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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-02-28 · 227 added, 280 removed, 165 unchanged (75% of the section changed)

6 unchanged sentences

Grid Dynamics Holdings, Inc.

(“Grid Dynamics,” “GDH,” the “Company,” “we,” “us,” or “our”) is a fast-growing company focused on 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 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.

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 leveraging Grid Dynamics’ proprietary processes optimized for innovation, emphasis on talent development and technical expertise, Grid Dynamics has been able to achieve significant growth.

(“Grid Dynamics,” “GDH,” the “Company,” “we,” “us,” or “our”) is a leading provider of technology consulting, platform and product engineering, and advanced analytics services.

As a forefront provider of technology consulting, platform and product engineering services, and bespoke software development, we draw from over 7 years of leadership in Enterprise artificial intelligence (“AI”), coupled with profound expertise in cloud, data, and advanced analytics.

Our commitment to engineering excellence, R&D leadership, a co-innovation ethos, globally efficient “Follow-the-Sun” delivery model, and an unwavering “whatever it takes” dedication to client success empower us to solve even the most complex enterprise challenges, ensuring profitable business outcomes and future-proof growth.

Founded in 2006, Grid Dynamics is headquartered in Silicon Valley and has a global talent pool of intellectually curious problem solvers in offices across the U.S., Mexico, Jamaica, the U.K., Europe, and India.

Fiscal Year Highlights

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Net loss (1,765) (0.6) % (29,214) (9.4) % (7,700) (3.6) %

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

Diluted loss per share

$ (0.02) n/a $ (0.42) n/a (0.13) n/a

Non-GAAP Financial information

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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, 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.

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 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.

Our key metrics for the year ended December 31, 2023 are presented below:

We recorded revenues of $312.9 million, an increase of $2.4 million, or 0.8% from the previous year.

Our GAAP and Non-GAAP gross profit margins were 36.2% and 36.8% respectively, and were down from 38.8% and 39.3% respectively in 2022.

The decline in gross profit margin, both on a GAAP and Non-GAAP basis was driven by a combination of increased personnel costs and foreign exchange effect.

Loss from operations decreased by $15.4 million reaching $5.6 million during 2023 compared to the prior year, which was largely attributed to decreased levels of stock-based compensation, geographic reorganization, and relocation costs.

We managed to decrease net loss by 94.0% to $1.8 million due to lower levels of operating expenses.

Non-GAAP EBITDA was $44.2 million, or 14.1% compared to $58.2 million, or 18.7% in 2022.

The decline in Non-GAAP EBITDA was largely due to decreased gross profit, combined with increased operating expenses both from our acquisitions and our organic business.

GAAP diluted loss per share decreased 95.2% reaching $0.02;

Non-GAAP diluted earnings per share decreased by $0.19 to $0.32 during 2023.

Operating cash flow increased by 29.8% reaching $41.1 million.

Our capital expenditures were $7.9 million and continued to rise with increased investments in computer hardware, related equipment, and office facilities caused by expansion of our geographical presence.

The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

Recent Acquisitions

On April 18, 2023, we acquired NextSphere Technologies Inc.

(“NextSphere”), a full-service custom application development firm.

NextSphere is headquartered in Tampa, FL.

It also has an engineering presence in Phoenix, AZ, and operates two large engineering centers in the India tech hubs of Hyderabad and Chennai.

The acquisition of NextSphere will support our objectives of enhancing our technical offerings, expanding our global footprint, and increasing our client base.

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”), a 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.

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 user experience (“UX”) expertise, and accelerates our strategic expansion to India while supporting our commitment toward 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.

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

The impact on Ukraine, coupled with the actions taken by other countries, including new and stricter sanctions imposed by the U.S., Canada, the U.K., the European Union, and other countries, 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 belonging to companies registered in the U.S., 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.

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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.

As of May 2023, our former subsidiary in Russia is liquidated and we are not performing any 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.

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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.

In addition, the current geopolitical situations in Armenia and separately in Serbia create 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.

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2023 2022 2021

Americas 521 386 259

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

2,806 3,034 2,888

Rest of the world (3)

Total 3,920 3,798 3,274

__________________________

(1) Americas includes personnel located in North, Central and South America.

