GRID DYNAMICS HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview
Grid 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. 29 As a leading global digital engineering and IT services provider with its headquarters inSilicon Valley and engineering centers inthe United States and multiple Central and Eastern 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 onMay 21, 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.
The following table sets forth a summary of
Year ended December 31,
2020 2019 2018
% of revenue % of revenue % of revenue
(dollars in thousands, except per share data)
Revenues $ 111,283 100.0 % $ 118,326 100.0 % $ 91,865 100.0 %
Gross profit 41,621 37.4 % 48,236 40.8 % 39,306 42.8 %
Income/(loss) from operations (15,448 ) (13.9 )% 15,625 13.2 % 13,829 15.1 %
Net income/(loss) (12,599 ) (11.3 )% 10,807 9.1 % 9,228 10.0 %
Diluted EPS $ (0.28 ) n/a $ 0.49 n/a $ 0.46 n/a
Non-GAAP Financial Information
Adjusted EBITDA(1) 12,549 11.3 % 23,661 20.0 % 19,405 21.1 %
Non-GAAP Net Income(1) 7,013 6.3 % 15,487 13.1 % 13,036 14.2 %
Non-GAAP Diluted EPS(1) $ 0.14 n/a $ 0.73 n/a $ 0.64 n/a
(1) Adjusted 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.
30
Recent Developments
In the three months ended December 31, 2020 , our revenues were $30.1 million ,
which included $1.0 million in revenue contribution from our recent acquisition
of Daxx Web Industries B.V. ("Daxx") completed on December 14, 2020 . Excluding
the contribution from Daxx , in the three months ended December 31, 2020 , our
revenues of $29.1 million were up 11% in comparison to the three months ended
September 30, 2020 , and down 9% from the three months ended December 2019 .
Overall, in the three months ended December 31, 2020 , we witnessed healthy
business trends as reflected in the 11% sequential revenue growth over the three
months ended September 30, 2020 . The three months ended December 31, 2020
quarter marked the second consecutive sequential quarter of revenue growth since
witnessing a bottom in revenues in the three months ended June 30, 2020 . During
the quarter, we witnessed healthy customer demand across our industry verticals
as digital transformation initiatives continue to be a priority with our
customers. Furthermore, the ongoing global pandemic has been a catalyst for
companies to seek or accelerate enterprise-level digital initiatives that
include, but are not limited to, maintaining remote workforces, selling products
online, and creating continued efficiencies in business processes. During the
three months ended December 31, 2020 , excluding Daxx , our largest industry
vertical was Technology, Media, and Telecom ("TMT") at 37% of our revenue, while
Consumer Packaged Goods (CPG)/Manufacturing, Finance, and Other verticals
contributed 21%, 10%, and 5% of our revenue, respectively.
We closed the twelve months ended December 31, 2020 with $111.3 million in
revenue, which included $1.0 million contributed by our recent acquisition of
Daxx . Excluding the contribution from Daxx , revenue of $110.3 million for the
twelve months ended December 31, 2020 was down from $118.3 million in the twelve
months ended December 31, 2019 . The key reason for the year-over-year decline of
7% was disruptions caused to our Retail vertical which was negatively impacted
by the Covid-19 pandemic. Additionally, 2020 marked a significant shift in our
largest industry vertical. Unlike previous years, where our largest vertical was
Retail, in the twelve months ended December 31, 2020 , our largest vertical was
Technology Media & Telecom. At 41% of our full year of 2020 revenue, the TMT
vertical grew by 40% on a year-over-year basis. While many customers positively
contributed to the year-over-year growth, Grid Dynamics' two largest customers
in 2020 (both in the TMT vertical) were the main contributors. We anticipate the
TMT vertical will continue to be our largest revenue contributing verticalin 2021. In the twelve months endedDecember 31, 2020 , excluding the contribution fromDaxx , our Retail vertical contributed$34.0 million in revenue, down from$67.4 million in revenue in the twelve months endedDecember 31, 2019 . In spite of the year-over-year decline of approximately 50%, in the second half of 2020, we have been witnessing a steady sequential pick up in business. For many of our retail customers, the COVID-19 pandemic caused significant business disruption that included closure of stores resulting in sales being severely impacted. Furthermore, within our Retail vertical, since the beginning of the pandemic, we have witnessed a shift towards retail customers who have embraced digital and online commerce. This is a contrast to some of our other customers who have not recovered from the impacts of the pandemic, and going forward, we expect that some of them will not recover to pre-COVID levels. We continue to focus on revenue diversification by increasing our customer base with new logo additions. During the twelve months endedDecember 31, 2020 , our coreGrid Dynamics business received revenues from a total of 52 customers and added 16 new logos. Additionally, in the three months endedDecember 31, 2020 our coreGrid Dynamics business exited the quarter with 43 paying customers, up from 40 paying customers in the three months endedDecember 31, 2019 . Furthermore, during the three months endedDecember 31, 2020 , our coreGrid Dynamics business added five new logos across industry verticals that included Finance and TMT. We closed the twelve months endedDecember 31, 2020 with GAAP Net loss of$(12.6) million and$12.5 million , or 11.3% of revenue in Adjusted EBITDA, down from GAAP Net income of$10.8 million and$23.7 million or 20% of revenue in Adjusted EBITDA in the twelve months endedDecember 31, 2019 . The year-over-year decline was largely driven by a combination of factors that included lower levels of revenue, increased general and administrative expenses associated with operating as a publicly traded company, and increased headcount and personnel costs.
