparison
to the three months ended June 30, 2021 , and up 198.2% from the three months
ended September 30, 2020 . The strong sequential and year-over-year growth was
driven by a combination of factors that included
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ramping of business by Retail customers as they invest in digital transformation
initiatives combined with several of our customers enhancing their engagements
as they witness improving business trends. Our Technology Media, and Telecom
("TMT") vertical comprised 30.4% of our revenue, while Consumer Packaged Goods
("CPG")/Manufacturing, Finance, and Other verticals contributed to 19.3%, 9.0%,
and 9.8% respectively. Revenues from our Top 5 customers during the quarter was
42.0%, down from 59.9% in the same quarter year ago. The diversification in our
Top 5 customer concentration was driven by a combination of factors that
included success in ramping business at new customers and growing business at
existing customers, aided by our recent acquisitions.
We continue to focus on revenue diversification by increasing our customer base
with new customers' additions. During the three months ended September 30, 2021 ,
we received revenues from a total of 215 customers, up from 212 customers in the
three months ended June 30, 2021 and 42 customers in the three months ended
September 30, 2020 . Of these, 160 customers came from our recent acquisitions of
Tacit and Daxx . Excluding customers from our recent acquisitions, we exited the
quarter with 55 paying customers that included 7 new customers added during the
three months ended September 30, 2021 .
We exited the three months ended September 30, 2021 with $(0.5) million , or
(0.9)% in GAAP Net Loss, an improvement from a GAAP Net Loss of $(1.5) million ,
or (3.1)% in the three months ended June 30, 2021 and a GAAP Net Loss of $(1.1)
million , or (4.2)% in the three months ended September 30, 2020 . We exited the
three months ended September 30, 2021 with $12.5 million , or 21.6% in Non-GAAP
EBITDA, up from $9.7 million , or 20.4% in the three months ended June 30, 2021
and $4.2 million , or 15.8% in the three months ended September 30, 2020 . The
sequential increase in profitability was largely driven by increase in billable
personnel and billable work hours combined by contributions from our recent
acquisitions of Tacit and Daxx .
Acquisition of Tacit Knowledge Inc.
On May 29, 2021 , we acquired UK based Tacit Knowledge Inc. ("Tacit") in an
all-cash transaction. Headquartered in UK , Tacit is a global consultancy focused
on digital commerce serving customers in the UK , North America , Continental
Europe , and Asia . The company serves leading global brands across technology,
CPG, financial, and retail markets. The company has approximately 180 employees
with engineering centers situated in Moldova and Mexico . The acquisition will
augment our service offerings and will strengthen our competitive position
within the market. Additionally, the acquisition will also enable us to leverage
near-shore capabilities with the company's presence in Mexico .
Acquisition of Daxx
On December 14, 2020 , we acquired Netherland based Daxx in an all-cash
transaction. Headquartered in Amsterdam , and with approximately 490 employees,
the company has engineering centers situated in major tech hubs across Ukraine .
The company has over 20 years of experience in delivering software services to
clients across a wide range of industry verticals that include high-tech,
digital media, healthcare, and education. Some of the key capabilities include
consulting services spanning agile process reengineering, lean development, and
DevOps. Daxx serves customers in the Netherlands , Germany , U.K. , and U.S. , and
with strong relationships with high-growth start-ups and established software
companies. We believe the acquisition of Daxx will enable our company to have a
stronger foothold in Europe and will enable the company to continue diversifying
its business.
COVID-19 Related Updates
In December 2019 , a novel coronavirus COVID-19 was reported in China , and in
March 2020 , the World Health Organization declared it a pandemic. This
contagious disease pandemic has continued to spread across the globe, including
extensively within the U.S. , and is impacting worldwide economic activity and
financial markets, significantly increasing economic volatility and uncertainty.
In response to this global pandemic, several local, state, and federal
governments have been prompted to take unprecedented steps that include, but not
limited to, travel restrictions, closure of businesses, social distancing, and
quarantines.
Starting in March 2020 , headwinds to our business from the pandemic were largely
centered around our retail customers as many of them witnessed a slowdown in
their sales. After witnessing a low point in the month of May 2020 , our business
has steadily improved as we have added new customers and have grown existing
business across industry verticals. We are now facing challenges from COVID-19
such as employee retention and shortage of talent on the job market. We continue
to take precautionary measures intended to minimize the risk of the virus to our
employees, our customers, and the communities in which we operate that include
suspension of all non-essential travel. Although a significant proportion of our
employees continue to work remotely, all our facilities have been opened for
employees to work following local government guidelines. We continue to deliver
services to our clients in this fashion and this has resulted in minimal
disruption in our operational and delivery capabilities.
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Business Combination
On March 5, 2020 , a wholly-owned subsidiary ("Merger Sub 1") of ChaSerg merged
with and into GDI, with GDI surviving the merger (the "Initial Merger").
Immediately following the Initial Merger, GDI merged with and into another
wholly-owned subsidiary of ChaSerg ("Merger Sub 2") with Merger Sub 2 surviving;
Merger Sub 2 was then renamed "Grid Dynamics International, LLC ," and ChaSerg
was then renamed "Grid Dynamics Holdings, Inc. " (the "Business Combination"). As
of the open of trading on March 6, 2020 , the common stock and warrants of Grid
Dynamics Holdings, Inc. ("Grid Dynamics"), formerly those of ChaSerg, began
trading on The NASDAQ Stock Market LLC as "GDYN" and "GDYNW," respectively.
Comparability of Financial Information
Grid Dynamics' results of operations and statements of assets and liabilities
may not be comparable between periods as a result of the Business Combination on
March 5, 2020 and the other events and transactions discussed below.
