Grid Dynamics(GDYN) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part encompasses the company's unaudited financial statements, management's analysis, market risk, and internal controls Item 1. Financial Statements (Unaudited) This section presents Grid Dynamics' unaudited financial statements and notes on accounting policies and financial items Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :-------------- | | Assets | | | | Cash and cash equivalents | $150,018 | $144,364 | | Total current assets | $207,753 | $192,764 | | Total assets | $278,173 | $256,719 | | Liabilities and Equity | | | | Total current liabilities | $38,568 | $25,344 | | Total liabilities | $45,248 | $29,668 | | Total stockholders' equity | $232,925 | $227,051 | | Total liabilities and stockholders' equity | $278,173 | $256,719 | Condensed Consolidated Statements of Loss and Comprehensive Loss This section presents the company's financial performance over periods, including revenue, expenses, and net loss Condensed Consolidated Statements of Loss and Comprehensive Loss (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $77,335 | $47,676 | $148,745 | $86,810 | | Gross profit | $28,861 | $19,797 | $55,640 | $35,134 | | Income/(loss) from operations | $(10,849) | $1,384 | $(10,646) | $(394) | | Net loss | $(13,186) | $(1,483) | $(15,853) | $(3,545) | | Comprehensive loss | $(13,968) | $(1,518) | $(16,918) | $(3,531) | | Basic loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) | | Diluted loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including net loss, stock-based compensation, and stock option exercises Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Net Loss (Q1 2022) | Stock-based Compensation (Q1 2022) | Exercise of Stock Options (Q1 2022) | Issuance/Tax Settlement (Q1 2022) | FX Adjustment (Q1 2022) | Balance at Mar 31, 2022 | | :-------------------------------- | :---------------------- | :----------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | :---------------------- | :---------------------- | | Total stockholders' equity | $227,051 | $(2,667) | $8,661 | $292 | $(1,802) | $(283) | $231,252 | | Metric | Balance at Mar 31, 2022 | Net Loss (Q2 2022) | Stock-based Compensation (Q2 2022) | Exercise of Stock Options (Q2 2022) | Issuance/Tax Settlement (Q2 2022) | FX Adjustment (Q2 2022) | Balance at Jun 30, 2022 | | :-------------------------------- | :---------------------- | :----------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | :---------------------- | :---------------------- | | Total stockholders' equity | $231,252 | $(13,186) | $16,387 | $538 | $(1,284) | $(782) | $232,925 | Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $15,322 | $6,650 | | Net cash used in investing activities | $(4,213) | $(32,525) | | Net cash used in financing activities | $(4,390) | $(18,910) | | Effect of exchange rate changes on cash and cash equivalents | $(1,065) | $14 | | Net increase/(decrease) in cash and cash equivalents | $5,654 | $(44,771) | | Cash and cash equivalents, end of period | $150,018 | $67,974 | Notes to Condensed Consolidated Financial Statements This section presents Grid Dynamics' unaudited financial statements and notes on accounting policies and financial items Note 1 — Background and nature of operations This note describes Grid Dynamics Holdings, Inc.'s business, incorporation, and NASDAQ listing - Grid Dynamics Holdings, Inc. provides enterprise-level digital transformation services in search, analytics, and release automation to Fortune 1000 companies. The company was incorporated in Delaware on May 21, 2018, as ChaSerg Technology Acquisition Corp. and changed its name to Grid Dynamics Holdings, Inc. on March 5, 2020, following a business combination. Its common stock is listed on NASDAQ under the symbol "GDYN"[25][26] Note 2 — Basis of presentation and summary of significant accounting policies This note outlines the basis for financial statement preparation and key accounting policies, including lease adoption - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, reflecting normal and recurring adjustments. The Company consolidates all directly or indirectly owned or controlled subsidiaries, including GD Ukraine, LLC and GD AM, LLC, which are considered Variable Interest Entities (VIEs) due to the Company's power to direct their significant activities and being their