Grid Dynamics(GDYN) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited condensed consolidated financial statements present total assets of $435.8 million, Q3 2023 revenue of $77.4 million, and a net income of $0.7 million Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2023, shows total assets of $435.8 million, total liabilities of $62.8 million, and stockholders' equity of $372.9 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $253,713 | $256,729 | | Total current assets | $326,053 | $323,126 | | Goodwill | $54,633 | $45,514 | | Total assets | $435,750 | $411,146 | | Liabilities and Equity | | | | Total current liabilities | $52,470 | $38,710 | | Total liabilities | $62,826 | $48,102 | | Total stockholders' equity | $372,924 | $363,044 | Condensed Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss) For Q3 2023, revenues were $77.4 million with a net income of $0.7 million, while nine-month revenues reached $234.8 million with a net loss of $4.7 million Statement of Income Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $77,419 | $81,161 | $234,841 | $229,906 | | Gross profit | $28,152 | $32,670 | $85,032 | $88,310 | | Income/(loss) from operations | $143 | $(4,750) | $(4,515) | $(15,396) | | Net income/(loss) | $676 | $(6,659) | $(4,667) | $(22,512) | | Diluted EPS | $0.01 | $(0.10) | $(0.06) | $(0.33) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $372.9 million by September 30, 2023, primarily due to $27.7 million in stock-based compensation, offset by a $4.7 million net loss - Total stockholders' equity grew to $372.9 million at September 30, 2023, from $363.0 million at December 31, 2022[21] - Key activities impacting equity during the first nine months of 2023 included a net loss of $4.7 million, stock-based compensation of $27.7 million, and payments of tax obligations from net share settlements of $15.0 million[21][24] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased to $33.5 million for the nine months ended September 30, 2023, with cash and cash equivalents ending at $253.7 million Cash Flow Summary (Nine months ended September 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $33,537 | $19,639 | | Net cash used in investing activities | $(23,423) | $(5,381) | | Net cash (used in)/provided by financing activities | $(14,467) | $98,503 | | Net increase/(decrease) in cash | $(3,016) | $110,824 | | Cash and cash equivalents, end of period | $253,713 | $255,188 | - The primary use of cash in investing activities was $17.8 million for the acquisition of a business, net of cash acquired[24] Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, including recent acquisitions, revenue concentration by geography and vertical, and stock-based compensation expenses - On April 18, 2023, the Company acquired NextSphere Technologies for a total purchase consideration of $25.2 million, including $24.3 million in cash and $0.9 million in contingent consideration[34] - During Q3 2023, the company concluded that performance targets for the NextSphere and Mutual Mobile acquisitions would not be met and reduced the related earn-out liabilities to zero, resulting in a gain from the change in fair value[43][44] Revenue by Vertical (Nine Months Ended Sep 30, in thousands) | Vertical | 2023 | 2022 | | :--- | :--- | :--- | | Retail | $77,972 | $74,019 | | Technology, Media and Telecom | $74,639 | $71,170 | | CPG/Manufacturing | $33,186 | $47,127 | | Finance | $20,562 | $15,649 | | Other | $28,482 | $21,941 | | Total Revenues | $234,841 | $229,906 | - Stock-based compensation expense totaled $7.3 million for Q3 2023 and $27.7 million for the nine months ended September 30, 2023, a decrease from $17.6 million and $42.6 million in the respective 2022 periods[75] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 4.6% Q3 2023 revenue decline, improved GAAP Net Income, geopolitical impacts, and the company's strong liquidity position Q3 2023 vs Q3 2022 Financial Results (in thousands) | Metric | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $77,419 | $81,161 | (4.6)% | | Gross Profit | $28,152 | $32,670 | (13.8)% | | Income/(loss) from operations | $143 | $(4,750) | (103.0)% | | Net income/(loss) | $676 | $(6,659) | (110.2)% | | Non-GAAP EBITDA | $10,733 | $17,086 | (37.2)% | - The year-over-year decrease in Q3 revenue was largely due to macroeconomic conditions, with Retail growing 5.1%, TMT decreasing 9.9%, and CPG/Manufacturing declining 39.8%[94][95] - The company has ceased operations in Russia and expanded its global footprint with new offices in Switzerland and Armenia, and workforce expansion in India[100] - Total personnel grew to 3,823 as of September 30, 2023, from 3,746 a year ago, with a significant shift in employee location from CEE to the Americas and Rest of the World[107] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange rate fluctuations, with 38.0% of Q3 2023 costs in foreign currencies, and it does not currently hedge this exposure - The company is exposed to foreign currency risk, with approximately 38.0% of its combined cost of revenue and total operating expenses in Q3 2023 denominated in currencies other than the U.S. dollar[151] Sensitivity to 10% Currency Depreciation vs. USD (Q3 2023) | Currency | Impact on Income from Operations | | :--- | :--- | | Polish zloty (PLN) | +$0.9 million | | Mexican peso (MXN) | +$0.3 million | - The company does not currently hedge its foreign currency exposure but seeks to minimize it by matching expenses to revenues in the same currency where possible[150][155] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[156] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[157] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings, nor is it aware of any such contemplated actions against it - As of the filing date, the company is not currently a party to any material legal proceedings[160] Risk Factors This section outlines significant business risks, including client concentration, intense competition, macroeconomic and geopolitical impacts, talent retention, security breaches, and challenges related to global operations and technology adaptation - The company's revenues are highly dependent on a limited number of clients; the top 10 clients accounted for 56.8% of revenue in the first nine months of 2023[170] - The military action in Ukraine has affected and may continue to affect business operations, including service delivery and financial transactions[176] - The company faces intense competition from global consulting firms, traditional IT service providers, and digital transformation specialists[184][185] - Failure to attract, hire, and retain highly skilled IT professionals in a competitive market poses a significant risk to business operations and growth[188] - The company is exposed to risks from acquisitions, including difficulties with integration, diversion of management attention, and potential unforeseen liabilities, as seen with recent acquisitions of Daxx, Tacit, Mutual Mobile, and NextSphere[250] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of its equity securities during the reporting period - None[314] Default Upon Senior Securities The company reported no defaults upon its senior securities - None[316] Mine Safety Disclosures This item is not applicable to the company - None[317] Other Information During Q3, CFO Anil Doradla and CEO Leonard Livschitz adopted Rule 10b5-1 trading plans for the sale of company common stock - On August 30, 2023, CFO Anil Doradla adopted a Rule 10b5-1 trading arrangement for the sale of up to 92,084 shares of common stock[319] - On September 1, 2023, CEO Leonard Livschitz adopted a Rule 10b5-1 trading arrangement for the sale of between 260,000 and 685,638 shares of common stock[320] Exhibits This section lists the exhibits filed with the quarterly report, including CEO and CFO certifications and Interactive Data Files (XBRL) - The exhibits filed with the report include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL data files[324]