(2) Europe includes personnel located in Western, Central and Eastern Europe.

(3) Rest of the world includes personnel located in India and other countries not included in regions described above.

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’ 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 our revenue in the years ended December 31, 2022, 2021 and 2020, respectively.

Grid Dynamics has a relatively high level of revenue concentration with certain customers and constantly works toward decreasing those levels.

During the year ended December 31, 2023, one customer accounted for 10% or more of our revenues for the period, compared to two customers each accounting for 10% or more of our revenues during the years ended December 31, 2022 and 2021, respectively.

We expect to continue our focus on maintaining our long-term relationships with customers while diversifying our customer base.

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

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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).

Critical Accounting Estimates

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 the U.S.

generally accepted accounting principles (“GAAP”).

Preparation of the financial statements requires us 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.

We consider 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 our consolidated financial statements.

Our significant accounting policies are described in Note 1 in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Determining the amount of revenue to be recognized requires from us significant estimates and judgements, including whether services specified in the agreements are single or distinct performance obligations, whether obligations are satisfied over time or at a point in time and what is the best method to measure our progress to completion.

We derive our revenues through time and materials and fixed fee contracts.

Although the majority of revenues have been derived through time and material contracts, our fixed-fee customer contracts business is constantly increasing.

Grid Dynamics recognizes revenue for services over time as hours are incurred by Grid 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.

Revenues related to fixed fee contracts are recorded as work is performed based upon actual labor hours incurred and level of effort expended throughout the duration of the contract.

The accuracy of revenue recognized for these contracts during the

reporting period largely depends on our ability to correctly estimate the total expected efforts required to fulfill the performance obligation.

We constantly evaluate our estimates of total efforts required based on available information and experience.

Some of our contracts give rise to variable considerations, including volume discounts.

Volume discounts apply once the customer reaches certain contractual spend thresholds.

If the consideration promised in a contract includes a variable amount, we include 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.

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 various U.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, we consider 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.

We are subject to tax payments and filling of tax returns in various tax jurisdictions.

Our tax returns are routinely examined by tax authorities in various countries.

Such inspections may result in future tax expenses, interest and penalties.

We evaluate for such 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, we measure the amount of tax benefit from the position and record the largest amount of tax benefit that is greater than 50% likely to be realized after settlement with a tax authority.

We believe our estimates for uncertain tax positions are appropriate and sufficient.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Business Combinations

We account for business combinations under the acquisition method of accounting, which requires recognition of 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.

We use significant management estimates and assumptions as well as available industry data to arrive at the acquisition date fair values of assets acquired and liabilities assumed, especially with respect to intangible assets and contingent consideration granted, if any.

Significant estimates used in valuation of intangible assets may include, but are not limited to, revenue projections, expected economic life of customer relations, royalty rates, useful lives and discount rates.

The fair value of any contingent consideration is determined using the Monte Carlo model which involves a simulation of future revenues and earnings during the earn-out period using projected financial results adjusted to market risk assumptions, discount rates and probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

We consider our assumptions and estimates used to determine fair values to be reasonable, but any changes due to inherent uncertainty and unpredictability may result in significant differences between actual and estimated results.

Stock-based Compensation

We have in the past issued, currently issue and intend to continue issuing incentive stock options and non-qualifying stock options, performance stock units and restricted stock units.

Stock-based compensation expense is measured based on the grant-date fair value of the share-based awards.

Forfeitures are recognized as incurred.

We estimate grant date fair value of stock using a number of objective and subjective factors, as described in more detail below, and the Black-Scholes-Merton 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 our 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.

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.

We evaluate the assumptions used to value stock-based awards on each grant date.

Grants are approved by our Board of Directors.

