What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-03 · 133 added, 196 removed, 312 unchanged (51% of the section changed)

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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 in Menlo 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 in Silicon Valley and engineering centers in the 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.

Since its inception

in 2006 in Menlo 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 in Silicon Valley and engineering centers in the United States, Mexico, India, Jamaica 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.

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By leveraging Grid 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 on October 4, 2018.

In March 2020, Grid Dynamics, formerly known as ChaSerg Technology Acquisition Corp (“ChaSerg”), completed its acquisition of Grid Dynamics International, Inc.

(“GDI”) pursuant to the business combination agreement dated November 13, 2019 (the “Business Combination”).

In conjunction with the completion of the Business Combination, ChaSerg was renamed as Grid 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.

Business Update Regarding Military Action in Ukraine

On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region is possible.

The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by Canada, the United Kingdom, the European Union, the U.S.

and other countries and companies and organizations against officials, individuals, regions, and industries in Russia and Ukraine, and each country’s potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations.

For example, in response to increased sanctions, Russia could attempt to take control of assets in Russia or Ukraine of companies registered in the United States, such as Grid Dynamics.

Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt our delivery of services, impair our ability to complete financial or banking transactions, cause us to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region or involving certain customers in the region.

We have a significant number of personnel in Ukraine and Russia.

We are actively monitoring the security of our personnel and the stability of our infrastructure, including communications and internet availability.

We are also executing our business continuity plan and adapting to developments as they occur to protect the safety of our people and handle potential impacts to our delivery infrastructure, including reallocating work to other geographies within our global footprint.

We are actively working with our personnel and with our customers to meet their needs and to mitigate delivery challenges.

We have no way to predict the progress or outcome of the situation, as the conflict and government reactions are rapidly developing and beyond our control.

Prolonged unrest, military activities, or broad-based sanctions, should they be implemented, could have a material adverse effect on our operations and business outlook.

We have accelerated hiring in locations outside of the region as part of our business continuity planning and in order to support client demand.

In addition, we have implemented plans to move some of our existing personnel to other countries in order to keep them safe and mitigate impacts on our delivery of services to our customers.

The information contained in this section is accurate as of the date hereof, but may become outdated due to changing circumstances beyond our present awareness or control.

For additional information on the various risks posed by the military action in Ukraine and the impact in the region, please read “Part I.

Risk Factors” included in this Annual Report on Form 10-K.

Fiscal Year Highlights

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% of revenue % of revenue % of revenue

(dollars in thousands, except per share data)

(in thousands, except percentages and per share data)

Revenues $ 310,482 100.0 % $ 211,280 100.0 % $ 111,283 100.0 %

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Income/(loss) from operations (21,008) (6.8) % 50 — % (15,448) (13.9) %

Net income/(loss) (7,700) (3.6) % (12,599) (11.3) % 10,807 9.1 %

Net loss (29,214) (9.4) % (7,700) (3.6) % (12,599) (11.3) %

Diluted EPS $ (0.42) n/a $ (0.13) n/a (0.28) n/a

Non-GAAP Financial Information

Adjusted EBITDA (1)

Non-GAAP EBITDA (1)

58,213 18.7 % 39,077 18.5 % 12,549 11.3 %

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__________________________

(1) Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP Diluted EPS are non-GAAP financial measures.

(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.

In the twelve months ended December 31, 2021 our revenues were $211.3 million, which included $44.9 million from our recent acquisitions of Daxx and Tacit.

In the twelve months ended December 31, 2022 our revenues were $310.5 million, which included $14.6 million from our recent acquisitions.

Organic revenue of $295.9 million for the twelve months ended December 31, 2022 was up from $166.3 million in the same period of 2021.

The key reasons for the organic year-over-year increase of 77.9% were increased demand for our services by our customers resulting in increased billable hours combined with revenue contribution from new customers.