Key Performance Indicators and Other Factors Affecting Performance
Grid Dynamics uses the following key performance indicators and assesses the
following other factors to analyze its business performance, to make budgets and
financial forecasts and to develop strategic plans:
Employees by Region
Attracting and retaining the right employees is critical to the success of Grid
Dynamics' business and is a key factor in Grid Dynamics' ability to meet client
needs and grow its revenue base. Grid Dynamics' revenue prospects and long-term
success depend significantly on its ability to recruit and retain qualified IT
professionals. A substantial majority of Grid Dynamics' personnel is comprised
of such IT professionals.
The following table shows the number of Grid Dynamics personnel (including
full-time employees and contractors serving in similar capacities) by region, as
of the dates indicated:
As of September 30,
2021 2020
United States and Mexico 349 249
Central and Eastern Europe(1), U.K. and the Netherlands 2,535 955
Total 2,884 1,204
(1)Includes Ukraine, Russia , Poland , Serbia , and Moldova .
Attrition
There is competition for IT professionals in the regions in which Grid Dynamics
operates, and any increase in such competition may adversely impact Grid
Dynamics' business and gross profit margins. Employee retention is one of Grid
Dynamics' main priorities and is a key driver of operational efficiency. Grid
Dynamics seeks to retain top talent by providing the opportunity to work on
exciting, cutting-edge projects for high profile clients, a flexible work
environment and training and development programs. Grid Dynamics' management
targets a voluntary attrition rate no higher than the mid-teen percentages, in
line with the industry.
Hours and Utilization
As most of Grid Dynamics' customer projects are performed and invoiced on a time
and materials basis, Grid Dynamics' management tracks and projects billable
hours as an indicator of business volume and corresponding resource needs for IT
professionals. To maintain its gross profit margins, Grid Dynamics must
effectively utilize its IT professionals, which depends on its ability to
integrate and train new personnel, to efficiently transition personnel from
completed projects to new assignments, to forecast customer demand for services
and to deploy personnel with appropriate skills and seniority to projects. Grid
Dynamics' management generally tracks utilization with respect to subsets of
employees, by location or by project, and calculates the utilization rate for
each subset by dividing (x) the aggregate number of billable hours for a period
by (y) the aggregate number of total available hours for the same period. Grid
Dynamics' management analyzes and projects utilization to measure the efficiency
of its workforce and to inform management's budget and personnel recruiting
decisions.
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Customer Concentration
Grid Dynamics' ability to retain and expand its relationships with existing
customers and add new customers are key indicators of its revenue potential.
Grid Dynamics grew its customer base from 47 customers during nine months of
2020 to 251 customers in the same period of 2021, including 190 customers that
were acquired as part of Daxx and Tacit acquisitions. Grid Dynamics' procurement
of new customers has a direct impact on its ability to diversify its sources of
revenue and replace customers that may no longer require its services. Grid
Dynamics has a relatively high level of revenue concentration with certain
customers.
The following table shows the evolution of Grid Dynamics' customer base and
revenue concentration, as of the dates and for the periods indicated:
Three Months Ended
September 30,
2021 2020
Total customers (for the period) (1) 215 42
Of which (customer revenue amounts annualized for interim
periods):
>$5.0 million 9 7
>$2.5 - 5.0 million 5 3
>$1.0 - 2.5 million 19 7
Top five customers 42.0 % 59.9 %
Top ten customers 58.2 % 77.7 %
Top five customers $ 24,333 $ 15,782
Top ten customers $ 33,728 $ 20,463 (1)Number of customers acquired as a result of
Nine Months Ended
September 30,
2021 2020
Total customers (for the period) (1) 251 47
Of which (customer revenue amounts annualized for interim
periods):
>$5.0 million 9 7
>$2.5 - 5.0 million 5 3
>$1.0 - 2.5 million 19 7
Top five customers 44.8 % 58.8 %
Top ten customers 61.7 % 81.2 %
Top five customers $ 64,817 $ 47,724
Top ten customers $ 89,373 $ 65,925
(1)Number of customers acquired as a result of Daxx and Tacit acquisitions for
the nine months ended September 30, 2021 is 190.
Foreign Currency Exchange Rate Exposure
Grid Dynamics is exposed to foreign currency exchange rate risk and its profit
margins are subject to volatility between periods due to changes in foreign
currency exchange rates relative to the U.S. dollar. Grid Dynamics' functional
currency apart from the U.S. dollar includes EURO, British pounds, Mexican pesos
and Moldovan leu. Grid Dynamics contracts with customers for payment in and
generates predominantly all of its revenue in U.S. dollars, except for Daxx and
Tacit that generate revenue predominantly in EURO and British pounds. Its
non-U.S. subsidiaries' operations relate substantially to performing services
under those contracts. Several of Grid Dynamics' subsidiaries conduct operations
and employ or contract personnel in Russia , Ukraine , Poland and Serbia , but keep
their books and records in U.S. dollars. Daxx's books are kept in EURO. Tacit's
books
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are kept in local currencies. Grid Dynamics' foreign currency transaction
exposure is a result of having to convert U.S. dollars into the local currencies
of the countries in which it must pay expenses, typically by transferring funds
to its non-U.S. subsidiaries. These expenses are primarily comprised of
compensation and benefits and other operating costs, such as rent. Subsidiary
transactions executed in local currencies are converted into U.S. dollars at the
exchange rate in effect on the date of the transaction, in the case of asset and
liability transactions, or at the average monthly exchange rate, in the case of
income and expense transactions. Certain balances in local currencies,
particularly cash and financial instruments, are adjusted at each balance sheet
date to reflect the then-current exchange rate, which is the rate at which the
related receivable or payable could be settled at that date. As a result, Grid
Dynamics' assets, liabilities, profit margins and other measures of
profitability may be subject to volatility due to changes in the exchange rate
of the U.S. dollar against the currencies in which Grid Dynamics' subsidiaries
incur operating expenses, hold assets, or owe liabilities, and may not be
comparable between periods.
