Grid Dynamics(GDYN) - 2020 Q4 - Annual Report

PART I Business Grid Dynamics is a global digital engineering and IT services provider specializing in enterprise-level digital transformations - Grid Dynamics completed a business combination on March 5, 2020, and began trading on NASDAQ under GDYN[20] - The company acquired Netherlands-based Daxx Web Industries B.V. on December 14, 2020, to expand its European presence[24] Revenue by Industry Vertical (2018-2020) | Vertical | 2020 Revenue ($ thousands) | 2020 % of Revenue | 2019 Revenue ($ thousands) | 2019 % of Revenue | 2018 Revenue ($ thousands) | 2018 % of Revenue | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Tech, Media and Telecom | $45,362 | 40.8% | $32,337 | 27.3% | $23,485 | 25.6% | | Retail | $33,975 | 30.5% | $67,367 | 56.9% | $58,544 | 63.7% | | Finance | $13,589 | 12.2% | $12,479 | 10.6% | $8,089 | 8.8% | | CPG/Manufacturing | $14,202 | 12.8% | $4,850 | 4.1% | $1,330 | 1.4% | | Other | $4,155 | 3.7% | $1,293 | 1.1% | $417 | 0.5% | | Total | $111,283 | 100.0% | $118,326 | 100.0% | $91,865 | 100.0% | - The company employs a "land and expand" sales strategy, targeting 85% revenue from long-term clients, 10% from mid-term, and 5% from new clients[54][55] - As of December 31, 2020, the company had 1,894 personnel across six countries, primarily in Central and Eastern Europe engineering centers[50][62] Risk Factors The company faces significant risks from client concentration, market downturns, competition, international operations, and regulatory compliance - Revenue concentration is high, with the top 10 clients accounting for 79% of 2020 revenue, and the top two clients each exceeding 10%[87] - The COVID-19 pandemic negatively impacted revenues, especially the retail segment, with most retail customer revenues not returning to pre-pandemic levels[92] - Intense competition stems from emerging digital services firms, large global consulting firms, India-based IT providers, and clients' in-house IT departments[64][98] - Operations in Russia, Ukraine, Poland, and Serbia expose the company to significant legal, economic, tax, and political risks[126][128][130] - The company is subject to evolving data privacy laws like GDPR and CCPA/CPRA, imposing stringent requirements and potential penalties[178][179] - A material weakness in internal controls over financial reporting, identified in 2019, was remediated as of December 31, 2020[121][122][123][124] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties Grid Dynamics leases 12 facilities totaling approximately 140,000 square feet across six countries, with principal executive offices in San Ramon, California - The company leases all its facilities, totaling approximately 140,000 square feet across 12 locations in six countries[223] - Engineering centers are located in the U.S., Poland, Serbia, Ukraine, the Netherlands, and Russia[223] Legal Proceedings The company is not currently a party to any material legal or governmental proceedings - Grid Dynamics is not currently a party to any material legal proceedings[225] Mine Safety Disclosures This item is not applicable to the company - Not applicable PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under GDYN since March 2020, with 53.8 million shares outstanding and no dividends expected - Common stock began trading on NASDAQ under GDYN on March 6, 2020[229] - As of February 28, 2021, 53,802,690 shares of common stock were outstanding[6][230] - The company has not paid cash dividends and does not expect to declare any, intending to retain all earnings for business operations[231] Selected Financial Data This section is not applicable as the company has elected not to provide this information - None Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue decreased to $111.3 million due to COVID-19's impact on Retail, offset by TMT growth, resulting in a net loss Financial Highlights (2018-2020) | Metric | 2020 ($ million) | 2019 ($ million) | 2018 ($ million) | | :--- | :--- | :--- | :--- | | Revenues | $111.3M | $118.3M | $91.9M | | Gross Profit | $41.6M | $48.2M | $39.3M | | Income/(loss) from operations | $(15.4)M | $15.6M | $13.8M | | Net income/(loss) | $(12.6)M | $10.8M | $9.2M | | Diluted EPS | $(0.28) | $0.49 | $0.46 | | Adjusted EBITDA | $12.5M | $23.7M | $19.4M | - The Retail vertical revenue declined by approximately 50% year-over-year in 2020 due to COVID-19 disruptions, from $67.4 million in 2019 to $34.0 million in 2020[243][279] - The Technology, Media & Telecom (TMT) vertical grew by 40% year-over-year, becoming the largest vertical at 41% of 2020 revenue[242] - General and administrative expenses increased by 76.9% to $37.7 million in 2020, primarily due to $11.1 million in stock-based compensation and retention bonuses[284] - The company ended 2020 with $112.7 million in cash and cash equivalents and no outstanding debt[297][298] Cash Flow Summary (2018-2020) | Cash Flow Activity ($ thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $5,932 | $12,534 | $10,584 | | Net cash used in investing activities | $(18,339) | $(2,811) | $(3,079) | | Net cash provided by financing activities | $82,967 | $14,604 | $0 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is foreign currency exchange rate risk, with significant operating expenses denominated in Russian rouble, Ukrainian hryvnia, and Polish zloty - The company is exposed to foreign currency risk as a significant portion of operating expenses are in Russian roubles, Ukrainian hryvnia, and Polish zloty, while revenues are in U.S. dollars[326][327] - A hypothetical 10% decrease in the Russian rouble against the USD in 2020 would have increased income from operations by $1.6 million, and a 10% decrease in the Polish zloty by $1.1 million[328] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018-2020, including balance sheets, income statements, equity statements, cash flows, and notes Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $112,745 | $42,189 | | Total current assets | $134,616 | $66,015 | | Goodwill | $14,690 | $0 | | Total assets | $167,135 | $71,531 | | Liabilities and Equity | | | | Total current liabilities | $13,318 | $8,300 | | Total liabilities | $15,411 | $8,300 | | Total stockholders' equity | $151,724 | $54,044 | Consolidated Statement of Income/(Loss) Summary (in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $111,283 | $118,326 | $91,865 | | Gross profit | $41,621 | $48,236 | $39,306 | | Total operating expenses | $57,069 | $32,611 | $25,477 | | Income/(loss) from operations | $(15,448) | $15,625 | $13,829 | | Net income/(loss) | $(12,599) | $10,807 | $9,228 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that internal control over financial reporting and disclosure controls were effective as of December 31, 2020, following the remediation of a 2019 material weakness - A material weakness related to a lack of sufficient resources with U.S. GAAP expertise, identified prior to 2020, was remediated as of December 31, 2020[481][483] - Remediation included hiring a new CFO and Global Controller, additional qualified accounting personnel, and implementing a new ERP system[483] - Management, including the CEO and CFO, concluded that internal control over financial reporting and disclosure controls were effective as of December 31, 2020[485][486] Other Information The company reports no other information for this item - None PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the upcoming Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement[492] Executive Compensation Information regarding executive compensation is incorporated by reference from the upcoming Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement[494] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the upcoming Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement[495] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the upcoming Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement[496] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the upcoming Definitive Proxy Statement - Information is incorporated by reference from the company's upcoming Proxy Statement[497] PART IV Exhibit and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K - This section lists all financial statements and exhibits filed with the Form 10-K[500][501] Form 10-K Summary The company has not provided a summary for this item - None