Acquisition of
OnDecember 14, 2020 , we acquired Netherland basedDaxx Web Industries B.V. ("Daxx") in an all-cash transaction. Headquartered inAmsterdam , and with approximately 490 employees, the company has engineering centers situated in major tech hubs acrossUkraine .Daxx 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 its key capabilities ofDaxx include consulting services spanning agile process reengineering, lean development, and DevOps.Daxx serves customers inthe Netherlands ,Germany ,U.K. , and theU.S. , and has strong relationships with high-growth start-ups and established software companies. We believe the acquisition ofDaxx will enable us to have a stronger foothold inEurope and will enable the company to continue diversifying our business. In the three months endedDecember 31, 2020 ,Daxx contributed$1.0 million in revenue. 31 COVID-19 Related Updates InDecember 2019 , a novel coronavirus COVID-19 was reported inChina , and inMarch 2020 , theWorld Health Organization declared it a pandemic. This contagious disease pandemic has continued to spread across the globe, including extensively within theU.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 are not limited to, travel restrictions, closure of businesses, social distancing, and quarantines. Starting inMarch 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 ofMay 2020 , our retail business has steadily improved as our retail customers resumed their operations although we expect that some of our customers will not recover to pre-COVID levels. 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 in the Central andEastern Europe (CEE) region have been opened for employees to work following local government guidelines. We continue to deliver services to our customers in this fashion and this has resulted in minimal disruption in our operational and delivery capabilities. In the twelve months endedDecember 31, 2020 , we have taken an allowance of$0.4 million doubtful accounts due to risks posed by the COVID-19 pandemic on our customers' ability to make payments. We continue to be engaged with all our customers regarding their ability to fulfill their payment obligations. In the course of the three months endedDecember 31, 2020 , we received payments from multiple customers, including some of the higher risk retail customers. Additionally, most of our customers who sought extended payment terms as the pandemic unfolded have reverted back to their historical levels of payment terms. We continue to review our accounts receivable on a regular basis and have put in place processes to ensure payments from our customers.
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 onMarch 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 ofGrid Dynamics' business and is a key factor inGrid Dynamics' ability to meet customers' 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 ofGrid Dynamics' personnel is comprised of such IT professionals.
The following table shows the number of
As of December 31,
2020 2019 2018
United States 259 265 218
Central and
1,402 1,430 1,144
(1) Includes Russia,Ukraine ,Poland andSerbia . (2) Excluding personnel ofDaxx .
As of
and part-time employees and contractors serving in similar capacities located
in Ukraine and the Netherlands .
