Grid Dynamics Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2025

Forward-Looking Statements

The following discussion and analysis of the financial condition and results of operations of Grid Dynamics Holdings, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2024 included in the Company's Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on February 27, 2025.

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seek,” “intends,” “plans,” “estimates,” “projects,” “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward Looking Statements,” included elsewhere in this Quarterly Report on Form 10-Q, and the section titled "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K.

Overview

Grid Dynamics Holdings, Inc. (“Grid Dynamics,” “GDH,” the “Company,” “we,” “us,” or “our”) is a leading provider of technology consulting, platform and product engineering, and advanced analytics services. As a forefront provider of technology consulting, platform and product engineering services, and bespoke software development, we draw from over eight years of leadership in enterprise artificial intelligence (“AI”), coupled with profound expertise in cloud, data, and advanced analytics. Our commitment to engineering excellence, R&D leadership, a co-innovation ethos, globally efficient “Follow-the-Sun” delivery model, and an unwavering “whatever it takes” dedication to client success empower us to solve even the most complex enterprise challenges, ensuring profitable business outcomes and future-proof growth.

Established in 2006 and headquartered in Silicon Valley, Grid Dynamics partners with clients ranging from innovative start-ups to the largest companies in the world. Grid Dynamics believes the key to its success is a culture encouraging an unwavering “whatever it takes” dedication that puts client success over contract terms, products over projects, and real business results over pure technical innovation. With our proprietary processes optimized for innovation, emphasis on talent development, and technical expertise, we believe Grid Dynamics is well-positioned for continued success.

The following table sets forth a summary of Grid Dynamics’ financial results for the periods indicated:

(in thousands, except per share data and percentages)

(1) Non-GAAP EBITDA, Non-GAAP net income and Non-GAAP diluted EPS are non-GAAP financial measures. See “Non-GAAP Measures” below for additional information and reconciliations to the most directly comparable GAAP financial measures.

Quarterly Highlights

Our key metrics for the three months ended March 31, 2025 are presented below:

• Our revenues reached $100.4 million, an increase of 25.8% on a year-over-year basis.
• Our GAAP gross profit margin improved 2.1% compared to the prior year quarter and reached 36.8%. The increase was largely due to higher revenues and improved utilization.
• We recorded net income of $2.9 million compared to a net loss of $3.9 million in prior-year quarter.
• Our non-GAAP EBITDA reached $14.6 million, or 14.5% of revenues, compared to $10.3 million, or 12.9% of revenues, in the corresponding period of 2024.
• Operating cash inflows improved by $6.1 million compared to the prior-year quarter, reaching $9.4 million.

The results in any period are not necessarily indicative of the results that may be expected for any future period.

Business Update Regarding Military Action in Ukraine

In February 2022, Russian forces launched a significant military action against Ukraine, with progress by Russia over the past several months. The impact on Ukraine, coupled with the actions taken by other countries, including sanctions imposed by the U.S., Canada, the U.K., the European Union, and other countries, companies and organizations against officials, individuals, regions, and industries in Russia and certain regions of Ukraine, and each country’s potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations. For example, Russia could attempt to take control of assets in Ukraine belonging to companies registered in the U.S., such as Grid Dynamics. Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt our delivery of services, impair our ability to complete financial or banking transactions, cause us to continue to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region or involving certain customers in the region.

We continue to actively monitor the security of our personnel and the stability of our infrastructure, including communications and internet availability. We executed our business continuity plan and have adapted to developments as they occur to protect the safety of our people and handle potential impacts to our delivery infrastructure. We continue to actively work with our personnel and with our customers to meet their needs and to ensure smooth delivery of services.

We have no way to predict the progress or outcome of the military action in Ukraine or the chance and terms of any possible peaceful or other resolution of the war, as the conflict and government responses continue to develop and are beyond our control. Prolonged unrest, military activities, expansion of hostilities, or broad-based sanctions could have a material adverse effect on our operations and business outlook. For example, if Russia were to invade other countries, such as Moldova, it could adversely affect our business. In addition, the current geopolitical situations in Armenia and separately in Serbia create additional uncertainty in the region, and could adversely affect our business.

