Bond Cliff

Main Menu

  • Home
  • Economic integration
  • Price index
  • Covariance
  • Labor augmenting
  • Fund

Bond Cliff

Header Banner

Bond Cliff

  • Home
  • Economic integration
  • Price index
  • Covariance
  • Labor augmenting
  • Fund
Labor augmenting
Home›Labor augmenting›GRID DYNAMICS HOLDINGS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

GRID DYNAMICS HOLDINGS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

By Susan Weiner
March 3, 2022
0
0
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes thereto included elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements based
upon current plans, expectations, and beliefs, involving risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements. You should review the section titled
"Special Note Regarding Forward-Looking Statements" for a discussion of
forward-looking statements and in Item 1A, "Risk Factors" for a discussion of
factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the
following discussion and analysis and elsewhere in this Annual Report on Form
10-K. Our historical results are not necessarily indicative of the results that
may be expected for any period in the future.

Overview

Grid Dynamics Holdings, Inc. ("Grid Dynamics," "GDH," the "Company," "we," "us,"
or "our") is a fast-growing company focused on enterprise-level digital
transformations in Fortune 1000 companies. For enterprises that create
innovative digital products and experiences, Grid Dynamics offers close
collaboration to provide digital transformation initiatives that span strategy
consulting, development of early prototypes and enterprise-scale delivery of new
digital platforms. Since its inception in 2006 in Menlo Park, California, as a
grid and cloud consultancy firm, Grid Dynamics has been on the forefront of
digital
                                       33

————————————————– ——————————

Contents

transformation, working on big ideas like cloud computing, NOSQL, DevOps, microservices, big data and AI, and has quickly established itself as a vendor of choice for technology and digital businesses.

As a leading global digital engineering and IT services provider with its
headquarters in Silicon Valley and engineering centers in the United States,
Mexico and multiple European countries, Grid Dynamics' core business is to
deliver focused and complex technical consulting, software design, development,
testing and internet service operations. Grid Dynamics also helps organizations
become more agile and create innovative digital products and experiences through
its deep expertise in emerging technology, such as AI, data science, cloud
computing, big data and DevOps, lean software development practices and a
high-performance product culture. Grid Dynamics believes that the key to its
success is a business culture that puts products over projects, client success
over contract terms and real business results over pure technical innovation. By
leveraging Grid Dynamics' proprietary processes optimized for innovation,
emphasis on talent development and technical expertise, Grid Dynamics has been
able to achieve significant growth.

We are a former blank check company that completed our initial public offering
on October 4, 2018. In March 2020, Grid Dynamics, formerly known as ChaSerg
Technology Acquisition Corp ("ChaSerg"), completed its acquisition of Grid
Dynamics International, Inc. ("GDI") pursuant to the business combination
agreement dated November 13, 2019 (the "Business Combination"). In conjunction
with the completion of the Business Combination, ChaSerg was renamed as Grid
Dynamics Holdings, Inc.

The Business Combination was accounted for as a reverse recapitalization for
which GDI was determined to be the accounting acquirer. Outstanding shares of
GDI were converted into our common shares, presented as a recapitalization, and
the net assets of ChaSerg were acquired at historical cost, with no goodwill or
other intangible assets recorded.

Update on activities regarding military action in Ukraine

On February 24, 2022, Russian forces launched significant military action
against Ukraine, and sustained conflict and disruption in the region is
possible. The impact to Ukraine as well as actions taken by other countries,
including new and stricter sanctions imposed by Canada, the United Kingdom, the
European Union, the U.S. and other countries and companies and organizations
against officials, individuals, regions, and industries in Russia and Ukraine,
and each country's potential response to such sanctions, tensions, and military
actions could have a material adverse effect on our operations. For example, in
response to increased sanctions, Russia could attempt to take control of assets
in Russia or Ukraine of companies registered in the United States, such as Grid
Dynamics. Any such material adverse effect from the conflict and enhanced
sanctions activity may disrupt our delivery of services, impair our ability to
complete financial or banking transactions, cause us to shift all or portions of
our work occurring in the region to other countries, and may restrict our
ability to engage in certain projects in the region or involving certain
customers in the region.

We have a significant number of personnel in Ukraine and Russia. We are actively
monitoring the security of our personnel and the stability of our
infrastructure, including communications and internet availability. We are also
executing our business continuity plan and adapting to developments as they
occur to protect the safety of our people and handle potential impacts to our
delivery infrastructure, including reallocating work to other geographies within
our global footprint. We are actively working with our personnel and with our
customers to meet their needs and to mitigate delivery challenges.

We have no way to predict the progress or outcome of the situation, as the
conflict and government reactions are rapidly developing and beyond our control.
Prolonged unrest, military activities, or broad-based sanctions, should they be
implemented, could have a material adverse effect on our operations and business
outlook. We have accelerated hiring in locations outside of the region as part
of our business continuity planning and in order to support client demand. In
addition, we have implemented plans to move some of our existing personnel to
other countries in order to keep them safe and mitigate impacts on our delivery
of services to our customers.

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

For more information on the various risks posed by military action in
Ukraine and impact in the region, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

                                       34

————————————————– ——————————

Contents

Exercise Highlights

The following table presents a summary of the Dynamic grid’ financial results for the annual periods indicated:

                                                                                          Year ended December 31,
                                                       2021                                         2020                                         2019
                                                            % of revenue                                 % of revenue                                 % of revenue
                                                                               (dollars in thousands, except per share data)
Revenues                              $ 211,280                     100.0  %       $ 111,283                     100.0  %       $ 118,326                     100.0  %
Gross profit                             87,728                      41.5  %          41,621                      37.4  %          48,236                      40.8  %
Income/(loss) from operations                50                         -  %         (15,448)                    (13.9) %          15,625                      13.2  %
Net income/(loss)                        (7,700)                     (3.6) %         (12,599)                    (11.3) %          10,807                       9.1  %
Diluted EPS                           $   (0.13)                         n/a       $   (0.28)                         n/a            0.49                          n/a
Non-GAAP Financial Information
Adjusted EBITDA(1)                       39,077                      18.5  %          12,549                      11.3  %          23,661                      20.0  %
Non-GAAP Net Income(1)                   24,160                      11.4  %           7,013                       6.3  %          15,487                      13.1  %
Non-GAAP Diluted EPS(1)                    0.36                          n/a            0.14                          n/a            0.73                          n/a


__________________________
(1)Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP Diluted EPS are non-GAAP
financial measures. See "Non-GAAP Measures" below for additional information and
reconciliations to the most directly comparable GAAP financial measures.