Our largest vertical, Technology Media & Telecom, continued to grow;

in the twelve months ended December 31, 2021 it represented 32.0% of our full year of 2021 revenue and grew by 49.2% on a year-over-year basis.

While many customers positively grew on the year-over-year basis, Grid Dynamics’ two largest TMT customers contributed meaningfully.

In the twelve months ended December 31, 2021, our Retail vertical contributed $61.7 million in revenue, up from $34.0 million in revenue in the twelve months ended December 31, 2020.

We have been witnessing a steady sequential pick up in business.

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 additions.

During the twelve months ended December 31, 2021, our organic and acquisitions combined received revenues from a total of 273 customers.

In the twelve months ended December 31, 2022, our GAAP Net loss was $(29.2) million, or (9.4)% of revenue and Non-GAAP EBITDA was $58.2 million, or 18.7% of revenue.

This was down from GAAP Net loss of $(12.6) million, or (11.3)% of revenue and and up from $12.5 million or 11.3% of revenue in Non-GAAP EBITDA in the twelve months ended December 31, 2020.

The decrease in GAAP Net Loss and increase in non-GAAP EBITDA on a year-over-year basis was due to a combination of higher levels of revenue and gross profit.

Acquisition of Tacit Knowledge Inc .

On May 29, 2021, we acquired UK based Tacit in an all-cash transaction.

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 is augmenting our service offerings and strengthening our competitive position within the market.

Additionally, the acquisition is also enabling us to leverage near-shore capabilities with the company’s presence in Mexico.

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 are 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 retail 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 customers in this fashion and this has resulted in minimal disruption in our operational and delivery capabilities.

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.

This was up from GAAP Net loss of $(7.7) million, or (3.6)% of revenue and and up from $39.1 million or 18.5% of revenue in Non-GAAP EBITDA in the twelve months ended December 31, 2021.

The increase in GAAP Net Loss was due to a combination of increased operating expenses, stock based compensation, and geographic reorganization costs.

The increase in non-GAAP EBITDA on a year-over-year basis was due to a combination of higher levels of revenue and gross profit.

Towards the second half of 2022 our business was impacted by some of our customers being impacted by the macroeconomic weakness.

Inflation rates in the US have increased to levels not seen in several years, and this in turn has impacted the spending patterns of some of our customers.

Acquisition of Mutual Mobile Inc.

On December 23, 2022, we acquired Mutual Mobile Inc.

("Mutual Mobile"), company based out of Austin, Texas and with delivery operations in India.

Mutual Mobile offers end-to-end design and development of next-generation applications, combining mobile, augmented/virtual/mixed reality, and cloud edge / IoT practices.

It has developed wide-ranging, technical

solutions for prominent global brands across numerous industry verticals, with Technology, Healthcare, Automotive, and Financial Services representing the top verticals by revenue.

The acquisition of Mutual Mobile enhances our skills in the area of mobile technologies and UX expertise as well as accelerates our strategic expansion to India and supports our commitment towards offering our customers a global engineering and delivery platform.

Business Update Regarding Military Action in Ukraine

On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region has resulted and is likely to continue.

The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by the U.S., Canada, the United Kingdom, the European Union, and other countries and companies and organizations against officials, individuals, regions, and industries in Russia and certain regions of Ukraine, and each country’s potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations.

For example, in response to increased sanctions, Russia could attempt to take control of assets in Ukraine of companies registered in the United States, such as Grid Dynamics.

Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt our delivery of services, impair our ability to complete financial or banking transactions, cause us to continue to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region or involving certain customers in the region.

We are actively monitoring the security of our personnel and the stability of our infrastructure, including communications and internet availability.

We executed our business continuity plan and have adapted to developments as they occur to protect the safety of our people and handle potential impacts to our delivery infrastructure.

This includes moving affected employees to safer locations in Western Ukraine and, where permissible, outside Ukraine, and reallocating work to other geographies within our global footprint.

We are actively working with our personnel and with our customers to meet their needs and to ensure smooth delivery of services.

