Grid Dynamics Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Grid Dynamics provides digital engineering and IT consulting services, primarily to large enterprises. On March 5, 2020, the company completed its business combination with Grid Dynamics International, Inc. (GDI), accounted for as a reverse recapitalization; GDI is the accounting predecessor. Results include ChaSerg’s net assets and operations only from the closing, so periods may not be fully comparable.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $32.5 million | $26.3 million | Up 23.5% |
| Gross profit / margin | $9.8 million / 30.2% | $10.3 million / 39.4% | Gross profit down 5.1%; margin down 9.2 percentage points |
| Operating income (loss) | $(7.0) million | $1.1 million | Operating expenses rose 81.5% to $16.9 million |
| Net income (loss) | $(4.6) million | $0.7 million | GAAP diluted loss per share was $(0.09), versus income per share of $0.04 |
| Adjusted EBITDA (non-GAAP) | $3.0 million; 9.4% margin | $3.9 million; 14.7% margin | Down from prior-year period |
| Adjusted net income / adjusted diluted EPS (non-GAAP) | $1.9 million / $0.04 | $2.5 million / $0.12 | Company also reports adjusted diluted EPS of $0.05 when adding back excess stock-compensation tax benefits |
| Operating cash flow | $(2.9) million | $6.9 million | Lower cash operating profit, retention-bonus payments and COVID-19 effects cited |
| Investing cash flow | $(0.7) million | $(0.2) million | Primarily capital expenditures |
| Financing cash flow | $82.9 million | $(2.0) million | Primarily business-combination proceeds, offset by cash paid to GDI shareholders and issuance costs |
At March 31, cash and cash equivalents were $121.5 million, versus $42.2 million at year-end 2019; current assets were $145.1 million and total liabilities were $9.8 million. The company reported no debt and stated its cash position was sufficient for expected needs for at least 12 months from the filing date. Total assets were $154.2 million. The quarter’s income tax benefit was $2.7 million.
Material changes and unusual items
- Revenue growth reflected higher business volume, including growth from existing and new customers. However, cost of revenue rose faster than revenue, reducing gross profit and margin.
- Management attributed the lower gross margin to stock-based compensation and retention bonuses associated with the business combination, lower March revenue amid COVID-19, and increased offshore delivery-center headcount.
- Q1 included $4.8 million of stock-based compensation, including $2.5 million from accelerated vesting at the transaction closing; $3.9 million of transaction and transformation-related costs; and $0.7 million of restructuring costs, primarily employee termination costs. The company also paid $3.4 million of accelerated retention bonuses before closing.
- The company recorded a $0.9 million increase in its allowance for doubtful accounts. Three customers represented 46% of revenue, and the top ten customers represented 86% of revenue.
- Following the combination, common shares outstanding increased to 50.8 million from 21.6 million at December 31, 2019. At quarter-end, 11.35 million warrants were outstanding, and the company had granted 1.55 million options and 2.31 million RSUs under its 2020 plan. Unrecognized stock-based compensation was approximately $24.5 million.
Outlook, risks and contingencies
- Management withdrew its previously announced 2020 guidance, citing the uncertain duration and magnitude of COVID-19 and reduced forecasting visibility. The filing gives no replacement guidance or clear quantitative outlook.
- COVID-19 effects included customer projects and statements of work placed on temporary hold, reduced project staffing, longer payment-term requests and greater exposure among retail customers. The company transitioned most employees to remote work and reported minimal disruption to service delivery; it also implemented salary and compensation cuts, a hiring freeze and travel restrictions.
- Key risks include customer and industry concentration, collections and credit exposure, economic weakness, utilization and staffing, foreign-exchange volatility, and political, regulatory and banking risks in Central and Eastern Europe. The company does not currently hedge foreign-currency exposure.
- The filing says no material legal proceedings were pending and no amounts were accrued for contingencies; management did not expect known contingencies to materially affect financial condition, liquidity or cash flows.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of March 31, 2020. Separately, the filing identifies an unremediated material weakness in internal control over financial reporting related to insufficient accounting resources and technical expertise; remediation steps were underway, with timing not estimated.
Important facts for investors to verify
- How COVID-19 affected revenue, project activity, customer payment behavior and the withdrawn 2020 guidance in subsequent periods.
- Whether gross margin and operating performance recover as transaction-related compensation, retention bonuses and restructuring costs subside.
- Customer concentration, receivables quality and adequacy of the doubtful-account allowance, especially for retail-exposed customers.
- Cash generation after the one-time business-combination financing proceeds, and the company’s stated 12-month liquidity assessment.
- Potential dilution and future compensation expense from warrants, options, RSUs, earnout shares and unrecognized stock-based compensation.
- Progress in remediating the material weakness in internal control over financial reporting.