32
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 ofGrid 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. 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. ExcludingDaxx ,Grid Dynamics grew its customer base from 40 customers in 2019 to 52 customers in 2020.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. OfGrid Dynamics' customers, two customers each accounted for 10% or more ofGrid Dynamics' revenue in the year endedDecember 31, 2020 and three customers each accounted for 10% or more ofGrid Dynamics' revenue in the year endedDecember 31, 2019 . The following table shows the evolution ofGrid Dynamics' customer base and revenue concentration, as of the dates and for the annual periods indicated: Year ended December 31, 2020 2019 2018 (in thousands,
except a number of customers and
percentages)
Total customers (for the period) (1) 52
40 25
Of which:
>$5.0 million 7 7 7
>$2.5 - 5.0 million 3 3 2
>$1.0 - 2.5 million 7 5 2
Top five customers 56 % 67 % 71 %
Top ten customers 79 % 87 % 94 %
Top five customers $ 62,152 $ 78,715 $ 65,351
Top ten customers $ 87,203 $ 102,646$ 86,604
(1) Excluding customers of
33
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 theU.S. dollar.Grid Dynamics' functional currency, as well as the functional currency of all of its subsidiaries, is theU.S. dollar.Grid Dynamics contracts with customers for payment in and generates substantially all of its revenue inU.S. dollars. Its non-U.S. subsidiaries' operations relate substantially to performing services under those contracts. Several ofGrid Dynamics' subsidiaries conduct operations and employ or contract personnel inRussia ,Ukraine ,Poland andSerbia , but keep their books and records inU.S. dollars.Grid Dynamics' foreign currency transaction exposure is a result of having to convertU.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 intoU.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 theU.S. dollar against the currencies in whichGrid Dynamics' subsidiaries incur operating expenses, hold assets or owe liabilities, and may not be comparable between periods. For the twelve months endedDecember 31, 2020 , approximately 14%, 12%, and 10% ofGrid Dynamics' $126.7 million of combined cost of revenue and total operating expenses were denominated in the Russian rouble, Ukrainian hryvnia and Polish zloty, respectively. Comparatively, for the year endedDecember 31, 2019 , approximately 22%, 13%, and 12% ofGrid Dynamics' $102.7 million of combined cost of revenue and total operating expenses were denominated in the Russian rouble, Ukrainian hryvnia and Polish zloty, respectively.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 theU.S. dollar. For example, inUkraine ,Grid Dynamics generally pays salaries in the current hryvnia equivalent of an agreedU.S. dollar amount, consistent with local requirements. As a result, a significant portion ofGrid Dynamics' exposure to fluctuations in the value of the Ukrainian hryvnia against theU.S. dollar is naturally hedged. Management carefully evaluates its exposure to foreign currency risk and, thoughGrid Dynamics does not currently hedge this exposure through the use of 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 aboutGrid Dynamics' exposure to foreign currency exchange rates. SeasonalityGrid 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 whichGrid Dynamics operates and theU.S. retail cycle, which drives the behavior ofGrid 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 inRussia andUkraine , for example, falls in the first quarter of the calendar year, resulting in reduced activity and billable hours. In addition, many ofGrid Dynamics' retail sector customers tend to slow their discretionary spending during the holiday sale season, which typically lasts from late November (beforeThanksgiving ) through late December (after Christmas). Non-GAAP Measures To supplementGrid Dynamics' consolidated financial data presented on a basis consistent withU.S. GAAP, this Annual Report contains certain non-GAAP financial measures, including Adjusted 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 byGrid Dynamics' management to evaluateGrid 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 underU.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 onGrid 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. 34 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.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.
? Adjusted EBITDA: Net income 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
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 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
Year ended December 31,
2020 2019 2018
(in thousands)
Net income/(loss) $ (12,599 ) $ 10,807 $ 9,228
Adjusted for:Depreciation and amortization 2,672 2,311
1,312
Provision/(benefit) for income taxes (2,613 ) 4,642
3,855
Impairment of goodwill - 139 -
Stock-based compensation 20,006 2,441 1,756Transaction and transformation-related costs(1) 4,407 3,145
2,508
Restructuring(2) 912 -
-
Other (income)/expenses, net(3) (236 ) 176
746
Adjusted EBITDA $ 12,549 $ 23,661 $ 19,405 (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 In the twelve months ended
plan and incurred restructuring and severance charges of
primarily resulting from a reduction in workforce and other charges.
(3) Other (income)/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.
35
The following table presents a reconciliation of Grid Dynamics' Non-GAAP Diluted
EPS and its Non-GAAP Net Income to its consolidated net income/(loss) for the
annual periods indicated:
Year ended December 31,
2020 2019 2018
(in thousands, except per share data)
Net income/(loss) $ (12,599 ) $ 10,807 $ 9,228
Adjusted for:
Impairment of goodwill - 139 -
Stock-based compensation 20,006 2,441 1,756
Transaction-related costs(1) 4,407 3,145 2,508
Restructuring(2) 912 - -Other (income)/expenses, net(3) (236 ) 176 746 Tax impact of non-GAAP adjustments(4) (5,477 ) (1,221 ) (1,202 ) Non-GAAP Net Income$ 7,013 $ 15,487 $ 13,036 Number of shares used in the Non-GAAP Diluted EPS 48,778
21,122 20,217
Earnout Share adjustment: Non-GAAP Net Income - Earnout Shares(5) (113 ) -- - Non-GAAP Net Income attributable to Class A shares$ 6,900 $
15,487$ 13,036 Non-GAAP Diluted EPS(6)$ 0.14 0.73$ 0.64
(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) In the twelve months ended
plan and incurred restructuring and severance charges of
primarily resulting from a reduction in workforce and other charges.
