Grid Dynamics Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. The company provides digital engineering and IT consulting services, primarily to large enterprises. Its March 5, 2020 business combination with ChaSerg was accounted for as a reverse recapitalization, with Grid Dynamics International as the accounting acquirer; this affects comparability with prior periods.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $22.4 | $28.6 | $54.8 | $54.9 |
| Gross profit / margin | $8.4 / 37.5% | $11.4 / 39.9% | $18.2 / 33.2% | $21.8 / 39.7% |
| Operating income (loss) | $(3.2) | $4.8 | $(10.2) | $5.9 |
| Net income (loss) | $(2.2) | $3.5 | $(6.8) | $4.2 |
| GAAP diluted EPS | $(0.04) | $0.16 | $(0.17) | $0.20 |
| Adjusted EBITDA (non-GAAP) | $1.2 | $6.1 | $4.2 | $9.9 |
Q2 revenue fell 21.9% year over year and 31% sequentially. For the first half, revenue was nearly flat, down 0.1%. Management attributed the downturn to COVID-19-related customer demand weakness, especially in retail. Retail revenue fell 75% year over year in Q2 and represented 18% of revenue, compared with 50% in Q1. Non-retail revenue grew 46% year over year and 12% sequentially in Q2.
Cash and cash equivalents were $123.1 million at June 30, 2020, versus $42.2 million at year-end 2019. Current assets were $143.6 million and total liabilities $7.6 million; the filing reports no debt outstanding. First-half operating cash flow was $(0.9) million, investing cash flow $(1.1) million, and financing cash flow $82.9 million, primarily reflecting the business combination. Management said cash on hand was sufficient for expected operating, investing, and financing needs for at least 12 months from the filing date. $4.2 million of cash was held outside the United States.
Changes, unusual items, and management commentary
- Q2 gross margin declined 2.4 percentage points year over year; first-half gross margin declined 6.5 points. Lower revenue and higher stock-based compensation contributed. First-half costs also included retention bonuses associated with the business combination.
- Operating expenses rose 75.5% in Q2 and 79.0% for the first half. Stock-based compensation was $3.7 million in Q2 and $8.5 million in the first half, versus $0.2 million and $1.9 million, respectively, in 2019. It includes accelerated vesting charges at the transaction closing.
- The company recorded $0.8 million of restructuring expense in the first half, mostly employee termination costs, and implemented workforce and cost-reduction measures. Most employees worked remotely, with management reporting minimal disruption to service delivery.
- Management said retail recovery was expected to be slower than in other segments and that business visibility remained below pre-pandemic levels. The filing provides no numerical revenue or earnings guidance.
- Customer concentration remains significant: the top 10 customers accounted for 84% of Q2 revenue and 84% of first-half revenue. Three customers represented 55% of Q2 revenue.
- Receivables included an $0.8 million allowance for doubtful accounts at June 30, compared with $0.02 million at year-end 2019; management cited pandemic-related collection risks, while noting payments received from some higher-risk customers.
- The company disclosed an unremediated material weakness in financial reporting controls, relating to insufficient accounting resources and expertise. Management concluded disclosure controls were not effective as of June 30 and described staffing, ERP, and training remediation efforts; timing to complete remediation was not estimated.
- Foreign-exchange exposure is unhedged; operating costs are incurred in several Central and Eastern European currencies. Management also cited pandemic uncertainty, retail exposure, customer concentration, cybersecurity, talent retention, and legal and regulatory risks in its international markets.
Investor verification priorities
- Track retail and non-retail demand, customer project pauses, utilization, and the pace of any recovery.
- Monitor customer concentration, receivable collections, and changes in the doubtful-account allowance.
- Assess cash generation excluding the one-time business-combination financing inflow, and verify the durability of the stated 12-month liquidity outlook.
- Review the effect of stock-based compensation, retention bonuses, transaction costs, and restructuring on GAAP results and non-GAAP adjustments.
- Follow remediation of the material weakness and any further corrections or control findings. The filing also reports that Q1 2020 weighted-average shares and loss per share were corrected: quarterly loss per share changed from $(0.09) as issued to $(0.16) as corrected.