Key Performance Indicators and Other Factors Affecting Performance

Grid Dynamics uses the following key performance indicators and assesses the following factors, among others, to analyze its business performance, to make budgets and financial forecasts and to develop strategic plans:

Employees by Region

Attracting and retaining the right employees in the right regions is critical to the success of Grid Dynamics’ business and is a key factor in Grid Dynamics’ ability to meet customers’ needs and grow its revenue base. Grid Dynamics’ revenue prospects and long-term success depend significantly on its ability to recruit and retain qualified IT professionals. We seek to employ the appropriate professionals globally to support our “Follow-the-Sun” strategy of client service and in locations to optimize our employee costs and expenses. A substantial majority of Grid Dynamics’ personnel is comprised of such IT professionals.

The following table shows the number of Grid Dynamics personnel (including full-time and part-time employees and contractors serving in similar capacities) by region, as of the dates indicated:

(1) Americas includes personnel located in North, Central and South America.

(2) Europe includes personnel located in Western, Central and Eastern Europe.

(3) Rest of the world includes personnel located in India and other countries not included in regions described above.

Attrition

There is significant competition for IT professionals in the regions in which Grid Dynamics operates, and such competition may adversely impact Grid Dynamics’ business and gross profit margins. Employee retention is one of Grid Dynamics’ main priorities and is a key driver of our operational efficiency. Grid Dynamics seeks to retain top talent by providing the opportunity to work on exciting, cutting-edge projects for high profile clients, a flexible work environment and training and development programs.

Hours and Utilization

As most of Grid Dynamics’ customer projects are performed and invoiced on a time and materials basis, Grid Dynamics’ management tracks and projects billable hours as an indicator of business volume and corresponding resource needs for IT professionals. To maintain its gross profit margins, Grid Dynamics must effectively utilize its IT professionals, which depends on its ability to integrate and train new personnel, to efficiently transition personnel from completed projects to new assignments, to forecast customer demand for services and to attract and deploy personnel in the right regions with appropriate skills and seniority to projects. Grid Dynamics’ management generally tracks utilization with respect to subsets of employees, by location or by project, and calculates the utilization rate for each subset by dividing (x) the aggregate number of billable hours for a period by (y) the aggregate number of total available hours for the same period. Grid Dynamics’ management analyzes and projects utilization to measure the efficiency of its workforce and to inform management’s budget and personnel decisions.

Customer Concentration

Grid Dynamics’ ability to retain and expand its relationships with existing customers and add new customers are key indicators of its revenue potential. New customers have a direct impact on the Company’s ability to diversify sources of revenue and replace customers that may no longer require its services. As of March 31, 2025, the Company had 204 customers, a slight decrease from 210 a year ago.

Grid Dynamics has a relatively high level of revenue concentration with certain customers and constantly works toward decreasing those levels. During the three months ended March 31, 2025 and 2024, one customer accounted for 10% or more of Grid Dynamics’ revenues in each of the periods indicated. The Company expects to continue its focus on maintaining long-term relationships with customers while diversifying its customer base.

The following table presents revenue concentration by amount and as a percentage of Grid Dynamics’ revenues for the periods indicated:

(in thousands, except percentages)

Results of Operations

The three months ended March 31, 2025 compared to the three months ended March 31, 2024

The following table sets forth a summary of Grid Dynamics’ consolidated results of operations for the interim periods indicated, and the changes between periods:

(in thousands, except percentages)

Revenues

For the three months ended March 31, 2025, our total revenues showed significant growth of 25.8%, reaching $100.4 million, compared to $79.8 million in the same period of 2024. This growth was driven by a strong performance across multiple verticals, with notable contributions from Finance and Retail along with contributions from our recent acquisitions.