Recently Adopted and Issued Accounting Pronouncements

Recently issued and adopted accounting pronouncements are described in Note 1 in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Results of Operations

Year Ended December 31, 2023 compared to Year Ended December 31, 2022

The following table sets forth a summary of Grid Dynamics’ consolidated results of operations for the periods indicated, and the changes between periods:

Year ended December 31, Change

2023 2022 Dollars Percentage

(in thousands, except percentages)

$ 312,910 $ 310,482 $ 2,428 0.8 %

Cost of revenue 199,764 189,892 9,872 5.2 %

Gross profit 113,146 120,590 (7,444) (6.2) %

Engineering, research, and development 14,741 15,772 (1,031) (6.5) %

Sales and marketing 24,151 19,808 4,343 21.9 %

General and administrative 79,834 106,018 (26,184) (24.7) %

Total operating expense 118,726 141,598 (22,872) (16.2) %

Loss from operations

(5,580) (21,008) 15,428 (73.4) %

Other income/(expenses), net 10,418 555 9,863 1,777.1 %

Income/(loss) before income taxes

4,838 (20,453) 25,291 (123.7) %

Provision for income taxes 6,603 8,761 (2,158) (24.6) %

Net loss $ (1,765) $ (29,214) $ 27,449 (94.0) %

We recorded revenues of $312.9 million, which was a slight increase of $2.4 million, or 0.8% from the previous year.

Revenues by Vertical.

We assign our customers into one of four main vertical markets or a group of various industries where we are increasing our presence, labeled 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,

2023 2022 2021

% of revenue % of revenue % of revenue

(in thousands, except percentages)

Retail $ 102,551 32.8 % $ 99,681 32.1 % $ 61,717 29.2 %

Tech, Media and Telecom 98,830 31.6 % 98,334 31.7 % 67,689 32.0 %

CPG/Manufacturing 42,861 13.7 % 61,216 19.7 % 43,461 20.6 %

Finance 28,842 9.2 % 21,893 7.1 % 17,515 8.3 %

Other 39,826 12.7 % 29,358 9.4 % 20,898 9.9 %

Total $ 312,910 100.0 % $ 310,482 100.0 % $ 211,280 100.0 %

During the year ended December 31, 2023, our Retail vertical remained the largest comprising 32.8% of total revenues and grew 2.9% compared to the prior year.

The increase was due to a combination of new customers, existing business and acquisitions.

The Technology, Media and Telecom (“TMT”) vertical remained flat compared to the year ended December 31, 2022 and reached $98.8 million during 2023.

During 2023, we added several new TMT customers offset by lower project activity from our existing customers.

Our CPG and Manufacturing vertical, representing 13.7% of our revenues for 2023, showed a decrease of 30.0%.

The key reasons for the decline were a combination of macro-related uncertainty resulting in a more cautionary outlook towards spending and customer specific factors at some of our larger customers.

Our Finance and Other verticals, representing 9.2% and 12.7% of total revenues, respectively, continued to steadily grow with each increasing by more than 30.0% during 2023.

Revenue growth was driven by increased demand from existing clients as well as newly added customers.

Cost of Revenues and Gross Margin

Our cost of revenues consists primarily of salaries and employee benefits, including performance bonuses and stock-based compensation, and project-related travel expenses of client-serving professionals.

Cost of revenues also includes depreciation and amortization expense related to client-serving activities.

During the year ended December 31, 2023, our cost of revenues were $199.8 million, an increase of $9.9 million, or 5.2%, from $189.9 million recorded in 2022.

Main drivers of growth include recent acquisitions as well as increased compensation of our delivery professionals due to increased presence in higher cost geographies.

The factors discussed above caused a decrease in our gross profit from $120.6 million during the year ended December 31, 2022 to $113.1 million during 2023.

Expressed as a percentage of revenues, our gross margin declined by 2.6 percentage points from 38.8% in 2022 to 36.2% in the year ended December 31, 2023.

Engineering, Research and Development

The principal components of engineering, research and development expenses are salaries and employee benefits including performance bonuses and stock-based compensation for personnel engaged in the design and development of solutions, as well as depreciation and amortization expenses related to engineering, research and development activities.

Engineering, research and development expenses decreased by $1.0 million or 6.5%, to $14.7 million in the year ended December 31, 2023 from $15.8 million recorded last year.

The decrease was primarily due to decline in stock-based compensation expenses, that was partially offset by increase in staffing and greater investments in customer delivery operations.

Expressed as a percentage of revenues, engineering research and development expenses decreased to 4.7% during the year ended December 31, 2023 compared to 5.1% in 2022.

Sales and Marketing

Sales and marketing expenses represent spending associated with promoting and selling of our services.