In the twelve months ended December 31, 2021 our revenues were $211.3 million,
which included $44.9 million from our recent acquisitions of Daxx and Tacit.
Organic revenue of $166.4 million for the twelve months ended December 31, 2021
was up from $110.3 million in the same period of 2020. The key reasons for the
organic year-over-year increase of 50.8% were increased demand for our services
by our customers resulting in increased billable hours combined with revenue
contribution from new customers. Our largest vertical, Technology Media &
Telecom, continued to grow; in the twelve months ended December 31, 2021 it
represented 32.0% of our full year of 2021 revenue and grew by 49.2% on a
year-over-year basis. While many customers positively grew on the year-over-year
basis, Grid Dynamics' two largest TMT customers contributed meaningfully.

In the twelve months ended December 31, 2021, our Retail vertical contributed
$61.7 million in revenue, up from $34.0 million in revenue in the twelve months
ended December 31, 2020. We have been witnessing a steady sequential pick up in
business. Furthermore, within our Retail vertical, since the beginning of the
pandemic, we have witnessed a shift towards retail customers who have embraced
digital and online commerce. This is a contrast to some of our other customers
who have not recovered from the impacts of the pandemic, and going forward, we
expect that some of them will not recover to pre-COVID levels.

We continue to focus on revenue diversification by increasing our customer base
with additions. During the twelve months ended December 31, 2021, our organic
and acquisitions combined received revenues from a total of 273 customers.

In the twelve months ended December 31, 2021, our GAAP Net loss was $(7.7)
million, or (3.6)% of revenue and Non-GAAP EBITDA was $39.1 million, or 18.5% of
revenue. This was down from GAAP Net loss of $(12.6) million, or (11.3)% of
revenue and and up from $12.5 million or 11.3% of revenue in Non-GAAP EBITDA in
the twelve months ended December 31, 2020. The decrease in GAAP Net Loss and
increase in non-GAAP EBITDA on a year-over-year basis was due to a combination
of higher levels of revenue and gross profit.

The acquisition of Tacit Knowledge Inc.

On May 29, 2021, we acquired UK based Tacit in an all-cash transaction. Tacit is
a global consultancy focused on digital commerce serving customers in the UK,
North America, Continental Europe, and Asia. The company serves leading global
brands across technology, CPG, financial, and retail markets. The company has
approximately 180 employees with engineering centers situated in Moldova and
Mexico. The acquisition is augmenting our service offerings and strengthening
our competitive position within the market. Additionally, the acquisition is
also enabling us to leverage near-shore capabilities with the company's presence
in Mexico.
                                       35

————————————————– ——————————

Contents

Updates related to COVID-19

In December 2019, a novel coronavirus COVID-19 was reported in China, and in
March 2020, the World Health Organization declared it a pandemic. This
contagious disease pandemic has continued to spread across the globe, including
extensively within the U.S., and is impacting worldwide economic activity and
financial markets, significantly increasing economic volatility and uncertainty.
In response to this global pandemic, several local, state, and federal
governments have been prompted to take unprecedented steps that include, but are
not limited to, travel restrictions, closure of businesses, social distancing,
and quarantines.

Starting in March 2020, headwinds to our business from the pandemic were largely
centered around our retail customers as many of them witnessed a slowdown in
their sales. After witnessing a low point in the month of May 2020, our retail
business has steadily improved as we have added new customers and have grown
existing business across industry verticals. We are now facing challenges from
COVID-19 such as employee retention and shortage of talent on the job market. We
continue to take precautionary measures intended to minimize the risk of the
virus to our employees, our customers, and the communities in which we operate
that include suspension of all non-essential travel. Although a significant
proportion of our employees continue to work remotely, all our facilities have
been opened for employees to work following local government guidelines. We
continue to deliver services to our customers in this fashion and this has
resulted in minimal disruption in our operational and delivery capabilities.

Comparability of financial information

Grid Dynamics' results of operations and statements of assets and liabilities
may not be comparable between periods as a result of the Business Combination on
March 5, 2020 and the other events and transactions discussed below.

Key performance indicators and other factors affecting performance

Grid Dynamics uses the following key performance indicators and assesses the
following other factors to analyze its business performance, to make budgets and
financial forecasts and to develop strategic plans:

Employees by region

Attracting and retaining the right employees is critical to the success of Grid
Dynamics' business and is a key factor in Grid Dynamics' ability to meet
customers' needs and grow its revenue base. Grid Dynamics' revenue prospects and
long-term success depend significantly on its ability to recruit and retain
qualified IT professionals. A substantial majority of Grid Dynamics' personnel
is comprised of such IT professionals.

The following table shows the number of Grid dynamics personnel (including full-time and part-time employees and contractors performing similar functions) by region, on the dates indicated:

                                                                            As of December 31,
                                                            2021                      2020                  2019
United States and Mexico                                        386                      259                   265
Central and Eastern Europe(1), U.K. and the
Netherlands                                                   2,888                    1,635                 1,165
Total                                                         3,274                    1,894                 1,430


__________________________

(1) Includes Ukraine, Russia, Poland, Serbiaand Moldova.

Wear

There is competition for IT professionals in the regions in which Grid Dynamics
operates, and any increase in such competition may adversely impact Grid
Dynamics' business and gross profit margins. Employee retention is one of Grid
Dynamics' main priorities and is a key driver of operational efficiency. Grid
Dynamics seeks to retain top talent by providing the opportunity to work on
exciting, cutting-edge projects for high profile clients, a flexible work
environment and training and development programs. Grid Dynamics' management
targets a voluntary attrition rate no higher than the mid-teen percentages, in
line with the industry.
                                       36

————————————————– ——————————

Contents

Hours and use

As most of Grid Dynamics' customer projects are performed and invoiced on a time
and materials basis, Grid Dynamics' management tracks and projects billable
hours as an indicator of business volume and corresponding resource needs for IT
professionals. To maintain its gross profit margins, Grid Dynamics must
effectively utilize its IT professionals, which depends on its ability to
integrate and train new personnel, to efficiently transition personnel from
completed projects to new assignments, to forecast customer demand for services
and to deploy personnel with appropriate skills and seniority to projects. Grid
Dynamics' management generally tracks utilization with respect to subsets of
employees, by location or by project, and calculates the utilization rate for
each subset by dividing (x) the aggregate number of billable hours for a period
by (y) the aggregate number of total available hours for the same period. Grid
Dynamics' management analyzes and projects utilization to measure the efficiency
of its workforce and to inform management's budget and personnel recruiting
decisions.