In the three and nine months ended September 30, 2021 , approximately 23.5%,
12.0% and 5.8% of Grid Dynamics' $56.0 million and approximately 24.6%, 11.6%
and 6.9% of Grid Dynamics' $143.2 million of combined cost of revenue and total
operating expenses were denominated in the Ukrainian hryvnia, Russian ruble, and
Polish zloty, respectively. Comparatively, the same foreign currencies accounted
for approximately 10.6%, 11.8% and 9.8% of Grid Dynamics' $28.0 million and
10.7%, 14.5%, and 10.0% of Grid Dynamics' $93.0 million of combined cost of
revenue and total operating expenses in the three and nine months ended
September 30, 2020 . Grid Dynamics does not currently hedge its foreign currency
exposure, although it seeks to minimize such exposure by limiting cash transfers
to amounts necessary to fund subsidiary operating expenses for a short period,
typically one to two weeks. When and where possible, Grid Dynamics seeks to
match expenses to the U.S. dollar. For example, in Ukraine , Grid Dynamics
generally pays salaries in the current hryvnia equivalent of an agreed U.S.
dollar amount, consistent with local requirements. As a result, a significant
portion of Grid Dynamics' exposure to fluctuations in the value of the Ukrainian
hryvnia against the U.S. dollar is naturally hedged. Management carefully
evaluates its exposure to foreign currency risk and, though Grid Dynamics does
not currently hedge this exposure using financial instruments, it may do so in
the future. See Item 7A, "Quantitative and Qualitative Disclosures about Market
Risk-Foreign Currency Exchange Rate Risk" below for more information about Grid
Dynamics' exposure to foreign currency exchange rates.
Seasonality
Grid Dynamics' business is subject to seasonal trends that impact its revenues
and profitability between quarters. Some of the factors that influence the
seasonal trends include the timing of holidays in the countries in which Grid
Dynamics operates and the U.S. retail cycle, which drives the behavior of Grid
Dynamics' retail customers. Excluding the impact of growth in its book of
business, Grid Dynamics has historically recorded higher revenue and gross
profit in the second and third quarters of each year compared to the first and
fourth quarters of each year. The Christmas holiday season in Russia and
Ukraine , for example, falls in the first quarter of the calendar year, resulting
in reduced activity and billable hours. In addition, many of Grid Dynamics'
retail sector customers tend to slow their discretionary spending during the
holiday sale season, which typically lasts from late November (before
Thanksgiving ) through late December (after Christmas).
Non-GAAP Measures
To supplement Grid Dynamics' consolidated financial data presented on a basis
consistent with U.S. GAAP, this Quarterly Report contains certain non-GAAP
financial measures, including Non-GAAP EBITDA, Non-GAAP Net Income and Non-GAAP
Diluted Earnings Per Share, or EPS. Grid Dynamics has included these non-GAAP
financial measures because they are financial measures used by Grid Dynamics'
management to evaluate Grid Dynamics' core operating performance and trends, to
make strategic decisions regarding the allocation of capital and new investments
and are among the factors analyzed in making performance-based compensation
decisions for key personnel. These measures exclude certain expenses that are
required under U.S. GAAP. Grid Dynamics excludes these items because they are
not part of core operations or, in the case of stock-based compensation,
non-cash expenses that are determined based in part on Grid Dynamics' underlying
performance.
Grid Dynamics believes these supplemental performance measurements are useful in
evaluating operating performance, as they are similar to measures reported by
its public industry peers and those regularly used by security analysts,
investors and other interested parties in analyzing operating performance and
prospects. These non-GAAP financial measures are not intended to be a substitute
for any GAAP financial measures and, as calculated, may not be comparable to
other similarly titled measures of performance of other companies in other
industries or within the same industry.
There are significant limitations associated with the use of non-GAAP financial
measures. Further, these measures may differ from the non-GAAP information, even
where similarly titled, used by other companies and therefore should not be used
to compare our performance to that of other companies. Grid Dynamics compensates
for these limitations by providing investors and other users of its financial
information a reconciliation of non-GAAP measures to the related GAAP financial
measures.
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Grid Dynamics encourages investors and others to review its financial
information in its entirety, not to rely on any single financial measure and to
view its non-GAAP measures in conjunction with GAAP financial measures.
Grid Dynamics defines and calculates its non-GAAP financial measures as follows:
•Non-GAAP EBITDA: Net income/(loss) before interest income/expense, provision
for income taxes and depreciation and amortization, and further adjusted for the
impact of stock-based compensation expense, transaction-related costs (which
include, when applicable, professional fees, retention bonuses, and consulting,
legal and advisory costs related to Grid Dynamics' merger and acquisition and
capital-raising activities), impairment of goodwill and other income/expenses,
net (which includes mainly interest income and expense, foreign currency
transaction losses and gains, fair value adjustments and other miscellaneous
expenses), and restructuring costs.
•Non-GAAP Net Income: Net income/(loss) adjusted for the impact of stock-based
compensation, impairment of goodwill, transaction-related costs, restructuring
costs, other income/expenses, net, and the tax impacts of these adjustments.
•Non-GAAP Diluted EPS: Non-GAAP Net income, divided by the diluted
weighted-average number of common shares outstanding for the period.