Revenues by Verticals. We assign our customers into one of our five main vertical markets or a group of various industries where we seek to increase our presence, which we label as “Verticals”. The following table presents our revenues by vertical and revenues as a percentage of total revenues for the periods indicated:

(in thousands, except percentages of revenues)

Retail continued to be our largest vertical, accounting for 31.4% of total revenues in the first quarter of 2025. Revenues from this vertical increased 28.0% on a year-over-year basis, reaching $31.5 million for the three months ended March 31, 2025. This growth was primarily driven by our specialty retail clients.

Our Finance vertical continued its strong performance, doubling revenues year-over-year for the third consecutive quarter. Revenues reached $25.0 million in the first quarter of 2025, up from $10.2 million in the corresponding period of 2024. The significant growth in this vertical was driven by increased demand from fintech and insurance customers, as well as contributions from our recent acquisitions that added global banking customers. As a result, Finance became our second largest vertical, contributing 24.9% of total revenues for the quarter.

The Technology, Media and Telecom (“TMT”) vertical remained relatively flat, generating $23.6 million and $24.0 million of revenues during the three months ended March 31, 2025 and 2024, respectively. While we experienced growth from our technology customers, it was offset by decreased demand from some of our telecom customers during the first quarter of 2025.

Revenues for the CPG and Manufacturing vertical increased 12.7% year-over-year, growing from $9.6 million in the first quarter of 2024 to $10.8 million during the current year period. This growth was driven by a combination of increased demand from existing customers and our recent acquisitions.

The Healthcare and Pharma vertical generated $2.4 million of revenues in the first quarter of 2025, representing 2.4% of total revenues, compared to $3.0 million, or 3.8%, of total revenues, in the prior-year period.

Lastly, our Other vertical declined 15.1% year-over-year with revenues of $7.1 million in the first quarter of 2025 compared to $8.3 million in the year-ago quarter. The decline was largely driven by decreased demand from a subset of customers tied to the hospitality industry. The Other vertical contributed 7.1% and 10.4% of total revenues for the three months ended March 31, 2025 and 2024, respectively.

Cost of Revenues and Gross Margin

Our cost of revenues consists primarily of salaries and employee benefits, including performance bonuses and stock-based compensation, and project-related travel expenses of client-serving professionals. Cost of revenues also includes depreciation and amortization expenses related to client-serving activities.

For the three months ended March 31, 2025, our cost of revenues was $63.4 million, an increase of $11.3 million, or 21.6%, compared to $52.2 million in the same period of 2024. The increase was primarily driven by higher headcount, including from our recent acquisitions.

Gross profit for the first quarter of 2025 increased 33.7% year-over-year to $37.0 million, primarily as a result of higher revenues and utilization levels. Expressed as a percentage of revenues, our gross margins improved by 2.1% to 36.8% for the three months ended March 31, 2025, from 34.7% in 2024.

Engineering, Research and Development

The principal components of engineering, research and development expenses are salaries and employee benefits, including performance bonuses and stock-based compensation for personnel engaged in the design and development of solutions, as well as depreciation and amortization expenses related to engineering, research and development activities.

Our engineering, research, and development expenses increased 48.4% during the first quarter of 2025 to $6.5 million compared to $4.4 million in the prior-year period. Growth primarily reflects our continued investments in customer delivery operations and internally developed software aimed at enhancing our long-term competitiveness.

Sales and Marketing

Sales and marketing expenses represent spending associated with promoting and selling our services. These expenses are comprised of personnel costs, including performance bonuses and stock-based compensation, marketing events, and travel expenses, as well as depreciation and amortization expenses related to such activities.

Our sales and marketing expenses showed modest growth of $1.0 million to $8.3 million for the three months ended March 31, 2025, compared to $7.3 million in the same period of 2024. Despite the increase in absolute dollars, our sales and marketing expenses, expressed as a percentage of revenues, decreased to 8.2% from 9.1% in the prior-year period.

General and Administrative

General and administrative expenses include costs to support the business and consist primarily of administrative personnel and officers’ salaries, employee benefits including performance bonuses, stock-based compensation, legal and audit expenses, insurance, operating lease expenses of office premises and other facility costs, workforce global mobility initiatives, restructuring and employee relocation costs not directly related to customer projects, and depreciation and amortization expenses related to such activities. General and administrative expenses include a substantial majority of Grid Dynamics’ stock-based compensation costs for the financial periods discussed herein.