Customer focus

Grid Dynamics' ability to retain and expand its relationships with existing
customers and add new customers are key indicators of its revenue potential.
Excluding Daxx and Tacit, Grid Dynamics grew its customer base from 52 customers
in 2020 to 65 customers in 2021. Grid Dynamics' procurement of new customers has
a direct impact on its ability to diversify its sources of revenue and replace
customers that may no longer require its services. Grid Dynamics has a
relatively high level of revenue concentration with certain customers. Of Grid
Dynamics' customers, two customers each accounted for 10% or more of Grid
Dynamics' revenue in the years ended December 31, 2021 and 2020, respectively,
and three customers each accounted for 10% or more of Grid Dynamics' revenue in
the year ended December 31, 2019.

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

                                                                   Year ended December 31,
                                                          2021                 2020               2019
                                                       (in thousands,

with the exception of a number of customers and

percentages)

Total customers (for the period) (1)                        273                  182                 40
Of which:
>$5.0 million                                                 9                    7                  7
>$2.5 - 5.0 million                                           5                    3                  3
>$1.0 - 2.5 million                                          20                    7                  5
Top five customers                                         43.9    %            55.9  %            66.5  %
Top ten customers                                          60.4    %            78.4  %            86.7  %
Top five customers                                  $    92,768            $  62,152          $  78,715
Top ten customers                                   $   127,564            

$87,203 $102,646

__________________________

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

Currency exposure

Grid Dynamics is exposed to foreign currency exchange rate risk and its profit
margins are subject to volatility between periods due to changes in foreign
currency exchange rates relative to the U.S. dollar. Grid Dynamics' functional
currency apart from the U.S. dollar includes EURO, British pounds, Mexican pesos
and Moldovan leu. Grid Dynamics contracts with customers for payment in and
generates predominantly all of its revenue in U.S. dollars, except for Daxx and
Tacit that generate revenue predominantly in EURO and British pounds. Its
non-U.S. subsidiaries' operations relate substantially to performing services
under those contracts. Several of Grid Dynamics' subsidiaries conduct operations
and employ or contract personnel in Russia, Ukraine, Poland and Serbia, but keep
their books and records in U.S. dollars. Daxx's books are kept in EURO. Tacit's
books are kept in local currencies. Grid Dynamics' foreign currency transaction
exposure is a result of having to convert U.S. dollars into the local currencies
of the countries in which it must pay expenses, typically by transferring funds
to its non-U.S. subsidiaries. These expenses are primarily comprised of
compensation and benefits and other operating costs, such as rent. Subsidiary
transactions executed in local currencies are converted into U.S. dollars at the
exchange rate in effect on the date of the transaction, in the case of asset and
liability transactions, or at the average monthly exchange rate, in the case of
income and expense transactions. Certain balances in local currencies,
particularly cash and financial instruments, are adjusted at each
                                       37

————————————————– ——————————

Contents

balance sheet date to reflect the then-current exchange rate, which is the rate
at which the related receivable or payable could be settled at that date. As a
result, Grid Dynamics' assets, liabilities, profit margins and other measures of
profitability may be subject to volatility due to changes in the exchange rate
of the U.S. dollar against the currencies in which Grid Dynamics' subsidiaries
incur operating expenses, hold assets, or owe liabilities, and may not be
comparable between periods.

For the twelve months ended December 31, 2021, approximately 12.5%, 11.9%, and
6.4% of Grid Dynamics' $211.2 million of combined cost of revenue and total
operating expenses were denominated in the Ukrainian hryvnia, Russian rouble,
and Polish zloty, respectively. Comparatively, for the year ended December 31,
2020 approximately 11.7%, 13.8% and 9.6% of of Grid Dynamics' $126.7 million of
combined cost of revenue and total operating expenses were denominated in the
Ukrainian hryvnia, Russian rouble, and Polish zloty, respectively. Grid Dynamics
does not currently hedge its foreign currency exposure, although it seeks to
minimize such exposure by limiting cash transfers to amounts necessary to fund
subsidiary operating expenses for a short period, typically one to two weeks.
When and where possible, Grid Dynamics seeks to match expenses to the U.S.
dollar. For example, in Ukraine, Grid Dynamics generally pays salaries in the
current hryvnia equivalent of an agreed U.S. dollar amount, consistent with
local requirements. As a result, a significant portion of Grid Dynamics'
exposure to fluctuations in the value of the Ukrainian hryvnia against the U.S.
dollar is naturally hedged. Management carefully evaluates its exposure to
foreign currency risk and, though Grid Dynamics does not currently hedge this
exposure through the use of financial instruments, it may do so in the future.
See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk-Foreign
Currency Exchange Rate Risk" below for more information about Grid Dynamics'
exposure to foreign currency exchange rates.

Seasonality

Grid Dynamics' business is subject to seasonal trends that impact its revenues
and profitability between quarters. Some of the factors that influence the
seasonal trends include the timing of holidays in the countries in which Grid
Dynamics operates and the U.S. retail cycle, which drives the behavior of Grid
Dynamics' retail customers. Excluding the impact of growth in its book of
business, Grid Dynamics has historically recorded higher revenue and gross
profit in the second and third quarters of each year compared to the first and
fourth quarters of each year. The Christmas holiday season in Russia and
Ukraine, for example, falls in the first quarter of the calendar year, resulting
in reduced activity and billable hours. In addition, many of Grid Dynamics'
retail sector customers tend to slow their discretionary spending during the
holiday sale season, which typically lasts from late November (before
Thanksgiving) through late December (after Christmas).

Non-GAAP Measures

To supplement Grid Dynamics' consolidated financial data presented on a basis
consistent with U.S. GAAP, this Annual Report contains certain non-GAAP
financial measures, including Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP
Diluted Earnings Per Share, or EPS. Grid Dynamics has included these non-GAAP
financial measures because they are financial measures used by Grid Dynamics'
management to evaluate Grid Dynamics' core operating performance and trends, to
make strategic decisions regarding the allocation of capital and new investments
and are among the factors analyzed in making performance-based compensation
decisions for key personnel. These measures exclude certain expenses that are
required under U.S. GAAP. Grid Dynamics excludes these items because they are
not part of core operations or, in the case of stock-based compensation,
non-cash expenses that are determined based in part on Grid Dynamics' underlying
performance.

Grid Dynamics believes these supplemental performance measurements are useful in
evaluating operating performance, as they are similar to measures reported by
its public industry peers and those regularly used by security analysts,
investors and other interested parties in analyzing operating performance and
prospects. These non-GAAP financial measures are not intended to be a substitute
for any GAAP financial measures and, as calculated, may not be comparable to
other similarly titled measures of performance of other companies in other
industries or within the same industry.

There are significant limitations associated with the use of non-GAAP financial
measures. Further, these measures may differ from the non-GAAP information, even
where similarly titled, used by other companies and therefore should not be used
to compare our performance to that of other companies. Grid Dynamics compensates
for these limitations by providing investors and other users of its financial
information a reconciliation of non-GAAP measures to the related GAAP financial
measures. Grid Dynamics encourages investors and others to review its financial
information in its entirety, not to rely on any single financial measure and to
view its non-GAAP measures in conjunction with GAAP financial measures.