In April 2022, Grid Dynamics also announced it would cease remaining operations in the Russian Federation.

We have worked towards the safe and expedient relocation of willing employees and ongoing management of projects to eliminate delivery impact to clients.

In addition we announced our expansion to a new European hub with an office in Zug, Switzerland, a new engineering office in Yerevan, Armenia and workforce expansion in India.

During the three months ended June 30, 2022, we relocated the majority of our Russia based employees outside of Russia.

As of February 2023, we have minimal office personnel in Russia and are performing no client services from Russia.

We have no way to predict the progress or outcome of the military action in Ukraine, as the conflict and government reactions continue to develop and are beyond our control.

Prolonged unrest, military activities, expansion of hostilities, or broad-based sanctions, could have a material adverse effect on our operations and business outlook.

For example, if Russia were to invade other countries, such as Moldova, it could adversely affect our business, including preventing the relocation of our employees from Russia.

In addition, the current geopolitical situation in Serbia creates additional uncertainty in the region, and could adversely affect our business.

The information contained in this section is accurate as of the date hereof, but may become outdated due to changing circumstances beyond our present awareness or control.

For additional information on the various risks posed by the military action in Ukraine and the impact in the region, as well as other macroeconomic factors affecting our business, please read “Part I.

Risk Factors” included in this Annual Report on Form 10-K.

Key Performance Indicators and Other Factors Affecting Performance

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2022 2021 2020

United States and Mexico 386 259 265

Central and Eastern Europe (1) , U.K.

and the Netherlands

2,888 1,635 1,165

Americas 521 386 259

CEE, U.K., and the Netherlands 3,034 2,888 1,635

Rest of the world 243 — —

Total 3,798 3,274 1,894

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(1) Includes Ukraine, Russia, Poland, Serbia, and Moldova.

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.

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Grid Dynamics’ ability to retain and expand its relationships with existing customers and add new customers are key indicators of its revenue potential.

Excluding Daxx and Tacit, Grid Dynamics grew its customer base from 52 customers in 2020 to 65 customers in 2021.

In 2022 the total number of customers was 272 comparable to 273 customers in 2021.

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.

Of Grid Dynamics’ customers, two customers each accounted for 10% or more of Grid Dynamics’ revenue in the years ended December 31, 2021 and 2020, respectively, and three customers each accounted for 10% or more of Grid Dynamics’ revenue in the year ended December 31, 2019.

The following table shows the evolution of Grid Dynamics’ customer base and revenue concentration, as of the dates and for the annual periods indicated:

Of Grid Dynamics' customers, two customers each accounted for 10% or more of our revenue in the years ended December 31, 2022, 2021 and 2020, respectively.

The following table presents revenues concentration by amount and as a percentage of our revenues for the periods indicated:

Year ended December 31,

2022 2021 2020

(in thousands, except a number of customers and percentages)

Total customers (for the period) (1)

>$5.0 million 9 7 7

>$2.5 - 5.0 million 5 3 3

>$1.0 - 2.5 million 20 7 5

Top five customers 43.9 % 55.9 % 66.5 %

Top ten customers 60.4 % 78.4 % 86.7 %

(in thousands, except percentages)

Top one customer $ 39,084 12.6 % $ 24,603 11.6 % $ 23,653 21.3 %

Top five customers $ 134,955 43.5 % $ 92,768 43.9 % $ 62,152 55.9 %

Top ten customers $ 185,253 59.7 % $ 127,564 60.4 % $ 87,203 78.4 %

Top twenty customers $ 225,303 72.6 % $ 153,229 72.5 % $ 103,154 92.7 %

Customers below top twenty $ 85,180 27.4 % $ 58,051 27.5 % $ 8,129 7.3 %

The following table shows the evolution of Grid Dynamics’ customer base where customers are grouped by revenues recognized for each annual period presented:

Year ended December 31,

2022 2021 2020

(1) Number of customers acquired as a result of Daxx and Tacit acquisitions for the years ended December 31, 2021 and 2020 is 208 and 130, respectively.