General and administrative expenses increased by 12.8% to $24.3 million for the three months ended March 31, 2025, compared to $21.5 million in the prior-year period. The increase was primarily driven by increased costs associated with our recent acquisitions, which included expenses related to compensation, depreciation, amortization, and acquisition-related costs, partially offset by lower levels of stock-based compensation expenses. Expressed as a percentage of revenues, our general and administrative expenses decreased by 2.8% to 24.2% during the three months March 31, 2025, compared to 27.0% in the year-ago period.

Other Income, Net

Other income, net represents interest earned on our cash and cash equivalents, including money market funds, interest expense related to our borrowings, and foreign exchange gains and losses as well as changes in the fair value of contingent consideration and investments in equity securities.

Other income, net was $4.5 million for the first quarter of 2025, compared to $2.5 million in the prior-year period. The increase in other income, net during the first quarter of 2025 was primarily driven by the revaluation of acquisition-related contingent consideration liabilities and higher gains from investments in money market funds, partially offset by foreign currency headwinds.

(Benefit from)/Provision for Income Tax

Grid Dynamics follows the asset and liability method of accounting for income taxes. The provision for income taxes reflects income earned and taxed in the various U.S. federal and state and non-U.S. jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

During the three months ended March 31, 2025, we recognized an income tax benefit of $0.4 million compared to income tax expense of $0.9 million in the same period of 2024. The difference in the tax provision was attributable mainly to the income tax benefit for equity compensation during the first quarter of 2025 and the change from pre-tax loss to pre-tax income.

Non-GAAP Measures

To supplement Grid Dynamics’ consolidated financial data presented on a basis consistent with U.S. GAAP, this Quarterly Report contains certain non-GAAP financial measures, including Non-GAAP EBITDA, Non-GAAP net income and Non-GAAP diluted earnings per share, or EPS. Grid Dynamics has included these non-GAAP financial measures because they are financial measures used by Grid Dynamics’ management to evaluate Grid Dynamics’ core operating performance and trends, to make strategic decisions regarding the allocation of capital and new investments and are among the factors analyzed in making performance-based compensation decisions for key personnel. These measures exclude certain expenses that are required under U.S. GAAP. Grid Dynamics excludes these items because they are not part of core operations or, in the case of stock-based compensation, non-cash expenses that are determined based in part on Grid Dynamics’ underlying performance.

Grid Dynamics believes these supplemental performance measurements are useful in evaluating operating performance, as they are similar to measures reported by its public industry peers and those regularly used by security analysts, investors and other interested parties in analyzing operating performance and prospects. These non-GAAP financial measures are not intended to be a substitute for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.

There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies. Grid Dynamics compensates for these limitations by providing investors and other users of its financial information a reconciliation of non-GAAP measures to the related GAAP financial measures. Grid Dynamics encourages investors and others to review its financial information in its entirety, not to rely on any single financial measure and to view its non-GAAP measures in conjunction with GAAP financial measures.

Grid Dynamics defines and calculates its non-GAAP financial measures as follows:

• Non-GAAP EBITDA: Net income/(loss) before interest income/(expense), provision for income taxes and depreciation and amortization, and further adjusted for the impact of stock-based compensation expense, transaction-related costs (which include, when applicable, professional fees, retention bonuses, and consulting, legal and advisory costs related to Grid Dynamics’ merger and acquisition and capital-raising activities), impairment of long-lived assets, restructuring costs, one-time charges, and non-operating income/(expenses), net (which includes mainly foreign currency transaction gains and losses, fair value adjustments and other miscellaneous expenses).
• Non-GAAP net income: Net income/(loss) adjusted for the impact of stock-based compensation expense, transaction-related costs (which include, when applicable, professional fees, retention bonuses, and consulting, legal and advisory costs related to Grid Dynamics’ merger and acquisition and capital-raising activities), impairment of long-lived assets, restructuring costs, one-time charges, and non-operating income/(expenses), net (which includes mainly foreign currency transaction gains and losses, fair value adjustments and other miscellaneous expenses), and the tax impacts of these adjustments.
• Non-GAAP diluted EPS: Non-GAAP net income, divided by the diluted weighted-average number of diluted shares outstanding for the period.