Grid dynamics defines and calculates its non-GAAP financial measures as follows:

•Non-GAAP EBITDA: Net income/(loss) before interest income/expense, provision
for income taxes and depreciation and amortization, and further adjusted for the
impact of stock-based compensation expense, transaction-related costs (which
include, when applicable, professional fees, retention bonuses, and consulting,
legal and advisory costs related
                                       38

————————————————– ——————————

Contents

to Grid Dynamics' merger and acquisition and capital-raising activities),
impairment of goodwill and other income/expenses, net (which includes mainly
interest income and expense, foreign currency transaction losses and gains, fair
value adjustments and other miscellaneous expenses), and restructuring costs.

•Non-GAAP Net Income: Net income/(loss) adjusted for the impact of stock-based
compensation, impairment of goodwill, transaction-related costs, restructuring
costs, other income/expenses, net, and the tax impacts of these adjustments.

•Non-GAAP diluted EPS: non-GAAP net income, divided by the diluted weighted average number of ordinary shares outstanding for the period.

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

                                                           Year ended December 31,
                                                      2021          2020           2019
                                                               (in thousands)
GAAP net income/(loss)                             $ (7,700)     $ (12,599)     $ 10,807
Adjusted for:
Depreciation and amortization                         5,049          2,672  

2,311

Provision/(benefit) for income taxes                  5,248         (2,613)        4,642
Impairment of goodwill                                    -              -           139
Stock-based compensation                             33,036         20,006         2,441

Transaction costs and costs related to transformation(1) 942 4,407

3,145

Restructuring(2)                                          -            912             -
Other (income)/expenses, net(3)                       2,502           (236)          176
Non-GAAP EBITDA                                    $ 39,077      $  12,549      $ 23,661


__________________________
(1)Transaction and transformation-related costs include, when applicable,
external deal costs, transaction-related professional fees, transaction-related
retention bonuses, which are allocated proportionally across cost of revenue,
engineering, research and development, sales and marketing and general and
administrative expenses as well as other transaction-related costs including
integration expenses consisting of outside professional and consulting services.
(2)During the year ended December 31, 2020, we implemented a cost reduction plan
and incurred restructuring and severance charges of $0.9 million, primarily
resulting from a reduction in workforce and other charges. We did not incur any
restructuring expenses during the year ended December 31, 2021.
(3)Other (income)/expenses consist primarily of losses and gains on foreign
currency transactions, fair value adjustments, and other miscellaneous
non-operating expenses and other income consists primarily of interest on cash
held at banks.
                                       39

————————————————– ——————————

Contents

The following table presents a reconciliation of Grid Dynamics' Non-GAAP Diluted
EPS and its Non-GAAP Net Income to its consolidated net income/(loss) for the
annual periods indicated:

                                                                            Year ended December 31,
                                                                   2021                 2020               2019
                                                                     (in thousands, except per share data)
Net income/(loss)                                            $      (7,700)         $ (12,599)         $  10,807
Adjusted for:
Impairment of goodwill                                                   -                  -                139
Stock-based compensation                                            33,036             20,006              2,441
Transaction-related costs(1)                                           942              4,407              3,145
Restructuring(2)                                                         -                912                  -
Other (income)/expenses, net(3)                                      2,502               (236)               176
Tax impact of non-GAAP adjustments(4)                               (4,620)            (5,477)            (1,221)
Non-GAAP Net Income                                          $      24,160          $   7,013          $  15,487
Number of shares used in the Non-GAAP Diluted EPS                   67,305             48,778             21,122
Non-GAAP Diluted EPS(5)                                      $        0.36  

$0.14 $0.73

__________________________

(1)Transaction and transformation-related costs include, when applicable,
external deal costs, transaction-related professional fees, transaction-related
retention bonuses, which are allocated proportionally across cost of revenue,
engineering, research and development, sales and marketing and general and
administrative expenses as well as other transaction-related costs including
integration expenses consisting of outside professional and consulting services.
(2)During the year ended December 31, 2020, we implemented a cost reduction plan
and incurred restructuring and severance charges of $0.9 million, primarily
resulting from a reduction in workforce and other charges. We did not incur any
restructuring expenses during the year ended December 31, 2021.
(3)Other (income)/expenses consist primarily of losses and gains on foreign
currency transactions, fair value adjustments, and other miscellaneous
non-operating expenses and other income consists primarily of interest on cash
held at banks.
(4)Reflects the estimated tax impact of the non-GAAP adjustments presented in
the table.
(5)Non-GAAP Diluted EPS is calculated by dividing Non-GAAP Net Income/(Loss) by
the diluted weighted-average shares outstanding. From the three months ended
December 31, 2020 onwards, we have chosen to calculate its Non-GAAP Diluted EPS
based on the diluted share count even in Net GAAP Loss situation. This
methodology differs from the prior approach when we applied the basic share
count in situations of a Net GAAP Loss and a positive Non-GAAP Net Income.
Management believes that the new methodology provides better representation of
the company's financial results as it takes into account the significance of the
dilutive impact from any outstanding equity instruments in a GAAP Net
Loss/Non-GAAP Net Income situation.

Key components of income and expenses

Income

Grid Dynamics generates revenue by providing focused and complex services in the
area of software engineering, development, integration, testing, and operations
of digital services. Grid Dynamics provides services mainly on a time and
materials basis and, to a much lesser extent, on a fixed-fee basis. While
fixed-fee contracts currently represent an immaterial portion of overall revenue
for the periods presented, Grid Dynamics expects proportionate revenue from
fixed-fee contracts to increase in future periods. On a time and materials
basis, Grid Dynamics earns and recognizes revenue as hours and costs are
incurred. On its current and future fixed fee contracts, Grid Dynamics earns and
recognizes revenue as the work is performed, the monthly calculation of which is
based upon actual labor hours incurred and level of effort expended throughout
the duration of the contract. For both time and materials contracts and fixed
fee contracts, hourly rates are typically determined based on the location and
experience of Grid Dynamics personnel selected to perform the service and are
negotiated for each contract or statement of work, as the case may be. For fixed
fee contracts, the fixed fee generally remains constant for the contracted
project period unless the customer directs a change in scope of project work or
requests additional Grid Dynamics employees in excess of those scheduled for a
specific project.

In select cases, Grid Dynamics offers volume discounts or early settlement
discounts, which are recorded as contra-revenue items. Volume discounts apply
once the customer reaches certain contractual spend thresholds. Early settlement
discounts are
                                       40

————————————————– ——————————

Contents

issued based on the time of payment by the customer. If there is uncertainty about project completion or receipt of payment for services provided, revenue is deferred until the uncertainty is sufficiently resolved.