primary beneficiary[28][29][30] - The Company adopted Topic 842, Leases, effective January 1, 2022, using the current period adjustment method, resulting in the recognition of $5.9 million in Right-of-Use (RoU) Assets and $5.7 million in operating lease liabilities. This adoption did not impact the statements of loss, stockholders' equity, or cash flows[33][37] - The Company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards. It is currently evaluating the impact of ASU 2016-13 (Credit Losses) and ASU 2020-3 (Financial Instruments) on its consolidated financial statements, with ASU 2016-13 effective for fiscal years beginning after December 15, 2022[32][40][41] Note 3 — Acquisitions This note details the acquisition of Tacit Knowledge Inc., including purchase price allocation and revenue contribution - On May 29, 2021, Grid Dynamics acquired 100% of Tacit Knowledge Inc., a global digital commerce solutions provider, for $37.6 million, comprising $33.6 million cash and $4.0 million in contingent consideration. The acquisition added approximately 180 employees, augmented service offerings, strengthened competitive position, and leveraged near-shore capabilities in Mexico[42][43] Tacit Acquisition Purchase Price Allocation (in thousands) | Asset/Liability | Fair Value | | :-------------------------- | :--------- | | 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 | - Tacit contributed approximately $14.3 million in revenue for the six months ended June 30, 2022, and $2.5 million from acquisition date to June 30, 2021. Pro forma revenue for the six months ended June 30, 2022, including Tacit as if acquired at the beginning of 2021, was $148.7 million, compared to $94.8 million for the same period in 2021[46][49] Note 4 — Fair value This note explains the measurement of contingent consideration and other investments at fair value - The Company measures contingent consideration payable at fair value using a Monte-Carlo model, based on budgets and discounted cash flow analysis. As of June 30, 2022, the contingent consideration payable was $5.0 million, down from $6.9 million at December 31, 2021, following a $1.9 million payment related to Daxx[51][54] - The Company holds a $1.0 million investment in equity securities of a related party, recorded at cost, classified as 'Other noncurrent assets' as of June 30, 2022[54] Note 5 — Prepaid expenses This note provides a breakdown of the company's prepaid expenses and other current assets Prepaid Expenses (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :-------------- | | Prepaid expenses | $3,888 | $2,188 | | Prepaid insurance | $1,462 | $921 | | Guarantee deposits placed | $1,388 | $345 | | Value added tax receivable | $911 | $931 | | Other assets | $156 | $118 | | Total prepaid expenses and other current assets | $7,805 | $4,503 | Note 6 — Property and equipment, net This note details the company's property, equipment, and capitalized software development costs, net of depreciation Property and Equipment, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :-------------- | | Computers and equipment | $12,128 | $10,784 | | Machinery and automobiles | $282 | $246 | | Furniture and fixtures | $1,194 | $1,174 | | Software | $513 | $513 | | Leasehold improvements | $500 | $486 | | Total gross property and equipment | $14,617 | $13,203 | | Less: Accumulated depreciation and amortization | $(8,477) | $(8,240) | | Net property and equipment | $6,140 | $4,963 | | Capitalized software development costs | $5,340 | $4,656 | | Less: Accumulated amortization | $(4,137) | $(3,450) | | Net capitalized software development costs | $1,203 | $1,206 | | Property and equipment, net | $7,343 | $6,169 | Note 7 — Intangible assets, net This note presents the company's intangible assets, including customer relationships and tradenames, net of amortization Intangible Assets, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :-------------- | | Customer relationships | $15,971 | $15,971 | | Tradenames | $4,676 | $4,676 | | Non-compete agreements | $440 | $440 | | Total gross intangible assets | $21,087 | $21,087 | | Less: Accumulated amortization | $(3,231) | $(1,990) | | Intangible assets, net | $17,856 | $19,097 | Note 8 — Other current liabilities This note provides a breakdown of other current liabilities, including contingent consideration and VAT payable Other Current