These expenses comprise of personnel costs, including performance bonuses and stock-based compensation, marketing events, travel expenses, as well as depreciation and amortization related to such activities.

Our sales and marketing expenses were $24.2 million in the year ended December 31, 2023, an increase of $4.3 million, or 21.9%, from $19.8 million in 2022.

The increase in sales and marketing expenses was mainly due to a $4.5 million increase of employee-related costs driven by growth in sales personnel, that was partially offset by decrease in stock-based compensation expenses.

General and Administrative

General and administrative expenses include costs to support the business and consist primarily of administrative personnel and officers’ salaries, employee benefits including performance bonuses, stock-based compensation, legal and audit expenses, insurance, operating lease expenses of office premises and other facility costs, workforce global mobility initiatives, restructuring and employee relocations cost not directly related to customer projects, and depreciation and amortization expenses related to such activities.

General and administrative expenses include a substantial majority of Grid Dynamics’ stock-based compensation costs for the financial periods discussed herein.

General and administrative expenses decreased by $26.2 million, or 24.7%, to $79.8 million in the year ended December 31, 2023 from $106.0 million in the year ended December 31, 2022.

The decrease is largely explained by a combination of considerably lower stock-based compensation and geographic reorganization costs partially offset by increased levels of

investments in infrastructure, physical assets and facilities.

As a result, expressed as a percentage of revenues, our general and administrative expenses decreased bv 8.6% to 25.5% during 2023.

Other Income/(Expenses), Net

Other income/(expense), net represents interest earned on our cash and cash equivalents, including money market funds, interest expense related to our borrowings, foreign exchange gains and losses as well as changes in the fair value of contingent considerations.

During the year ended December 31, 2023, other income/(expenses), net increased to $10.4 million from $0.6 million reported in the prior year.

The increase was primarily driven by income generated by our money market funds which we started to receive during the third quarter of 2022.

Additionally we have written-off our contingent consideration liability related to Mutual Mobile and NextSphere acquisitions in the amount of $4.2 million.

Provision for Income Tax

Grid Dynamics follows the asset and liability method of accounting for income taxes.

The provision for income taxes reflects income earned and taxed in the various U.S.

federal and state and non-U.S.

jurisdictions.

Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

Provision for income tax was $6.6 million in the year ended December 31, 2023 compared to $8.8 million in the year ended December 31, 2022.

The effective tax rate increased between periods from (42.8)% in 2022 to 136.5% in 2023.

The difference in the tax provision was mainly attributable to Section162 (m) compensation deduction limitations, tax credit utilization, and foreign inclusion adjustments.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 includes a discussion and analysis of our financial condition and results of operations between the years ended December 31, 2022 and 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is hereby incorporated herein by reference.

Non-GAAP Measures

To supplement Grid Dynamics’ consolidated financial data presented on a basis consistent with U.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.

GAAP, this Annual Report contains certain non-GAAP financial measures, including Non-GAAP EBITDA, Non-GAAP net income and Non-GAAP diluted earnings per share, or Non-GAAP diluted EPS.

Grid Dynamics has included these non-GAAP financial measures because they are financial measures used by Grid Dynamics’ management to evaluate Grid Dynamics’ core operating performance and trends, to make strategic decisions regarding the allocation of capital and new investments and are among the factors analyzed in making performance-based compensation decisions for key personnel.

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• Non-GAAP diluted EPS :

Non-GAAP Net Income, divided by the diluted weighted-average number of common shares outstanding for the period.

The following table presents the reconciliation of Grid Dynamics’ Non-GAAP EBITDA to its consolidated net income/(loss), the most directly comparable GAAP measure, for the annual periods indicated:

Non-GAAP net income, divided by the diluted weighted-average number of diluted shares outstanding for the period.

The following table presents the reconciliation of Grid Dynamics’ Non-GAAP EBITDA to its consolidated net loss, the most directly comparable GAAP measure, for the annual periods indicated:

Year ended December 31,

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Depreciation and amortization 8,926 6,626 5,049

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

Provision for income taxes

6,603 8,761 5,248

Stock-based compensation 35,516 60,968 33,036

Geographic reorganization (1)

1,858 11,023 —

Transaction and transformation-related costs (2)

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Restructuring (3)

Other (income)/expenses, net (4)

Other (income)/expense, net (4)

(10,418) (555) 2,502

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(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.