(3) Other (income)/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 Net Income attributable to Earnout Shares is calculated based on the
proportion of Earnout Shares outstanding. The number of Earnout Shares
outstanding was 0.8 million.
(6) 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
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
RevenueGrid 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 ofGrid 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 additionalGrid 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. 36 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 sellingGrid 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 ofGrid 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 variousU.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.Grid Dynamics' effective tax rate was 17%, 30%, and 29% in the years endedDecember 31, 2020 , 2019 and 2018, respectively. The differences in effective tax rate between the years endedDecember 31, 2020 and 2019 and 2018 were attributable mainly to stock based compensation excess tax benefit, partially offset by Section162(m) compensation deduction limitations. Results of Operations
Year Ended
The following table sets forth a summary of
Year ended December 31, Change
2020 2019 Dollars Percentage
(in thousands, except percentages)
Revenue $ 111,283 $ 118,326 $ (7,043 ) (6.0 )%
Cost of revenue 69,662 70,090 (428 ) (0.6 )%
Gross profit 41,621 48,236 (6,615 ) (13.7 )%Engineering, research, and development 9,311 4,346
4,965 114.2 %
Sales and marketing 10,051 6,947 3,104 44.7 %
General and administrative 37,707 21,318 16,389 76.9 %
Total operating expense 57,069 32,611 24,458 75.0 %
Income/(loss) from operations (15,448 ) 15,625 (31,073 ) (198.9 )%
Other income/(expenses), net 236 (176 ) 412 (234.1 )%Income/(loss) before income taxes (15,212 ) 15,449 (30,661 ) (198.5 )% Provision/(benefit) for income taxes (2,613 ) 4,642
(7,255 ) (156.3 )% Net Income/(Loss)$ (12,599 ) $ 10,807 $ (23,406 ) (216.6 )% 37 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:
Year ended December 31,
2020 2019 2018
% of revenue % of revenue % of revenue
(dollars in thousands)Tech, Media and Telecom$ 45,362 40.8 %$ 32,337
27.3 %$ 23,485 25.6 % Retail 33,975 30.5 % 67,367 56.9 % 58,544 63.7 % Finance 13,589 12.2 % 12,479 10.6 % 8,089 8.8 %
CPG/Manufacturing 14,202 12.8 % 4,850
4.1 % 1,330 1.4 %
Other (1) 4,155 3.7 % 1,293 1.1 % 417 0.5 %
Total $ 111,283 100.0 % $ 118,326 100.0 % $ 91,865 100.0 %
(1) Includes Daxx
Revenue. Revenue decreased by $7.0 million , or 6.0%, to $111.3 million in 2020
from $118.3 million in 2019. The key reason for the year-over-year decline was
the decline in revenues from Retail customers impacted by the COVID-19 pandemic.
This decline in Retail business was offset by increase in revenue from other
industry verticals such as TMT, CPG/Manufacturing, and Other. For the year ended
December 31, 2020 , retail revenues were $34.0 million , down from $67.4 million
in the same period a year ago. The 50% year-over-year decline in retail revenues
was partially offset by revenues of the other segments that, on a combined
basis, grew from $51.0 million in the year ended December 31, 2019 to $77.3
million in the year ended December 31, 2020 . Additionally, Grid Dynamics' top
ten customers contributed $87.2 million and $102.6 million to revenue for the
years ended December 31, 2020 and 2019, respectively, in the aggregate
accounting for $15.4 million of the decrease. The remainder of the other
industry verticals increase reflected growth in revenue from new customers
(i.e., customers for which Grid Dynamics performed services for the first time
during the period) and other existing customers.
Cost of Revenue and Gross Profit. Cost of revenue decreased by $0.4 million , or
0.6%, to $69.7 million in 2020 from $70.1 million in 2019 reflecting a decrease
in revenue offset by higher retention bonuses resulting from the Business
Combination and stock-based compensation expenses.