Liabilities (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :-------------- | | Contingent consideration payable | $5,000 | $6,933 | | Value added tax payable | $1,232 | $1,274 | | Customer deposits | $752 | $798 | | Other liabilities | $638 | $594 | | Total other current liabilities | $7,622 | $9,599 | - As of June 30, 2022, the Company had $0.6 million payable to a related party, classified under Other current liabilities[59] Note 9 — Debt This note describes the company's new secured multicurrency revolving loan facility and compliance with covenants - On March 15, 2022, Grid Dynamics entered into a new Credit Agreement for a secured multicurrency revolving loan facility of up to $30.0 million, with a $10.0 million letter of credit sublimit, maturing on March 15, 2025. The facility can be increased to $50.0 million[60] - Borrowings accrue interest based on base rate, adjusted SOFR/EURIBOR, or adjusted daily simple SOFR, with margins determined by the Company's consolidated total leverage ratio. The Company was in compliance with all covenants as of June 30, 2022, and had no outstanding debt under this facility or its previous Line of Credit (closed March 2022)[61][63][65] Note 10 — Revenue This note disaggregates revenue by customer location, vertical market, and contract type, identifying major customers Disaggregated Revenue by Customer Location (in thousands) | Customer Location | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $63,658 | $38,783 | $121,267 | $71,389 | | Europe | $13,596 | $8,855 | $27,331 | $15,383 | | Other | $81 | $38 | $147 | $38 | | Total Revenues | $77,335 | $47,676 | $148,745 | $86,810 | Disaggregated Revenue by Vertical Market (in thousands) | Vertical | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Retail | $25,452 | $12,729 | $48,759 | $21,579 | | Technology, Media and Telecom | $23,391 | $16,115 | $44,835 | $30,526 | | CPG/Manufacturing | $16,090 | $9,899 | $31,069 | $18,624 | | Finance | $5,049 | $4,071 | $9,576 | $7,509 | | Other | $7,353 | $4,862 | $14,506 | $8,572 | | Total Revenues | $77,335 | $47,676 | $148,745 | $86,810 | Disaggregated Revenue by Contract Type (in thousands) | Contract Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Time-and-material | $71,002 | $44,230 | $136,208 | $80,470 | | Fixed-fee | $6,333 | $3,446 | $12,537 | $6,340 | | Total Revenues | $77,335 | $47,676 | $148,745 | $86,810 | - For the three and six months ended June 30, 2022, Customer 1 and Customer 2 each accounted for over 10% of total revenue. Revenue from related parties was $1.4 million and $2.6 million for the three and six months ended June 30, 2022, respectively[73] Note 11 — Leases This note details the company's lease obligations, primarily for office real estate, and operating lease costs - The Company's lease obligations primarily consist of office real estate, with remaining lease terms ranging from 0.4 to 4.1 years. Operating lease cost for the six months ended June 30, 2022, was $1.552 million, with total lease cost at $1.747 million[75][76][78] Operating Lease Maturities (in thousands) | Years ending December 31, | Lease Payments | | :------------------------ | :------------- | | 2022 (excluding six months ended June 30, 2022) | $1,263 | | 2023 | $1,604 | | 2024 | $1,404 | | 2025 | $565 | | 2026 | $172 | | Total lease payments | $5,008 | | Less: imputed interest | $(290) | | Total | $4,718 | Note 12 — Income taxes This note explains the income tax expense, effective tax rate, and the discrete effective tax rate method used - Income tax expense for the three months ended June 30, 2022, was $1.7 million (effective tax rate of -14.9%), compared to $2.8 million (effective tax rate of 213.6%) in 2021, primarily due to Section 162(m) compensation deduction limitations and foreign rate differential. For the six months ended June 30, 2022, income tax expense increased to $3.9 million (effective tax rate of -32.4%) from $2.0 million (effective tax rate of -132.8%) in 2021[79][80] - The Company used a discrete effective tax rate method for the three and six months ended June 30, 2022, due to the inability to reliably forecast 2022 operating expenses and uncertainties from geopolitical risks, which would otherwise cause significant changes and material distortion in the estimated annual effective tax rate[81][82] Note 13 — Stockholders' equity This note details