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.

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.

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.

Daxx’s books are kept in EURO.

Tacit’s books 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.

For the twelve months ended December 31, 2021, approximately 12.5%, 11.9%, and 6.4% of Grid Dynamics’ $211.2 million of combined cost of revenue and total operating expenses were denominated in the Ukrainian hryvnia, Russian rouble, and Polish zloty, respectively.

Comparatively, for the year ended December 31, 2020 approximately 11.7%, 13.8% and 9.6% of of Grid Dynamics’ $126.7 million of combined cost of revenue and total operating expenses were denominated in the Ukrainian hryvnia, Russian rouble, 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 the U.S.

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 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 about Grid Dynamics’ exposure to foreign currency exchange rates.

>$5.0 million 13 9 7

>$2.5 - 5.0 million 8 5 3

>$1.0 - 2.5 million 27 20 7

>$0.5 - 1 million 21 19 6

Grid Dynamics’ business is subject to seasonal trends that impact its revenues and profitability between quarters.

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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).

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• Non-GAAP EBITDA :

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.

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 :

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(in thousands)

GAAP net income/(loss) $ (7,700) $ (12,599) $ 10,807

GAAP net loss $ (29,214) $ (7,700) $ (12,599)

Adjusted for:

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Provision/(benefit) for income taxes 8,761 5,248 (2,613)

Impairment of goodwill — — 139

Stock-based compensation 60,968 33,036 20,006

Geographic reorganization (1)

Transaction and transformation-related costs (2)

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__________________________

(1) Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, allowances as well as legal and professional fees related to geographic repositioning in various locations.

These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(2) 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.

(3) During the year ended December 31, 2020, we implemented a cost reduction plan and incurred restructuring and severance charges of $0.9 million, primarily resulting from a reduction in workforce and other charges.

We did not incur any restructuring expenses during the year ended December 31, 2021.

(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.

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:

We did not incur any restructuring expenses during the years ended December 31, 2022 and 2021.

(4) 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 and returns on investments in money-market funds.

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 annual periods indicated:

Year ended December 31,

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(in thousands, except per share data)

Net income/(loss) $ (7,700) $ (12,599) $ 10,807

GAAP net loss $ (29,214) $ (7,700) $ (12,599)

Adjusted for:

Impairment of goodwill — — 139

Stock-based compensation 60,968 33,036 20,006

Transaction-related costs (1)

Geographic reorganization (1)

Transaction and transformation-related costs (2)

604 942 4,407

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Non-GAAP Net Income $ 36,627 $ 24,160 $ 7,013

Number of shares used in the GAAP Diluted EPS 69,197 58,662 44,737

GAAP Diluted EPS $ (0.42) $ (0.13) $ (0.28)

Number of shares used in the Non-GAAP Diluted EPS (6)

72,223 67,305 48,778

Non-GAAP Diluted EPS (6)

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__________________________

We did not incur any restructuring expenses during the year ended December 31, 2021.

We did not incur any restructuring expenses during the years ended December 31, 2022 and 2021.

(5) Reflects the estimated tax impact of the non-GAAP adjustments presented in the table.

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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.

While fixed-fee contracts currently represent not significant portion of overall revenue for the periods presented compared to time and material engagements, 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.

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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.

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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Grid Dynamics’ effective tax rate was (42.8)%, (214.1)%, and 17.2% in the years ended December 31, 2022, 2021 and 2020, respectively.

The differences in effective tax rate between the years ended December 31, 2021 and 2020 and 2019 were attributable mainly to stock based compensation excess tax benefit, partially offset by Section162(m) compensation deduction limitations.

The increase in effective tax rate for the twelve months ended December 31, 2022, as compared to the same periods in 2021 was attributable mainly to Section162 (m) compensation deduction limitations.