Gross profit decreased by $6.6 million , or 13.7%, to $41.6 million in 2020 from
$48.2 million in 2019. Gross margin (gross profit as a percentage of revenue)
decreased by 3.4 percentage points to 37.4% in the year ended December 31, 2020
from 40.8% in the year ended December 31, 2019 . The gross margin decline was
attributable to a combination of increased costs associated with stock-based
compensation and retention bonuses resulting from the Business Combination and
lower levels of revenue in the year ended December 31, 2020 due to the impacts
of the ongoing COVID-19 pandemic.
Engineering, Research and Development. Engineering, research and development
expenses increased by $5.0 million to $9.3 million in the year ended December
31, 2020 , a 114.2% increase from $4.3 million in the year ended December 31,
2019 . The increase was primarily due to a combination of enhanced efforts around
engineering and development projects, Grid Dynamics' efforts to develop its
solutions and expertise, reallocation of delivery personnel to strategic R&D
initiatives, costs associated with stock-based compensation, and retention
bonuses resulting from the Business Combination.
Sales and Marketing. Sales and marketing expenses increased by $3.1 million , or
44.7%, to $10.1 million in the year ended December 31, 2020 from $6.9 million in
the year ended December 31, 2019 . Sales and marketing expenses accounted for
9.0% of Grid Dynamics' revenue in the year ended December 31, 2020 compared to
5.9% in the year ended December 31, 2019 , an increase of 3.1 percentage points.
The increase was due mainly to the increased costs associated with stock-based
compensation and retention bonuses resulting from the Business Combination and
partially offset by decrease in marketing and sales events due to the COVID-19
pandemic.
General and Administrative. General and administrative expenses increased by
$16.4 million , or 76.9%, to $37.7 million in the year ended December 31, 2020
from $21.3 million in the year ended December 31, 2019 . Increased stock-based
compensation accounted for approximately $11.1 million of the increase. The
remaining portion of the increase was due mainly to the retention bonuses
resulting from the Business Combination. As a result, general and administrative
expenses accounted for 33.9% of Grid Dynamics' revenue in the year ended
December 31, 2020 , an increase of 15.9 percentage points from 18.0% in theyear endedDecember 31, 2019 .
Other income/(expenses), net. Other net income/(expenses) increased to
38
Provision/(benefit) for Income Tax. Provision/(benefit) for income tax was
Net Income/(loss). Net income/(loss) decreased to$(12.6) million in the year endedDecember 31, 2020 from$10.8 million in the year endedDecember 31, 2019 for the reasons discussed above.
Year Ended
The following table sets forth a summary of
Year ended December 31, Change
2019 2018 Dollars Percentage
(dollars in thousands, except percentages)
Revenue $ 118,326 $ 91,865 $ 26,461 28.8 %
Cost of revenue 70,090 52,559 17,531 33.4 %
Gross profit 48,236 39,306 8,930 22.7 %Engineering, research, and development 4,346 2,643 1,703 64.4 % Sales and marketing 6,947 5,200 1,747 33.6 % General and administrative 21,318 17,634 3,684 20.9 % Total operating expense 32,611 25,477 7,134 28.0 % Income from operations 15,625 13,829 1,796 13.0 % Other income/(expenses), net (176 ) (746 ) 570 (76.4 % Income before income taxes 15,449 13,083 2,366 18.1 % Provision/(benefit) for income taxes 4,642 3,855
787 20.4 %
Net Income $ 10,807 $ 9,228 $ 1,579 17.1 %
Revenue. Revenue increased by$26.4 million , or 28.8%, to$118.3 million in 2019 from$91.9 million in 2018.Grid Dynamics' top ten customers contributed$102.6 million and$86.6 million to revenue for the year endedDecember 31, 2019 and 2018, respectively, in the aggregate accounting for$16.0 million of the increase despite a decline in revenue from one ofGrid Dynamics' top five customers due to cost-cutting initiatives. The remainder of the increase reflected growth in revenue from new customers (i.e., customers for whichGrid Dynamics performed services for the first time during the period), which accounted for an additional$6.9 million of the increase, and other existing customers. The entire revenue increase was driven primarily by increased business volume, as well as a slight increase to average rates.