the company's common stock outstanding and the accounting treatment of warrants - As of June 30, 2022, the Company had 67.3 million shares of common stock outstanding. Following the SEC's Staff Statement on SPAC Warrants, the Company determined its private warrants should be accounted for as liabilities. By June 30, 2022, all private warrants and public warrants were exchanged for common stock, resulting in no outstanding warrants[84][85][87][88] Note 14 — Stock-based compensation This note provides a breakdown of stock-based compensation expense and unrecognized compensation expenses for various plans Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $272 | $149 | $521 | $260 | | Engineering, research, and development | $1,638 | $617 | $2,502 | $1,171 | | Sales and marketing | $1,207 | $453 | $1,878 | $1,244 | | General and administrative | $13,270 | $5,456 | $20,147 | $9,671 | | Total stock-based compensation | $16,387 | $6,675 | $25,048 | $12,346 | - As of June 30, 2022, unrecognized compensation expenses for the 2018 Plan options totaled $0.1 million (expensed over 1.19 years) and for the 2020 Plan options totaled $9.6 million (expensed over 2.83 years). For RSUs, unrecognized compensation expenses were $27.3 million (expensed over 1.79 years), and for PSUs, $25.7 million (expensed over 0.67 years based on 218% performance goal achievement)[90][91][93][94] Note 15 — Earnings per share This note presents the basic and diluted earnings per share calculations and anti-dilutive share equivalents Basic and Diluted EPS (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(13,186) | $(1,483) | $(15,853) | $(3,545) | | Weighted-average shares outstanding – basic and diluted | 67,136 | 54,431 | 67,028 | 53,044 | | Basic loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) | | Diluted loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) | Anti-Dilutive Share Equivalents Excluded from EPS Calculation (in thousands) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options to purchase common stock | 4,380 | 6,435 | 4,280 | 6,495 | | Restricted stock units | 2,178 | 2,186 | 1,817 | 2,522 | | Performance stock units | 1,131 | 938 | 1,153 | 966 | | Warrants to purchase common stock | — | 4,611 | — | 6,523 | | Total | 7,689 | 14,170 | 7,250 | 16,506 | Note 16 — Commitments and contingencies This note addresses the company's legal proceedings, claims, and management's assessment of material impact - The Company is subject to legal proceedings and claims in the ordinary course of business but currently has no material legal proceedings or claims requiring financial statement reflection. Management believes any future accruals for known contingencies would not materially affect financial condition, liquidity, or cash flows[100] Note 17 — Subsequent events This note confirms the date through which subsequent events were evaluated for the financial statements - The Company performed subsequent event procedures through August 4, 2022, the date the condensed consolidated financial statements were issued[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Grid Dynamics' financial condition, operational results, liquidity, and critical accounting policies Overview This section introduces Grid Dynamics' business, services, and key financial highlights - Grid Dynamics Holdings, Inc. is a leader in enterprise-level digital transformation services for Fortune 1000 companies, offering strategy consulting, prototype development, and enterprise-scale delivery of new digital platforms. The company specializes in emerging technologies like AI, data science, cloud computing, big data, and DevOps, emphasizing a product-over-project culture and client success[105][106] Summary of Financial Results (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $77,335 | $47,676 | $148,745 | $86,810 | | Gross profit | $28,861 (37.3%) | $19,797 (41.5%) | $55,640 (37.4%) | $35,134 (40.5%) | | Income/(loss) from operations | $(10,849) (-14.0%) | $1,384 (2.9%) | $(10,646) (-7.2%) | $(394) (-0.5%) | | Net loss | $(13,186) (-17.1%) | $(1,483) (-3.1%) | $(15,853) (-10.7%) | $(3,545) (-4.1%) | | Diluted loss per share | $(0.20) | $(0.03) | $(0.24) | $(0.07) | | Non-GAAP EBITDA | $13,282 (17.2%) | $9,731 (20.4%) | $24,657 (16.6%) | $14,994 (17.3%) | | Non-GAAP Net Income | $8,230 (10.6%) | $6,090 (12.8%) | $15,178 (10.2%) | $9,155 (10.5%) | | Non-GAAP