(3) We implemented a restructuring plan during the first quarter of 2023.

Our restructuring costs comprised of severance charges and respective taxes and are included in General and administrative expenses in the Company’s consolidated statement of loss and comprehensive income/(loss).

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.

(4) Other (income)/expense, net consist primarily of gains and losses 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:

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Geographic reorganization (1)

1,858 11,023 —

Transaction and transformation-related costs (2)

1 unchanged sentence

Restructuring (3)

Other (income)/expenses, net (4)

Other (income)/expense, net (4)

(10,418) (555) 2,502

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Non-GAAP net income

$ 25,077 $ 36,627 $ 24,160

Number of shares used in the GAAP diluted EPS

75,193 69,197 58,662

GAAP diluted EPS

$ (0.02) $ (0.42) $ (0.13)

Number of shares used in the Non-GAAP diluted EPS

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(3) We implemented a restructuring plan during the first quarter of 2023.

Our restructuring costs comprised of severance charges and respective taxes and are included in general and administrative expenses in the Company’s consolidated statement of loss and comprehensive income/(loss).

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

(4) Other (income)/expense, net 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.

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

(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 December 31, 2020 onwards, we have chosen to calculate its Non-GAAP Diluted EPS based on the diluted share count even in Net GAAP Loss situation.

This methodology differs from the prior approach when we applied the basic share count in situations of a Net GAAP Loss and a positive Non-GAAP Net Income.

Management believes that the new methodology provides better representation of the company’s financial results as it takes into account the significance of the dilutive impact from any outstanding equity instruments in a GAAP Net Loss/Non-GAAP Net Income situation.

Key Components of Revenue and Expenses

Grid Dynamics generates revenue by providing focused and complex services in the area of software engineering, development, integration, testing, and operations of digital services.

Grid Dynamics provides services mainly on a time and materials basis and, to a much lesser extent, on a fixed-fee basis.

While fixed-fee contracts currently represent 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.

On its current and future fixed fee contracts, Grid Dynamics earns and recognizes revenue as the work is performed, the monthly calculation of which is based upon actual labor hours incurred and level of effort expended throughout the duration of the contract.

For both time and materials contracts and fixed fee contracts, hourly rates are typically determined based on the location and experience of Grid Dynamics personnel selected to perform the service and are negotiated for each contract or statement of work, as the case may be.

For fixed fee contracts, the fixed fee generally remains constant for the contracted project period unless the customer directs a change in scope of project work or requests additional Grid Dynamics employees in excess of those scheduled for a specific project.

In select cases, Grid Dynamics offers volume discounts or early settlement discounts, which are recorded as contra-revenue items.

Volume discounts apply once the customer reaches certain contractual spend thresholds.

Early settlement discounts are issued contingent upon the timing of the payment from the customer.

If there is uncertainty about project completion or receipt of payment for services provided, revenue is deferred until the uncertainty is sufficiently resolved.

Costs and Expenses

Cost of Revenue.

Cost of revenue consists primarily of salaries and employee benefits, including performance bonuses and stock-based compensation, and travel expenses for client-serving personnel.

Cost of revenue also includes depreciation and amortization expense related to client-serving activities.

Engineering, Research and Development.

Engineering, research and development expenses consist mainly of salaries and employee benefits including performance bonuses and stock-based compensation for personnel engaged in the design and development of solutions.

Engineering, research and development expenses also include depreciation and amortization expenses related to such activities.

Engineering, research and development costs are expensed as incurred.

Sales and Marketing.

Sales and marketing expenses consist primarily of expenses associated with promoting and selling Grid Dynamics’ services and consists mainly of salaries and employee benefits, including performance bonuses and stock-based compensation, marketing events, travel, as well as depreciation and amortization expenses related to such activities.

General and Administrative.

General and administrative expenses consist primarily of administrative personnel and officers’ salaries and employee benefits including performance bonuses and stock-based compensation, legal and audit expenses, insurance, operating lease expenses (mainly facilities and vehicles) and other facility costs, workforce global mobility initiatives, restructuring and employee relocations cost (not in connection with customer projects), and depreciation and amortization expenses related to such activities.

