Grid Dynamics Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Grid Dynamics provides digital engineering and IT consulting services, primarily to Fortune 1000 companies. Its March 5, 2020 business combination with ChaSerg was accounted for as a reverse recapitalization, with Grid Dynamics International treated as the accounting predecessor; this affects period comparability.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $26.3 | $31.4 | $81.2 | $86.3 |
| Gross profit / margin | $11.2 / 42.4% | $13.8 / 43.9% | $29.4 / 36.2% | $35.6 / 41.2% |
| Operating income (loss) | $(1.7) | $5.6 | $(11.9) | $11.5 |
| Net income (loss) | $(1.1) | $4.5 | $(7.9) | $8.7 |
| Adjusted EBITDA (non-GAAP) | $4.2 | $7.0 | $8.4 | $17.0 |
| Adjusted diluted EPS (non-GAAP) | $0.05 | $0.23 | $0.11 | $0.55 |
For the nine months, operating cash flow was $3.0 million, versus $10.8 million in 2019; investing cash outflow was $1.6 million, mainly capital expenditures. Financing provided $82.9 million, primarily from the business combination. Cash and cash equivalents were $126.5 million at September 30, 2020, compared with $42.2 million at December 31, 2019. Total current assets were $147.8 million and total liabilities were $7.8 million. The company reported no debt outstanding and said cash was sufficient for expected operating, investing and financing needs for at least 12 months from the filing date.
Changes and management commentary
- Q3 revenue fell 16.2% year over year, while rising 18% sequentially from Q2. Management attributed the year-over-year decline mainly to COVID-19 effects on retail customers.
- Non-retail segments represented 77% of Q3 revenue, up 47% year over year and 10% sequentially. Retail represented 23%, up 53% sequentially but down 65% year over year; management said most retail customers remained below pre-pandemic levels.
- The customer base grew to 42 paying customers at quarter-end, from 35 a year earlier; five new customer relationships were added during Q3. The top ten customers still generated 78% of quarterly revenue.
- Higher operating expenses, particularly stock-based compensation, contributed to the shift from profit to loss. Q3 stock-based compensation was $5.1 million, versus $0.1 million a year earlier; nine-month expense was $13.6 million, versus $2.0 million. Management also cited lower revenue and retention bonuses in explaining weaker gross margins and cash operating profit.
- Adjusted EBITDA margin was 15.8% in Q3, down from 22.3% a year earlier. These are non-GAAP measures and exclude specified items, including stock-based compensation; they should be considered alongside GAAP results.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said customer trends improved during Q3 but the business had not returned to pre-COVID revenue and profitability levels; pandemic duration and effects remained uncertain.
- The company reduced its doubtful-account allowance from $0.8 million at June 30 to $0.4 million at September 30 after collecting from several customers, including higher-risk retail customers. It continued to identify collection risk as a concern.
- A restructuring plan focused on utilization resulted in $0.9 million of expenses paid in the first nine months, primarily employee termination costs. The business combination also involved substantial transaction-related and retention-bonus costs; $3.4 million of previously outstanding retention bonuses were accelerated and paid before closing.
- Management disclosed a material weakness in internal control over financial reporting, and concluded disclosure controls were not effective at September 30. The weakness involved insufficient accounting resources and experience; remediation efforts included finance hires, an ERP implementation and enhanced processes, but completion timing was uncertain.
- Other key risks include customer and industry concentration, reliance on skilled personnel and utilization, foreign-exchange exposure (not currently hedged), operations in Central and Eastern Europe, and cybersecurity, privacy and regulatory risks. Management reported no material legal proceedings and no amounts accrued for contingencies.
- Equity compensation may create dilution and cash needs: the company estimated approximately $7.1 million of share-settlement tax withholding in Q1 2021 under an assumed share price of $7.73; actual amounts would depend on settlement share prices and awards.
Important facts for investors to verify
- Whether revenue, retail demand and profitability continued recovering after Q3, and whether non-retail growth offset retail weakness.
- How much of reported operating-cost growth and margin pressure reflects recurring operations versus stock-based compensation, retention bonuses and transaction-related items.
- Customer concentration, receivable collections and the adequacy of the doubtful-account allowance.
- Progress in remediating the material weakness and whether disclosure controls and financial reporting have become effective.
- Cash flow generation and expected cash requirements, including equity-award tax withholding, alongside the company’s stated 12-month liquidity assessment.