The following table presents the reconciliation of Grid Dynamics' Non-GAAP
EBITDA to its consolidated net loss, the most directly comparable GAAP measure,
for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
GAAP net loss $ (549) $ (1,117) $ (4,094) $ (7,879)
Adjusted for:
Depreciation and amortization 1,420 662 3,520 1,896
Provision/(benefit) for income taxes 2,633 (99) 4,655 (3,594)
Stock-based compensation 9,113 5,126 21,459 13,584
Transaction and transformation-related costs (1) - - 942 3,940
Restructuring costs (2) - 56 - 888
Other (income)/expenses, net (3) (114) (455) 1,015 (419)
Non-GAAP EBITDA $ 12,503 $ 4,173 $ 27,497 $ 8,416
(1)Transaction and transformation-related costs include, when applicable,
external deal costs, transaction-related professional fees, transaction-related
retention bonuses, which are allocated proportionally across cost of revenue,
engineering, research and development, sales and marketing and general and
administrative expenses as well as other transaction-related costs including
integration expenses consisting of outside professional and consulting services.
(2)We implemented a cost reduction plan during first quarter of 2020. During the
three and nine months ended September 30, 2020 , we incurred restructuring and
severance charges of $0.1 million and $0.9 million , respectively, primarily
resulting from a reduction in workforce and other charges. We did not incur any
restructuring expenses during the three and nine months ended September 30,
2021 .
(3)Other expenses consist primarily of losses and gains on foreign currency
transactions, fair value adjustments, and other miscellaneous non-operating
expenses and other income consists primarily of interest on cash held at banks.
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The following table presents a reconciliation of Grid Dynamics' Non-GAAP Diluted
EPS and its Non-GAAP Net Income to its consolidated net loss for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 2021 2020 2021 2020
GAAP net loss $ (549) $ (1,117) $ (4,094) $ (7,879)
Adjusted for:
Stock-based compensation 9,113 5,126 21,459 13,584
Transaction and transformation-related costs (1) - - 942 3,940
Restructuring costs (2) - 56 - 888
Other (income)/expenses, net (3) (114) (455) 1,015 (419)
Tax impact of non-GAAP adjustments (4) (581) (1,118) (2,298) (5,311)
Non-GAAP Net Income $ 7,869 $ 2,492 $ 17,024 $ 4,803
Non-GAAP Diluted EPS(5) $ 0.11 $ 0.05 $ 0.26 $ 0.10
Number of shares used in the Non-GAAP Diluted EPS 69,494 52,317 64,361 46,734
(1)Transaction and transformation-related costs include, when applicable,
external deal costs, transaction-related professional fees, transaction-related
retention bonuses, which are allocated proportionally across cost of revenue,
engineering, research and development, sales and marketing and general and
administrative expenses as well as other transaction-related costs including
integration expenses consisting of outside professional and consulting services.
(2)We implemented a cost reduction plan during first quarter of 2020. During the
three and nine months ended September 30, 2020 , we incurred restructuring and
severance charges of $0.1 million and $0.9 million , respectively, primarily
resulting from a reduction in workforce and other charges. We did not incur any
restructuring expenses during the three and nine months ended September 30,
2021 .
(3)Other expenses consist primarily of losses and gains on foreign currency
transactions, fair value adjustments, and other miscellaneous non-operating
expenses and other income consists primarily of interest on cash held at banks.
(4)Reflects the estimated tax impact of the non-GAAP adjustments presented in
the table.
(5)Non-GAAP Diluted EPS is calculated by dividing Non-GAAP Net Income/(Loss) by
the diluted weighted-average shares outstanding. From the three months ended
December 31, 2020 onwards, we have chosen to calculate its Non-GAAP Diluted EPS
based on the diluted share count even in net GAAP loss situation. This
methodology differs from the prior approach when we applied the basic share
count in situations of a net GAAP loss and a positive non-GAAP net income.
Management believes that the new methodology provides better representation of
the company's financial results as it takes into account the significance of the
dilutive impact from any outstanding equity instruments in a GAAP net
loss/non-GAAP Net income situation.
Key Components of Revenue and Expenses
Revenue
Grid Dynamics generates revenue by providing focused and complex services in the
area of software engineering, development, integration, testing, and operations
of digital services. Grid Dynamics provides services mainly on a time and
materials basis and, to a much lesser extent, on a fixed-fee basis. While
fixed-fee contracts currently represent an immaterial portion of overall revenue
for the periods presented, Grid Dynamics expects proportionate revenue from
fixed-fee contracts to increase in future periods. On a time and materials
basis, Grid Dynamics earns and recognizes revenue as hours and costs are
incurred. On its current and future fixed fee contracts, Grid Dynamics earns and
recognizes revenue as the work is performed, the monthly calculation of which is
based upon actual labor hours incurred and level of effort expended throughout
the duration of the contract. For both time and materials contracts and fixed
fee contracts, hourly rates are typically determined based on the location and
experience of Grid Dynamics personnel selected to perform the service and are
negotiated for each contract or statement of work, as the case may be. For fixed
fee contracts, the fixed fee generally remains constant for the contracted
project period unless the customer directs a change in scope of project work or
requests additional Grid Dynamics employees in excess of those scheduled for a
specific project.
In select cases, Grid Dynamics offers volume discounts or early settlement
discounts, which are recorded as contra-revenue items. Volume discounts apply
once the customer reaches certain contractual spend thresholds. Early settlement
discounts are issued contingent upon the timing of the payment from the
customer. If there is uncertainty about project completion or receipt of payment
for services provided, revenue is deferred until the uncertainty is sufficiently
resolved.
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Costs and Expenses
Cost of Revenue. Cost of revenue consists primarily of salaries and employee
benefits, including performance bonuses and stock-based compensation, and travel
expenses for client-serving personnel. Cost of revenue also includes
depreciation and amortization expense related to client-serving activities.
Engineering, Research and Development. Engineering, research and development
expenses consist mainly of salaries and employee benefits including performance
bonuses and stock-based compensation for personnel engaged in the design and
development of solutions. Engineering, research and development expenses also
include depreciation and amortization expenses related to such activities.