Results of Operations

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Loss before income taxes (20,453) (2,452) (18,001) 734.1 %

Provision/(benefit) for income taxes 5,248 (2,613) 7,861 (300.8) %

Provision for income taxes 8,761 5,248 3,513 66.9 %

Net loss $ (29,214) $ (7,700) $ (21,514) 279.4 %

Foreign currency translation adjustments, net of tax

(122) (4) (118) 2,950.0 %

Comprehensive loss

$ (7,822) 0 $ (12,603) $ 4,781 (37.9) %

Revenues by Vertical.

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% of revenue % of revenue % of revenue

(dollars in thousands)

(in thousands, except percentages)

Tech, Media and Telecom $ 98,334 31.7 % $ 67,689 32.0 % $ 45,362 40.8 %

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Revenue increased by $99.2 million, or 47.0%, to $310.5 million in 2022 from $211.3 million in 2021.

In 2021, we witnessed growth across all our verticals in comparison to 2020.

Additionally, our Retail vertical, which declined in 2020 in comparison to 2019, witnessed increase in 2021.

Growth was also driven by contributions from our acquisitions of Daxx and Tacit which we acquired in December of 2020 and May of 2021, respectively.

For the year ended December 31, 2021, retail revenues were $61.7 million, up from $34.0 million in the same period a year ago.

The 81.7% year-over-year increase in retail revenues was driven by combination of factors that include adding new customers and increase in revenue from the existing customers.

Additionally, Grid Dynamics’ top ten customers contributed $127.6 million and $87.2 million to revenue for the years ended December 31, 2021 and 2020, respectively, in the aggregate accounting for $40.4 million of the increase.

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.

In 2022, we continued to witness growth across all our verticals with four out of five growing over 40.0% during the year.

Our Retail vertical, which declined in 2020 due to COVID-19 continues to be our largest contributor to the overall revenue growth adding 38.3% to the annual increase in revenue in 2022.

Our revenue during the year ended December 31, 2022 also continued to benefit from the acquisition of Tacit, which was acquired in the first half of 2021.

Cost of Revenue and Gross Profit.

Cost of revenue increased by $53.9 million, or 77.4%, to $123.6 million in 2021 from $69.7 million in 2020 largely from increased costs of personnel to support higher revenue offset by lower expenses, such as travel related expenses and retention bonuses.

Cost of revenue increased by $66.3 million, or 53.7%, to $189.9 million in 2022 from $123.6 million in 2021 largely from increased costs of personnel to support higher revenue.

Gross Profit.

Gross profit increased by $32.9 million, or 37.5%, to $120.6 million in 2022 from $87.7 million in 2021.

Gross margin (gross profit as a percentage of revenue) increased to 38.8% in the year ended December 31, 2022 from 41.5% in the year ended December 31, 2021.

The gross margin increase was attributable to a combination of increased levels of business resulting in higher revenue, favorable mix-shift towards offshore delivery locations, and improving engineering workforce utilization.

Our gross margins for 2022 were impacted by higher costs associated with the relocation of employees due to the Russian invasion of Ukraine.

Engineering, Research and Development.

Engineering, research and development expenses decreased by $(0.9) million to $8.5 million in the year ended December 31, 2021, a (9.2)% decrease from $9.3 million in the year ended December 31, 2020.

The decrease in R&D expenses was largely due to the wind down of R&D programs initiated during the period of the pandemic in 2020 and their replacement with the new R&D initiatives.

Engineering, research and development expenses increased by $7.3 million to $15.8 million in the year ended December 31, 2022, a 86.5% increase from $8.5 million in the year ended December 31, 2021.

The increase was largely attributed to staffing and greater investments in customer delivery operations.

Sales and Marketing.

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Sales and marketing expenses accounted for 6.4% of Grid Dynamics’ revenue in the year ended December 31, 2022 compared to 6.8% in the year ended December 31, 2021, a decrease of (0.4) percentage points.

The increase was due mainly to the increased personnel costs associated with the expansion activities both on the sales and marketing fronts.