Diluted EPS | $0.12 | $0.10 | $0.22 | $0.15 | Quarterly Highlights This section summarizes key financial and operational achievements for the quarter, including revenue growth and net loss - In Q2 2022, revenues reached $77.3 million, an 8.3% sequential increase from Q1 2022 and a 62.2% year-over-year increase from Q2 2021, marking the eighth consecutive sequential growth quarter. This growth was driven by strong demand for digital transformation initiatives across industry verticals[109][144] - Retail was the largest industry vertical in Q2 2022, comprising 32.9% of revenue, up 9.2% sequentially and 100.0% year-over-year. Top 5 customer revenue concentration slightly decreased to 44.2% from 45.4% year-over-year, indicating diversification through new and existing customer growth[110][111] - GAAP Net Loss increased to $13.2 million (-17.1% of revenue) in Q2 2022, from $1.5 million (-3.1% of revenue) in Q2 2021, primarily due to higher stock-based compensation and operating expenses, including geographic reorganization costs related to the Ukraine conflict. Non-GAAP EBITDA increased to $13.3 million (17.2% of revenue) from $9.7 million (20.4% of revenue) year-over-year, driven by increased business volume[112] COVID-19 Related Updates This section discusses the ongoing impact of the COVID-19 pandemic on global economic activity and company operations - The COVID-19 pandemic continues to impact global economic activity, with initial headwinds in March 2020 primarily affecting retail customers. Despite a low point in May 2020, retail business has steadily improved, and quarterly revenues now exceed pre-COVID levels. The Company continues precautionary measures, with most employees working remotely, and facilities open following local guidelines, resulting in minimal operational disruption[113] - Future impacts depend on the pandemic's duration, new variants, vaccine efficacy, government actions, and altered consumer behavior. Challenges include employee retention and talent shortages, with growth and investor confidence potentially weakened by supply chain disruptions, inflationary pressures, and global labor shortages[113][206][207] Business Update Regarding Military Action in Ukraine This section details the impact of the Ukraine conflict on operations, including employee relocation and cessation of Russian operations - The military action in Ukraine and associated sanctions pose material adverse effects on operations, potentially disrupting service delivery, financial transactions, and requiring work reallocation. Grid Dynamics has implemented its business continuity plan, relocating affected employees to safer locations within and outside Ukraine, and reallocating work to other global geographies[114][115] - In April 2022, the Company announced it would cease remaining operations in the Russian Federation, relocating most Russia-based employees and managing projects to eliminate client impact. As of August 2022, minimal office personnel remain in Russia, and no client services are performed from there. The Company also expanded to a new European hub in Zug, Switzerland, and opened an engineering office in Yerevan, Armenia, with workforce expansion in India[116][201] - The progress and outcome of the conflict are unpredictable, and prolonged unrest, military activities, or expanded sanctions could materially adversely affect operations and business outlook[117] Key Performance Indicators and Other Factors Affecting Performance This section outlines critical metrics and external factors influencing Grid Dynamics' success, including personnel and currency risk - Attracting and retaining skilled IT professionals is critical for Grid Dynamics' success and revenue growth. The company's personnel count increased from 2,510 in June 2021 to 3,763 in June 2022, with significant growth in Central and Eastern Europe, U.K., and the Netherlands[119][120] - Employee retention is a priority, with a target voluntary attrition rate no higher than mid-teen percentages. Effective utilization of IT professionals, tracked by billable hours and utilization rates, is crucial for maintaining gross profit margins[121][122] Customer Base and Revenue Concentration | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total customers (for the period) | 208 | 212 | 232 | 226 | | Customers >$5.0 million | 13 | 9 | 13 | 9 | | Customers >$2.5 – 5.0 million | 7 | 4 | 7 | 4 | | Customers >$1.0 – 2.5 million | 26 | 15 | 26 | 15 | | Top five customers (% of revenue) | 44.2% | 45.4% | 43.5% | 48.6% | | Top ten customers (% of revenue) | 60.2% | 62.3% | 59.0% | 64.3% | | Top five customers (revenue in thousands) | $34,166 | $21,634 | $64,710 | $42,213 | | Top ten customers (revenue in thousands) | $46,539 | $29,690 | $87,826 | $55,786 | - Grid Dynamics is exposed to foreign currency exchange rate risk, with a significant portion of combined cost of revenue and operating expenses denominated in non-U.S. dollar currencies (31.2% in Q2 2022, 35.1% in H1 2022). The company does not currently hedge this exposure but seeks to minimize it by matching expenses to U.S. dollars and limiting cash transfers[125] - The business is subject to seasonal trends, with historically higher revenue and gross profit in Q2 and Q3 compared to Q1 and Q4, influenced by holidays and the U.S. retail cycle[126] Non-GAAP Measures This section explains the use of Non-GAAP financial measures and provides reconciliations to GAAP equivalents - Grid Dynamics uses Non-GAAP EBITDA, Non-GAAP Net Income, and Non-GAAP Diluted EPS to evaluate core operating performance, make strategic decisions, and determine performance-based compensation. These measures exclude certain GAAP expenses like stock-based compensation, transaction-related costs, and geographic reorganization expenses[127][128][132] Reconciliation of Non-GAAP EBITDA to GAAP Net Loss (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | GAAP net loss | $(13,186) | $(1,483) | $(15,853) | $(3,545) | | Depreciation and amortization | $1,691 | $1,154 | $3,280 | $2,100 | | Provision for income taxes | $1,711 | $2,788 | $3,881 | $2,022 | | Stock-based compensation | $16,387 | $6,675 | $25,048 | $12,346 | | Transaction and transformation-related costs | — | $518 | — | $942 | | Geographic reorganization | $6,053 | — | $6,975 | — | | Other expenses | $626 | $79 | $1,326 | $1,129 | | Non-GAAP EBITDA | $13,282 | $9,731 | $24,657 | $14,994 | Reconciliation of Non-GAAP Diluted EPS and Non-GAAP Net Income to GAAP Net Loss (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | GAAP net loss | $(13,186) | $(1,483) | $(15,853) | $(3,545) | | Stock-based compensation | $16,387 | $6,675 | $25,048 | $12,346 | | Transaction and transformation-related costs | — | $518 | — | $942 | | Geographic reorganization | $6,053 | — | $6,975 | — | | Other expenses | $626 | $79 | $1,326 | $1,129 | | Tax impact of non-GAAP adjustments | $(1,650) | $301 | $(2,318) | $(1,717) | | Non-GAAP Net Income | $8,230 | $6,090 | $15,178 | $9,155 | Key Components of Revenue and Expenses This section describes the primary sources of revenue and the categorization of the company's operating expenses - Grid Dynamics primarily generates revenue from software engineering, development, integration, testing, and operations services, mainly on a time and materials basis, with a smaller portion from fixed-fee contracts. Revenue is recognized as hours and costs are incurred for time and materials, and as work is performed for fixed-fee contracts[135] - Cost of revenue includes salaries, employee benefits, performance bonuses, stock-based compensation, travel expenses for client-serving personnel, and related depreciation and amortization. Operating expenses are categorized into Engineering, Research and Development; Sales and Marketing; and General and Administrative, each including salaries, benefits, and stock-based compensation, with G&A also covering administrative costs, legal/audit, insurance, operating leases, and geographic reorganization expenses[138][139][140][141] - Provision for income taxes follows the asset and liability method, recognizing deferred income taxes for temporary differences. The effective tax rate is influenced by income allocation across jurisdictions, tax law changes, and audit resolutions[142] Results of Operations This section provides a detailed comparison of Grid Dynamics' revenues and expenses for the reported periods Consolidated Results of Operations (in thousands, except percentages) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (Dollars) | Change (Percentage) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------------- | :------------------ | | Revenue | $77,335 | $47,676 | $29,659 | 62.2% | | Cost of revenue | $48,474 | $27,879 | $20,595 | 73.9% | | Gross profit | $28,861 | $19,797 | $9,064 | 45.8% | | Engineering, research, and development | $3,840 | $1,772 | $2,068 | 116.7% | | Sales and marketing | $5,132 | $2,837 | $2,295 | 80.9% | | General and administrative | $30,738 | $13,804 | $16,934 | 122.7% | | Total operating expense | $39,710 | $18,413 | $21,297 | 115.7% | | Income/(loss) from operations | $(10,849) | $1,384 | $(12,233) | -883.9% | | Other expenses | $(626) | $(79) | $(547) | 692.4% | | Income/(loss) before income taxes | $(11,475) | $1,305 | $(12,780) | -979.3% | | Provision for income taxes | $1,711 | $2,788 | $(1,077) | -38.6% | | Net loss | $(13,186) | $(1,483) | $(11,703) | 789.1% | Consolidated Results of Operations (in thousands, except percentages) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (Dollars) | Change (Percentage) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------------- | :------------------ | | Revenue | $148,745 | $86,810 | $61,935 | 71.3% | | Cost of revenue | $93,105 | $51,676 | $41,429 | 80.2% | | Gross profit | $55,640 | $35,134 | $20,506 | 58.4% | | Engineering, research, and development | $6,936 | $3,555 | $3,381 | 95.1% | | Sales and marketing | $9,347 | $5,869 | $3,478 | 59.3% | | General and administrative | $50,003 | $26,104 | $23,899 | 91.6% | | Total operating expense | $66,286 | $35,528 | $30,758 | 86.6% | | Loss from operations | $(10,646) | $(394) | $(10,252) | 2,602.0% | | Other expenses | $(1,326) | $(1,129) | $(197) | 17.4% | | Loss before income taxes | $(11,972) | $(1,523) | $(10,449) | 686.1% | | Provision for income taxes | $3,881 | $2,022 | $1,859 | 91.9% | | Net loss | $(15,853) | $(3,545) | $(12,308) | 347.2% | Revenues by Vertical (in thousands, except percentages) | Vertical | Three Months Ended June 30, 2022 | % of Revenue | Three Months Ended June 30, 2021 | % of Revenue | | :---------------------------- | :------------------------------- | :----------- | :------------------------------- | :----------- | | Retail | $25,452 | 32.9% | $12,729 | 26.7% | | Technology, Media and Telecom | $23,391 | 30.2% | $16,115 | 33.8% | | CPG/Manufacturing | $16,090 | 20.8% | $9,899 | 20.8% | | Finance | $5,049 | 6.5% | $4,071 | 8.5% | | Other | $7,353 | 9.6% | $4,862 | 10.2% | | Total | $77,335 | 100.0% | $47,676 | 100.0% | | Vertical | Six Months Ended June 30, 2022 | % of Revenue | Six Months Ended June 30, 2021 | % of Revenue | | :---------------------------- | :------------------------------- | :----------- | :------------------------------- | :----------- | | Retail | $48,759 | 32.8% | $21,579 | 24.9% | | Technology, Media and Telecom | $44,835 | 30.1% | $30,526 | 35.2% | | CPG/Manufacturing | $31,069 | 20.9% | $18,624 | 21.5% | | Finance | $9,576 | 6.4% | $7,509 | 8.6% | | Other | $14,506 | 9.8% | $8,572 | 9.8% | | Total | $148,745 | 100.0% | $86,810 | 100.0% | - Revenue increased by 62.2% to $77.3 million in Q2 2022 and 71.3% to $148.7 million in H1 2022, driven by improved business conditions, increased billable headcount, and billable hours. Cost of revenue increased by 73.9% in Q2 2022 and 80.2% in H1 2022 due to higher personnel costs supporting increased revenue[144][145] - Gross profit increased by 45.8% to $28.9 million in Q2 2022 and 58.4% to $55.6 million in H1 2022. However, gross margin decreased to 37.3% in Q2 2022 (from 41.5%) and 37.4% in H1 2022 (from 40.5%), impacted by higher costs associated with employee relocation due to the Russian invasion of Ukraine[146][147] - Engineering, research, and development expenses rose by 116.7% in Q2 2022 and 95.1% in H1 2022 due to increased staffing and investments in customer delivery operations. Sales and marketing expenses increased by 80.9% in Q2 2022 and 59.3% in H1 2022, mainly from increased sales personnel, initiatives, and wages[148][149] - General and administrative expenses increased by over 70% in both Q2 and H1 2022, driven by higher stock-based compensation, wages, bonuses, facilities expenses, amortization of intangibles, and geographic reorganization costs. Other expenses increased by $0.5 million in Q2 2022 due to currency fluctuations[150][151] - Net loss for Q2 2022 was $13.2 million and for H1 2022 was $15.9 million, compared to $1.5 million and $3.5 million in the respective prior periods, primarily due to the aforementioned increases in operating expenses and stock-based