Cost of Revenue and Gross Profit. Cost of revenue increased by
Gross profit increased by$8.9 million , or 22.7%, to$48.2 million in 2019 from$39.3 million in 2018. Gross margin (gross profit as a percentage of revenue) decreased by 2.0 percentage points to 40.8% in the year endedDecember 31, 2019 from 42.8% in the year endedDecember 31, 2018 . The gross margin decline was attributable mainly to a change in employee mix, reflectingGrid Dynamics' expansion inPoland and an increase in the ratio ofU.S. -based to non-U.S. -based personnel engaged in performingGrid Dynamics' customer contracts. These trends reflectGrid Dynamics' commitment to staffing its increasingly complex projects with appropriately experienced personnel.Grid Dynamics' U.S. andPoland based employees are billed at higher hourly rates and generate more gross profit dollars per hour than professionals in otherGrid Dynamics locations. However, the costs of theseU.S. andPoland based employees are also higher and, therefore, they generate modestly lower gross margins. Engineering, Research and Development. Engineering, research and development expense increased by$1.7 million to$4.3 million in the year endedDecember 31, 2019 , a 64.4% increase from$2.6 million in the year endedDecember 31, 2018 , reflectingGrid Dynamics' efforts to develop its solutions and expertise. Sales and Marketing. Sales and marketing expense increased by$1.7 million , or 33.6%, to$6.9 million in the year endedDecember 31, 2019 from$5.2 million in the year endedDecember 31, 2018 . Sales and marketing expense accounted for 5.9% ofGrid Dynamics' revenue in the year endedDecember 31, 2019 compared to 5.7% in the year endedDecember 31, 2018 , an increase of 0.2 percentage points. The increase was due mainly to the development ofGrid Dynamics' sales force personnel and ramp up in marketing events, starting in mid-2018. 39
General and Administrative. General and administrative expense increased by$3.7 million , or 20.9%, to$21.3 million in the year endedDecember 31, 2019 from$17.6 million in the year endedDecember 31, 2018 . Labor, bonus, and vacation costs accounted for approximately$1.2 million of the increase, consistent with the increase in headcount. In addition, we renewed certain operating leases for corporate office rent accounting for an additional$1.0 million . Stock-based compensation accounted for an additional$0.7 million . The remainder of the increase was attributable toGrid Dynamics' relocation of personnel, increased spend on workforce global mobility initiatives, increased acquisition-related exploratory costs, an increase in other travel-related costs and human-resources expenses. As a result, general and administrative expense accounted for 18.0% ofGrid Dynamics' revenue in the year endedDecember 31, 2019 , a decrease of 1.2 percentage points from 19.2% in the year endedDecember 31, 2018 . Other income/(expenses), net. Other net expenses decreased to$0.2 million for the year endedDecember 31, 2019 from$0.7 million for the year endedDecember 31, 2018 , reflecting increased interest income and a reduction in miscellaneous expenses.
Provision/(benefit) for Income Tax. Provision/(benefit) for income tax was$4.6 million in the year endedDecember 31, 2019 compared to$3.9 million in the year endedDecember 31, 2018 . The effective tax rate increased by 0.5 percentage points between periods. See "- Key Components of Revenue and Expenses - Costs and Expenses - Provision for income tax."
Net Income/(loss). Net income/(loss) increased to
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 ofGrid 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$112.7 million 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, ifGrid 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 ofGrid Dynamics' control and may not be available on terms acceptable toGrid Dynamics' management or at all. As ofDecember 31, 2020 ,Grid Dynamics had cash and cash equivalents amounting to$112.7 million (compared to$42.2 million atDecember 31, 2019 ). Of this amount,$3.1 million was held outsidethe United States , namely inRussia ,Ukraine ,Poland ,Serbia andthe Netherlands (compared to$2.2 million as ofDecember 31, 2019 ). As many ofGrid 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 andGrid Dynamics' management has no intention of repatriating the funds. IfGrid Dynamics decided to remit funds from these countries tothe 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 inRussia ,Ukraine ,Poland andSerbia 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 ofthe United States .