Additionally, the acquisition of Tacit partially contributed to the increase in the year ended December 31, 2021 in comparison to the year ended December 31, 2020.

The increase of $5.4 million was due mainly to the increase in sales initiatives, sales personnel and related costs associated with the expansion activities both on the sales and marketing fronts.

General and Administrative.

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Increased stock-based compensation accounted for approximately $22.9 million of the increase.

The remaining portion of the increase was due mainly to costs associated with expanding our operations that required increased levels of hiring along with investments in infrastructure and facilities to support our increased headcount.

Additionally our acquisitions of Daxx and Tacit contributed to the increase.

As a result, general and administrative expenses accounted for 30.7% of Grid Dynamics’ revenue in the year ended December 31, 2021, a decrease of (3.2) percentage points from 33.9% in the year ended December 31, 2020.

The remaining portion of the increase was mainly due to geographic reorganization expenses triggered by the Russian invasion of Ukraine as well as costs associated with expansion of our operations that triggered increased levels of investments in infrastructure and facilities.

As a result, general and administrative expenses accounted for 34.1% of Grid Dynamics’ revenue in the year ended December 31, 2022, an increase of 3.4 percentage points from 30.7% in the year ended December 31, 2021.

Other Income/(Expenses), Net .

Other net income/(expenses) decreased to $(2.5) million for the year ended December 31, 2021 from $0.2 million for the year ended December 31, 2020, mainly due to changes in the fair value of private warrants of $1.0 million, adjustment to the final Daxx earnout of $0.4 million in the third quarter of 2021, and fair value adjustment of Tacit earnout of $1.0 million in the fourth quarter of 2021.

Other net income/(expenses), net increased to $0.6 million for the year ended December 31, 2022 from $(2.5) million for the year ended December 31, 2021, The increase was primarily due to interest income from our money market investment.

Provision/(benefit) for Income Tax .

Provision/(benefit) for income tax was $8.8 million in the year ended December 31, 2022 compared to $5.2 million in the year ended December 31, 2021.

The effective tax rate decreased by 231.21% between periods.

The effective tax rate increased by 171.3% between periods.

See “— Key Components of Revenue and Expenses—Costs and Expenses—Provision for Income Taxes .

Net Income/(loss) .

Net loss decreased to $(7.7) million million in the year ended December 31, 2021 from $(12.6) million in the year ended December 31, 2020 for the reasons discussed above.

Net loss decreased to $(29.2) million in the year ended December 31, 2022 from $(7.7) million in the year ended December 31, 2021 for the reasons discussed above.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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Provision/(benefit) for income taxes 5,248 (2,613) 7,861 (300.8) %

Net Income $ (12,599) $ 10,807 $ (23,406) (216.6) %

Foreign currency translation adjustments, net of tax

(4) — (4) n.m.

Comprehensive loss

$ (12,603) $ 10,807 $ (23,410) (216.6) %

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.

Net loss $ (7,700) $ (12,599) $ 4,899 (38.9) %

Revenue increased by $100.0 million, or 89.9%, to $211.3 million in 2021 from $111.3 million in 2020.

In 2021, we witnessed growth across all our verticals in comparison to 2020.

Additionally, our Retail vertical, which declined in 2020 in comparison to 2019, witnessed increase in 2021.

Growth was also driven by contributions from our acquisitions of Daxx and Tacit which we acquired in December of 2020 and May of 2021, respectively.

For the year ended December 31, 2021, retail revenues were $61.7 million, up from $34.0 million in the same period a year ago.

The 81.7% year-over-year increase in retail revenues was driven by combination of factors that include adding new customers and increase in revenue from the existing customers.

The remainder of the other industry verticals increase reflected growth in revenue from new customers ( i.e.

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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.

Gross profit increased by $46.1 million, or 110.8%, to $87.7 million in 2021 from $41.6 million in 2020.