compensation[153] Liquidity and Capital Resources This section discusses the company's cash position, funding sufficiency, and access to credit facilities - As of June 30, 2022, Grid Dynamics had $150.0 million in cash and cash equivalents, an increase from $144.4 million at December 31, 2021. Of this, $14.3 million was held outside the U.S. (up from $8.5 million), intended for future operating needs in those regions[155] - The Company believes its current cash position is sufficient to fund operating, investing, and financing expenditures for the next twelve months. However, additional equity or debt financing may be sought if resources are insufficient[154] - Cash in banks in Ukraine, Russia, Poland, Moldova, Serbia, Armenia, and Mexico may be subject to risks due to periodic instability, sanctions, and less rigorous banking standards compared to the U.S[155] - A new $30.0 million revolving credit facility was established on March 15, 2022, with no outstanding debt as of June 30, 2022[156] Cash Flows This section summarizes the company's cash flows from operating, investing, and financing activities Summary of Cash Flows (in thousands) | Category | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $15,322 | $6,650 | | Net cash used in investing activities | $(4,213) | $(32,525) | | Net cash used in financing activities | $(4,390) | $(18,910) | | Effect of exchange rate changes on cash and cash equivalents | $(1,065) | $14 | | Net increase/(decrease) in cash and cash equivalents | $5,654 | $(44,771) | | Cash, cash equivalents (beginning of period) | $144,364 | $112,745 | | Cash, cash equivalents (end of period) | $150,018 | $67,974 | - Net cash provided by operating activities increased by $8.7 million to $15.3 million in H1 2022, driven by higher cash operating profit. Net cash used in investing activities was $(4.2) million in H1 2022, mainly for capital expenditures and an investment, significantly lower than $(32.5) million in H1 2021 which included the Tacit acquisition[157][158] - Net cash used in financing activities was $(4.4) million in H1 2022, reflecting contingent consideration payments and tax withholding for vested awards, compared to $(18.9) million in H1 2021, primarily due to tax withholding[159] Off-Balance Sheet Arrangements and Commitments This section addresses Grid Dynamics' off-balance sheet arrangements, contingent commitments, and consolidated VIEs - Grid Dynamics has no material off-balance sheet arrangements or contingent commitments, except for credit support for letters of credit and corporate credit card balances, and operating leases. Subcontractors GD Ukraine, LLC and GD AM, LLC are consolidated as Variable Interest Entities (VIEs)[160][161] Critical Accounting Policies and Estimates This section highlights the significant judgments, estimates, and assumptions used in preparing the financial statements - The Company's financial statements rely on judgments, estimates, and assumptions, particularly for revenue, expenses, assets, liabilities, and contingent items. Critical estimates include allowances for receivables, accrued liabilities, stock-based compensation, and fair value of intangible assets[31][162] - Lease accounting involves determining if an arrangement is a lease, classifying it, and measuring RoU assets and liabilities based on present value of future lease payments, using incremental borrowing rates if implicit rates are unavailable. The Company elected practical expedients to combine lease and non-lease components and for short-term lease recognition[164][165] Emerging Growth Company Accounting Election This section explains Grid Dynamics' election to use the extended transition period for new accounting standards - Grid Dynamics is an "emerging growth company" and has elected to take advantage of the extended transition period for complying with new or revised financial accounting standards, meaning it adopts new standards at the same time as private companies. The Company expects to lose this status on December 31, 2022[166] Recently Adopted and Issued Accounting Pronouncements This section refers to Note 2 for details on recently adopted and issued accounting pronouncements - Recently adopted and issued accounting pronouncements are detailed in Note 2 to the condensed consolidated financial statements[167] [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=