Costs and expenses

Cost of Revenue. Cost of revenue consists primarily of salaries and employee
benefits, including performance bonuses and stock-based compensation, and travel
expenses for client-serving personnel. Cost of revenue also includes
depreciation and amortization expense related to client-serving activities.

Engineering, Research and Development. Engineering, research and development
expenses consist mainly of salaries and employee benefits including performance
bonuses and stock-based compensation for personnel engaged in the design and
development of solutions. Engineering, research and development expenses also
include depreciation and amortization expenses related to such activities.
Engineering, research and development costs are expensed as incurred.

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

General and Administrative. General and administrative expenses consist
primarily of administrative personnel and officers' salaries and employee
benefits including performance bonuses and stock-based compensation, legal and
audit expenses, insurance, operating lease expenses (mainly facilities and
vehicles) and other facility costs, workforce global mobility initiatives,
restructuring and employee relocations cost (not in connection with customer
projects), and depreciation and amortization expenses related to such
activities. General and administrative expenses include a substantial majority
of Grid Dynamics' stock-based compensation costs for the financial periods
discussed herein.

Provision for Income Taxes. Grid Dynamics follows the asset and liability method
of accounting for income taxes, whereby deferred income taxes are recognized for
the tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of the assets and liabilities. The provision
for income taxes reflects income earned and taxed in the various U.S. federal
and state and non-U.S. jurisdictions. Jurisdictional tax law changes, increases
or decreases in permanent differences between book and tax items, accruals or
adjustments of accruals for tax contingencies or valuation allowances, and the
change in the mix of earnings from these taxing jurisdictions all affect the
overall effective tax rate. Grid Dynamics' effective tax rate was (214.0)%,
17.2%, and 30.1% in the years ended December 31, 2021, 2020 and 2019,
respectively. The differences in effective tax rate between the years ended
December 31, 2021 and 2020 and 2019 were attributable mainly to stock based
compensation excess tax benefit, partially offset by Section162(m) compensation
deduction limitations.
                                       41

————————————————– ——————————

Contents

Operating results

Year ended December 31, 2021 compared to the year ended December 31, 2020

The following table presents a summary of the Dynamic grid’ the consolidated results of operations for the periods indicated and the variations between the periods:

                                                          Year ended December 31,                              Change
                                                          2021                   2020             Dollars             Percentage
                                                                          (in thousands, except percentages)
Revenue                                           $     211,280              $ 111,283          $ 99,997                      89.9  %
Cost of revenue                                         123,552                 69,662            53,890                      77.4  %
Gross profit                                             87,728                 41,621            46,107                     110.8  %
Engineering, research, and development                    8,459                  9,311              (852)                     (9.2) %
Sales and marketing                                      14,457                 10,051             4,406                      43.8  %
General and administrative                               64,762                 37,707            27,055                      71.8  %
Total operating expense                                  87,678                 57,069            30,609                      53.6  %
Income/(loss) from operations                                50                (15,448)           15,498                    (100.3) %
Other income/(expenses), net                             (2,502)                   236            (2,738)                 (1,160.2) %
Loss before income taxes                                 (2,452)               (15,212)           12,760                     (83.9) %
Provision/(benefit) for income taxes                      5,248                 (2,613)            7,861                    (300.8) %
Net loss                                          $      (7,700)             $ (12,599)         $  4,899                     (38.9) %
Foreign currency translation adjustments, net of
tax                                                        (122)                    (4)             (118)                  2,950.0  %
Comprehensive loss                                $      (7,822)           0 $ (12,603)         $  4,781                     (37.9) %


Revenues by Vertical. We assign our customers into one of our four main vertical
markets or a group of various industries where we are increasing our presence,
which we label as "Verticals". The following table presents our revenues by
vertical and revenues as a percentage of total revenues by vertical for the
periods indicated:

                                                                                          Year ended December 31,
                                                     2021                                           2020                                           2019
                                                          % of revenue                                   % of revenue                                   % of revenue
                                                                                           (dollars in thousands)
Tech, Media and Telecom            $  67,689                        32.0  %       $  45,362                        40.8  %       $  32,337                        27.3  %
Retail                                61,717                        29.2  %          33,975                        30.5  %          67,367                        56.9  %
Finance                               17,515                         8.3  %          13,589                        12.2  %          12,479                        10.6  %
CPG/Manufacturing                     43,461                        20.6  %          14,202                        12.8  %           4,850                         4.1  %
Other                                 20,898                         9.9  %           4,155                         3.7  %           1,293                         1.1  %
Total                              $ 211,280                       100.0  %       $ 111,283                       100.0  %       $ 118,326                       100.0  %


Revenue. Revenue increased by $100.0 million, or 89.9%, to $211.3 million in
2021 from $111.3 million in 2020. In 2021, we witnessed growth across all our
verticals in comparison to 2020. Additionally, our Retail vertical, which
declined in 2020 in comparison to 2019, witnessed increase in 2021. Growth was
also driven by contributions from our acquisitions of Daxx and Tacit which we
acquired in December of 2020 and May of 2021, respectively. For the year ended
December 31, 2021, retail revenues were $61.7 million, up from $34.0 million in
the same period a year ago. The 81.7% year-over-year increase in retail revenues
was driven by combination of factors that include adding new customers and
increase in revenue from the existing customers. Additionally, Grid Dynamics'
top ten customers contributed $127.6 million and $87.2 million to revenue for
the years ended December 31, 2021 and 2020, respectively, in the aggregate
accounting for $40.4 million of the increase. The
                                       42

————————————————– ——————————

Contents

remainder of the other industry verticals increase reflected growth in revenue
from new customers (i.e., customers for which Grid Dynamics performed services
for the first time during the period) and other existing customers.

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

Gross profit increased by $46.1 million, or 110.8%, to $87.7 million in 2021
from $41.6 million in 2020. Gross margin (gross profit as a percentage of
revenue) increased to 41.5% in the year ended December 31, 2021 from 37.4% in
the year ended December 31, 2020. The gross margin increase was attributable to
a combination of increased levels of business resulting in higher revenue,
favorable mix-shift towards offshore delivery locations, and improving
engineering workforce utilization.

Engineering, Research and Development. Engineering, research and development
expenses decreased by $(0.9) million to $8.5 million in the year ended December
31, 2021, a (9.2)% decrease from $9.3 million in the year ended December 31,
2020. The decrease in R&D expenses was largely due to the wind down of R&D
programs initiated during the period of the pandemic in 2020 and their
replacement with the new R&D initiatives.

Sales and Marketing. Sales and marketing expenses increased by $4.4 million, or
43.8%, to $14.5 million in the year ended December 31, 2021 from $10.1 million
in the year ended December 31, 2020. Sales and marketing expenses accounted for
6.8% of Grid Dynamics' revenue in the year ended December 31, 2021 compared to
9.0% in the year ended December 31, 2020, a decrease of (2.2) percentage points.
The increase was due mainly to the increased personnel costs associated with the
expansion activities both on the sales and marketing fronts. Additionally, the
acquisition of Tacit partially contributed to the increase in the year ended
December 31, 2021 in comparison to the year ended December 31, 2020.

General and Administrative. General and administrative expenses increased by
$27.1 million, or 71.8%, to $64.8 million in the year ended December 31, 2021
from $37.7 million in the year ended December 31, 2020. Increased stock-based
compensation accounted for approximately $12.6 million of the increase. The
remaining portion of the increase was due mainly to costs associated with
expanding our operations that required increased levels of hiring along with
investments in infrastructure and facilities to support our increased headcount.
Additionally our acquisitions of Daxx and Tacit contributed to the increase. As
a result, general and administrative expenses accounted for 30.7% of Grid
Dynamics' revenue in the year ended December 31, 2021, a decrease of (3.2)
percentage points from 33.9% in the year ended December 31, 2020.

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

Provision/(benefit) for Income Tax. Provision/(benefit) for income tax was $5.2
million in the year ended December 31, 2021 compared to $(2.6) million in the
year ended December 31, 2020. The effective tax rate decreased by 231.21%
between periods. See "-Key Components of Revenue and Expenses-Costs and
Expenses-Provision for Income Taxes.

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

                                       43

————————————————– ——————————

Contents

Year ended December 31, 2020 Compared to the year ended December 31, 2019

The following table presents a summary of the Dynamic grid’ consolidated results of operations for the years indicated and changes between periods:

                                                          Year ended December 31,                               Change
                                                          2020                   2019             Dollars              Percentage
                                                                       (dollars in thousands, except percentages)
Revenue                                           $     111,283              $ 118,326          $  (7,043)                     (6.0) %
Cost of revenue                                          69,662                 70,090               (428)                     (0.6) %
Gross profit                                             41,621                 48,236             (6,615)                    (13.7) %
Engineering, research, and development                    9,311                  4,346              4,965                     114.2  %
Sales and marketing                                      10,051                  6,947              3,104                      44.7  %
General and administrative                               37,707                 21,318             16,389                      76.9  %
Total operating expense                                  57,069                 32,611             24,458                      75.0  %
Income from operations                                  (15,448)                15,625            (31,073)                   (198.9) %
Other income/(expenses), net                                236                   (176)               412                    (234.1) %
Income before income taxes                              (15,212)                15,449            (30,661)                   (198.5) %
Provision/(benefit) for income taxes                     (2,613)                 4,642             (7,255)                   (156.3) %
Net Income                                        $     (12,599)             $  10,807          $ (23,406)                   (216.6) %
Foreign currency translation adjustments, net of
tax                                                          (4)                     -                 (4)                        n.m.
Comprehensive loss                                $     (12,603)             $  10,807          $ (23,410)                   (216.6) %


Revenue. Revenue decreased by $(7.0) million, or (6.0)%, to $111.3 million in
2020 from $118.3 million in 2019. The key reason for the year-over-year decline
was the decline in revenues from Retail customers impacted by the COVID-19
pandemic. This decline in Retail business was offset by increase in revenue from
other industry verticals such as TMT, CPG/Manufacturing, and Other. For the year
ended December 31, 2020, retail revenues were $34.0 million, down from $67.4
million in the same period a year ago. The 50% year-over-year decline in retail
revenues was partially offset by revenues of the other segments that, on a
combined basis, grew from $51.0 million in the year ended December 31, 2019 to
$77.3 million in the year ended December 31, 2020. Additionally, Grid Dynamics'
top ten customers contributed $87.2 million and $102.6 million to revenue for
the years ended December 31, 2020 and 2019, respectively, in the aggregate
accounting for $15.4 million of the decrease. The remainder of the other
industry verticals increase reflected growth in revenue from new customers
(i.e., customers for which Grid Dynamics performed services for the first time
during the period) and other existing customers.

Revenue cost and gross profit. Cost of sales decreased by ($0.4) millioni.e. (0.6)%, to $69.7 million in 2020 from $70.1 million in 2019 reflecting lower revenue offset by higher retention bonuses resulting from the business combination and stock-based compensation charges.

Gross profit decreased by $(6.6) million, or (13.7)%, to $41.6 million in 2020
from $48.2 million in 2019. Gross margin (gross profit as a percentage of
revenue) decreased by 3.4 percentage points to 37.4% in the year ended December
31, 2020 from 40.8% in the year ended December 31, 2019. The gross margin
decline was attributable to a combination of increased costs associated with
stock-based compensation and retention bonuses resulting from the Business
Combination and lower levels of revenue in the year ended December 31, 2020 due
to the impacts of the ongoing COVID-19 pandemic.

Engineering, Research and Development. Engineering, research and development
expenses increased by $5.0 million to $9.3 million in the year ended December
31, 2020, a 114.2% increase from $4.3 million in the year ended December 31,
2019. The increase was primarily due to a combination of enhanced efforts around
engineering and development projects, Grid Dynamics' efforts to develop its
solutions and expertise, reallocation of delivery personnel to strategic R&D
initiatives, costs associated with stock-based compensation, and retention
bonuses resulting from the Business Combination.

Sales and Marketing. Sales and marketing expenses increased by $3.1 million, or
44.7%, to $10.1 million in the year ended December 31, 2020 from $6.9 million in
the year ended December 31, 2019. Sales and marketing expenses accounted for
9.0% of Grid Dynamics' revenue in the year ended December 31, 2020 compared to
5.9% in the year ended December 31, 2019, an increase of 3.1 percentage points.
The increase was due mainly to the increased costs associated with stock-based
compensation and retention bonuses resulting from the Business Combination and
partially offset by decrease in marketing and sales events due to the COVID-19
pandemic.
                                       44

————————————————– ——————————

Contents

General and Administrative. General and administrative expenses increased by
$16.4 million, or 76.9%, to $37.7 million in the year ended December 31, 2020
from $21.3 million in the year ended December 31, 2019. Increased stock-based
compensation accounted for approximately $17,565 million of the increase. The
remaining portion of the increase was due mainly to the retention bonuses
resulting from the Business Combination. As a result, general and administrative
expenses accounted for 33.9% of Grid Dynamics' revenue in the year ended
December 31, 2020, an increase of 15.9 percentage points from 18.0% in the year
ended December 31, 2019.

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

Provision/(benefit) for income tax. The provision/(benefit) for income tax was
($2.6) million in the year ended December 31, 2020 compared to $4.6 million in the year ended December 31, 2019. The effective tax rate decreased by 13% between periods. To see “-Essentials revenue and expenditure-costs and expenditure-provision for income taxes.

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

Cash and capital resources

Grid Dynamics measures liquidity in terms of its ability to fund the cash
requirements of its business operations, including working capital needs,
capital expenditures, contractual obligations and other commitments with cash
flows from operations and other sources of funding. Grid Dynamics' current
liquidity needs relate mainly to compensation and benefits of Grid Dynamics'
employees and contractors and capital expenditures for computer hardware and
office furniture. Grid Dynamics' ability to expand and grow its business will
depend on many factors including its capital expenditure needs and the evolution
of its operating cash flows. Grid Dynamics may need more cash resources due to
changing business conditions or other developments, including investments or
acquisitions. Grid Dynamics believes that its current cash position on its
balance sheet of $144.4 million is sufficient to fund its currently expected
levels of operating, investing and financing expenditures for a period of twelve
months from the date of this filing. However, if Grid Dynamics' resources are
insufficient to satisfy its cash requirements, it may need to seek additional
equity or debt financing, which may be subject to conditions outside of Grid
Dynamics' control and may not be available on terms acceptable to Grid Dynamics'
management or at all.

As of December 31, 2021, Grid Dynamics had cash and cash equivalents amounting
to $144.4 million (compared to $112.7 million at December 31, 2020). Of this
amount, $8.5 million was held in Russia, Ukraine, Poland, Serbia, the
Netherlands, UK, Mexico, Moldova, and Singapore (compared to $3.1 million as of
December 31, 2020). As many of Grid Dynamics' assets, operations and employees
are located in these countries, Grid Dynamics expects that all such cash and
cash equivalents will be used to fund future operating needs. In a scenario that
Grid Dynamics decides to remit funds from these countries to the United States
in the future, whether in the form of inter-company dividends or otherwise, the
company may be subject to foreign withholding taxes. In addition, Grid Dynamics'
cash in banks in Russia, Ukraine, Moldova, Serbia, and Mexico may be subject to
other risks, as the banking sector in some of these countries are subject to
periodic instability, may be subject to sanctions, and may be subject to capital
adequacy and other banking standards that are substantially less rigorous than
those of the United States. This is particularly true given the significant
military action against Ukraine launched by Russia and the sanctions on certain
Russian banks that have been imposed as a result, although this would not
materially disrupt our liquidity as a whole.

Grid dynamics has no outstanding debt December 31, 2021 and had no debt outstanding at any balance sheet date presented.

                                       45

————————————————– ——————————

Contents

Cash flow

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

                                                                   Year ended December 31,
                                                          2021               2020               2019
                                                                        (in thousands)
Net cash provided by operating activities             $  17,973          $   5,932          $  12,534
Net cash used in investing activities                   (35,366)           (18,339)            (2,811)
 Net cash provided by financing activities               49,134             82,967             14,604
Effect of exchange rate changes on cash and cash
equivalents                                                (122)                (4)                 -
Net increase in cash and cash equivalents                31,619             70,556             24,327
Cash, cash equivalents (beginning)                      112,745             42,189             17,862
Cash, cash equivalents (end)                          $ 144,364          $ 112,745          $  42,189



Operating Activities. Net cash provided by operating activities during the year
ended December 31, 2021 increased by $12.0 million, or 203.0%, to $18.0 million
from $5.9 in the same period in 2020, driven by higher cash operating profit
(before non-cash depreciation and amortization and stock-based compensation
charges). The key reasons for the increase in cash operating profit in year
ended December 31, 2021 in comparison to the year ended December 31, 2020, were
higher levels of revenue and greater billable utilization resulting in higher
profitability.

Net cash provided by operating activities during the year ended December 31,
2020 decreased by $6.6 million, or 52.7%, to $5.9 million from $12.5 million in
the same period in 2019, driven by lower cash operating profit (before non-cash
depreciation and amortization and stock-based compensation charges). The key
reasons for the decline in net cash provided by operating activities were
retention bonuses paid out to employees due to the successful Business
Combination on March 5, 2020, lower level of revenues due to the impact of the
COVID-19 pandemic in the period of March through September 30, 2020, and higher
costs associated with our delivery centers.

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

Net cash used in investing activities during the year ended December 31, 2020
was $18.3 million compared to $2.8 million in cash used in the same period in
2019, due primarily to cash paid for the Daxx acquisition in the year ended
December 31, 2020 as well as capital expenditures for computer hardware and
related equipment in both periods.

Fundraising activities. Net cash provided by financing activities was $49.1 million in the year ended December 31, 2021reflecting the proceeds of the stock offering and the exercise of warrants offset by tax liabilities resulting from the net settlement in stock of vested stock awards.

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

Off-balance sheet arrangements and commitments

Except for its credit support for the letter of credit and balances on corporate
credit cards, Grid Dynamics does not have any off-balance sheet arrangements of
the kind required to be disclosed under SEC rules and does not have any
off-balance sheet or contingent commitments, except as described elsewhere with
respect to operating leases.

As a result of analysis related to Grid Dynamics' functional control of
subcontractor GD Ukraine, LLC, the subcontractor was determined to be a variable
interest entity ("VIE") and is therefore consolidated in Grid Dynamics'
financial statements. The assets and liabilities of this VIE consist primarily
of intercompany balances and transactions, all of which have been eliminated in
consolidation.

Significant Accounting Policies and Estimates

Grid Dynamics management's discussion and analysis of our financial condition
and results of operations is based on the consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. Preparation of the
financial statements requires Grid Dynamics to make judgments, estimates and
assumptions that impact the reported amount of revenue
                                       46

————————————————– ——————————

Contents

and expenses, assets and liabilities and the disclosure of contingent assets and
liabilities. Grid Dynamics considers an accounting judgment, estimate or
assumption to be critical when (1) an estimate or assumption is complex in
nature or requires a high degree of judgment, and (2) the use of different
judgments, estimates and assumptions could have a material impact on Grid
Dynamics' consolidated financial statements. Grid Dynamics' critical accounting
policies are described in Note 2 to its consolidated financial statements.

Income

Grid Dynamics derives its revenue through time and materials and fixed fee
contracts. Although the majority of revenues have been derived through time and
material contracts, our fixed-fee customer contracts business is increasing,
although not significant historically, will comprise a more significant portion
of revenue in future periods. For all contracts, Grid Dynamics uses master
agreements that govern the overall relevant terms and conditions of the business
arrangement and executes statements of work pursuant to such agreements to
execute specific projects. Grid Dynamics recognizes revenue for services over
time as hours are incurred by Grid Dynamics' engineering personnel. For all
contracts, the customer derives value from the Company providing daily
consulting services, and the value derived corresponds to the labor hours
expended. Therefore, the Company measures the progress and recognizes revenue
using an effort-based input method.