Gross margin (gross profit as a percentage of revenue) increased to 41.5% in the year ended December 31, 2021 from 37.4% in the year ended December 31, 2020.

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.

The decrease in R&D expenses was largely due to the wind down of R&D programs initiated during the period of the pandemic in 2020 and their replacement with the new R&D initiatives.

Sales and Marketing.

Sales and marketing expenses increased by $4.4 million, or 43.8%, to $14.5 million in the year ended December 31, 2021 from $10.1 million in the year ended December 31, 2020.

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.

Sales and marketing expenses accounted for 6.8% of Grid Dynamics’ revenue in the year ended December 31, 2021 compared to 9.0% in the year ended December 31, 2020, a decrease of (2.2) percentage points.

The increase was due mainly to the increased personnel costs associated with the expansion activities both on the sales and marketing fronts.

Additionally, the acquisition of Tacit partially contributed to the increase in the year ended December 31, 2021 in comparison to the year ended December 31, 2020.

General and Administrative.

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Increased stock-based compensation accounted for approximately $12.6 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 the year ended December 31, 2019.

The remaining portion of the increase was due mainly to costs associated with expanding our operations that required increased levels of hiring along with investments in infrastructure and

facilities to support our increased headcount.

Additionally our acquisitions of Daxx and Tacit contributed to the increase.

Other income/(expenses), net .

Other net income/(expenses) increased to $0.2 million for the year ended December 31, 2020 from $(0.2) million for the year ended December 31, 2019, mainly due to interest and other income offset by miscellaneous expenses.

Provision/(benefit) for Income Tax .

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See “— Key Components of Revenue and Expenses—Costs and Expenses—Provision for Income Taxes .

Net Income/(loss) .

Net income/(loss) decreased to $(12.6) million in the year ended December 31, 2020 from $10.8 million in the year ended December 31, 2019 for the reasons discussed above.

Net loss decreased to $(7.7) million in the year ended December 31, 2021 from $(12.6) million in the year ended December 31, 2020 for the reasons discussed above.

Liquidity and Capital Resources

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As of December 31, 2022, Grid Dynamics had cash and cash equivalents amounting to $256.7 million (compared to $144.4 million at December 31, 2021).

Of this amount, $8.5 million was held in Russia, Ukraine, Poland, Serbia, the Netherlands, UK, Mexico, Moldova, and Singapore (compared to $3.1 million as of December 31, 2020).

Of this amount, $16.8 million was held in countries outside US and included among others UK, India, Switzerland, Poland, Serbia, Ukraine and other countries (compared to $8.5 million as of December 31, 2021).

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.

In a scenario that Grid Dynamics decides to remit funds from these countries to the United States in the future, whether in the form of inter-company dividends or otherwise, the company may be subject to foreign withholding taxes.

In addition, Grid Dynamics’ cash in banks in Russia, Ukraine, Moldova, Serbia, and Mexico may be subject to other risks, as the banking sector in some of these countries are 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.

In addition, Grid Dynamics’ cash in banks in Armenia, Ukraine, Moldova, and Mexico may be subject to other risks, as the banking sector in some of these countries are 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.

This is particularly true given the significant military action against Ukraine launched by Russia and the sanctions on certain Russian banks that have been imposed as a result, although this would not materially disrupt our liquidity as a whole.

On March 15, 2022, we entered into a new agreement establishing a revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent for the lenders.

See Note 10 "Debt" to the consolidated financial statements for further details.

Grid Dynamics does not have any debt outstanding as of December 31, 2022 and did not have any debt outstanding at any balance sheet date presented.

On September 12, 2022 and July 6, 2021, Grid Dynamics closed follow-on public offerings of common stock that resulted in $109.5 million and $78.3 million net proceeds, respectively, after deducting underwriting discounts and commissions.

See Note 14 to the consolidated financial statements for further details.

The following table summarizes Grid Dynamics’ cash flows for the annual periods indicated:

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Operating Activities.

