GRID DYNAMICS HOLDINGS, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GRID DYNAMICS HOLDINGS, INC Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) F- 1 Consolidated Balance Sheets as of December 31, 2023 and 2022 F- 4 Consolidated Statements of Loss and Comprehensive Income/(Loss) for the Years Ended December 2023, 2022, and 2021 F- 5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022, and 2021 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021 F- 7 Notes to Consolidated Financial Statements F- 8 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Grid Dynamics Holdings, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Grid Dynamics Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of loss and comprehensive income/(loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 29, 2024 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2017. San Francisco, California February 29, 2024 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Grid Dynamics Holdings, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Grid Dynamics Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated February 29, 2024 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of NextSphere Technologies, Inc. (“NextSphere”), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 1.7 and 2.7 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023. As indicated in Management’s Report on Internal Control over Financial Reporting, NextSphere was acquired during 2023. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of NextSphere. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. s/ GRANT THORNTON LLP San Francisco, California February 29, 2024 F-3 GRID DYNAMICS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) As of December 31, 2023 2022 Assets Current assets Cash and cash equivalents $ 257,227 $ 256,729 Accounts receivable, net of allowance of $ 1,363 , and $ 443 as of December 31, 2023 and December 31, 2022, respectively 49,824 48,358 Unbilled receivables 3,735 5,591 Prepaid income taxes 3,998 4,294 Prepaid expenses and other current assets 9,196 8,154 Total current assets 323,980 323,126 Property and equipment, net 11,358 8,215 Operating lease right-of-use assets, net 10,446 7,694 Intangible assets, net 26,546 20,375 Goodwill 53,868 45,514 Deferred tax assets 6,418 4,998 Other noncurrent assets 2,549 1,224 Total assets 435,165 411,146 Liabilities and equity Current liabilities Accounts payable $ 3,621 $ 3,897 Accrued compensation and benefits 19,263 13,065 Accrued income taxes 8,828 10,718 Operating lease liabilities, current 4,235 2,505 Accrued expenses and other current liabilities 6,276 8,525 Total current liabilities 42,223 38,710 Deferred tax liabilities 3,274 3,756 Operating lease liabilities, noncurrent 6,761 5,636 Total liabilities 52,258 48,102 Commitments and contingencies (Note 14) Stockholders’ equity (Note 9) Common stock, $ 0.0001 par value; 110,000,000 shares authorized; 75,887,475 and 74,156,458 issued and outstanding as of December 31, 2023 and December 31, 2022, respectively $ 8 $ 7 Additional paid-in capital 397,511 378,006 Accumulated deficit ( 15,886 ) ( 14,121 ) Accumulated other comprehensive income/(loss), net 1,274 ( 848 ) Total stockholders’ equity 382,907 363,044 Total liabilities and stockholders’ equity $ 435,165 $ 411,146 The accompanying notes are an integral part of these consolidated financial statements. F-4 GRID DYNAMICS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE INCOME/(LOSS) (In thousands, except per share data) For the years ended December 31, 2023 2022 2021 Revenues $ 312,910 $ 310,482 $ 211,280 Cost of revenues 199,764 189,892 123,552 Gross profit 113,146 120,590 87,728 Operating expenses Engineering, research, and development 14,741 15,772 8,459 Sales and marketing 24,151 19,808 14,457 General and administrative 79,834 106,018 64,762 Total operating expenses 118,726 141,598 87,678 Income/(loss) from operations ( 5,580 ) ( 21,008 ) 50 Other income/(expenses), net 10,418 555 ( 2,502 ) Income/(loss) before income taxes 4,838 ( 20,453 ) ( 2,452 ) Provision for income taxes 6,603 8,761 5,248 Net loss $ ( 1,765 ) $ ( 29,214 ) $ ( 7,700 ) Foreign currency translation adjustments 2,122 ( 722 ) ( 122 ) Comprehensive income/(loss) $ 357 $ ( 29,936 ) $ ( 7,822 ) Loss per share Basic $ ( 0.02 ) $ ( 0.42 ) $ ( 0.13 ) Diluted $ ( 0.02 ) $ ( 0.42 ) $ ( 0.13 ) Weighted average shares outstanding Basic 75,193 69,197 58,662 Diluted 75,193 69,197 58,662 The accompanying notes are an integral part of these consolidated financial statements. F-5 GRID DYNAMICS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Retained Earnings/ (Accumulated Deficit) Accumulated Other Comprehensive Income/(loss) Total Stockholders’ Equity Shares Amount Balance at January 1, 2021 50,879 $ 5 $ 128,930 $ 22,793 $ ( 4 ) $ 151,724 Net loss — — — ( 7,700 ) — ( 7,700 ) Stock-based compensation — — 33,036 — — 33,036 Exchange of warrants into common stock 6,680 1 49,123 — — 49,124 Exercise of stock options 1,631 — ( 27,528 ) — — ( 27,528 ) Issuance of common stock in 2021 offering, net of transaction costs of $ 498 5,470 1 77,812 — — 77,813 Issuance of shares and payments of tax obligations resulted from net share settlement of vested stock awards 2,060 — ( 49,296 ) — — ( 49,296 ) Issuance of escrow common stock due to Closing of Business Combination 131 — — — — — Foreign currency translation adjustment — — — — ( 122 ) ( 122 ) Balance at December 31, 2021 66,851 $ 7 $ 212,077 $ 15,093 $ ( 126 ) $ 227,051 Net loss — — — ( 29,214 ) — ( 29,214 ) Stock-based compensation — — 60,968 — — 60,968 Exercise of stock options 341 — 1,432 — — 1,432 Issuance of common stock in 2022 Offering, net of transaction costs of $ 253 6,571 — 109,284 — — 109,284 Issuance of shares and payments of tax obligations resulted from net share settlement of vested stock awards 393 — ( 5,755 ) — — ( 5,755 ) Foreign currency translation adjustment — — — — ( 722 ) ( 722 ) Balance at December 31, 2022 74,156 $ 7 $ 378,006 $ ( 14,121 ) $ ( 848 ) $ 363,044 Net loss — — — ( 1,765 ) — ( 1,765 ) Stock-based compensation — — 35,516 — — 35,516 Exercise of stock options 182 — 821 — — 821 Issuance of shares and payments of tax obligations resulted from net share settlement of vested stock awards 1,549 1 ( 16,832 ) — — ( 16,831 ) Foreign currency translation adjustment — — — — 2,122 2,122 Balance at December 31, 2023 75,887 $ 8 $ 397,511 $ ( 15,886 ) $ 1,274 $ 382,907 The accompanying notes are an integral part of these consolidated financial statements. F-6 GRID DYNAMICS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the years ended December 31, 2023 2022 2021 Cash flows from operating activities Net loss $ ( 1,765 ) $ ( 29,214 ) $ ( 7,700 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,926 6,626 5,049 Operating lease right-of-use assets amortization expense 3,192 3,021 — Bad debt expense 945 132 45 Deferred income taxes ( 4,140 ) ( 3,633 ) 2,611 Change in fair value of contingent consideration ( 4,220 ) — — Stock-based compensation 35,516 60,968 33,036 Other expenses 324 71 979 Changes in assets and liabilities: Accounts receivable ( 434 ) ( 8,738 ) ( 18,676 ) Unbilled receivables 2,518 ( 1,116 ) ( 849 ) Prepaid income taxes 435 ( 3,450 ) 237 Prepaid expenses and other assets ( 511 ) ( 3,371 ) ( 1,176 ) Accounts payable ( 538 ) 1,729 957 Accrued compensation and benefits 5,260 1,694 873 Operating lease liabilities ( 3,135 ) ( 2,574 ) — Accrued income taxes ( 2,271 ) 8,525 532 Accrued expenses and other current liabilities 991 982 2,055 Net cash provided by operating activities 41,093 31,652 17,973 Cash flows from investing activities Purchase of property and equipment ( 7,870 ) ( 6,069 ) ( 4,716 ) Purchase of investments ( 250 ) ( 1,000 ) — Acquisition of business, net of cash acquired ( 17,830 ) ( 9,254 ) ( 30,650 ) Net cash used in investing activities ( 25,950 ) ( 16,323 ) ( 35,366 ) Cash flows from financing activities Proceeds from exercises of stock options, net of shares withheld for taxes 510 1,432 ( 27,528 ) Payments of tax obligations resulted from net share settlement of vested stock awards ( 16,831 ) ( 5,755 ) ( 49,296 ) Proceeds from issuance of Common Stock from 2022 and 2021 Offerings — 109,537 78,311 Proceeds from debt — 5,000 — Proceeds from exercise of warrants — — 48,145 Payment of contingent consideration related to previously acquired businesses — ( 6,933 ) — Repayment of debt — ( 5,000 ) — Debt issuance cost — ( 270 ) — Equity issuance costs — ( 253 ) ( 498 ) 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 and cash equivalents, beginning of period 256,729 144,364 112,745 Cash and cash equivalents, end of period $ 257,227 $ 256,729 $ 144,364 GRID DYNAMICS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Continued) For the years ended December 31, 2023 2022 2021 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 12,365 $ 7,474 $ 2,448 Supplemental disclosure of non-cash activities Acquisition fair value of contingent consideration issued for acquisition of business $ 932 $ 3,288 $ 4,986 The accompanying notes are an integral part of these consolidated financial statements. F-7 GRID DYNAMICS HOLDINGS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 1 — Description of business and summary of significant accounting policies Description of business Grid Dynamics Holdings, Inc. (the “Company” or “GDH” ) is a leading provider of technology consulting, platform and product engineering, and advanced analytics services. The Company’s core business includes cloud platform and product engineering, supply chain and advanced manufacturing, and data and machine learning platform engineering. Grid Dynamics also helps organizations become more agile and create innovative digital products and experiences through its deep expertise in emerging technology, such as artificial intelligence (“AI”), data science, cloud computing, big data and DevOps, lean software development practices and a high-performance product culture. The Company’s headquarters and principal place of business is in San Ramon, California. The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries that are directly or indirectly owned or controlled. Intercompany transactions and balances have been eliminated upon consolidation. The Company provides services to its customers utilizing its own personnel as well as personnel from subcontractors. One of the subcontractors exclusively supports and performs services on behalf of the Company and its customers. The Company had no ownership in this subcontractor (“Affiliate”) as of December 31, 2023. During the years ended December 31, 2022 and 2021 the Company had similar subcontractors that ceased its operations at the beginning of 2022. The Company is required to apply accounting standards which address how a business enterprise should evaluate whether it has a controlling financial interest in a variable interest entity (“VIE”) through means other than voting rights and accordingly should determine whether or not to consolidate the entity. The Company has determined that it is required to consolidate the Affiliate because the Company has the power to direct the VIE’s most significant activities and is the primary beneficiary of the Affiliate. The assets and liabilities of the Affiliate primarily consist of inter-company balances and transactions all of which have been eliminated in consolidation. There was minimal activity in the Affiliate during the year ended December 31, 2023. Use of estimates The preparation of the consolidated financial statements in accordance with the U.S. generally accepted accounting principles (“GAAP”) requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates on an ongoing basis including allowance of credit losses, determination of fair value, useful lives and recoverability of intangible assets and goodwill, valuation of stock-based compensation and contingent consideration payable, determination of provision for income taxes, deferred tax assets and liabilities and uncertain tax positions. The Company builds its estimates on historical data and assumptions as well as forward-looking expectations that the Company believes to be reasonable under current conditions and circumstances. Actual results could differ from these estimates and such differences could be material. Foreign currency translation The Company’s reporting currency is the U.S. dollar. All assets and liabilities of consolidated foreign subsidiary whose functional currency is different from the U.S. dollar are translated into U.S. dollar at the current exchange rate as of the end of the period, and revenue and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of Accumulated other comprehensive income/(loss), net. Cash and cash equivalents Cash and cash equivalents consist of cash balances and short-term, highly liquid investments and deposits with original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value due to their short-term nature. F-8 Non-marketable securities The Company holds investments in privately-held entities. Such investments do not have readily determinable fair value and as such are accounted for under the fair value measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. Non-marketable securities are classified as Other noncurrent assets on the consolidated balance sheets. All gains and losses on non-marketable securities, whether realized or unrealized, are recognized in Other income/(expense), net in the consolidated statements of loss and comprehensive income/(loss). Contract balances Depending on the timing of revenue recognition and contractual payment terms, the Company records trade receivables, contract assets or contract liabilities in its consolidated financial statements. The Company’s accounts receivables are rights to consideration that are conditional only on the passage of time. Accounts receivable are recorded net of allowance for credit losses. From time-to-time, a service period may overlap with a period-end and the unbilled receivables represent amounts for services performed through period-end, but not yet billed. The unbilled receivable represents the amount expected to be billed and collected for services performed through period-end in accordance with contract terms. Comparatively, if a right to consideration is conditional upon factors other than the passage of time, the Company records contract assets. Contract assets usually arise in fixed-price arrangements when services have been provided, but the Company is to satisfy other performance obligations to receive consideration. If the Company receives consideration in advance of the performance obligation being satisfied or in excess of the revenue recognized, the Company records a contract liability. The Company records its contract assets and liabilities on a net contract-by-contract basis at the end of each reporting period. Allowance for credit losses The Company maintains an allowance against accounts receivable for the estimated probable losses on uncollectible accounts. The allowance is based upon historical loss experience, as adjusted for the current market conditions and forecasts about future economic conditions. Accounts receivable are charged off against the reserve when, in management’s estimation, further collection efforts would not result in a reasonable likelihood of receipt. Movement of allowance for credit losses for the years ended December 31, 2023, 2022 and 2021 is presented in the following table: Balance at Beginning of Year Provision/Adjustment Write-offs Net Foreign Currency Exchange Rate Changes Balance at End of Year Year ended December 31, 2023 $ 443 945 ( 47 ) 22 $ 1,363 Year ended December 31, 2022 $ 315 132 — ( 4 ) $ 443 Year ended December 31, 2021 $ 418 45 ( 148 ) — $ 315 Property and equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, generally two to 10 years. Leasehold improvements and property under capital leases are amortized over the shorter of estimated useful lives of the assets or the lease term. Expenditures for repairs and maintenance are expensed as incurred. Software development costs The Company incurs certain internal and external costs associated with the development of internally used software. Such costs are capitalized once the application development stage is reached, and it is probable that the project will be completed, and the software will be used to perform the function intended. Capitalization ceases and amortization begins once the developed software is substantially complete and ready for its intended use. The capitalized amounts are included in Property and equipment, net on the consolidated balance sheets. Costs incurred during planning, preliminary project and post-implementation stages are expensed as incurred. Internally developed software is amortized on a straight-line basis over the useful life of the respective asset, generally two years . Amortization of internally developed software is recorded within Engineering, research, and development and Sales and marketing expenses in the consolidated statements of loss and comprehensive income/(loss) as the software is developed for purposes of supporting internal R&D, engineering, and marketing activities. Management evaluates the useful lives of these F-9 assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There was no impairment of internally developed software in the years ended December 31, 2023, 2022 and 2021. Business combinations The Company accounts for business combinations under the acquisition method of accounting that requires to allocate the purchase price of acquired company to any assets acquired and liabilities assumed at the acquisition date based on their estimated 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. Goodwill Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. Goodwill is not amortized but is to be tested for impairment at least annually, or more frequently if indicators of potential impairment arise. Impairment evaluation is performed at reporting unit level. Based on the internal reporting structure, the Company had one reporting unit as of December 31, 2023 and 2022. On December 31 of each year the Company makes a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment assessment, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company uses the discounted cash flow method of the income approach and market approach to determine the fair value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. There was no impairm ent of goodwill in the years ended December 31, 2023, 2022 and 2021. Intangible assets other than goodwill Finite-lived intangible assets include assets acquired as a result of a business acquisition and are initially measured at estimated fair values as of the acquisition date. Depending on class of intangible asset the Company may utilize various methods to determine its estimated fair value, including “multi-period excess earnings”, “relief-from-royalty”, or “with and without” methods. After the initial recognition finite-lived intangible assets are amortized over the asset’s useful lives. Amortization is computed either on the straight-line basis or declining balance method ranging between two and 12 years. The Company evaluates the estimated useful lives and potential impairment of finite and indefinite-lived intangible assets on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. If facts and circumstances indicate that the carrying value might not be recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives is compared against their respective carrying amounts. If an asset is found to be impaired, the impairment charge will be measured as the amount by which the carrying amount of an entity exceeds its fair value. There was no impairme nt of intangible assets in the years ended December 31, 2023, 2022 and 2021. The Company does not have intangible assets other than goodwill that have indefinite useful lives. Fair value Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value: • Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. F-10 • Level 2 — Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. • Level 3 — Unobservable inputs that are supported by little or no market activities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings. Leases The Company determines if an arrangement is a lease or contains a lease at lease inception. Assessment and classification of lease as either operating or financing is performed at the lease commencement date. Operating lease liabilities and their corresponding right-of-use assets (“RoU Assets”) are initially measured based on the present value of future lease payments over the expected remaining lease term. RoU Asset value is additionally adjusted by initial direct costs and incentives received. Present value is calculated based on either the interest rate implicit in the lease agreement or, if not available, based on our incremental borrowing rate. The incremental borrowing rate reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew or terminate a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will exercise the renewal option. RoU Assets are subject to periodic impairment tests. Lease expense for operating leases is recognized on a straight-line basis over the lease term. In accordance with ASC Topic 842, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components. The Company elected a practical expedient to account for lease and non-lease components together as a single lease component. The Company also elected the short-term lease recognition exemption for all classes of lease assets with an original term of twelve months or less. For transition, practical expedients were accepted to carry forward historical accounting for any expired or existing contracts that are or contain lease contracts and not to re-assess initial direct costs for any expired or existing leases. Revenues The Company accounts for a contract when there is a commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized only when control of the promised services is transferred to a customer in an amount that reflects the consideration that the Company expects to receive in exchange for those services. A promise to transfer a distinct service is defined as a performance obligation. The Company derives its revenue from contracts for consulting and hosting services. These contracts have different terms based on the scope and complexity of engagements and are priced based on time-and-material, fixed-fee or multiple fee types. Consideration for some contracts may include variable consideration including volume discounts. If the consideration promised in a contract includes a variable amount, the Company 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. These estimates may require management to make subjective judgments and to make estimates about the effects of matters inherently uncertain. The determination of whether to constrain consideration in the transaction price are based on information (historical, current and forecasted) that is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. If the Company is not certain about collectability of consideration for services rendered, revenue recognition is deferred until uncertainty is sufficiently resolved. The Company reports gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of loss and comprehensive income/(loss). Consulting services The Company offers a suite of digital engineering and information technology (“IT”) consulting services, including digital transformation strategy, emerging technology, lean labs and legacy system replatforming. The Company recognizes revenue for services over time as the customer simultaneously receives and consumes the benefits as the Company performs IT consulting F-11 services. Consulting services require the Company to provide a series of distinct daily services and as such represent a single performance obligation earned over the term of a contract 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. Where applicable the Company applies the practical expedient and revenue from time-and-materials contracts is recognized based on the right to invoice for services performed, with the corresponding cost of providing those services reflected as cost of sales when incurred. For fixed fee contracts, the Company 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. Hosting services The Company’s hosting services contracts comprise of the right to access hosted software, and use apart from hosting, set-up, installation, support and maintenance services. The Company does not grant the customer with the right to take possession of the software at any time during the hosting period. Due to the complexity of software, installation, set-up, support and maintenance services are provided only at the level of service provider, and the customer can benefit from these services only when combined with software and hosting services. Accordingly, each of these services is not considered a distinct performance obligation in terms of a contract, and are combined in a single performance obligation. Because hosting services are transferred to the customer evenly over the contract period, the Company recognizes revenue ratably over the term of the contract. Cost of revenues Cost of revenue primarily consists of compensation for professional staff generating revenues for the Company. Compensation includes salary, benefits, performance bonuses, retention bonuses, stock compensation expense, technology and travel expenses. The Company allocates a portion of depreciation and amortization to cost of revenue. Engineering, research and development Engineering, research, and development expenses primarily include compensation for professional staff performing research and development related activities that are not directly attributable to generating revenues for the Company. Research and development activities relate to building and scaling the next generation e-commerce platform solutions for customers. Research and development costs are expensed as incurred. Engineering, research, and development expenses also include depreciation and amortization costs, stock-based compensation expenses and performance and retention bonuses. Sales and marketing Sales and marketing expenses are those expenses associated with promoting and selling the Company’s services and include such items as sales and marketing personnel salaries, benefits, stock compensation expenses, travel, advertising, depreciation and amortization, performance and retention bonuses, and other promotional activities. General and administrative General and administrative expenses include other operating items such as officers’ and administrative personnel salaries, benefits, stock compensation expenses, legal, tax and audit expenses, public company related expenses, insurance, technology costs, facility costs, performance and retention bonuses, depreciation and amortization, including amortization of purchased intangibles, and operating lease expenses. Advertising and promotional expenses Advertising and promotional costs are expensed in the period in which they are incurred and are included in Sales and marketing expenses. For the years ended December 31, 2023, 2022 and 2021, advertising and promotional expenses totaled $ 1.0 million, $ 0.9 million and $ 0.5 million, respectively. Stock-based compensation The Company recognizes the cost of its stock-based awards based on the fair value of these awards at the date of grant. The fair value of service-based and performance based awards at the date of grant is based on the closing price of the Company’s shares on NASDAQ. Grant-date fair value of stock options is estimated using the Black-Scholes-Merton option pricing model. The model requires management to make a number of key assumptions including expected volatility, expected term, risk-free interest rate, and expected dividends. The Company evaluates the assumptions used to value its share-based awards on each grant date. For an award with graded vesting that is subject only to a service condition (e.g., time-based vesting), the Company uses the straight-line attribution method under ASC Topic 718 under which it recognizes compensation cost on a straight-line F-12 basis over the total requisite service period for the entire award (i.e., over the requisite service period of the last separately-vesting tranche of the award). For awards with performance conditions the compensation cost recognized is based on the actual or expected achievement of the performance condition. Additionally, the Company 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. That is, 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, the company will increase its recognized expense to at least equal the fair value of the vested amount. The requisite service period, which is the vesting period, of service-based and performance-based awards is typically four years and one year , respectively. The Company made an accounting policy election to account for forfeitures when they occur. Benefit plans The Company maintains a 401(k) defined contribution savings and retirement plan for substantially all of its U.S. employees. Subject to ERISA regulations, an employee may elect to contribute an amount up to 90 % of compensation during each plan year not to exceed the annual maximum defined by the IRS. The Company is not required to make contributions to the plan but can make discretionary contributions. The Company has not made any contributions to the 401(k) plan for the years ended December 31, 2023, 2022, and 2021. Income taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, 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 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, international and other 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. In assessing the realizability of deferred tax assets, management 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. Such evidence includes 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. The Company 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, the Company 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. The Company’s policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in income tax expense. Restructuring Restructuring costs include charges for the costs of exit or disposal activities. The liability associated with restructuring activities is measured initially at fair value and recognized when the liability is incurred. During the first quarter of 2023, the Company initiated actions focused on optimization of its billable and non-billable functions and reduction of associated costs. The Company incurred and paid total restructuring costs of $ 1.5 million during the year ended December 31, 2023. Restructuring costs comprised of employee severance and other personnel costs and were classified as General and administrative expenses in the consolidated financial statements. The Company did not incur any restructuring expenses during the years ended December 31, 2022 and 2021. Earnings per share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common and potential dilutive common shares outstanding during the period. Diluted earnings per share include outstanding stock options, unvested restricted stock units (“RSUs”) and performance stock units (“PSUs”), except cases where the effect of the inclusion of options would be antidilutive. The Company includes PSUs in computation of diluted earnings per share when they become contingently issuable F-13 per the authoritative guidance and excludes them when they are not contingently issuable. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Prior period reclassifications The Company presented and analyzed its revenues by customer locations attributing revenues based upon billed customer location. Effective December 31, 2023, the Company attributes revenues to geographic regions based upon location of the customer served irrespective of the location billed, or the location of the delivery center performing the work. The Company believes this change allows it to more effectively analyze its geographies and associated risks. This change did not result in any adjustments to our previously issued financial statements and were applied retrospectively beginning on January 1, 2021. Comparative information for the years ended December 31, 2022 and 2021 is presented in the following tables: For the year ended December 31, 2022 For the year ended December 31, 2021 As reported Reclassified As reported Reclassified Customer Location (in thousands) North America $ 255,480 $ 243,962 $ 168,524 $ 168,561 Europe 54,708 53,109 42,479 36,595 Other 294 13,411 277 6,124 Total Revenues $ 310,482 $ 310,482 $ 211,280 $ 211,280 Certain significant risks and uncertainties The Company is subject to risks, including but not limited to customer concentration, concentrations of credit and foreign currency risks. Concentrations of credit risk Capital resources Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We manage our credit risk exposure through timely assessment of our counterparty creditworthiness and credit limits. The Company places its cash and cash equivalents with high credit-quality financial institutions. The Company places its cash with financial institutions considered stable in the region and conducts ongoing assessment of its creditworthiness. At the same time, a banking crisis, bankruptcy or insolvency of banks that process or hold the Company’s funds, may result in the loss of the Company’s deposits or adversely affect the Company’s ability to complete banking transactions, which could adversely affect the Company’s business and financial condition. As of December 31, 2023 and 2022, cash held by the Company outside the U.S. was $ 21.2 million and $ 16.8 million, respectively, and included, among others, the U.K., Netherlands, India, Poland, Ukraine, Armenia, Moldova, Serbia, Mexico and other countries. The banking sector of Ukraine, Armenia, Moldova, Serbia, and Mexico remains periodically unstable, banking and other financial systems generally do not meet the financial standards of more developed European and American markets, and bank deposits made by corporate entities are not insured. In addition to that, the Ukrainian financial system was and continues to be significantly impacted by military action launched by Russia against the country. As of December 31, 2023 and 2022, cash balances held in Ukraine equaled $ 4.3 million and $ 0.6 million, respectively. The Company tends to hold cash in Ukraine and other countries of its presence with less developed and regulated banking systems at levels necessary to cover operating needs of local entities. Customers The Company derives its revenues from customers operating in multiple industries located around the world. This fact accompanied by ongoing evaluation of customer financial position allows the Company to disaggregate and limit its exposure to credit risk. Historically, the Company has not experienced significant credit losses and write-offs of accounts receivable, however, if any of its customers encounter financial difficulties or become insolvent, the Company’s credit losses could increase which would negatively affect its results of operations. F-14 The following table shows number of customers exceeding 10% of the Company’s billed and unbilled receivable balances at December 31, 2023 and 2022: As of December 31, 2023 2022 Billed receivables 1 2 Unbilled receivables 2 2 The following table shows the amount of revenue derived from each customer exceeding 10% of the Company’s revenue during the years ended December 31, 2023, 2022 and 2021: For the years ended December 31, 2023 2022 2021 Customer 1 14.4 % 12.6 % 11.6 % Customer 2 n/a 10.6 % 11.0 % Foreign currency risks The Company is exposed to foreign currency exchange rate risk in the ordinary course of business. The Company’s operations are predominantly conducted in U.S. dollars. Other than U.S. dollars, the Company generates revenues in EURO and British pounds and incur expenditures principally in Polish zlotys, EURO, British pounds and Mexican pesos. International foreign operations expose the Company to foreign currency exchange rate changes that could impact remeasurement of foreign denominated monetary assets and liabilities into the U.S. dollars with the remeasurement impact recorded to income. The Company has not entered into any foreign exchange forward contracts, derivatives, or similar financial instruments to hedge against the risk of foreign exchange rate fluctuations. During the years ended December 31, 2023, 2022, and 2021, the net loss on foreign currency transactions was $ 2.3 million, $ 1.5 million, and $ 0.7 million, respectively. Recently adopted accounting pronouncements Changes to the U.S. GAAP are established by the Financial Accounting Standards Board (the “FASB”), in the form of Accounting Standards Updates (“ASUs”), to the FASB’s ASC. The Company will adopt these changes according to the various timetables the FASB specifies. In February 2016, the FASB issued ASU 2016-02 , Leases (Topic 842). The standard supersedes previously existing lease guidance (“Topic 840”) and requires entities to recognize all leases, with the exception of leases with a term of twelve months or less, on the balance sheet as right-of-use assets (“RoU Assets”) and lease liabilities. Disclosures should provide the information in the financial statements summarizing the amount, timing and cash flows arising from leasing. The Company adopted Topic 842, effective January 1, 2022 using current period adjustment method. Prior period amounts were not adjusted. The adoption of Topic 842 on January 1, 2022 resulted in the recognition of RoU Assets for operating leases of $ 5.9 million and operating lease liabilities of $ 5.7 million. The adoption of Topic 842 did not have an impact on the consolidated statement of loss and comprehensive income/(loss), consolidated statement of changes in stockholders’ equity or the consolidated statement of cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments that was subsequently amended by ASU 2019-4, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, ASU 2019-5, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief, and clarified with the release of ASU 2020-2 Financial Instruments — Credit Losses (Topic 326) and Leases (Topic 842). These ASUs replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses measured at amortized cost and certain other instruments, including loans, held-to-maturity debt securities, net investments in leases, and off-balance sheet credit exposures. The Company adopted Topic 326, effective January 1, 2023, using a modified-retrospective approach. Adoption of Topic 326 did not have any impact on its consolidated financial statements. In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance , which requires entities to make annual disclosures about government assistance received during reporting periods presented. Disclosures are aimed at increasing transparency and include the following (1) the nature, significant terms and conditions of the transactions, including related commitments and contingencies, (2) the related F-15 accounting policy applied to those transactions; and (3) the effect of those transactions on an entity’s financial statements. The new guidance is effective for annual reporting periods beginning after December 15, 2021 and impacts only annual financial statement note disclosures. The Company receives government grants in certain countries of its operations. The grants are mainly aimed at reaching certain employment rates. The Company recognizes grants in Other income/(expense), net or as a reduction to the related Operating expenses in the consolidated statement of loss and comprehensive income/(loss) when there is reasonable assurance that the terms of the grant will be met. Funds received before the Company meets the terms of the grant are reported as a deferred income classified in the consolidated balance sheets under Accrued expenses and other current liabilities or Other noncurrent liabilities depending on grant’s maturity. During the year ended December 31, 2023, the Company recognized $ 1.3 million related to government grants, which are included in Cost of revenues and Operating expenses in the consolidated statements of loss. There were no material grants received during the years ended December 31, 2022, and 2021, respectively. Recently issued accounting pronouncements On November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosures, that expands disclosures requirements around significant segment expenses and other segment items that are included in reported measure of segment profit or loss. The guidance also requires entities to provide in their interim financial reports all disclosures about a reportable segment’s profit or loss and assets that are currently required only on annual basis. Guidance also obliges entities with a single reportable segment to provide all the disclosures under amended ASC 280 in their interim and annual financial statement. The new guidance is effective for annual reporting periods beginning after December 15, 2023, and interim reporting periods within fiscal years beginning after December 15, 2024 on a retrospective basis, The Company is currently evaluating the impact on this guidance on its consolidated financial statements. On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) — I mprovements to Income Tax Disclosures, which expands annual disclosure requirements around income taxes primarily related to the rate reconciliation and income taxes paid. The new guidance is effective for annual reporting periods beginning after December 15, 2024 with early adoption permitted. The guidance will be applied on a prospective basis with a retrospective application option. The Company is currently evaluating the impact on this guidance on its consolidated financial statements . Note 2 — Acquisitions NextSphere — On April 18, 2023, the Company completed the acquisition of 100 % of NextSphere Technologies, Inc. (“NextSphere”). Founded in 2006, NextSphere is headquartered in Tampa, FL, has an engineering presence in Phoenix, AZ, and operates two large engineering centers in India’s tech hubs of Hyderabad and Chennai. NextSphere specializes in modern application development, systems monetization, product development, cloud and infrastructure services, and quality assurance. Over the years, NextSphere has worked with several brands across numerous industry verticals with expertise in Healthcare, Fintech and CPG/Manufacturing industries. The Company believes this acquisition will support the Company’s objectives of enhancing its technical capabilities, expanding its global footprint, and increasing its client base. The total purchase consideration is $ 25.2 million and consists of cash consideration of $ 24.3 million paid at closing, and fair value of the contingent consideration at the date of the acquisition of $ 0.9 million. The maximum amount of potential contingent cash consideration is $ 2.0 million. The contingent consideration is payable based on revenue and gross profit metrics to be achieved by NextSphere within 12 months. The Company recorded a liability for the contingent consideration amount based on the Company’s best estimate of the fair value of the expected payout. See Note 3 for further details on contingent consideration. Mutual Mobile — On December 23, 2022, the Company acquired 100 % of the equity interest of the software company Mutual Mobile Inc. (“Mutual Mobile”). Founded in 2009, Mutual Mobile is based in the United States and India, offers end-to-end design and development of next-generation applications, combining mobile, augmented/virtual/mixed reality, and cloud edge / IoT practices. The acquisition of Mutual Mobile added approximately 180 employees to the Company’s headcount. The acquisition will accelerate the Company’s strategic expansion into the India engineering market and further solidifies Grid Dynamics’ commitment to global growth. The total purchase consideration is $ 16.1 million and consists of cash consideration of $ 12.8 million paid at closing, and fair value of the contingent consideration at the date of the acquisition of $ 3.3 million. The maximum amount of potential contingent cash consideration is $ 5.0 million. The contingent consideration is payable based on revenue and gross profit metrics to be achieved by Mutual Mobile within 12 months. The Company recorded a liability for the contingent consideration amount based on the Company’s best estimate of the fair value of the expected payout. See Note 3 for further details on contingent consideration. Tacit — On May 29, 2021, the Company acquired 100 % of the equity interest of the global consultancy company Tacit Knowledge Inc. (“Tacit”). Founded in 2002, Tacit is a global provider of digital commerce solutions, serving customers across the UK, North America, Continental Europe, and Asia. The acquisition of Tacit added approximately 180 employees to the F-16 Company's headcount. The acquisition will augment the Company’s service offerings and will strengthen its competitive position within the market. Additionally, the acquisition will also enable the Company to leverage near-shore capabilities with Tacit’s presence in Mexico. The total purchase consideration is $ 37.6 million and consists of cash consideration of $ 33.6 million paid at closing, and fair value of the contingent consideration at the date of the acquisition of $ 4.0 million. The maximum amount of potential contingent cash consideration is $ 5.0 million. See Note 3 for further details on contingent consideration. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as updated for any changes as of December 31, 2023 for NextSphere, Mutual Mobile, and Tacit: NextSphere Mutual Mobile Tacit (in thousands) Current assets $ 9,708 $ 4,982 $ 9,145 Property, plant and equipment 192 132 466 Intangible assets 9,906 3,749 12,913 Goodwill 9,031 8,879 21,268 Other noncurrent assets 511 102 — Total assets acquired $ 29,348 $ 17,844 $ 43,792 Accounts payable and accrued expenses ( 1,990 ) ( 1,576 ) ( 3,675 ) Deferred taxes ( 2,427 ) ( 686 ) ( 2,500 ) Total liabilities assumed $ ( 4,417 ) $ ( 2,262 ) $ ( 6,175 ) Purchase price allocation $ 24,931 $ 15,582 $ 37,617 The fair value of current assets acquired include cash and cash equivalents in the amount of $ 6.4 million, $ 3.5 million, and $ 3.0 million for NextSphere, Mutual Mobile, and Tacit acquisitions, respectively. The purchase price was assigned to assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, and any excess was allocated to goodwill, as shown in the table above. The goodwill recognized as a result of the NextSphere acquisition represents the value the Company expects to achieve through the implementation of operational synergies and growth opportunities as the Company expands its global reach as well as the assembled workforce acquired, The goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the Mutual Mobile acquisition is attributable to synergies expected to be achieved by combining the businesses of the Company and Mutual Mobile, expected future contracts, the assembled workforce acquired and other factors. The goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the Tacit acquisition is attributable to synergies expected to be achieved by expanding the Company’s ability to serve customers in Europe and the assembled workforce acquired. The goodwill for all acquisitions is not deductible for income tax purposes. During the fourth quarter of 2023, the Company finalized working capital adjustment for NextSphere that resulted in a decrease of original purchase price in the amount of $ 0.3 million and updated fair value of deferred taxes by $ 0.2 million. These adjustments resulted in a corresponding net change in goodwill by $ 0.1 million. Due to complexity of valuation and potential adjustments to income taxes, the estimated fair values of certain assets acquired and liabilities assumed are provisional and subject to potential adjustments. The Company expects to complete the purchase price allocations as soon as practicable but no later than one year from the acquisition date. During the fourth quarter of 2023, the Company finalized working capital adjustment for Mutual Mobile which reduced the original purchase price by $ 0.5 million and decreased fair value of deferred taxes by $ 0.2 million. These adjustments resulted in F-17 a corresponding net change in goodwill by $ 0.7 million. The Company then finalized the fair value of the assets acquired and liabilities assumed in the acquisition of Mutual Mobile. During the second half of 2021, the Company updated fair value of the contingent consideration for Tacit at the acquisition date that resulted in increase of goodwill for $ 0.7 million. During the fourth quarter of 2021, the Company finalized the fair value of the assets acquired and liabilities assumed in the acquisition of Tacit. The estimated fair value, useful lives and amortization methods of identifiable intangible assets as of the date of acquisition updated for any changes during the year ended December 31, 2023 are as follows: NextSphere Mutual Mobile Tacit Fair Value Useful Life Fair Value Useful Life Fair Value Useful Life Customer relationships $ 8,415 10 years $ 3,453 8 years $ 11,737 12 years Acquired software 995 2.5 years — — — — Trade name 496 2 years 152 4 years 1,176 4 years Non-compete agreements — 144 2 years — — Total identified intangible assets $ 9,906 $ 3,749 $ 12,913 During the years ended December 31, 2023, 2022 and 2021, the Company incurred $ 1.0 million, $ 0.6 million and $ 0.9 million, respectively, of transaction-related costs, that were included in General and administrative costs in the consolidated statement of loss and comprehensive income/(loss). The Company used acquisition method of accounting for all acquisitions, and consequently, the results of operations for all acquisitions are reported in the consolidated financial statements from the dates of acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions on the Company’s consolidated financial statements was not material individually or in the aggregate. Note 3 — Fair value Financial assets and liabilities masured at fair value on a recurring basis The Company measures contingent consideration payable at fair value on a recurring basis using significant inputs that are not observable in the market. Fair value of the contingent consideration liability is based on the Monte-Carlo model which is primarily based on forecasts and discounted cash flow analysis. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. Changes in the fair value of contingent consideration payable primarily result from changes in the timing and amount of specific milestone estimates and changes in probability assumptions with respect to the likelihood of achieving the various earnout criteria. These changes could cause a material impact to, and volatility in the Company’s operating results. During the years ended December 31, 2023, 2022 and 2021, the Company completed three acquisitions under which the Company committed to make a cash earnout payment subject to attainment of specific performance targets. The weighted F-18 average discount rates used to determine fair values of NextSphere, Mutual Mobile and Tacit contingent considerations were 15.5 %, 10.3 % and 13.5 %, respectively. The Company records contingent consideration payable in Other current liabilities in its consolidated balance sheets. A reconciliation of the beginning and ending balances of Level 3 acquisition-related contingent consideration payable using significant unobservable inputs for the years ended December 31, 2023, 2022 and 2021 are as follows: Amount (in thousands) Contingent consideration payable as of January 1, 2021 $ 1,947 Acquisition date fair value of contingent consideration payable — Tacit 4,000 Change in fair value of contingent consideration payable included in Other income/(expense), net — Daxx ( 14 ) Change in fair value of contingent consideration payable included in Other income/(expense), net — Tacit 1,000 Contingent consideration payable as of December 31, 2021 $ 6,933 Acquisition date fair value of contingent consideration payable — Mutual Mobile 3,288 Payment of contingent consideration — Daxx ( 1,933 ) Payment of contingent consideration — Tacit ( 5,000 ) Contingent consideration payable as of December 31, 2022 $ 3,288 Acquisition date fair value of contingent consideration payable — NextSphere 932 Change in fair value of contingent consideration payable included in Other income/(expense), net — Mutual Mobile ( 3,288 ) Change in fair value of contingent consideration payable included in Other income/(expense), net — NextSphere ( 932 ) Contingent consideration payable as of December 31, 2023 $ — There were no transfers of liabilities among the levels within the fair value hierarchy during the years ended December 31, 2023, 2022 and 2021. Financial assets and liabilities not measured at fair value on a recurring basis Estimates of fair value of financial instruments not carried at fair value on a recurring basis are generally subjective in nature, and are determined as of a specific point in time based on the characteristics of the financial instruments and relevant market information. The Company’s financial assets and liabilities are generally short-term in nature; therefore, the carrying value of these items approximates their fair value. The following tables present the estimated fair values of the Company’s financial assets and liabilities not measured at fair value on a nonrecurring basis as of the dates indicated: Fair Value Hierarchy Balance Estimated Fair Value Level 1 Level 2 Level 3 December 31, 2023 Financial Assets: Cash equivalents: Money market funds $ 204,388 $ 204,388 $ 204,388 $ — $ — December 31, 2022 Financial Assets: Cash equivalents: Money market funds $ 205,787 $ 205,787 $ 205,787 $ — $ — Non-marketable securities without readily determinable fair values The Company holds investment in equity securities of a related party, a company affiliated with the member of the Company’s Board of Directors, that do not have readily determinable fair values. This investment is recorded at cost and is remeasured to F-19 fair value based on certain observable price changes or impairment events as they occur. The carrying amount of the investment was $ 1.3 million and $ 1.0 million as of December 31, 2023 and 2022, respectively, and was classified as Other noncurrent assets in the Company’s consolidated balance sheets. Note 4 — Property and equipment, net Property and equipment, net consist of the following: Estimated Useful Life As of December 31, 2023 2022 (in years) (in thousands) Computers and equipment 2 - 5 $ 13,837 $ 11,679 Furniture and fixtures 3 - 10 1,732 1,614 Leasehold improvements 2 - 8 1,343 646 Software 3 - 5 1,236 1,053 Machinery and automobiles 4 - 6 570 349 $ 18,718 $ 15,341 Less: Accumulated depreciation and amortization ( 12,441 ) ( 8,614 ) $ 6,277 $ 6,727 Capitalized software development costs 2 $ 9,050 $ 6,210 Less: Accumulated amortization ( 3,969 ) ( 4,722 ) $ 5,081 $ 1,488 Property and equipment, net $ 11,358 $ 8,215 During the years ended December 31, 2023 and 2022, the Company capitalized $ 5.9 million and $ 1.6 million of internally developed software costs, respectively. Property and equipment depreciation and amortization expense for the years ended December 31, 2023, 2022, and 2021 was $ 5.2 million, $ 4.2 million, and $ 3.1 million, respectively. F-20 Note 5 — Goodwill and intangible assets, net Goodwill rollforward for the years ended December 31, 2023 and 2022 was as follows: Amount (in thousands) Goodwill as of January 1, 2022 $ 35,958 Acquisition of Mutual Mobile 9,556 Goodwill as of December 31, 2022 $ 45,514 Mutual Mobile purchase accounting adjustment ( 677 ) Acquisition of NextSphere 9,031 Goodwill as of December 31, 2023 $ 53,868 There were no accumulated impairment losses of goodwill recognized as of December 31, 2023 and 2022. Intangible assets consist of the following: Estimated Useful Life As of December 31, 2023 2022 (in years) (in thousands) Customer relationships 8 - 12 $ 27,839 $ 19,424 Tradenames 2 - 10 5,324 4,828 Acquired software 2.5 995 — Non-compete agreements 2 584 584 $ 34,742 $ 24,836 Less: Accumulated amortization ( 8,196 ) ( 4,461 ) Intangible assets, net $ 26,546 $ 20,375 Intangible assets amortization expense for the years ended December 31, 2023, 2022, and 2021 was $ 3.7 million, $ 2.5 million, $ 2.0 million, respectively. Based on the carrying value of the Company’s existing intangible assets as of December 31, 2023, the estimated amortization expense for the future years is as follows (in thousands): Amount (in thousands) 2024 $ 4,048 2025 3,627 2026 3,168 2027 3,130 2028 3,107 Thereafter 9,466 Total $ 26,546 F-21 Note 6 — Accrued expense and other current liabilities The components of accrued expense and other current liabilities were as follows: As of December 31, 2023 2022 (in thousands) Accrued expenses $ 2,943 $ 1,302 Value added tax payable 993 1,345 Customer deposits 756 754 Deferred revenue 577 1,124 Contingent consideration payable — 3,288 Other liabilities 1,007 712 Total accrued expense and other current liabilities $ 6,276 $ 8,525 As of December 31, 2023 and December 31, 2022 the Company had payable to its related party, a company affiliated with the member of the Company’s Board of Directors, in the amount of $ 0.6 million in each of the respective years that was classified as Accrued expense and other current liabilities in consolidated balance sheet. Note 7 — Debt Revolving Credit Facility — On March 15, 2022, the Company entered into a Credit Agreement (the “2022 Credit Agreement”) by and among the Company, as borrower, the guarantors party thereto from time to time, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (the “Agent”). The 2022 Credit Agreement provided for a secured multicurrency revolving loan facility with an initial aggregate principal amount of up to $ 30.0 million, with a $ 10.0 million letter of credit sublimit. The Company could increase the size of the revolving loan facility up to $ 50.0 million, subject to certain conditions and additional commitments from existing and/or new lenders. The 2022 Credit Agreement matures March 15, 2025. At the Company’s option, borrowings under the 2022 Credit Agreement accrued interest at a per annum rate based on either (i) the base rate plus a margin ranging from 1.0 % to 1.5 %, (ii) an adjusted term Secured Overnight Financing Rate (“SOFR”) or adjusted the Euro Interbank Offer Rate (“EURIBOR”) (based on one, three or six-month interest periods) plus a margin ranging from 2.0 % to 2.5 %, or (iii) an adjusted daily simple SOFR rate (or SONIA rate in the case of loans denominated in pounds sterling, or SARON rate in the case of loans denominated in Swiss francs), plus a margin ranging from 2.0 % to 2.5 %, in each case, with the applicable margin determined based on the Company’s consolidated total leverage ratio. The Company was also obligated to pay other closing fees, administration fees, commitment fees and letter of credit fees customary for a credit facility of this size and type. The Company’s obligations under the 2022 Credit Agreement were required to be guaranteed by certain of its domestic subsidiaries meeting materiality thresholds set forth in the 2022 Credit Agreement. Such obligations, including the guaranties, are secured by substantially all of the personal property of the Company and the Company’s subsidiary guarantors. The 2022 Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments and acquisitions, make certain restricted payments, dispose of assets, enter into certain transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the 2022 Credit Agreement. The Company is also required to maintain compliance with a consolidated total leverage ratio, determined in accordance with the terms of the 2022 Credit Agreement. As of December 31, 2023, the Company was in compliance with all covenants contained in the 2022 Credit Agreement. Line of Credit — In October, 2017, the Company entered into a loan agreement for a revolving line of credit facility (the “Line of Credit”) with a borrowing capacity of $ 0.5 million. The Line of Credit was secured by substantially all of the Company’s assets and was secured in order to provide credit support for a letter of credit facility and balances under the Company’s credit cards. Borrowings under the Line of Credit were subject to a variable interest rate, based on changes in the Prime Rate, as calculated published by the Wall Street Journal. The Company closed the Line of Credit in March of 2022. As of December 31, 2023 and December 31, 2022, respectively, the Company did not have any outstanding debt under the 2022 Credit Agreement and Line of Credit. F-22 Note 8 — Leases A major part of the Company's lease obligations is for office real estate. The Company may also lease corporate apartments, cars, and office equipment. Payments on some of our leases may depend on index or rate, including Consumer Price Index. Such payments are included in the calculation of lease liability and assets at the commencement dates, all future changes are accounted as variable payments similar to other variable payments, such as common area maintenance, property and other taxes, utilities and insurance that are based on the lessor’s cost. The Company’s leases have remaining lease terms ranging from 0.2 to 6.4 years . Certain lease agreements may include the option to extend or terminate before the end of the contractual term and are often non-cancelable or cancellable only by the payment of penalties. The Company includes these options in the lease term when it is reasonably certain that they will be exercised. The Company had no finance leases as of December 31, 2023 and 2022, respectively. Operating lease expense is recorded on a straight-line basis over the lease term and lease costs were as follows: For the years ended December 31, 2023 2022 (in thousands) Operating lease cost $ 3,860 $ 3,268 Variable lease cost 405 43 Short-term lease cost 343 513 Total lease cost $ 4,608 $ 3,824 Lease expense under operating lease agreements for the year ended December 31, 2021 was $ 4.2 million. Supplemental information related to operating lease transactions is as follows (in thousands): For the years ended December 31, 2023 2022 (in thousands) Lease liability payments $ 3,692 $ 2,888 Lease right-of-use assets obtained in exchange for liabilities $ 5,005 $ 4,468 Non-cash net decrease in lease assets due to lease modifications $ 553 $ ( 1,015 ) Non-cash net decrease in lease liability due to lease modifications $ ( 553 ) $ 1,015 Weighted average remaining lease term and discount rate as of December 31, 2023 and 2022 is as follows: As of December 31, 2023 2022 Weighted average remaining lease term, in years 3.4 3.8 Weighted average discount rate 7.0 % 5.0 % As of December 31, 2023, operating lease liabilities will mature as follows: F-23 Lease Payments (in thousands) 2024 4,255 2025 3,381 2026 2,323 2027 2,023 2028 273 Thereafter 269 Total lease payments 12,524 Less: imputed interest ( 1,528 ) Total $ 10,996 There were no material lease agreements signed with related parties as of December 31, 2023 and 2022. As of December 31, 2023, the Company had committed to payments of $ 0.4 million related to operating lease agreement that had not yet commenced as of December 31, 2023. These operating lease will commence in 2024 with lease term of 6.2 years. The Company does not have finance lease agreements that had not yet commenced. Note 9 — Revenues Disaggregation of revenues The tables below present disaggregated revenues from contracts with customers by customer location, verticals and contract-types. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by industry, market and other economic factors. The Company has a single reportable segment for the years ended December 31, 2023, 2022 and 2021. The following table shows the disaggregation of the Company’s revenues by major customer location. Revenues are attributed to geographic regions based upon location of the customer served irrespective of the location billed, or the location of the F-24 delivery center performing the work. Substantially all of the revenue in our North America region relates to operations in the United States. For the years ended December 31, 2023 2022 2021 Customer Location (in thousands) North America $ 238,989 $ 243,962 $ 168,561 Europe 60,756 53,109 36,595 Other 13,165 13,411 6,124 Total Revenues $ 312,910 $ 310,482 $ 211,280 The following table shows the disaggregation of the Company’s revenues by main vertical markets for the years ended December 31, 2023, 2022 and 2021: For the years ended December 31, 2023 2022 2021 Vertical (in thousands) Retail $ 102,551 $ 99,681 $ 61,717 Tech, Media and Telecom 98,830 98,334 67,689 CPG/Manufacturing 42,861 61,216 43,461 Finance 28,842 21,893 17,515 Other 39,826 29,358 20,898 Total Revenues $ 312,910 $ 310,482 $ 211,280 The following table shows the disaggregation of the Company’s revenues by contract types for the years ended December 31, 2023, 2022 and 2021: For the years ended December 31, 2023 2022 2021 Contract Type (in thousands) Time-and-material $ 281,282 $ 285,916 $ 194,926 Fixed-fee 29,991 24,566 16,354 Other revenues 1,637 — — Total Revenues $ 312,910 $ 310,482 $ 211,280 Contract balances The payment terms included on the Company’s contracts with customers vary and depend on multiple factors including type of service provided, credit evaluation of a customer and prior payment history. When the timing of payment by a customer differs from the timing of rendering services, the Company records either a contract asset or a contract liability. Contract assets include amounts related to a right to consideration that is conditional upon factors other than the passage of time. Contract liabilities comprise amounts received in advance of the Company’s performance or billings in excess of revenues recognized. As of December 31, 2023, 2022, and 2021, the Company did not have contract assets recorded in its consolidated balance sheet. As of December 31, 2023, 2022, and 2021, the Company recorded $ 0.6 million, $ 1.1 million and $ 0.4 million, respectively that were classified as Accrued and other current liabilities in the consolidated balance sheet. Decrease in our contract liabilities from December 31, 2022 was largely attributed to a decline in number of fixed fee projects in the total project pool, specifically in the second half of 2023. Revenues recognized during the year ended December 31, 2023 that were included in Accrued and other current liabilities at December 31, 2022 were $ 1.1 million. Revenues recognized during the year ended December 31, 2022 that were included in Accrued and other current liabilities at December 31, 2021 were $ 0.4 million. Revenues recognized during the year ended December 31, 2021 that were included in Accrued and other current liabilities at December 31, 2020 were $ 0.1 million. F-25 Remaining performance obligation As of December 31, 2023, the aggregate amount of transaction price allocated to remaining performance obligations was $ 5.3 million. Our remaining performance obligations represent commitments for future services for which work has not been performed and revenues are to be recorded in future periods. The Company expects to recognize approximately 55.5 % of its remaining performance obligations as revenues in fiscal year 2024, and an additional 44.5 % in 2025. Remaining performance obligations include currently recorded contract liability as well as amounts that will be invoiced in future periods and excludes the contracts that meet at least one of the following criteria under ASC Topic 606: 1) contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty, 2) contracts for which the Company recognizes revenues based on the right to invoice for services performed, 3) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met, or 4) variable consideration in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Many of our performance obligations met one or more of these exemptions as of December 31, 2023. Transactions with related parties During the years ended December 31, 2023, 2022, and 2021, the Company conducted transaction with a number of companies affiliated with the members of the Company’s Board of Directors. As a result, the Company recorded revenue from its related parties of $ 7.6 million, $ 6.8 million and $ 4.3 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023 and 2022, accounts receivable from related parties were $ 0.9 million in both periods, respectively. Note 10 — Income taxes Income before provision for income taxes consisted of the following: For the years ended December 31, 2023 2022 2021 (in thousands) United States $ ( 6,107 ) $ ( 23,490 ) $ ( 11,530 ) International 10,945 3,037 9,078 Total income/(loss) before provision for income taxes $ 4,838 $ ( 20,453 ) $ ( 2,452 ) F-26 The federal and state income tax provision/(benefit) is summarized as follows: For the years ended December 31, 2023 2022 2021 (in thousands) Current Federal $ 3,619 $ 6,951 $ 71 State 941 1,774 80 International 6,183 3,681 2,164 Total current tax expense $ 10,743 $ 12,406 $ 2,315 Deferred Federal $ ( 2,265 ) $ ( 2,740 ) $ 2,752 State ( 474 ) ( 315 ) ( 59 ) International ( 1,401 ) ( 590 ) 240 Total deferred tax expense/(benefit) $ ( 4,140 ) $ ( 3,645 ) $ 2,933 Total tax expense/(benefit) $ 6,603 $ 8,761 $ 5,248 Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company’s deferred taxes as of December 31, 2023 and 2022 are as follows: As of December 31, 2023 2022 (in thousands) Deferred tax assets Capitalized R&D $ 3,968 $ 1,056 Stock-based compensation 3,833 4,004 Accrued compensation 1,950 931 Lease liability 636 465 Net operating loss 267 401 State tax accrual 183 243 Allowance for bad debt 185 105 Total deferred tax assets $ 11,022 $ 7,205 Deferred tax liabilities Intangible assets $ ( 6,908 ) $ ( 5,207 ) Lease right-of-use assets ( 597 ) ( 465 ) Fixed asset basis ( 373 ) ( 291 ) Total deferred tax liabilities ( 7,878 ) ( 5,963 ) Net deferred taxes $ 3,144 $ 1,242 The Company assessed its ability to realize the benefits of its domestic deferred tax assets (“DTA”) by evaluating all available positive and negative evidence, objective and subjective in nature, including (1) cumulative results of operations in recent years, (2) sources of recent pre-tax income, (3) estimates of future taxable income, and (4) the length of net operating loss (“NOL”) carryforward periods. The Company determined it is in a 3-year cumulative taxable income position as of December 31, 2023, and expects to continue to be in a taxable income position in the long-term foreseeable future. After an evaluation of all available qualitative and quantitative evidence, both positive and negative in nature, the Company concluded it is more likely than not that sufficient future taxable income will be generated to realize the benefits of its DTAs prior to expiration. As a result, the Company determined that no valuation allowance was needed as of December 31, 2023. F-27 Net operating losses and tax credit carryforwards as of December 31, 2023 are as follows: Amount Expiration years (in thousands) Net operating losses, federal $ 891 N/A Net operating losses, state $ 6,821 2040 The effective tax rate of the Company differs from the federal statutory rate as follows: For the years ended December 31, 2023 2022 2021 Statutory rate 21.0 % 21.0 % 21.0 % State tax 10.1 ( 7.5 ) ( 0.4 ) Permanent and other items ( 9.9 ) ( 1.0 ) ( 10.8 ) Stock-based compensation 39.3 4.4 114.4 Tax credits ( 120.0 ) 13.9 3.8 Foreign rate differential 7.2 ( 11.9 ) ( 4.9 ) Foreign inclusion adjustments 74.7 ( 10.8 ) ( 75.7 ) Foreign intangible amortization 10.2 ( 2.3 ) ( 15.7 ) 162M limitation 103.9 ( 48.6 ) ( 245.8 ) Total 136.5 % ( 42.8 ) % ( 214.1 ) % As of December 31, 2023, the Company has approximately $ 1.2 million of unrecognized tax benefits. Approximately all of the unrecognized tax benefits, if recognized, would affect the effective tax rate. A reconciliation of beginning to ending amounts of unrecognized tax benefits is as follows: For the years ended December 31, 2023 2022 2021 (in thousands) Unrecognized tax benefit as of January 1 $ 1,151 $ 780 $ 654 Changes related to prior year tax positions ( 101 ) 168 ( 50 ) Changes related to current year tax positions 112 203 176 Unrecognized tax benefit as of December 31 $ 1,162 $ 1,151 $ 780 Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business. The Company does not anticipate a material change to its unrecognized tax benefits over the next twelve months. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. There was no interest or penalties accrued as of December 31, 2023 and 2022. The Company is subject to income taxes in U.S. federal and various state, local and foreign jurisdictions. For federal and states, tax years subsequent to 2019 remain open to examination due to the carryover of unused net operating losses or tax credits. With respect to foreign jurisdictions, tax years 2016 and after remain open. The Company's provision for income taxes does not include provisions for foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely in our foreign subsidiaries. As part of the 2017 Tax Cuts and Jobs Act, Section 174 was amended to require that specified research and experimental (“SR&E”) expenditures be capitalized and amortized but delayed the effective date of this amendment to tax years beginning January 1st, 2022 or later. The amortization period is 5 years for domestic research expenditures and 15 years for foreign research expenditures using a mid-year convention. The Company evaluated its R&D expenses both in the U.S. and foreign jurisdictions and determined there were approximately $ 12.9 million of expenses worldwide subject to capitalization and treated as a temporary adjustment. F-28 The President signed the CHIPS and Science Act and Inflation Reduction Act (“IRA”) into law on August 9 and 16, 2022, respectively. The IRA provides funding for climate and energy provisions. The new law includes a corporate alternative minimum tax, a stock buyback tax, and increased IRS enforcement funding. The CHIPS Act includes funding for the semiconductor industry in the U.S.. Both the Inflation Reduction Act and the CHIPS and Science Act were enacted in 2022. Both CHIPS Act and IRA were not materially impactful on the Company’s tax positions. Note 11 — Stockholders’ equity The following description summarizes the material terms and provisions of the securities that the Company has authorized. Common stock The Company is authorized to issue 110.0 million shares of common stock. On September 12, 2022, the Company concluded a follow-on public offering of 6.6 million shares of its common stock. These amounts included shares sold upon exercise in full of the underwriters' option to purchase additional shares at a price of $ 17.5 per share. J.P. Morgan Securities, LLC and William Blair & Company, LLC acted as joint book-running managers for the offering. Needham & Company, LLC and Cantor Fitzgerald & Co. acted as co-managers for the offering. The net proceeds from this offering for the company, after deducting underwriting discounts and commissions were $ 109.5 million. On July 6, 2021, the Company concluded a follow-on public offering of 11.6 million shares of its common stock, which included 5.5 million shares offered by Grid Dynamics and 6.1 million shares offered by certain selling stockholders, at a price to the public of $ 15.03 per share. These amounts included shares sold upon exercise in full of the underwriters’ option to purchase additional shares. J.P. Morgan Securities, LLC, William Blair & Company, L.L.C. and Cowen and Company, LLC acted as joint book-running managers for the offering. Needham & Company, LLC and Cantor Fitzgerald & Co. acted as co-managers for the offering. The net proceeds from this offering for the company, after deducting underwriting discounts and commissions and estimated offering expenses, were $ 78.3 million. The Company did not receive any proceeds from the sale of the shares by the selling stockholders. As of December 31, 2023 the Company had 75.9 million shares of common stock that were outstanding. Additionally, there were 3.1 million outstanding vested options to purchase the Company’s common stock. Warrants As part of its initial public offering (“IPO”), ChaSerg issued 22.0 million units including one share of common stock and one-half of one redeemable warrant. Simultaneously with its IPO, ChaSerg issued 0.6 million private placement units to its sponsor underwriter, each consisting of one common share and one-half of one redeemable warrant. ChaSerg issued 0.1 million units as a result of the conversion of a working capital sponsor loan consisting of one common share and one-half of one redeemable warrant. Each whole warrant entitled the holder to purchase one share of common stock at a price of $ 11.50 . Each warrant was currently exercisable and was set to expire on March 5, 2025 ( five years after the completion of the Business Combination), or earlier upon redemption or liquidation. The Company was set to call the warrants for redemption at a price of $ 0.01 per warrant upon a minimum 30 days’ prior written notice of redemption, if and only if, the reported last sale price of the Company’s common stock had equaled or exceeded $ 18.00 per share for any 20 trading days within a 30 -trading day period ending three business days before the Company sends the notice of redemption to the warrant holders; and if and only if, there was a current registration statement in effect with respect to the shares of common stock underlying such warrants. From July 23, 2021 to July 26, 2021, 1.4 million public warrants were exercised with cash proceeds of $ 16.4 million. On July 28, 2021, the Company announced the redemption of its 2.8 million then outstanding public warrants. Any public warrants not exercised prior to 5:00 p.m., New York City time, on August 30, 2021 were redeemed at that time for $ 0.01 per warrant. The public warrants were exercisable at a price of $ 11.50 per share. Of the total of 2.8 million warrants outstanding on July 28, 2021, 2.8 million were exercised and cash proceeds generated from these exercised warrants were approximately $ 31.7 million. Pursuant to the terms of the agreements governing the rights of the holders of the public warrants, the Company redeemed the remaining unexercised and outstanding 0.02 million public warrants on August 30, 2021 for a redemption price of $ 0.01 per public warrant. As of December 31, 2023 and 2022, there were no outstanding private or public warrants. F-29 Note 12 — Stock-based compensation Stock-Based Compensation Expense Employee stock-based compensation cost recognized in the consolidated statements of loss and comprehensive income/(loss) was as follows: Twelve months ended December 31, 2023 2022 2021 (in thousands) Cost of revenue $ 1,959 $ 1,334 $ 664 Engineering, research, and development 4,872 6,530 2,980 Sales and marketing 3,616 4,463 3,606 General and administrative 25,069 48,641 25,786 Total stock-based compensation $ 35,516 $ 60,968 $ 33,036 Equity Plans 2018 Stock Plan - Effective November 12, 2018, GDI adopted the 2018 Stock Option Plan. Under the terms of the 2018 Stock Plan, certain options are subject to accelerated vesting in full or by an additional 12 months as a result of business combinations. The Company is no longer issuing any awards under the 2018 Plan. All of the awards issued pursuant to the 2018 Plan expire 10 years from the date of grant. 2020 Equity Incentive Plan - Effective March 5, 2020, our Board of Directors approved an equity incentive plan (the “2020 Plan”). The 2020 Plan permits the Company to grant a maximum aggregate amount of 16.3 million Incentive Stock Options, Non-Statutory Stock Options (“NSOs”), Restricted Stock, Restricted Stock Units (“RSUs”), Stock Appreciation Rights, Performance Units (“PSUs”), and Performance Shares (“PSAs”) (collectively, the “Awards”) to employees, directors, and consultants of the Company. Our Board of Directors or any committee appointed by The Board has the authority to grant Awards. NSOs and RSUs issued under the 2020 Plan have the following vesting conditions: one-fourth of the NSOs will vest on one year after the grant date; and thereafter one-sixteenth of the NSOs will vest each subsequent three-month anniversary. PSUs are normally capped at 300 % maximum payout and have the following performance goals: 1) Year-over-year growth in specified revenue for the Performance Period, expressed as a percentage increase over the previous fiscal year revenue (“Revenue Growth”), and 2) Contribution Margin for the Performance Period as a percentage of specified revenue for the Performance Period. Fifty percent ( 50 %) of the target number of performance shares granted will vest (if at all) based on the extent of achievement of Revenue Growth for the Performance Period and the remaining fifty percent ( 50 %) of the target number of performance shares granted will vest (if at all) based on the extent of achievement of the Contribution Margin. F-30 As of December 31, 2023, 7.2 million shares of stock remained available for grant under the 2020 Plan. All of the awards issued pursuant to the 2020 Plan expire 10 years from the date of grant. Stock Options The grant date fair value of each NSO issued under both plans was estimated on the date of grant using the Black-Scholes-Merton option pricing model. The key assumptions for the years ended December 31, 2023, 2022 and 2021 are provided in the following table. For the years ended December 31, 2023 2022 2021 Dividend yield — % — % — % Expected volatility 48 % 45 % 40 % Risk-free interest rate 3.63 %- 4.84 % 1.76 %- 4.25 % 0.81 %- 1.33 % Expected term in years 6.11 6.11 6.11 Grant date fair value of common stock $ 10.07 -$ 11.97 $ 12.15 -$ 18.88 $ 14.40 -$ 29.07 The Company used a zero percent dividend yield assumption for all Black-Scholes-Merton stock option-pricing calculations. Since the Company’s shares were not publicly traded prior to the Closing and its shares were rarely traded privately, expected volatility is estimated based on the average historical volatility of peer group entities with publicly traded shares. The risk-free rate for the expected term of the options is based on the U.S. Treasury yield at the date of grant. Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term instead of actual data due to a lack of relevant historical data. 2018 Plan The following table sets forth the activity for the 2018 Stock Plan for the years ended December 31, 2023, 2022 and 2021: Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value, thousands Weighted Average Contractual Term (in years) Options outstanding as of January 1, 2021 4,599,790 $ 3.54 $ 41,674 Options exercised ( 2,668,191 ) $ 3.54 Options forfeited ( 15,498 ) $ 3.54 Options outstanding as of December 31, 2021 1,916,101 $ 3.54 $ 65,971 Options exercised ( 286,842 ) $ 3.54 Options forfeited ( 30,448 ) $ 3.54 Options outstanding as of December 31, 2022 1,598,811 $ 3.54 $ 12,279 Options exercised ( 112,383 ) $ 3.54 Options outstanding as of December 31, 2023 1,486,428 $ 3.54 $ 14,552 5.04 Options vested and exercisable as of December 31, 2023 1,486,428 $ 3.54 $ 14,552 5.04 The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 0.9 million, $ 3.8 million and $ 76.6 million, respectively. As of December 31, 2023 the Company fully recognized stock-based compensation costs related to 2018 Plan options. 2020 Plan The following table summarizes option activity for the years ended December 31, 2023, 2022 and 2021 under the 2020 Plan: F-31 Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value, thousands Weighted Average Contractual Term (in years) Options outstanding as of January 1, 2021 1,942,400 $ 8.38 $ 8,200 Options granted 766,250 $ 21.61 Options exercised ( 112,087 ) $ 8.20 Options forfeited ( 371,876 ) $ 8.88 Options outstanding as of December 31, 2021 2,224,687 $ 12.86 $ 55,856 Options granted 1,228,700 $ 14.67 Options exercised ( 67,593 ) $ 9.69 Options forfeited ( 382,183 ) $ 16.40 Options outstanding as of December 31, 2022 3,003,611 $ 13.22 $ 3,883 Options granted 689,500 $ 11.49 Options exercised ( 153,302 ) $ 8.67 Options forfeited ( 329,889 ) $ 14.99 Options expired ( 44,205 ) $ 19.74 Options outstanding as of December 31, 2023 3,165,715 $ 12.79 $ 7,197 7.53 Options vested and exercisable as of December 31, 2023 1,646,249 $ 11.68 $ 5,382 6.57 The weighted average grant-date fair value of stock options granted during the years ended December 31, 2023, 2022 and 2021 was $ 5.87 , $ 6.93 and $ 8.61 , respectively. The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 0.5 million, $ 0.5 million and $ 1.9 million, respectively. The total unrecognized compensation expenses related to 2020 Stock Plan options as of December 31, 2023 was $ 8.8 million, net of forfeitures, to be expensed on a straight-line basis over the remaining 2.6 years. Restricted Stock Units RSUs granted do not participate in earnings, dividends, and do not have voting rights until vested. The following table summarizes activity of the Company’s RSUs for the years ended December 31, 2023, 2022 and 2021: Number of Shares Weighted Average Grant Date Fair Value Unvested awards as of January 1, 2021 2,995,669 $ 8.38 Awards granted 61,539 $ 24.35 Awards vested and released ( 1,272,136 ) $ 8.32 Awards forfeited ( 291,157 ) $ 8.14 Unvested awards as of December 31, 2021 1,493,915 $ 8.82 Awards granted 1,414,925 $ 14.05 Awards vested and released ( 662,872 ) $ 9.26 Unvested awards as of December 31, 2022 2,245,968 $ 11.99 Awards granted 251,955 $ 11.64 Awards vested and released ( 1,663,702 ) $ 11.98 Awards forfeited ( 105,008 ) $ 11.25 Unvested awards as of December 31, 2023 729,213 $ 11.99 The total unrecognized compensation expenses related to 2020 Stock Plan RSUs as of December 31, 2023 was $ 6.5 million to be expensed on a straight-line basis over 0.9 years. F-32 Performance Stock Units The following table summarizes activity of the Company’s PSUs for the years ended December 31, 2023, 2022 and 2021: Number of Shares Weighted Average Grant Date Fair Value Unvested awards as of January 1, 2021 1,452,696 $ 7.92 Awards granted (1) 1,478,765 $ 15.68 Awards vested and released ( 2,787,001 ) $ 11.64 Awards forfeited ( 32,375 ) $ 15.61 Unvested awards as of December 31, 2021 (1) 112,085 $ 15.69 Awards granted (2) 518,938 $ 39.41 Awards vested ( 112,085 ) $ 15.69 Unvested awards as of December 31, 2022 (2) 518,938 $ 39.41 Awards granted (2) 523,938 $ 11.97 Performance achievement adjustment (3) 1,148,376 $ 31.31 Awards vested and released ( 1,335,982 ) $ 39.26 Awards forfeited ( 32,375 ) $ 11.97 Unvested awards as of December 31, 2023 (4) 822,895 $ 11.97 __________________________ (1) Reported at the certified performance achievement at 271 % of the target shares granted (2) Reported at 100 % of the target shares granted (3) Reported at the certified performance achievement at 256 % of the target shares granted in 2022 and at 170 % of the target shares granted in 2023 (4) Reported at the certified performance achievement at 170 % of the target shares granted . The total unrecognized compensation expenses related to 2022 PSUs as of December 31, 2023 was $ 1.6 million to be expensed on over 0.2 years. The fair value of vested RSUs and PSUs issued under the 2020 Plan (measured at the vesting date) for the years ended December 31, 2023, 2022 and 2021 was as follows: For the years ended December 31, 2023 2022 2021 (in thousands) RSUs $ 18,926 $ 9,982 $ 25,702 PSUs $ 15,993 $ 1,650 $ 72,615 F-33 Note 13 — Earnings per share The following table sets forth the computation of basic and diluted EPS of common stock as follows: For the years ended December 31, 2023 2022 2021 (in thousands, except per share data) Numerator for basic and diluted loss per share Net loss $ ( 1,765 ) $ ( 29,214 ) $ ( 7,700 ) Denominator for basic and diluted loss per share Weighted-average shares outstanding – basic and diluted 75,193 69,197 58,662 Net loss per share Basic $ ( 0.02 ) $ ( 0.42 ) $ ( 0.13 ) Diluted $ ( 0.02 ) $ ( 0.42 ) $ ( 0.13 ) The following potentially dilutive common shares, presented based on weighted average potential shares outstanding during each period were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect: For the years ended December 31, 2023 2022 2021 (in thousands) Stock options to purchase common stock 4,823 4,396 5,826 Restricted stock units 1,488 2,112 2,110 Performance stock units 912 1,338 1,301 Warrants to purchase common stock — — 3,657 Total 7,223 7,846 12,894 Note 14 — Segment and geographic information In accordance with ASC Topic 280, Segment Reporting , the Company has determined it has one operating segment and one reportable segment. The chief operating decision maker assesses the Company’s performance and allocates resources based on the Company’s consolidated financial information. The Company’s business activities have similar economic characteristics and are similar in all of the following areas: the nature of services, the type or class of customer for which they provide their services, and the methods used to provide their services. Geographic Information F-34 The following table presents revenues by customer location for the years ended December 31, 2023, 2022 and 2021. The Company attributes customers to respective countries based upon location of the customer served. It differs from the prior period definition that was based upon location of the customer billed. Refer to Note 1 for more details on reclassifications. For the years ended December 31, 2023 2022 2021 (in thousands) United States 238,155 242,645 167,445 United Kingdom 31,880 21,888 10,574 Netherlands 12,247 15,894 14,599 Other 30,628 30,055 18,662 Total 312,910 310,482 211,280 Long-lived assets include property and equipment, net of accumulated depreciation and amortization. Physical locations and values of the Company’s long-lived assets are summarized below: As of December 31, 2023 2022 ( in thousands) Serbia $ 2,457 $ 1,235 Ukraine 2,437 2,468 United States 2,174 1,317 Other 4,290 3,195 Total $ 11,358 $ 8,215 Note 15 — Commitments and contingencies Software subscription services agreement The Company entered into a software subscription services agreement (the “SSA”) effective as of June 1, 2019. The SSA is non-cancelable for a term of 5 years from the effective date and renewable at the election of the Company. On December 20, 2023 the Company decided to renew the SSA for an additional term of 5 years starting from June 1, 2024. Payments under the terms of the SSA are due quarterly in advance. Total future minimum payments under the non-cancelable SSA are as follows: Subscription Payments (in thousands) 2024 $ 570 2025 979 2026 979 2027 979 2028 979 Thereafter 490 Total $ 4,976 Litigation The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. Management evaluates each claim and provides for potential loss when the claim is probable to be paid and reasonably estimable. While adverse decisions in certain of these litigation matters, claims and administrative proceedings could have a material effect on a particular period’s results of operations, subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that any future accruals with respect to these currently known contingencies would not have a material effect on the financial condition, liquidity or cash flows of the Company. There are no amounts required to be reflected in these consolidated financial statements related to contingencies. F-35 Note 16 — Subsequent events The vesting of PSUs with the performance factors based on the 2023 results was certified by the Board of Directors for release on February 20, 2024. Approximately 0.8 million shares were released upon vesting of 2023 PSUs with approximately 0.4 million shares net withheld to cover tax obligations. F-36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.