General and administrative expenses include a substantial majority of Grid Dynamics’ stock-based compensation costs for the financial periods discussed herein.

Provision for Income Taxes.

Grid Dynamics follows the asset and liability method of accounting for income taxes, whereby deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities.

The provision for income taxes reflects income earned and taxed in the various U.S.

federal and state and non-U.S.

jurisdictions.

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 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

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

The following table sets forth a summary of Grid Dynamics’ consolidated results of operations for the periods indicated, and the changes between periods:

Year ended December 31, Change

2022 2021 Dollars Percentage

(in thousands, except percentages)

Revenue $ 310,482 $ 211,280 $ 99,202 47.0 %

Cost of revenue 189,892 123,552 66,340 53.7 %

Gross profit 120,590 87,728 32,862 37.5 %

Engineering, research, and development 15,772 8,459 7,313 86.5 %

Sales and marketing 19,808 14,457 5,351 37.0 %

General and administrative 106,018 64,762 41,256 63.7 %

Total operating expense 141,598 87,678 53,920 61.5 %

Income/(loss) from operations (21,008) 50 (21,058) (42,116.0) %

Other income/(expenses), net 555 (2,502) 3,057 (122.2) %

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

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

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

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,

2022 2021 2020

% of revenue % of revenue % of revenue

(in thousands, except percentages)

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

Retail 99,681 32.1 % 61,717 29.2 % 33,975 30.5 %

Finance 21,893 7.1 % 17,515 8.3 % 13,589 12.2 %

CPG/Manufacturing 61,216 19.7 % 43,461 20.6 % 14,202 12.8 %

Other 29,358 9.4 % 20,898 9.9 % 4,155 3.7 %

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

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

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 $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.

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 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.

Sales and marketing expenses increased by $5.4 million, or 37.0%, to $19.8 million in the year ended December 31, 2022 from $14.5 million in the year ended December 31, 2021.

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 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.

General and administrative expenses increased by $41.3 million, or 63.7%, to $106.0 million in the year ended December 31, 2022 from $64.8 million in the year ended December 31, 2021.

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

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), 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 increased by 171.3% between periods.

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

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

The following table sets forth a summary of Grid Dynamics’ consolidated results of operations for the years indicated, and the changes between periods:

Year ended December 31, Change

2021 2020 Dollars Percentage

(dollars in thousands, except percentages)

Revenue $ 211,280 $ 111,283 $ 99,997 89.9 %

Cost of revenue 123,552 69,662 53,890 77.4 %

Gross profit 87,728 41,621 46,107 110.8 %

Engineering, research, and development 8,459 9,311 (852) (9.2) %

Sales and marketing 14,457 10,051 4,406 43.8 %

General and administrative 64,762 37,707 27,055 71.8 %

Total operating expense 87,678 57,069 30,609 53.6 %

Income from operations 50 (15,448) 15,498 (100.3) %

Other income/(expenses), net (2,502) 236 (2,738) (1,160.2) %

Income before income taxes (2,452) (15,212) 12,760 (83.9) %

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

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.

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.

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 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.

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.

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.

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.

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 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.

General and administrative expenses increased by $27.1 million, or 71.8%, to $64.8 million in the year ended December 31, 2021 from $37.7 million in the year ended December 31, 2020.

Increased stock-based compensation accounted for approximately $12.6 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.

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.

Provision/(benefit) for Income Tax .

Provision/(benefit) for income tax was $5.2 million in the year ended December 31, 2021 compared to $(2.6) million in the year ended December 31, 2020.

The effective tax rate decreased by 231.21% between periods.

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

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

Grid Dynamics measures liquidity in terms of its ability to fund the cash requirements of its business operations, including working capital needs, capital expenditures, contractual obligations and other commitments with cash flows from operations and other sources of funding.

Grid Dynamics’ current liquidity needs relate mainly to compensation and benefits of Grid Dynamics’ employees and contractors and capital expenditures for computer hardware and office furniture.

Grid Dynamics’ ability to expand and grow its business will depend on many factors including its capital expenditure needs and the evolution of its operating cash flows.

Grid Dynamics may need more cash resources due to changing business conditions or other developments, including investments or acquisitions.