Net cash provided by operating activities during the year ended December 31, 2021 increased by $12.0 million, or 203.0%, to $18.0 million from $5.9 in the same period in 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 year ended December 31, 2021 in comparison to the year ended December 31, 2020, were higher levels of revenue and greater billable utilization resulting in higher profitability.

Net cash provided by operating activities during the year ended December 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 on March 5, 2020, lower level of revenues due to the impact of the COVID-19 pandemic in the period of March through September 30, 2020, and higher costs associated with our delivery centers.

Net cash provided by operating activities during the year ended December 31, 2022 increased by $13.7 million, or 76.1%, to $31.7 million from $18.0 million in the same period in 2021, driven by higher levels of revenue growth of 47.0%.

Net cash provided by operating activities during the year ended December 31, 2021 increased by $12.0 million, or 203.0%, to $18.0 million from $5.9 million in the same period in 2020, driven by higher cash operating profit (before non-cash depreciation and amortization and stock-based compensation charges).

Investing Activities.

Net cash used in investing activities during the year ended December 31, 2022 was $(16.3) million compared to $(35.4) million in cash used in the same period in 2021, due primarily to the difference of $21.4 million in cash paid for acquisition of Mutual Mobile in the year ended December 31, 2022 and Tacit in the year ended December, 31 2021.

Net cash used in investing activities during the year ended December 31, 2021 was $(35.4) million compared to $(18.3) million in cash used in the same period in 2020, due primarily to cash paid for the Tacit acquisition in the year ended December 31, 2021 as well as capital expenditures for computer hardware and related equipment in both periods.

Net cash used in investing activities during the year ended December 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 the Daxx acquisition in the year ended December 31, 2020 as well as capital expenditures for computer hardware and related equipment in both periods.

Financing Activities .

Net cash provided by financing activities was $97.8 million in the year ended December 31, 2022, reflecting the equity offering during the third quarter of 2022 that was slightly offset by the payment of contingent consideration related to acquisitions and the tax withholding obligations due to issuance of shares in connection with vested stock awards.

Net cash provided by financing activities was $49.1 million in the year ended December 31, 2021, reflecting the equity offering and warrant exercise proceeds offset by tax obligations resulted from net share settlement of vested stock awards.

Net cash provided by financing activities was $83.0 million in the year ended December 31, 2020, reflecting primarily the proceeds from the Business Combination.

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 under SEC rules and does not have any off-balance sheet or contingent commitments, except as described elsewhere with respect to operating leases.

As a result of analysis related to Grid Dynamics’ functional control of subcontractor GD Ukraine, LLC, the subcontractor was determined to be a variable interest entity (“VIE”) and is therefore consolidated in Grid 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.

As a result of analysis related to Grid Dynamics’ functional control of subcontractor GD AM, LLC (in Armenia) the subcontractors were determined to be a variable interest entity (“VIE”) and are therefore consolidated in Grid Dynamics’ financial statements.

The assets and liabilities of these VIEs consist primarily of intercompany balances and transactions, all of which have been eliminated in consolidation.

Critical Accounting Policies and Estimates

Grid 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 with U.S.

Preparation of the financial statements requires Grid 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 on Grid Dynamics’ consolidated financial statements.

Preparation of the financial statements requires Grid 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’ consolidated financial statements.

Grid Dynamics’ critical accounting policies are described in Note 2 to its consolidated financial statements.

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The Company determines the fair value of the contingent consideration liabilities using Monte Carlo model which involves a simulation of future revenues and earnings during the earn-out period using management's best estimates and assumptions.

Changes in financial projections, market risk assumptions, discount rates or probability assumptions with respect to the likelihood of achieving the various earnout criteria may result in a significant change in the fair value of contingent

consideration.

Such changes, if any, are recorded within Other income/(expense), net in the Company’s consolidated statements of income.

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For more detailed information about Grid Dynamics’ historical and outstanding grants and its valuation of its stock-based compensation and awards, see Note 13 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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis