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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38685

Grid Dynamics Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	83-0632724
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5000 Executive Parkway, Suite 520

San Ramon, CA 94583

(Address of principal executive offices)

(650) 523-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	GDYN	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No ¨

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨      No x

As of May 2, 2022, there were 67,063,701 shares of registrant’s common stock issued and outstanding.

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TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Loss and Comprehensive Loss	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Default Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
SIGNATURES		58

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•the evolution of the digital engineering and information technology services landscape facing our customers and prospects;

•our ability to educate the market regarding the advantages of our digital transformation products;

•our ability to maintain an adequate rate of revenue growth;

•our future financial and operating results;

•our business plan and our ability to effectively manage our growth and associated investments;

•beliefs and objectives for future operations;

•our ability to expand a leadership position in enterprise-level digital transformation;

•our ability to attract and retain customers;

•our ability to further penetrate our existing customer base;

•our ability to maintain our competitive technological advantages against new entrants in our industry;

•our ability to timely and effectively scale and adapt our existing technology;

•our ability to innovate new products and services and bring them to market in a timely manner;

•our ability to maintain, protect, and enhance our brand and intellectual property;

•our ability to capitalize on changing market conditions;

•our ability to develop strategic partnerships;

•benefits associated with the use of our services;

•our ability to expand internationally;

•our ability to raise financing in the future;

•operating expenses, including changes in research and development, sales and marketing, and general administrative expenses;

•the effects of seasonal trends on our results of operations;

•our ability to grow and manage growth profitably and retain our key employees;

•the expected benefits and effects of strategic acquisitions of business, products or technologies;

•our ability to maintain the listing of our shares of common stock on the NASDAQ;

•costs related to being a public company;

•changes in applicable laws or regulations;

•the military action launched by Russian forces in Ukraine, the actions that have been and could be taken by other countries, including new and stricter sanctions and actions taken in response to such sanctions, and the effect of these developments on our business and results of operations;

•the possibility that we have been and may continue to be adversely affected by other economic, business, and/or competitive factors, including the effects of the global COVID-19 pandemic; and

•other risks and uncertainties indicated in this Quarterly Report on Form 10-Q, including those set forth in Item 1A, “Risk Factors.”

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in in Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on any forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in such forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, restructurings, joint ventures, partnerships, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GRID DYNAMICS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	As of
	March 31, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	153,308	$	144,364
Accounts receivable, net of allowance of $360 and $315 as of March 31, 2022 and December 31, 2021, respectively	41,366		38,838
Unbilled receivables	5,341		4,475
Prepaid income taxes	783		584
Prepaid expenses and other current assets	5,771		4,503
Total current assets	206,569		192,764
Property and equipment, net	6,854		6,169
Operating lease right-of-use assets, net	5,280		—
Intangible assets, net	18,476		19,097
Deferred tax assets	2,665		2,731
Goodwill	35,958		35,958
Total assets	$	275,802	$	256,719
Liabilities and equity
Current liabilities
Accounts payable	$	2,212	$	2,053
Accrued liabilities	1,019		1,150
Accrued compensation and benefits	15,946		10,562
Accrued income taxes	3,878		1,980
Operating lease liabilities, current	2,047		—
Other current liabilities	7,589		9,599
Total current liabilities	32,691		25,344
Deferred tax liabilities	4,171		4,324
Long-term debt, net	4,806		—
Operating lease liabilities, noncurrent	2,882		—
Total liabilities	44,550		29,668
Commitments and contingencies (Note 16)
Stockholders’ equity (Note 13)
Common stock, $0.0001 par value; 110,000,000 shares authorized; 67,056,826 and 66,850,941 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	7		7
Additional paid-in capital	219,228		212,077
Retained earnings	12,426		15,093
Accumulated other comprehensive loss	(409)		(126)
Total stockholders’ equity	231,252		227,051
Total liabilities and stockholders’ equity	$	275,802	$	256,719

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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GRID DYNAMICS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND

COMPREHENSIVE LOSS

(In thousands, except per share data)

	Three Months Ended March 31,
	2022		2021
Revenue	$	71,410	$	39,134
Cost of revenue	44,631		23,797
Gross profit	26,779		15,337
Operating expenses
Engineering, research, and development	3,096		1,783
Sales and marketing	4,215		3,032
General and administrative	19,265		12,300
Total operating expenses	26,576		17,115
Income/(loss) from operations	203		(1,778)
Other expenses	(700)		(1,050)
Loss before income taxes	(497)		(2,828)
Provision/(benefit) for income taxes	2,170		(766)
Net loss	$	(2,667)	$	(2,062)
Foreign currency translation adjustments, net of tax	(283)		49
Comprehensive loss	$	(2,950)	$	(2,013)
Loss per share
Basic	$	(0.04)	$	(0.04)
Diluted	$	(0.04)	$	(0.04)
Weighted average shares outstanding
Basic	66,919		51,629
Diluted	66,919		51,629

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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GRID DYNAMICS HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

	Common Stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive income/(loss)		Total stockholders’ equity
	Shares	Amount
Balance at December 31, 2021	66,851	$	7	$	212,077	$	15,093	$	(126)	$	227,051
Net loss	—	—		—		(2,667)		—		(2,667)
Stock-based compensation	—	—		8,661		—		—		8,661
Exercise of stock options	72	—		292		—		—		292
Issuance of shares and payments of tax obligations resulted from net share settlement of vested stock awards	134	—		(1,802)		—		—		(1,802)
Foreign currency translation adjustment, net of tax	—	—		—		—		(283)		(283)
Balance at March 31, 2022	67,057	$	7	$	219,228	$	12,426	$	(409)	$	231,252

	Common Stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive income/(loss)		Total stockholders’ equity
	Shares	Amount
Balance at December 31, 2020	50,879	$	5	$	128,930	$	22,793	$	(4)	$	151,724
Net loss	—	—		—		(2,062)		—		(2,062)
Stock-based compensation	—	—		5,671		—		—		5,671
Exchange of warrants into common stock	2,221	—		—		—		—		—
Exercise of stock options	41	—		162		—		—		162
Issuance of shares and payments of tax obligations resulted from net share settlement of vested stock awards	1,030	—		(15,297)		—		—		(15,297)
Foreign currency translation adjustment, net of tax	—	—		—		—		49		49
Balance at March 31, 2021	54,171	$	5	$	119,466	$	20,731	$	45	$	140,247

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GRID DYNAMICS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

	For the three months ended March 31,
	2022		2021
Cash flows from operating activities
Net loss	$	(2,667)	$	(2,062)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	1,589		946
Operating lease right-of-use assets amortization expense	636		—
Bad debt expense	45		(107)
Deferred income taxes	(87)		(1,192)
Stock-based compensation	8,661		5,671
Change in fair value of warrants	—		859
Changes in assets and liabilities:
Accounts receivable	(2,573)		(2,951)
Unbilled receivables	(866)		(430)
Prepaid income taxes	(199)		83
Prepaid expenses and other current assets	(1,268)		(1,553)
Accounts payable	159		1,576
Accrued liabilities	(131)		268
Accrued compensation and benefits	5,384		2,021
Operating lease liabilities	(987)		—
Accrued income taxes	1,898		(70)
Other current liabilities	(77)		(15)
Net cash provided by operating activities	9,517		3,044
Cash flows from investing activities
Purchase of property and equipment	(1,653)		(851)
Net cash used in investing activities	(1,653)		(851)
Cash flows from financing activities
Proceeds from exercises of stock options, net of shares withheld for taxes	292		162
Payments of tax obligations resulted from net share settlement of vested stock awards	(1,802)		(15,297)
Payment of contingent consideration related to previously acquired business	(1,933)		—
Proceeds from debt	5,000		—
Debt issuance cost	(194)		—
Net cash provided by/(used in) financing activities	1,363		(15,135)
Effect of exchange rate changes on cash and cash equivalents	(283)		49
Net increase/(decrease) in cash and cash equivalents	8,944		(12,893)
Cash and cash equivalents, beginning of period	144,364		112,745
Cash and cash equivalents, end of period	$	153,308	$	99,852
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	643	$	834

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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GRID DYNAMICS HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Note 1 — Background and nature of operations

Grid Dynamics Holdings, Inc. (the “Company”) provides enterprise-level digital transformation in the areas of search, analytics, and release automation to Fortune 1000 companies. The Company’s headquarters and principal place of business is in San Ramon, California.

The Company was originally incorporated in Delaware on May 21, 2018 as a special purpose acquisition company under the name ChaSerg Technology Acquisition Corp. (“ChaSerg”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving ChaSerg and one or more businesses. On March 5, 2020 (the “Closing”), the Company consummated its business combination with Grid Dynamics International, Inc. (“GDI”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated November 13, 2019 (the “Business Combination”). In connection with the Closing, the Company changed its name from ChaSerg Technology Acquisition Corp. to Grid Dynamics Holdings, Inc. The Company’s common stock is now listed on the NASDAQ under the symbol “GDYN”.

Note 2 — Basis of presentation and summary of significant accounting policies

The following is a summary of critical accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements. Full description of significant accounting policies is provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 3, 2022.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021 included in the Company’s annual report on Form 10-K that the Company filed with the SEC on March 3, 2022.

Principles of consolidation

The accompanying condensed 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. The most significant subcontractor is GD Ukraine, LLC (“Affiliate”), a third-party contractor in Ukraine. The affiliate performs services and support exclusively on behalf of the Company and its customers. The Company has no ownership in the Affiliate. 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.

Use of estimates

The preparation of the unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and such differences could be material. Significant estimates include allowances for receivables, calculation of accrued liabilities, capitalization of internally developed software, stock-based compensation, contingent consideration payable, determination of fair value, useful lives and recoverability of intangible assets and goodwill, determination of provision for income taxes and uncertain tax positions.

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Recently adopted accounting pronouncements

Changes to 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 has elected not to opt out of the extended transition period and thus when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

Leases — 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 Company determines if an arrangement is a lease or contains a lease at lease inception. Assessment and classification of lease as either an operating or a financing is performed at the lease commencement date. Operating lease liabilities and their corresponding 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 in either interest rate implicit in lease agreement or, if not available, based on incremental borrowing rate. 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 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.

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 unaudited condensed consolidated statement of loss and comprehensive loss, condensed consolidated statement of changes in stockholders’ equity or the condensed consolidated statement of cash flows.

See Note 11 “Leases” in the unaudited condensed consolidated financial statements for additional information regarding leases.

Recently issued accounting pronouncements

The Company considered the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments. Topic 326 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 the guidance 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 update is effective for fiscal years beginning after December 15, 2022, and interim periods with fiscal years after December 15, 2022. The Company has not yet determined the impact that the adoption of this guidance will have on the consolidated financial statements.

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In March 2020, FASB issued ASU No. 2020-3, Codification to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to U.S. GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments related to Issue 1, Issue 2, Issue 3, Issue 4, and Issue 5 were effective upon issuance of this update. The new guidance did not have a material impact on the consolidated financial statements. The amendments related to Issue 6 and Issue 7 are effective for the Company the earlier of January 1, 2023 or when the Company adopts ASU 2016-13, if early adopted. The Company is currently evaluating the impact these topics will have on the consolidated financial statements.

Note 3 — Acquisitions

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 Company's headcount. The acquisition will augment the Company's service offerings and will strengthen its competitive position within the market. Additionally, the acquisition also enabled 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. During the fourth quarter of 2021 the Company adjusted fair value of contingent consideration as of December 31, 2021 to its maximum amount and reflected the expense in its consolidated statement of loss. The contingent consideration is payable based on revenue and EBITDA metrics to be achieved by Tacit 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 4 for further details on contingent consideration.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed. There were no measurement period adjustments for the quarter ended March 31, 2022 for Tacit:

	Tacit
Current assets	$	9,145
Property, plant and equipment	466
Intangible assets	12,913
Goodwill	21,268
Total assets acquired	$	43,792
Accounts payable and accrued expenses	(3,675)
Deferred taxes	(2,500)
Total liabilities assumed	$	(6,175)
Purchase price allocation	$	37,617

Current assets acquired include cash and cash equivalents in the amount of $3.0 million. 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. Goodwill represents the value the Company expects to achieve through the implementation of operational synergies and growth opportunities as the Company expands its global reach. The goodwill for Tacit is not deductible for income tax purposes. 

During the second half of 2021 the Company updated fair value of contingent consideration for Tacit at acquisition date that resulted in the 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.

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The estimated fair value, useful lives and amortization methods of identifiable intangible assets as of the date of acquisition updated for any changes during March 31, 2022 are as follows:

Tacit	Fair Value		Useful Life	Amortization method
Customer relationships	$	11,737	12 years	Straight-line
Trade name	1,176		4 years	Declining balance
Total Tacit identified intangible assets	$	12,913

The acquisition of Tacit was accounted for using the acquisition method of accounting, and consequently, the results of operations for Tacit are reported in the consolidated financial statements from the date of acquisition. Tacit revenue was approximately $7.1 million during three months ended March 31, 2022.

The following unaudited pro forma information presents the combined results of operations as if the acquisition of Tacit had occurred at the beginning of 2021. Tacit pre-acquisition results have been added to the Company’s historical results. The pro forma results contained in the table below include adjustment for amortization of acquired intangibles. Any potential cost savings or other operational efficiencies that could result from the acquisition are not included in these pro forma results. 

These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor are they necessarily an indication of future operating results.

	Three Months Ended March 31,
(Unaudited)	2022		2021
Revenue	$	71,410	$	43,415
Net loss	$	(2,667)	$	(1,721)
Diluted loss per share	$	(0.04)	$	(0.03)

Note 4 — Fair value

The Company’s financial assets and liabilities, with the exceptions of contingent consideration payable described further herein, are all short term in nature; therefore, the carrying value of these items approximates their fair value.

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 budgets 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, 2021 and 2020 the Company completed two acquisitions under which the Company committed to make a cash earnout payment subject to attainment of specific performance targets. The weighted average discount rates used to determine the final fair value of Daxx Web Industries B.V. (“Daxx”) and Tacit contingent considerations was 4.8% and 13.5%, respectively.

The Company records contingent consideration payable in Other current liabilities in its consolidated balance sheet. A reconciliation of the beginning and ending balances of Level 3 acquisition-related contingent consideration payable using significant unobservable inputs for the three months ended March 31, 2022 are as follows (in thousands):

	Amount
Contingent consideration payable as of December 31, 2021	$	6,933
Payment of contingent consideration - Daxx	(1,933)
Contingent consideration payable as of March 31, 2022	$	5,000

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Note 5 — Prepaid expenses

The prepaid expenses were as follows (in thousands):

	As of
	March 31, 2022		December 31, 2021
Prepaid expenses	$	3,431	$	2,188
Value added tax receivable	585		931
Prepaid insurance	371		921
Other assets	1,384		463
Total prepaid expenses and other current assets	5,771		4,503

Note 6 — Property and equipment, net

Property and equipment consist of the following (in thousands):

	Estimated Useful Life (In Years)	As of
		March 31, 2022		December 31, 2021
Computers and equipment	2-5	$	11,950	$	10,784
Machinery and automobiles	5	285		246
Furniture and fixtures	3-7	1,190		1,174
Software	5	513		513
Leasehold improvements	7-12	479		486
		14,417		13,203
Less: Accumulated depreciation and amortization		(8,737)		(8,240)
		5,680		4,963
Capitalized software development costs	2-3	4,974		4,656
Less: Accumulated amortization		(3,800)		(3,450)
		1,174		1,206
Property and equipment, net		$	6,854	$	6,169

Note 7 — Intangible assets, net

Intangible assets consist of the following (in thousands):

	Estimated Useful Life (In Years)	As of
		March 31, 2022		December 31, 2021
Customer relationships	8-12	$	15,971	$	15,971
Tradename	4-10	4,676		4,676
Non-compete agreements	2	440		440
		21,087		21,087
Less: Accumulated amortization		(2,611)		(1,990)
Intangible assets, net		$	18,476	$	19,097

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Note 8 — Other current liabilities

The components of other current liabilities were as follows (in thousands):

	As of
	March 31, 2022		December 31, 2021
Contingent consideration payable	$	5,000	$	6,933
Value added tax payable	1,168		1,274
Customer deposits	783		798
Other liabilities	638		594
Total other current liabilities	$	7,589	$	9,599

Note 9 — 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 provides 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 may 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 on March 15, 2025.

At the Company’s option, borrowings under the 2022 Credit Agreement accrue 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 is 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 are 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 March 31, 2022, the Company was in compliance with all covenants contained in the 2022 Credit Agreement.

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 is 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 are 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.

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The following table presents the outstanding debt and borrowing capacity of the Company under the 2022 Revolving Facility as of March 31, 2022 and and Line of Credit as of December 31, 2021 (in thousands):

	As of
	March 31, 2022			December 31, 2021
Outstanding debt	$	5,000		$	—
Interest rate	2.2		%	—		%
Available borrowing capacity	$	25,000		$	500
Current maximum borrowing capacity	$	30,000		$	500

Note 10 — Revenue

Disaggregation of revenues

The tables below present disaggregated revenues from contracts with customer by customer location, industries 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 during for the three months ended March 31, 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 billed client location. Substantially all of the revenue in our North America region relates to operations in the United States.

	Three months ended March 31,
	2022		2021
Customer Location	(in thousands)
North America	$	57,609	$	32,606
Europe	13,735		6,528
Other	66		—
Total Revenues	$	71,410	$	39,134

The following table shows the disaggregation of the Company’s revenues by main vertical markets:

	Three months ended March 31,
	2022		2021
Vertical	(in thousands)
Retail	$	23,307	$	8,850
Technology, Media and Telecom	21,444		14,411
CPG/Manufacturing	14,979		8,725
Finance	4,527		3,438
Other	7,153		3,710
Total Revenues	$	71,410	$	39,134

The following table shows the disaggregation of the Company’s revenues by contract types:

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	Three months ended March 31,
	2022		2021
Contract Type	(in thousands)
Time-and-material	$	65,206	$	36,240
Fixed-fee	6,204		2,894
Total Revenues	$	71,410	$	39,134

Contract balances

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. A contract liability, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. As of March 31, 2022 and December 31, 2021 the Company did not have material contract assets or liabilities recognized in condensed consolidated financial statements.

Remaining performance obligation

ASC 606 “Revenue from Contracts with Customers” requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2022. This disclosure is not required for:

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.

All of the Company’s contracts met one or more of these exemptions as of March 31, 2022.

Customers concentration

The following table shows the amount of revenue derived from each customer exceeding 10% of the Company’s revenue:

	Three months ended March 31,
	2022		2021
Customer 1	11.2	%	14.3	%
Customer 2	10.3	%	13.0	%

The following table shows number of customers exceeding 10% of the Company’s billed and unbilled receivable balances:

	As of
	March 31, 2022	December 31, 2021
Accounts receivable	2	1
Unbilled receivable	3	1

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Note 11 — Leases

A major part of the Company's lease obligations is for office real estate. The Company may also lease corporate flats, cars and office equipment. Payments on some of our leases may depend on index or rate, including Consumer Price Index (CPI). 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 1 month to 3.8 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.

As of March 31, 2022, the Company had no finance leases. Operating lease expense is recorded on a straight-line basis over the lease term. During three months ended March 31, 2022 lease costs were as follows (in thousands):

	Three Months Ended March 31, 2022
Operating lease cost	$	694
Variable lease cost	24
Short-term lease cost	239
Total lease cost	$	957

Supplemental information related to operating lease transactions is as follows (in thousands):

	Three Months Ended March 31, 2022
Lease liability payments	$	866
Non-cash net decrease in lease assets due to lease modifications	(28)
Non-cash net decrease in lease liability due to lease modifications	28

Weighted average remaining lease term and discount rate as of March 31, 2022 is as follows:

	As of March 31, 2022
Weighted average remaining lease term, in years	3.46
Weighted average discount rate	3.4	%

As of March 31, 2022, operating lease liabilities will mature as follows:

Years ending December 31, (in thousands)	Lease Payments
2022 (excluding three months ended March 31, 2022)	$	1,730
2023	1,346
2024	1,331
2025	734
2026	70
Total lease payments	5,211
Less: imputed interest	(282)
Total	$	4,929

Note 12 — Income taxes

The Company recorded income tax expense of $2.2 million and income tax benefit of $(0.8) million for the three months ended March 31, 2022 and 2021, respectively. The Company’s effective tax rate was (436.6)% and 27.1% for the first quarter of 2022

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and 2021, respectively. The increase in the effective tax rate for the three months ended March 31, 2022, as compared to the same periods in 2021 was attributable mainly to Section 162(m) compensation deduction limitations and foreign income inclusions. For the three months ended March 31, 2022, the Company used a discrete effective tax rate method to calculate income taxes due to sensitivity of the forecast. Through March 31, 2022, the Company determined that small changes in estimated "ordinary" income would result in significant changes in the estimated annual effective tax rate causing material distortion in the year-to-date tax provision. As of March 31, 2022, the Company is unable to produce a reliable estimate of ordinary income for the quarter and year ending 2022 due to the inability to reliably or accurately forecast 2022 operating expenses. Similarly, for the three months ended March 31, 2022, due to uncertainties created by geopolitical risks, the Company’s estimated annual effective tax rate method would not provide a reliable estimate and therefore was not used.

Note 13 — 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. As of March 31, 2022 and December 31, 2021 the Company had 67.1 million and 66.9 million shares of common stock that were outstanding, respectively.

Warrants

On April 12, 2021, the Staff of the SEC issued the “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “Staff Statement”). The Staff Statement provided new guidance for all SPAC-related companies regarding the accounting and reporting for their warrants that could result in the warrants issued by SPACs being classified as a liability measured at fair value, with non-cash fair value adjustments reported in earnings at each reporting period. The Company reviewed the accounting for both its public warrants and private warrants following the Staff Statement. The Company determined that the accounting for its public warrants as equity was consistent with the Staff Statement. The Company determined that its private warrants should be accounted for as liabilities but that the related accounting errors during the year ended December 31, 2020 were not material to the required financial statements and disclosures included in its annual report on Form 10-K filed on March 5, 2021. In the three months ended March 31, 2021, the Company began accounting for the private warrants correctly, as disclosed in its quarterly report on Form 10-Q filed on May 6, 2021.

As of March 31, 2021, there were a total of 4,963,231 warrants outstanding, of which 346,500 were private and 4,616,731 were publicly traded. As part of its initial public offering (“IPO”), ChaSerg issued 22,000,000 units including one share of common stock and one-half of one redeemable warrant. Simultaneously with its IPO, ChaSerg issued 640,000 private placement units to its sponsor underwriter, each consisting of one common share and one-half of one redeemable warrant. ChaSerg issued 53,000 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. The change in fair value of the 346,500 outstanding private warrants in the amount of $0.9 million was recorded in other expenses in the condensed consolidated financial statements in the three months ended March 31, 2021.

On February 17, 2021, the Company and Riverview Group LLC, an affiliate of Millennium Management LLC, a holder of 6,383,269 the outstanding publicly traded warrants (the “Public Warrants”) entered into a Warrant Exchange Agreement (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the holder exchanged each of its public warrants for 0.3480 shares of the Company’s common stock, i.e., 2,221,378 shares.

As of March 31, 2022, there were no outstanding private or public warrants.  

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Note 14 — Stock-based compensation

Employee stock-based compensation cost recognized in the consolidated statements of income/(loss) and comprehensive income/(loss) was as follows:

	Three months ended March 31,
	2022		2021
	(in thousands)
Cost of revenue	$	249	$	111
Engineering, research, and development	864		554
Sales and marketing	671		791
General and administrative	6,877		4,215
Total stock-based compensation	$	8,661	$	5,671

Stock Options

2018 Plan

Stock option activity under the Company’s 2018 Plan is set forth below:

	Number of Options	Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Contractual Term (in years)
Options outstanding as of December 31, 2021	1,916,101	$	3.54	$	65,971	6.97
Options exercised	(62,396)	$	3.54
Options forfeited	(12,398)	$	3.54
Options outstanding as of March 31, 2022	1,841,307	$	3.54	$	19,407	6.82
Options vested and exercisable as of March 31, 2022	1,729,216	$	3.54	$	18,226	6.78

The total unrecognized compensation expenses related to 2018 Plan options as of March 31, 2022 was $0.1 million to be expensed on a straight-line basis over 1.44 years.

2020 Plan

As of March 31, 2022, 9.6 million shares were available for grant under 2020 Incentive Stock Plan ("2020 Plan").

Stock option activity under the Company’s 2020 Plan is set forth below:

	Number of Options	Weighted Average Exercise Price		Aggregate Intrinsic Value, in thousands		Weighted Average Contractual Term (in years)
Options outstanding as of December 31, 2021	2,224,687	$	12.86	$	55,856	8.53
Options granted	358,800	$	12.15
Options exercised	(9,308)	$	7.70
Options forfeited	(83,345)	$	17.00
Options outstanding as of March 31, 2022	2,490,834	$	12.64	$	8,888	8.56
Options vested and exercisable as of March 31, 2022	705,387	$	8.61	$	3,895	7.93

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The Company elected the policy to account for forfeitures as these occur. The total unrecognized compensation expenses related to 2020 Stock Plan options as of March 31, 2022 was $9.4 million to be expensed on a straight-line basis over the remaining 2.90 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 three months ended March 31, 2022:

	Number of Shares	Weighted Average Grant Date Fair Value
Unvested awards as of December 31, 2021	1,493,915	$	8.82
Awards granted	13,290	$	13.87
Awards vested and released	(156,525)	$	8.19
Unvested awards as of March 31, 2022	1,350,680	$	8.94

During the three months ended March 31, 2022 the Company net withheld and returned to the 2020 Plan pool 0.1 million shares to cover $1.0 million tax obligations for RSU releases during first quarter of 2022. The total unrecognized compensation expenses related to 2020 Stock Plan RSUs as of March 31, 2022 was $11.3 million to be expensed on a straight-line basis over 1.97 years.

Performance Stock Units

The following table summarizes activity of the Company's PSUs for the three months ended March 31, 2022:

	Number of Shares	Weighted Average Grant Date Fair Value
Unvested awards as of December 31, 2021	112,085	$	15.69
Awards granted	518,938	$	39.41
Awards vested and released	(112,085)	$	15.69
Unvested awards as of March 31, 2022	518,938	$	39.41

During the three months ended March 31, 2022 the Company net withheld 0.1 million shares to cover the $0.8 million tax obligations related to the release of remaining 2021 PSU on February 25, 2022. The total estimated unrecognized compensation expenses related to 2020 Stock Plan PSUs as of March 31, 2022 was $24.0 million to be expensed on over 0.92 years based on projected 148% performance goal achievement.

Note 15 — Earnings per share

The Company computed earnings per share (“EPS”) in conformity with the two-class method required for participating securities. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

All participating securities are excluded from basic weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, restricted stock units, performance stock units, warrants, and convertible preferred securities. The dilutive effect of potentially dilutive securities is reflected in diluted EPS in order of dilution and by application of the treasury stock method and the if-converted method for stock-based compensation and convertible preferred securities, respectively.

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The following table sets forth the computation of basic and diluted EPS of common stock as follows (in thousands except per share data):

	Three months ended March 31,
	2022		2021
Numerator for basic and diluted loss per share
Net loss	$	(2,667)	$	(2,062)
Denominator for basic and diluted loss per share
Weighted-average shares outstanding – basic and diluted	66,919		51,629
Net loss per share
Basic	$	(0.04)	$	(0.04)
Diluted	$	(0.04)	$	(0.04)

The following table represents the number of share equivalents (in thousands) outstanding during the period that were excluded from the calculation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect.

	Three months ended March 31,
	2022	2021
Stock options to purchase common stock	4,178	6,555
Restricted stock units	1,453	2,862
Performance stock units	576	994
Warrants to purchase common stock	—	8,478
Total	6,207	18,889

Note 16 — Commitments and contingencies

Legal Matters

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 were no amounts required to be reflected in these consolidated financial statements related to contingencies.

Note 17 — Subsequent events

In April 2022, Grid Dynamics announced it would cease remaining operations in the Russian Federation. We have worked towards the safe and expedient relocation of willing employees and ongoing management of projects to eliminate delivery impact to clients. In addition we announced our expansion to a new European hub with an office in Zug, Switzerland, a new engineering office in Yerevan, Armenia and workforce expansion in India.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of the financial condition and results of operations of Grid Dynamics Holdings, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2021, which has been filed with the Securities and Exchange Commission (“SEC”) on March 3, 2022.

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seek,” “intends,” “plans,” “estimates,” “projects,” “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements,” included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Grid Dynamics Holdings, Inc. (“Grid Dynamics,” the “Company,” “we,” “us,” or “our”) is an emerging leader in enterprise-level digital transformations in Fortune 1000 companies. For enterprises that create innovative digital products and experiences, Grid Dynamics offers close collaboration to provide digital transformation initiatives that span strategy consulting, development of early prototypes and enterprise-scale delivery of new digital platforms. Since its inception in 2006 in Menlo Park, California, as a grid and cloud consultancy firm, Grid Dynamics has been on the forefront of digital transformation, working on big ideas like cloud computing, NOSQL, DevOps, microservices, big data and AI, and quickly established itself as a provider of choice for technology and digital enterprise companies.

As a leading global digital engineering and IT services provider with its headquarters in Silicon Valley and engineering centers in the United States, Mexico and multiple European countries, Grid Dynamics’ core business is to deliver focused and complex technical consulting, software design, development, testing and internet service operations. 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.

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The following table sets forth a summary of Grid Dynamics’ financial results for the periods indicated:

	Three months ended March 31,
(dollars in thousands, except per share data)	2022				2021
			% of revenue				% of revenue
Revenues	$	71,410	100.0	%	$	39,134	100.0	%
Gross profit	26,779		37.5	%	15,337		39.2	%
Income/(loss) from operations	203		0.3	%	(1,778)		(4.5)	%
Net loss	(2,667)		(3.7)	%	(2,062)		(5.3)	%
Comprehensive loss	(2,950)		(4.1)	%	(2,013)		(5.1)	%
Diluted loss per share	$	(0.04)	n/a		$	(0.04)	n/a
Non-GAAP Financial Information(1)
Non-GAAP EBITDA(1)	11,375		15.9	%	5,263		13.4	%
Non-GAAP Net Income(1)	6,948		9.7	%	3,065		7.8	%
Non-GAAP Diluted EPS(1)	$	0.10	n/a		$	0.05	n/a

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

Quarterly Highlights

In the three months ended March 31, 2022, our revenues of $71.4 million were up $4.9 million or 7.3% in comparison to the three months ended December 31, 2021, and up 82.5% from the three months ended March 31, 2021. Similar to the last year, in the three months ended March 31, 2022, we witnessed healthy business trends. The three months ended March 31, 2022 also marked the fifth consecutive sequential growth quarter since witnessing a bottom in revenues in the three months ended March 31, 2020. During the quarter, we witnessed strong demand from our customers across our industry verticals as digital transformation initiatives take center stage.

During the three months ended March 31, 2022, our largest industry vertical was Retail. At 32.6% of revenue, our Retail vertical was up 6.6% in comparison to the three months ended December 31, 2021, and up 163.4% from the three months ended March 31, 2021. The strong sequential and year-over-year growth was driven by a combination of factors that included ramping of business by Retail customers as they invest in digital transformation initiatives combined with several of our customers enhancing their engagements as they witness improving business trends. Our Technology Media, and Telecom (“TMT”) vertical comprised 30.0% of our revenue, while Consumer Packaged Goods (“CPG”)/Manufacturing, Finance, and Other verticals contributed to 21.0%, 6.3%, and 10.1% respectively. Revenues from our Top 5 customers during the quarter was 42.8%, down from 50.1% in the same quarter year ago. The diversification in our Top 5 customer concentration was driven by a combination of factors that included success in ramping business at new customers and growing business at existing customers, aided by our recent acquisitions.

We continue to focus on revenue diversification by increasing our customer base with new customer additions. During the three months ended March 31, 2022, we received revenues from a total of 213 customers, up from 184 customers in the three months ended March 31, 2021.

We ended the three months ended March 31, 2022 with $(2.7) million, or (3.7)% in GAAP Net Loss, an improvement from a GAAP Net Loss of $(3.6) million, or (5.4)% in the three months ended December 31, 2021 and a GAAP Net Loss of $(2.1) million, or (5.3)% in the three months ended March 31, 2021. We ended the three months ended March 31, 2022 with $11.4 million, or 15.9% in Non-GAAP EBITDA, down from $11.6 million, or 17.4% in the three months ended December 31, 2021 and up from $5.3 million, or 13.4% in the three months ended March 31, 2021. The year-over-year increase in Non-GAAP EBITDA was largely driven by increase in billable personnel and billable work hours.

COVID-19 Related Updates

In December 2019, a novel coronavirus COVID-19 was reported in China, and in March 2020, the World Health Organization declared it a pandemic. This contagious disease pandemic has continued to spread across the globe, including extensively

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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 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. 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.

Business Update Regarding Military Action in Ukraine

On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region has resulted and is likely to continue. The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by the U.S., Canada, the United Kingdom, the European Union, and other countries and companies and organizations against officials, individuals, regions, and industries in Russia and 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 continue to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region or involving certain customers in the region.

We have historically had 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 executed our business continuity plan and have adapted to developments as they occur to protect the safety of our people and handle potential impacts to our delivery infrastructure. This includes moving affected employees to safer locations in Western Ukraine and, where permissible, outside Ukraine, and reallocating work to other geographies within our global footprint. We are actively working with our personnel and with our customers to meet their needs and to mitigate delivery challenges.

In April 2022, Grid Dynamics also announced it would cease remaining operations in the Russian Federation. We have worked towards the safe and expedient relocation of willing employees and ongoing management of projects to eliminate delivery impact to clients. In addition we announced our expansion to a new European hub with an office in Zug, Switzerland, a new engineering office in Yerevan, Armenia and workforce expansion in India.

We have no way to predict the progress or outcome of the military action in Ukraine, as the conflict and government reactions are rapidly developing and beyond our control. Prolonged unrest, military activities, expansion of hostilities, or broad-based sanctions, should they be implemented, could have a material adverse effect on our operations and business outlook.

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

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

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 closed during the year ended December 31, 2021 as well as due to 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:

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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 client 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 employees and contractors serving in similar capacities) by region, as of the dates indicated:

	As of March 31,
	2022	2021
United States and Mexico	406	253
Central and Eastern Europe(1), U.K., and the Netherlands	3,248	1,803
Rest of the world	17	—
Total	3,671	2,056

__________________________

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

Attrition

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

Hours and Utilization

As most 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 Concentration

Grid Dynamics’ ability to retain and expand its relationships with existing customers and add new customers are key indicators of its revenue potential. Grid Dynamics grew its customer base from 184 customers during the three months ended March 31, 2021 to 213 customers in the same period of 2022. 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.

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

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	Three Months Ended March 31,
	2022			2021
Total customers (for the period)	213			184
Of which (customer revenue amounts annualized for interim periods):
>$5.0 million	11			8
>$2.5 – 5.0 million	9			5
>$1.0 – 2.5 million	25			13
Top five customers	42.8		%	50.1		%
Top ten customers	58.3		%	66.7		%
Top five customers	$	30,543		$	19,603
Top ten customers	$	41,653		$	26,096

Foreign Currency Exchange Rate Exposure

Grid Dynamics is exposed to foreign currency exchange rate risk and its profit margins are subject to volatility between periods due to changes in foreign currency exchange rates relative to the U.S. 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. Apart from U.S. dollars revenues are also generated in EURO and British pounds. At the same time the major part of our expenses excluding U.S. dollars are incurred in Russian rubles, EURO and Polish zloty. For the three months ended March 31, 2022, these currencies comprised approximately 13.3%, 10.7% and 6.6% of Grid Dynamics’ $71.2 million combined cost of revenue and total operating expenses, respectively. Comparatively, the same foreign currencies accounted for approximately 10.9%, 13.9% and 7.9% of Grid Dynamics’ $40.9 million of combined cost of revenue and total operating expenses in the three months ended March 31, 2021. 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. Management carefully evaluates its exposure to foreign currency risk and, though Grid Dynamics does not currently hedge this exposure using 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. 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 Quarterly Report contains certain non-GAAP financial measures, including Non-GAAP 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

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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 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 Russia-Ukraine expenses.

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

•Non-GAAP Diluted EPS: Non-GAAP Net income, divided by the diluted weighted-average number of common shares outstanding for the period.

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

	Three Months Ended March 31,
(in thousands)	2022		2021
GAAP net loss	$	(2,667)	$	(2,062)
Adjusted for:
Depreciation and amortization	1,589		946
Provision/(benefit) for income taxes	2,170		(766)
Stock-based compensation	8,661		5,671
Transaction and transformation-related costs (1)	—		424
Russia - Ukraine expenses (2)	922		—
Other expenses (3)	700		1,050
Non-GAAP EBITDA	$	11,375	$	5,263

(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)Russia - Ukraine expenses are direct expenses connected with military actions of Russia against Ukraine and exit plan announced by the Company and include travel and relocation-related expenses of employees from mentioned countries. Does not include other indirect expenses incurred due to the circumstances of the conflict.

(3)Other 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.

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The following table presents a reconciliation of Grid Dynamics’ Non-GAAP Diluted EPS and its Non-GAAP Net Income to its consolidated net loss for the periods indicated:

	Three Months Ended March 31,
(in thousands, except per share data)	2022		2021
GAAP net loss	$	(2,667)	$	(2,062)
Adjusted for:
Stock-based compensation	8,661		5,671
Transaction and transformation-related costs (1)	—		424
Russia - Ukraine expenses (2)	922		—
Other expenses (3)	700		1,050
Tax impact of non-GAAP adjustments (4)	(668)		(2,018)
Non-GAAP Net Income	$	6,948	$	3,065
Number of shares used in the Non-GAAP Diluted EPS	70,176		60,191
Non-GAAP Diluted EPS	$	0.10	$	0.05

(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)Russia - Ukraine expenses are direct expenses connected with military actions of Russia against Ukraine and exit plan announced by the Company and include travel and relocation-related expenses of employees from mentioned countries. Does not include other indirect expenses incurred due to the circumstances of the conflict.

(3)Other 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.

Key Components of Revenue and Expenses

Revenue

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 issued contingent upon the timing of the payment from the customer. If there is uncertainty about project completion or receipt of payment for services provided, revenue is deferred until the uncertainty is sufficiently resolved.

Costs and Expenses

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