Grid Dynamics believes that its current cash position on its balance sheet of $256.7 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, if Grid Dynamics’ resources are insufficient to satisfy its cash requirements, it may need to seek additional equity or debt financing, which may be subject to conditions outside of Grid Dynamics’ control and may not be available on terms acceptable to Grid Dynamics’ management or at all.

We measure liquidity in terms of our ability to fund the cash requirements for business operations, including working capital needs, capital expenditures, contractual obligations and other commitments with cash flows from operations and other sources of funding.

Our current liquidity needs relate mainly to compensation and benefits of our employees and contractors and capital investments to support our growth and geographical expansion.

Our ability to expand and grow our business will depend on many factors including capital expenditure needs and the evolution of our operating cash flows.

We may need more cash resources due to changing business conditions or other developments, including investments or acquisitions.

Our principal source of liquidity continues to be cash generated from our operations.

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

The revolving credit facility provides us with $30.0 million of available borrowing capacity.

See Note 7 “Debt” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

As of December 31, 2023, Grid Dynamics had cash and cash equivalents amounting to $257.2 million compared to $256.7 million at December 31, 2022.

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 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.

Of this amount, $21.2 million was held in countries outside the U.S, and included among others

the U,K., Netherlands, India, Poland, Ukraine and other countries (compared to $16.8 million as of December 31, 2022).

We did not have any debt outstanding under the revolving credit facility at any balance sheet date presented.

We believe that our cash and cash equivalents balance and cash generated from operating activities will be sufficient to fund currently expected levels of operating, investing and financing expenditures for a period of twelve months from the date of this filing.

However, if our resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing, which may be subject to conditions outside of our control and may not be available on terms acceptable to our management or at all.

See Note 7 “Debt”, Note 8 “Leases” and Note 15 “Commitments and contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for detailed information on our contractual obligations and commitments.

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

4 unchanged sentences

Net cash used in investing activities (25,950) (16,323) (35,366)

Net cash provided by financing activities 97,758 49,134 82,967

Net cash (used in)/provided by financing activities

(16,321) 97,758 49,134

Effect of exchange rate changes on cash and cash equivalents 1,676 (722) (122)

Net increase in cash and cash equivalents 498 112,365 31,619

Cash, cash equivalents (beginning) 144,364 112,745 42,189

Cash, cash equivalents (end) $ 256,729 $ 144,364 $ 112,745

Cash and cash equivalents (beginning)

256,729 144,364 112,745

Cash and cash equivalents (ending)

$ 257,227 $ 256,729 $ 144,364

Operating Activities.

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).

Net cash provided by operating activities during the year ended December 31, 2023 increased by $9.4 million, or 29.8%, to $41.1 million from $31.7 million in the same period in 2022.

The increase in operating cash flow was largely due to a decrease in geographical reorganization costs.

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, 2023 was $26.0 million compared to $16.3 million used in the same period in 2022, primarily due to larger closing payment for the 2023 acquisition compared to the 2022 acquisition.

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 used for financing activities was $16.3 million in the year ended December 31, 2023, reflected primarily the tax withholding obligations due to issuance of shares in connection with vested stock awards and was $11.1 million higher compared to 2022.

Cash provided by financing activities during the year ended December 31, 2022 of $97.8 million was generated by 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 noted above.

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 includes a discussion and analysis of our cash flows between the years ended December 31, 2022 and 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 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.

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

Grid Dynamics derives its revenue through time and materials and fixed fee contracts.

Although the majority of revenues have been derived through time and material contracts, our fixed-fee customer contracts business is increasing, 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 by Grid 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.

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 various U.S.

federal and state and non-U.S.

jurisdictions.

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.

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.

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.

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 13 to the audited consolidated financial statements included elsewhere in this Annual Report.

Recently Adopted and Issued Accounting Pronouncements

Recently issued and adopted accounting pronouncements are described in Note 2 to Grid Dynamics’ consolidated financial statements.

We do not have any material off-balance sheet commitments or contractual arrangements other than those disclosed in Note 8 “Leases” and Note 15 “Commitments and contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

As a result of analysis related to Grid Dynamics’ functional control of its subcontractors one 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.

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