Our performance stock units, or PSUs, vest upon the satisfaction of a performance-based vesting condition. The compensation committee of our board of directors determined that the performance conditions of the PSUs were met as ofFebruary 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 tax withholding and remittance obligations. The first vesting event for our restricted stock units, or RSUs, will also occur onMarch 13, 2021 , at which time approximately 0.6 million shares underlying RSUs held by our officers and employees will vest and settle into shares of our common stock. We currently expect that the average withholding tax rate for individuals holding our RSUs will be approximately 52%. We have determined that our policy will be to require individuals to withhold to cover, so approximately 52% of the vested shares would be withheld on the settlement date, with the equivalent value being paid by us from our working capital. If the price of our common stock at the time of settlement of the RSUs in the first quarter of 2021 were equal to the share price that triggered the vesting of the PSUs, or$14.33 per share, we estimate that this tax withholding obligation in the first quarter of 2021 would be approximately be$15.0 million in the aggregate. 40 Cash Flows The following table summarizesGrid Dynamics' cash flows for the annual periods indicated: Year ended December 31, 2020 2019 2018 (in thousands) Net cash provided by operating activities$ 5,932 $ 12,534 $ 10,584 Net cash used in investing activities (18,339 ) (2,811 ) (3,079 ) Net cash provided by financing activities 82,967 14,604
-
Net increase in cash and cash equivalents 70,556 24,327 7,505 Cash, cash equivalents (beginning)
42,189 17,862 10,357
Cash, cash equivalents (end) $ 112,745 $ 42,189 $ 17,862 Operating Activities. Net cash provided by operating activities during the year endedDecember 31, 2020 decreased by$6.6 million , or 52.7%, to$5.9 million from$12.5 million in the same period in 2019, driven by lower cash operating profit (before non-cash depreciation and amortization and stock-based compensation charges). The key reasons for the decline in net cash provided by operating activities were retention bonuses paid out to employees due to the successful Business Combination onMarch 5, 2020 , lower level of revenues due to the impact of the COVID-19 pandemic in the period of March throughSeptember 30, 2020 , and higher costs associated with our delivery centers. Net cash provided by operating activities during the year endedDecember 31, 2019 increased by$1.9 million , or 18.4%, to$12.5 million from$10.6 million in the same period in 2018, driven by higher operating profit ($2.3 million increase year-on-year) as well as higher non-cash operating costs, particularly depreciation and amortization and stock-based compensation charges, offset by increases in prepaid expenses and deferred transaction costs. Investing Activities. Net cash used in investing activities during the year endedDecember 31, 2020 was$18.3 million compared to$2.8 million in cash used in the same period in 2019, due primarily to cash paid for theDaxx acquisition in the year endedDecember 31, 2020 as well as capital expenditures for computer hardware and related equipment in both periods. Net cash used in investing activities during the year endedDecember 31, 2019 was$2.8 million compared to$3.1 million in cash used in the same period in 2018, and in both periods reflected mainly capital expenditures for computer hardware and related equipment. Financing Activities. Net cash provided by financing activities was$83.0 million in the year endedDecember 31, 2020 , reflecting primarily the proceeds from the Business Combination. Net cash provided by financing activities was$14.6 million in the year endedDecember 31, 2019 reflecting primarily$14.9 million in proceeds from the sale of common and preferred stock and$1.7 million in proceeds from stock option grant exercises in 2019, partially offset by dividends paid of$2.0 million . Net cash provided by financing activities was$14.6 million in the year endedDecember 31, 2019 , reflecting primarily$14.9 million in proceeds from the sale of common and preferred stock and$1.7 million in proceeds from stock option grant exercises in 2019, offset by dividends paid of$2.0 million .Grid Dynamics had substantially no cash flows from or used in financing activities in the
year endedDecember 31, 2018 . Contractual Obligations
The following table and the information that follows summarizes
Less than 1-3 3-5 More than
Total 1 year Years Years 5 Years
(in thousands)
Operating lease obligations(1)
$ 2 $ Software service agreement obligation(2)$ 1,279 $ 505 $ 693 $ 81 $
(1) Includes leases of facilities and vehicles.
Dynamics also has 20 lease agreements for facilities in
between
(2)
with a term of five years. Payments are due quarterly in advance beginning
March 1, 2020 .
Non-perpetual licenses are typically renewed annually.
41
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 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' consolidated financial statements.Grid Dynamics' critical accounting policies are described in Note 2 to its consolidated financial statements. RevenueGrid Dynamics derives substantially all of its revenue through time and materials contracts. Fixed-fee customer contracts, although not significant historically, will comprise a more significant portion of revenue in future periods. For all contracts,Grid Dynamics uses master agreements that govern the overall relevant terms and conditions of the business arrangement and executes statements of work pursuant to such agreements to execute specific projects.Grid Dynamics recognizes revenue for services over time as hours are incurred byGrid Dynamics' engineering personnel. For all contracts, the customer derives value from the Company providing daily consulting services, and the value derived corresponds to the labor hours expended. Therefore, the Company measures the progress and recognizes revenue using an effort-based input method.Grid Dynamics also offers volume discounts or early settlement discounts. 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 the consideration promised in a contract includes a variable amount,Grid Dynamics only includes estimated amounts of consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Income Taxes The determination of the provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The provision for income taxes reflects a combination of income earned and taxed in the variousU.S. federal and state and non-U.S. jurisdictions. Changes in tax law, 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 across taxing jurisdictions all affect the overall effective tax rate. In assessing the realizability of deferred tax assets,Grid Dynamics considers whether it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. Management considers all available evidence, both positive and negative, in determining whether a valuation allowance is required, including prior earnings history, the scheduled reversal of deferred tax liabilities, projected future taxable income, carryback and carryforward periods of tax attributes and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset in making this assessment. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.Grid Dynamics evaluates for uncertain tax positions at each balance sheet date. When it is more likely than not that a position will be sustained upon examination by a tax authority that has full knowledge of all relevant information,Grid Dynamics measures the amount of tax benefit from the position and records the largest amount of tax benefit that is greater than 50% likely of being realized after settlement with a tax authority.Grid Dynamics' policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in provision for income tax. 42 Business Combinations
The Company accounts for business combinations under the acquisition method of
accounting, in accordance with Accounting Standards Codification ("ASC") Topic
805, Business Combinations, recording any assets acquired and liabilities
assumed based on their respective fair values. Any excess of the fair value of
purchase consideration over the fair value of the assets acquired less
liabilities assumed is recorded as goodwill. The Company uses management
estimates and industry data to assist in establishing the acquisition date fair
values of assets acquired, liabilities assumed, and contingent consideration
granted, if any. These estimates and valuations require the Company to make
significant assumptions, including projections of future events and operating
performance.
Stock-based Compensation
Grid Dynamics has in the past issued, currently issues and intends to continue
issuing incentive stock options and non-qualifying stock options, performance
stock units and restricted stock units. While Grid Dynamics does not currently
have any other form of stock-based awards outstanding, it may also issue stock
appreciation rights. Stock-based compensation expense is measured based on the
grant-date fair value of the share-based awards. Forfeitures are recognized as
incurred. Grid Dynamics estimates grant date fair value of its stock using a
number of objective and subjective factors, as described in more detail below,
and the Black-Scholes option pricing model to estimate the grant date fair value
of option grants. The model requires management to make a number of key
assumptions, including expected volatility, expected term, risk free interest
rate and expected dividends. As Grid Dynamics' shares do not have sufficient
trading history, expected volatility is estimated based on the average
historical volatility of similar entities with publicly traded shares. The risk
free rate for the expected term of the option is based on the U.S. Treasury
yield curve at the date of grant. The expected term is estimated using the
simplified method, which takes into account vesting and contractual term. Grid
Dynamics' options grants generally vest over a 4-year period and from time to
time Grid Dynamics makes grants with a portion vesting at the time of grant.
Management elected to use the simplified method instead of historical experience
due to a lack of relevant historical data resulting from changes in option
vesting schedules and changes in the pool of employees receiving option grants.
Grid Dynamics evaluates the assumptions used to value its stock-based awards on
each grant date. Grants are approved by Grid Dynamics' Board of Directors.
Grid Dynamics amortizes the grant date fair value of all stock-based
compensation awards over the employee's requisite service period for the entire
award on a straight-line basis, which is generally the vesting period. For an
award with graded vesting that is subject only to a service condition (e.g.,
time-based vesting), Grid Dynamics uses the straight-line attribution method
under ASC 718, under which it recognizes compensation cost on a straight-line
basis over the total requisite service period for the entire award.
Additionally, Grid Dynamics applies the "floor" concept, so that the amount of
compensation cost that is recognized as of any date is at least equal to the
grant-date fair value of the vested portion of the award on that date. In other
words, if the straight-line expense recognized to date is less than the grant
date fair value of the award that is legally vested at that date (for example,
as a result of a portion of a grant vesting at the grant date), Grid Dynamics
will increase its recognized expense to at least equal the fair value of the
vested amount. The fair market value of Grid Dynamics stock is determined based
on the closing price on NASDAQ on the measurement date. For more detailed
information about Grid Dynamics' historical and outstanding grants and its
valuation of its stock-based compensation and awards, see Note 10 to the audited
consolidated financial statements included elsewhere in this Annual Report.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 to
In particular,Grid Dynamics implemented Accounting Standards Codification (ASC) Topic 606 (Revenue from Contracts with Customers) inJanuary 2019 .Grid Dynamics adopted the standard using the modified retrospective method, where it recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings while prior period amounts are not adjusted and continue to be reported in accordance withGrid Dynamics' legacy accounting under ASC Topic 605. The implementation of the new standard did not materially affect our consolidated financial statements as discussed further in Note 2 toGrid Dynamics' consolidated financial statements. 43
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