Grid Dynamics also offers volume discounts or early settlement discounts. Volume
discounts apply once the customer reaches certain contractual spend thresholds.
Early settlement discounts are issued contingent upon the timing of the payment
from the customer. If the consideration promised in a contract includes a
variable amount, Grid Dynamics only includes estimated amounts of consideration
in the transaction price to the extent it is probable that a significant
reversal of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is resolved.

Income taxes

The determination of the provision for income taxes requires significant
judgment, the use of estimates and the interpretation and application of complex
tax laws. The provision for income taxes reflects a combination of income earned
and taxed in the various U.S. federal and state and non-U.S. jurisdictions.
Changes in tax law, increases or decreases in permanent differences between book
and tax items, accruals or adjustments of accruals for tax contingencies or
valuation allowances, and the change in the mix of earnings across taxing
jurisdictions all affect the overall effective tax rate.

In assessing the realizability of deferred tax assets, Grid Dynamics considers
whether it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. Management considers all available evidence,
both positive and negative, in determining whether a valuation allowance is
required, including prior earnings history, the scheduled reversal of deferred
tax liabilities, projected future taxable income, carryback and carryforward
periods of tax attributes and tax planning strategies that could potentially
enhance the likelihood of realization of a deferred tax asset in making this
assessment. The weight given to the positive and negative evidence is
commensurate with the extent to which the evidence may be objectively verified.

Grid Dynamics evaluates for uncertain tax positions at each balance sheet date.
When it is more likely than not that a position will be sustained upon
examination by a tax authority that has full knowledge of all relevant
information, Grid Dynamics measures the amount of tax benefit from the position
and records the largest amount of tax benefit that is greater than 50% likely of
being realized after settlement with a tax authority. Grid Dynamics' policy for
interest and/or penalties related to underpayments of income taxes is to include
interest and penalties in provision for income tax.

Business combinations

The Company accounts for business combinations under the acquisition method of
accounting, in accordance with Accounting Standards Codification ("ASC") Topic
805, Business Combinations, recording any assets acquired and liabilities
assumed based on their respective fair values. Any excess of the fair value of
purchase consideration over the fair value of the assets acquired less
liabilities assumed is recorded as goodwill. The Company uses management
estimates and industry data to assist in establishing the acquisition date fair
values of assets acquired, liabilities assumed, and contingent consideration
granted, if any. These estimates and valuations require the Company to make
significant assumptions, including projections of future events and operating
performance.

The Company determines the fair value of contingent consideration liabilities using Monte Carlo model that involves simulation of future revenues and earnings during the earn-out period using management’s best estimates and assumptions. Changes in financial projections, market risk assumptions, discount rates or probability assumptions regarding the probability of achieving the various earn-out criteria may result in a significant change in the fair value of

                                       47

————————————————– ——————————

Contents

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

Stock-based compensation

Grid Dynamics has in the past issued, currently issues and intends to continue
issuing incentive stock options and non-qualifying stock options, performance
stock units and restricted stock units. While Grid Dynamics does not currently
have any other form of stock-based awards outstanding, it may also issue stock
appreciation rights. Stock-based compensation expense is measured based on the
grant-date fair value of the share-based awards. Forfeitures are recognized as
incurred. Grid Dynamics estimates grant date fair value of its stock using a
number of objective and subjective factors, as described in more detail below,
and the Black-Scholes option pricing model to estimate the grant date fair value
of option grants. The model requires management to make a number of key
assumptions, including expected volatility, expected term, risk free interest
rate and expected dividends. As Grid Dynamics' shares do not  have sufficient
trading history, expected volatility is estimated based on the average
historical volatility of similar entities with publicly traded shares. The risk
free rate for the expected term of the option is based on the U.S. Treasury
yield curve at the date of grant. The expected term is estimated using the
simplified method, which takes into account vesting and contractual term. Grid
Dynamics' options grants generally vest over a 4-year period and from time to
time Grid Dynamics makes grants with a portion vesting at the time of grant.
Management elected to use the simplified method instead of historical experience
due to a lack of relevant historical data resulting from changes in option
vesting schedules and changes in the pool of employees receiving option grants.
Grid Dynamics evaluates the assumptions used to value its stock-based awards on
each grant date. Grants are approved by Grid Dynamics' Board of Directors.

Grid Dynamics amortizes the grant date fair value of all stock-based
compensation awards over the employee's requisite service period for the entire
award on a straight-line basis, which is generally the vesting period. For an
award with graded vesting that is subject only to a service condition (e.g.,
time-based vesting), Grid Dynamics uses the straight-line attribution method
under ASC 718, under which it recognizes compensation cost on a straight-line
basis over the total requisite service period for the entire award.
Additionally, Grid Dynamics applies the "floor" concept, so that the amount of
compensation cost that is recognized as of any date is at least equal to the
grant-date fair value of the vested portion of the award on that date. In other
words, if the straight-line expense recognized to date is less than the grant
date fair value of the award that is legally vested at that date (for example,
as a result of a portion of a grant vesting at the grant date), Grid Dynamics
will increase its recognized expense to at least equal the fair value of the
vested amount. The fair market value of Grid Dynamics stock is determined based
on the closing price on NASDAQ on the measurement date. For more detailed
information about Grid Dynamics' historical and outstanding grants and its
valuation of its stock-based compensation and awards, see Note 13 to the audited
consolidated financial statements included elsewhere in this Annual Report.

Accounting Election for Emerging Growth Companies

Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies and any such election to not to take advantage of the extended
transition period is irrevocable. Prior to the Business Combination, ChaSerg was
an "emerging growth company" as defined in Section 2(a) of the Securities Act
and has elected to take advantage of the benefits of this extended transition
period. Following the consummation of the Business Combination, Grid Dynamics
remains an emerging growth company and continues to take advantage of the
benefits of the extended transition period.

Recently Adopted and Issued Accounting Pronouncements

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

                                       48

————————————————– ——————————

Contents

© Edgar Online, source Previews

Related posts:

  1. Meals Robotics Market Measurement To Attain USD 3,441.9 Million By 2027, With CAGR Of 11.5% | Experiences and information
  2. Sensible Factories Market – Evaluation and Forecast of Trade Progress by 2025
  3. Bensulide Market – Notable Developments, Upcoming Trends & Future Applications 2025 – Clark County Blog
  4. Increase, not automation | Boston Review
Tagscovid pandemiclong termnorth americaunited states

Categories

  • Covariance
  • Economic integration
  • Fund
  • Labor augmenting
  • Price index
  • TERMS AND CONDITIONS
  • Privacy Policy