Engineering, research and development costs are expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of expenses
associated with promoting and selling Grid Dynamics' services and consists
mainly of salaries and employee benefits, including performance bonuses and
stock-based compensation, marketing events, travel, as well as depreciation and
amortization expenses related to such activities.
General and Administrative. General and administrative expenses consist
primarily of administrative personnel and officers' salaries and employee
benefits including performance bonuses and stock-based compensation, legal and
audit expenses, insurance, operating lease expenses (mainly facilities and
vehicles) and other facility costs, workforce global mobility initiatives,
restructuring and employee relocations cost (not in connection with customer
projects), and depreciation and amortization expenses related to such
activities. General and administrative expenses include a substantial majority
of Grid Dynamics' stock-based compensation costs for the financial periods
discussed herein.
Provision for Income Taxes. Grid Dynamics follows the asset and liability method
of accounting for income taxes, whereby deferred income taxes are recognized for
the tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of the assets and liabilities. The provision
for income taxes reflects income earned and taxed in the various U.S. federal
and state and non-U.S. jurisdictions. Jurisdictional tax law changes, increases
or decreases in permanent differences between book and tax items, accruals, or
adjustments of accruals for tax contingencies or valuation allowances, and the
change in the mix of earnings from these taxing jurisdictions all affect the
overall effective tax rate.
Results of Operations
The three and nine months ended September 30 , 2021compared to the three and nine
months ended September 30, 2020
The following table sets forth a summary of Grid Dynamics' consolidated results
of operations for the interim periods indicated, and the changes between
periods:
Three Months Ended
September 30,
(unaudited, in thousands, except percentages) 2021 2020 Change
Revenue $ 57,933 $ 26,332 $ 31,601 120.0 %
Cost of revenue 32,667 15,178 17,489 115.2 %
Gross profit 25,266 11,154 14,112 126.5 %
Engineering, research, and development 2,132 2,076 56 2.7 %
Sales and marketing 4,073 2,245 1,828 81.4 %
General and administrative 17,091 8,504 8,587 101.0 %
Total operating expense 23,296 12,825 10,471 81.6 %
Profit/(loss) from operations 1,970 (1,671) 3,641 (217.9) %
Other income/(expenses), net 114 455 (341) (74.9) %
Profit/(loss) before income taxes 2,084 (1,216) 3,300 (271.4) %
Provision/(benefit) for income taxes 2,633 (99) 2,732 (2,759.6) %
Net loss (549) (1,117) 568 (50.9) %
Foreign currency translation adjustments, net of
tax (86) - (86) n.m.
Comprehensive loss $ (635) $ (1,117) $ 482 (43.2) %
n.m. = not meaningful.
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Nine Months Ended
September 30,
(unaudited, in thousands, except percentages) 2021 2020 Change
Revenue $ 144,743 $ 81,157 $ 63,586 78.3 %
Cost of revenue 84,343 51,799 32,544 62.8 %
Gross profit 60,400 29,358 31,042 105.7 %
Engineering, research, and development 5,687 7,193 (1,506) (20.9) %
Sales and marketing 9,942 7,451 2,491 33.4 %
General and administrative 43,195 26,606 16,589 62.4 %
Total operating expense 58,824 41,250 17,574 42.6 %
Income/(loss) from operations 1,576 (11,892) 13,468 (113.3) %
Other expenses, net (1,015) 419 (1,434) (342.2) %
Income/(loss) before income taxes 561 (11,473) 12,034 (104.9) %
Provision/(benefit) for income taxes 4,655 (3,594) 8,249 (229.5) %
Net loss (4,094) (7,879) 3,785 (48.0) %
Foreign currency translation adjustments, net of
tax (72) - (72) n.m.
Comprehensive loss $ (4,166) $ (7,879) $ 3,713 (47.1) %
Revenues by Vertical. We assign our customers into one of our four main vertical
markets or a group of various industries where we are increasing our presence,
which we label as "Verticals". The following table presents our revenues by
vertical and revenues as a percentage of total revenues by vertical for the
periods indicated:
Three Months Ended September 30,
(unaudited, in thousands, except percentages) 2021 % of revenue 2020 % of revenue
Technology, Media and Telecom $ 17,597 30.4 % $ 12,637 48.0 %
Retail 18,271 31.5 % 6,127 23.3 %
CPG/Manufacturing 11,208 19.3 % 3,357 12.7 %
Finance 5,224 9.0 % 3,091 11.7 %
Other 5,633 9.8 % 1,120 4.3 %
Total $ 57,933 100.0 % $ 26,332 100.0 %
Nine Months Ended September 30,
(unaudited, in thousands, except percentages) 2021 % of revenue 2020 % of revenue
Technology, Media and Telecom $ 48,123 33.2 % $ 34,689 42.7 %
Retail 39,850 27.5 % 26,226 32.3 %
CPG/Manufacturing 29,832 20.6 % 8,012 9.9 %
Finance 12,733 8.8 % 10,646 13.1 %
Other 14,205 9.9 % 1,584 2.0 %
Total $ 144,743 100.0 % $ 81,157 100.0 %
Revenue. Revenue increased by $31.6 million , or 120.0%, to $57.9 million in the
three months ended September 30, 2021 from $26.3 million in the three months
ended September 30, 2020 . Revenue increased by $63.6 million , or 78.3%, to
$144.7 million in the nine months ended September 30, 2021 from $81.2 million in
the nine months ended September 30, 2020 . The year- over- year increases, both
on a three month and nine-month basis, were largely driven by the improved
business conditions as the company recovered from the impact of COVID-19 that
resulted in increased billable headcount and billable hours. Additionally, the
acquisitions of Daxx and Tacit contributed to the year-over-year growth, both on
a three month and nine-month basis. Combined, these two acquisitions contributed
a total of $13.8 million and $29.7 million during the three and nine months
ended September 30, 2021 , respectively.
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Cost of Revenue and Gross Profit. Cost of revenue increased by $17.5 million , or
115.2%, to $32.7 million in the three months ended September 30, 2021 from $15.2
million in the three months ended September 30, 2020 largely from increased
costs of personnel to support higher revenue. Cost of revenue increased by $32.5
million , or 62.8%, to $84.3 million in the nine months ended September 30, 2021
from $51.8 million in the same period of September 30, 2020 , largely from
increased costs of personnel to support higher revenue offset by lower expenses,
such as travel related expenses and retention bonuses.
Gross profit increased by $14.1 million , or 126.5%, to $25.3 million in the
three months ended September 30, 2021 from $11.2 million in the three months
ended September 30, 2020 . Gross margin (gross profit as a percentage of revenue)
increased by 1.2 percentage points to 43.6% in the three months ended
September 30, 2021 from 42.4% in the three months ended September 30, 2020 .
Gross profit increased by $31.0 million , or 105.7%, to $60.4 million in the nine
months ended September 30, 2021 from $29.4 million in the nine months ended
September 30, 2020 . Gross margin (gross profit as a percentage of revenue)
increased by 5.5 percentage points to 41.7% in the nine months ended
September 30, 2021 from 36.2% in the same period of 2020. The increase in gross
margins, both on a three-month and nine-month basis, was largely driven by a
combination of increased billable workforce utilization and greater mix shift
towards offshore delivery locations. Additionally, in the three and nine months
ended September 30, 2020 , our business was severely impacted by COVID-19 which
resulted in a significant proportion of our workforce becoming non-billable
resulting in lower gross margins in comparison to the same period of 2021.
Engineering, Research and Development. Engineering, research and development
expenses remained on the same level in the three months ended September 30, 2021
and 2020. During the nine months ended September 30, 2021 , engineering, research
and development expenses decreased by 20.9% to $5.7 million from $7.2 million
during the nine months ended September 30, 2020 . The decrease was primarily due
to greater utilization of our personnel towards billable engagements and
decrease in retention bonuses.
Sales and Marketing. Sales and marketing expenses increased by $1.8 million , or
81.4% to $4.1 million in the three months ended September 30, 2021 as compared
to the three months ended September 30, 2020 and increased by 2.5 million, or
33.4% during nine months ended September 30, 2021 compared to the same period of
2020. The increase on a three month and nine month basis was mainly due to
increase in sales personnel, sales initiatives, and increase in wages in 2021.
General and Administrative. General and administrative expenses increased by
$8.6 million or 101.0% to $17.1 million in the three months ended September 30,
2021 and increased by $16.6 million , or 62.4%, to $43.2 million in the nine
months ended September 30, 2021 . The increase on a three month and nine month
basis was mainly due to increase in stock-based compensation, increase in wages
and bonuses, increase in legal and professional fees due to the recent
acquisition of Tacit in May of 2021, additional expenses from facilities, and
increase in amortization of intangibles. General and administrative expenses
accounted for 29.5% and 29.8% of Grid Dynamics' revenue in the three and nine
months ended September 30, 2021 respectively, a decrease from 32.3% and 32.8% in
the three month and nine months ended September 30, 2020 , respectively.
Other Income/(Expenses), Net. Other expenses decreased by $0.3 million for the
three months ended September 30, 2021 in comparison to the three months ended
September 30, 2020 . The decrease was primarily due to adjustment to the final
Daxx earnout of $0.4 million . On a nine month ended September 30, 2021 basis,
Other expense increased by $1.4 million compared to Other expense, net during
the same period of 2020 mainly due to changes in the fair value of private
warrants of $1.0 million in the nine months ended September 30, 2021 .
Provision/(Benefit) for Income Tax. During the three months ended September 30,
2021 we recognized a provision for income tax of $2.6 million compared to
benefit for income tax of $(0.1) million in the same period of 2020. The
difference in tax provision was attributable mainly to Section 162(m)
compensation deduction limitations partially offset by stock-based compensation
excess tax benefit. Additionally, the United Kingdom's ("UK") recently enacted
Finance Act 2021 has increased its corporate tax rate to 25% for companies with
profits exceeding 250,000 pounds, effective beginning April 01, 2023 . As a
result of this change in tax law, the Company remeasured its UK deferred taxes
which resulted in a $0.5 million discrete tax expense in the three months ended
June 30, 2021 . Provision for income tax was $4.7 million in the nine months
ended September 30, 2021 compared to benefit for income tax of $(3.6) million in
the nine months ended September 30, 2020 .
During three and nine months ended September 30, 2021 , we recognized net loss of
$(0.5) million and $(4.1) million , respectively, compared to net loss of $(1.1)
million and $(7.9) million in the same periods of 2020 due to the reasons stated
above.
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Liquidity and Capital Resources
Grid Dynamics measures liquidity in terms of its ability to fund the cash
requirements of its business operations, including working capital needs,
capital expenditures, contractual obligations, and other commitments with cash
flows from operations and other sources of funding. Grid Dynamics' current
liquidity needs relate mainly to compensation and benefits of Grid Dynamics'
employees and contractors and capital expenditures for computer hardware and
office furniture. Grid Dynamics' ability to expand and grow its business will
depend on many factors including its capital expenditure needs and the evolution
of its operating cash flows. Grid Dynamics may need more cash resources due to
changed business conditions or other developments, including investments or
acquisitions. Grid Dynamics believes that its current cash position on its
balance sheet of $199.3 million as of September 30, 2021 is sufficient to fund
its currently expected levels of operating, investing and financing expenditures
for a period of twelve months from the date of this filing. However, if Grid
Dynamics' resources are insufficient to satisfy its cash requirements, it may
need to seek additional equity or debt financing, which may be subject to
conditions outside of Grid Dynamics' control and may not be available on terms
acceptable to Grid Dynamics' management or at all.
As of September 30, 2021 , Grid Dynamics had cash and cash equivalents amounting
to $199.3 million (compared to $112.7 million at December 31, 2020 ). Of this
amount, $6.8 million was held outside the United States , namely in Russia ,
Ukraine , Poland , Serbia , the Netherlands , UK , Mexico , Moldova , and Singapore
(compared to $3.1 million as of December 31, 2020 ). As many of Grid Dynamics'
assets, operations and employees are located in these countries, Grid Dynamics
expects that all such cash and cash equivalents will be used to fund future
operating needs and Grid Dynamics' management has no intention of repatriating
the funds. If Grid Dynamics decided to remit funds from these countries to the
United States in the future, whether in the form of inter-company dividends or
otherwise, they may be subject to foreign withholding taxes. In addition, Grid
Dynamics' cash in banks in Russia , Ukraine , Poland , Moldova , Serbia , and Mexico
may be subject to other risks, as the banking sector in certain of these
countries is subject to periodic instability, may be subject to sanctions and
may be subject to capital adequacy and other banking standards that are
substantially less rigorous than those of the United States .
On July 6, 2021 , Grid Dynamics closed a follow-on public offering of common
stock that resulted in $78.3 million net proceeds, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
Grid Dynamics does not have any debt outstanding as of September 30, 2021 and or
December 31, 2020 .
Our performance stock units, or PSUs, vested upon the satisfaction of a
performance-based vesting condition. The compensation committee of our board of
directors certified that the performance conditions of the PSUs were met, and
PSUs were released on February 12, 2021 . Approximately 0.7 million shares were
issued upon vesting of the PSUs and 0.75 million shares were net withheld to
cover $10.7 million employees' tax withholding obligations. In the nine months
ended September 30, 2021 , approximately 1.1 million shares underlying RSUs held
by our officers vested. Upon vesting of the RSUs, approximately 0.6 million
shares were released, and 0.5 million shares were net withheld to cover the
employees' tax withholding obligations. We have determined that our policy will
be to require individuals to withhold to cover taxes, so approximately 52% of
the vested shares were withheld on the settlement date, with the equivalent
value being paid by us from our working capital. The total net tax withholding
obligations for the nine months ended September 30, 2021 were approximately
$23.3 million in the aggregate for the option exercises, RSU and PSU releases.
The next vesting events for our RSUs will occur during the fourth quarter of
2021, at which time approximately 0.16 million shares underlying RSUs held by
our officers and employees will vest and settle into shares of our common stock.
We currently expect that at the current market price of $29.0 the tax obligation
will amount to $2.3 million
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Cash Flows
The following table summarizes Grid Dynamics' cash flows for the periods
indicated:
Nine Months Ended
September 30,
(unaudited, in thousands) 2021 2020
Net cash provided by/(used in) operating activities $ 14,655 $ 2,998
Net cash used in investing activities $ (33,601) $ (1,607)
Net cash provided by financing activities $ 105,570 $ 82,946
Effect of exchange rate changes on cash and cash equivalents $ (72) $ -
Net increase in cash and cash equivalents $ 86,552 $ 84,337
Cash, cash equivalents (beginning of period) $ 112,745 $ 42,189
Cash, cash equivalents (end of period) $ 199,297 Operating Activities. Net cash provided by operating activities for the nine months endedSeptember 30, 2021 increased by$11.7 million to$14.7 million from$3.0 million provided by in the same period of 2020, driven by higher cash operating profit (before non-cash depreciation and amortization and stock-based compensation charges). The key reasons for the increase in cash operating profit in the nine months endedSeptember 30, 2021 in comparison to the nine months endedSeptember 30, 2020 , were higher levels of revenue and greater billable utilization resulting in higher profitability. Investing Activities. Net cash used in investing activities during the nine months endedSeptember 30, 2021 was$(33.6) million . which primarily reflects the acquisition of Tacit, compared to$(1.6) million used in the same period in 2020 reflecting mainly capital expenditures for computer hardware, related equipment and software. Financing Activities. Net cash provided by financing activities was$105.6 million in the nine months endedSeptember 30, 2021 , reflecting the equity offering and warrant exercise proceeds. Net cash provided by financing activities was$82.9 million in the nine months endedSeptember 30, 2020 , reflecting primarily the proceeds from the Business Combination. Contractual ObligationsGrid Dynamics' outstanding operating leases and software service agreement obligations have not changed materially sinceDecember 31, 2020 . In addition,Grid Dynamics purchases software licenses in the ordinary course of business. Non-perpetual licenses are typically renewed annually.Grid Dynamics does not have any material obligations under contractual arrangements other than as disclosed in this report. Off-Balance Sheet Arrangements and Commitments Except for its credit support for the letter of credit and balances on corporate credit cards,Grid Dynamics does not have any off-balance sheet arrangements of the kind required to be disclosed underSEC rules and does not have any off-balance sheet or contingent commitments, except as described above with respect to operating leases. As a result of analysis related toGrid Dynamics' functional control of subcontractorGD Ukraine, LLC , the subcontractor was determined to be a variable interest entity ("VIE") and is therefore consolidated inGrid Dynamics' financial statements. The assets and liabilities of this VIE consist primarily of intercompany balances and transactions, all of which have been eliminated in consolidation. Critical Accounting PoliciesGrid Dynamics management's discussion and analysis of our financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. Preparation of the financial statements requiresGrid Dynamics to make judgments, estimates and assumptions that impact the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities.Grid Dynamics considers an accounting judgment, estimate or assumption to be critical when (1) an estimate or assumption is complex in nature or requires a high degree of judgment, and (2) the use of different judgments, estimates and assumptions could have a material impact onGrid Dynamics' condensed consolidated financial statements. There have been no changes to our significant accounting 34 -------------------------------------------------------------------------------- Table of Contents policies described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 5, 2021 , that have had a material impact on our condensed consolidated financial statements and related notes. Emerging Growth Company Accounting Election Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies and any such election to not to take advantage of the extended transition period is irrevocable. Prior to the Business Combination, ChaSerg was an "emerging growth company" as defined in Section 2(a) of the Securities Act and has elected to take advantage of the benefits of this extended transition period. Following the consummation of the Business Combination,Grid Dynamics remains an emerging growth company and continues to take advantage of the benefits of the extended transition period. Recently Adopted and Issued Accounting Pronouncements Recently issued and adopted accounting pronouncements are described in Note 2 toGrid Dynamics' condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market RiskGrid Dynamics has in the past and may in the future be exposed to certain market and credit risks in the ordinary course of business, including exposure related to fluctuations in foreign currency rates, and on occasion and to a lesser extent, changes in interest rates and concentration of credit risk. In addition,Grid Dynamics' international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions. See the section titled "Risk Factors" for additional information. Foreign Currency Exchange Rate RiskGrid Dynamics is exposed to foreign currency exchange rate risk and its profit margins are subject to volatility between periods due to changes in foreign currency exchange rates relative to theU.S. dollar.Grid Dynamics' functional currency apart from theU.S. dollar includes EURO, British pounds, Mexican pesos, Moldovan leu. In addition,Grid Dynamics' profit margins are subject to volatility as a result of changes in foreign exchange rates. When and where possible,Grid Dynamics seeks to match expenses to theU.S. dollar, and believes, due to Ukrainian payroll being pegged to theU.S. dollar, that a significant portion of its foreign currency exchange rate exposure to the Ukrainian hryvnia is naturally hedged. In future periods,Grid Dynamics may also become materially exposed to changes in the value of the Serbian dinar, Mexican pesos and Moldovan leu against theU.S. dollar, due to the recent acquisitions and continuous expansion of operations. In the three months endedSeptember 30, 2021 , approximately 23.5%, 12.0% and 5.8% ofGrid Dynamics' $56.0 million of combined cost of revenue and total operating expenses were denominated in the Ukrainian hryvnia, Russian ruble, and Polish zloty, respectively. Comparatively, the same foreign currencies accounted for approximately 10.6%, 11.8% and 9.8% ofGrid Dynamics' $28.0 million of combined cost of revenue and total operating expenses in the three months endedSeptember 30, 2020 . In the three months endedSeptember 30, 2021 : •a 10% decrease in the value of the Russian rouble against theU.S. dollar would have resulted in a$0.6 million increase inGrid Dynamics' income from operations, while a 10% increase in the rouble's value would have resulted in a$0.7 million decrease in income from operations. •a 10% decrease in the value of the Polish zloty against theU.S. dollar would have resulted in a$0.3 million increase inGrid Dynamics' income from operations, while a 10% increase in the zloty's value would have resulted in a$0.4 million decrease in income from operations. 35 -------------------------------------------------------------------------------- Table of Contents In the three months endedSeptember 30, 2020 : •a 10% decrease in the value of the Russian rouble against theU.S. dollar would have resulted in a$0.3 million increase inGrid Dynamics' income from operations, while a 10% increase in the rouble's value would have resulted in a$0.4 million decrease in income from operations. •a 10% decrease in the value of the Polish zloty against theU.S. dollar would have resulted in a$0.2 million increase inGrid Dynamics' income from operations, while a 10% increase in the zloty's value would have resulted in a$0.3 million decrease in income from operations. In the nine months endedSeptember 30, 2021 , approximately 24.6%, 11.6% and 6.9% ofGrid Dynamics' $143.2 million of combined cost of revenue and total operating expenses were denominated in the Ukrainian hryvnia, Russian ruble, and Polish zloty, respectively. Comparatively, the same foreign currencies accounted for approximately 10.7%, 14.5%, and 10.0% ofGrid Dynamics' $93.0 million of combined cost of revenue and total operating expenses in the nine months endedSeptember 30, 2020 . In the nine months endedSeptember 30, 2021 : •a 10% decrease in the value of the Russian rouble against theU.S. dollar would have resulted in a$1.5 million increase inGrid Dynamics' income from operations, while a 10% increase in the rouble's value would have resulted in a$1.9 million decrease in income from operations. •a 10% decrease in the value of the Polish zloty against theU.S. dollar would have resulted in a$0.9 million n increase inGrid Dynamics' income from operations, while a 10% increase in the zloty's value would have resulted in a$1.1 million decrease in income from operations. In the nine months endedSeptember 30, 2020 : •a 10% decrease in the value of the Russian ruble against theU.S. dollar would have resulted in a$1.2 million increase inGrid Dynamics' income from operations, while a 10% increase in the ruble's value would have resulted in a$1.5 million decrease in income from operations. •a 10% decrease in the value of the Polish zloty against theU.S. dollar would have resulted in a$0.8 million increase inGrid Dynamics' income from operations, while a 10% increase in the zloty's value would have resulted in a$1.0 million decrease in income from operations.Grid Dynamics analyses sensitivity to the rouble and zloty separately because, in management's experience, fluctuations in the value of these currencies against theU.S. dollar are frequently driven by distinct macroeconomic and geopolitical factors.Grid Dynamics does not currently hedge its foreign currency exposure, although it seeks minimize it by limiting cash transfers to amounts necessary to fund subsidiary operating expenses for a short period, typically one week.Grid Dynamics' management may evaluate new hedging strategies in future periods. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 36 -------------------------------------------------------------------------------- Table of Contents Changes in Internal Control Over Financial Reporting Our management, including the CEO and CFO, confirmed there have been no changes in our internal control over financial reporting during the three months endedSeptember 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 37
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