The following table presents the reconciliation of Grid Dynamics’ Non-GAAP EBITDA to its GAAP net income/(loss), the most directly comparable GAAP measure, for the periods indicated:

(in thousands)

(1) Transaction and transformation-related costs include, when applicable, external deal costs, transaction-related professional fees, transaction-related retention bonuses, which are allocated proportionally across cost of revenues, engineering, research and development, sales and marketing and general and administrative expenses as well as other transaction-related costs including integration expenses consisting of outside professional and consulting services.

(2) Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(3) Our restructuring costs are comprised of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of income/(loss) and comprehensive income/(loss).

(4) Interest and other income, net consist primarily of gains and losses on foreign currency transactions, fair value adjustments, interest on cash held at banks and returns on investments in money-market funds, and other miscellaneous non-operating expenses.

The following table presents a reconciliation of Grid Dynamics’ Non-GAAP diluted EPS and its Non-GAAP net income to its GAAP net income/(loss) for the periods indicated:

(in thousands, except per share data)

(1) Transaction and transformation-related costs include, when applicable, external deal costs, transaction-related professional fees, transaction-related retention bonuses, which are allocated proportionally across cost of revenues, engineering, research and development, sales and marketing and general and administrative expenses as well as other transaction-related costs including integration expenses consisting of outside professional and consulting services.

(2) Geographic reorganization includes expenses connected with military actions of Russia against Ukraine and the exit plan announced by the Company and includes travel and relocation-related expenses of employees from the aforementioned countries, severance payments, allowances as well as legal and professional fees related to geographic repositioning in various locations. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(3) Our restructuring costs are comprised of severance charges and respective taxes, and are included in General and administrative expenses in the Company’s unaudited condensed consolidated statements of income/(loss) and comprehensive income/(loss).

(4) Other (income)/expense, net consists primarily of gains and losses on foreign currency transactions, fair value adjustments, and other miscellaneous non-operating income and expense. During the fourth quarter ended December 31, 2024, the Company started to include interest (income)/expense, net in its calculation of non-GAAP net income. As a result, the Company has adjusted previously reported Other expense, net adjustment to include interest income, net of $2.6 million for the three months ended March 31, 2024.

(5) Reflects the estimated tax impact of the non-GAAP adjustments presented in the table.

Liquidity and Capital Resources

We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital needs, capital expenditures, contractual obligations, and other commitments with cash flows from operations and other sources of funding. Our current liquidity needs relate mainly to compensation and benefits of our employees and contractors and capital investments to support our growth and geographical expansion. Our ability to expand and grow our business will depend on many factors including our capital expenditure needs and the evolution of our operating cash flows. We may need more cash resources due to changed business conditions or other developments, including investments or acquisitions.

Our principal source of liquidity continues to be cash generated from our operations. From time to time, we seek additional financing by means of follow-on public offerings of our common stock. The latest offering closed on November 14, 2024 and resulted in $107.6 million of net proceeds, after deducting underwriting discounts and commissions. Additionally, we entered into an agreement establishing a revolving credit facility with JPMorgan Chase Bank, N.A., as an administrative agent for the lenders. The revolving credit facility provides us with $30.0 million of available borrowing capacity. The maturity of this facility was recently extended to May 30, 2025. See Note 7 “Debt” in the notes to our condensed consolidated financial statements in “Part I. Item 1. Financial Statements (Unaudited)” of this Quarterly Report for information regarding our debt.

As of March 31, 2025, Grid Dynamics had cash and cash equivalents amounting to $325.5 million compared to $334.7 million at December 31, 2024. Of these amounts, $43.2 million and $38.6 million, respectively, were held outside the United States, and included Switzerland, the U.K., Netherlands, India, Argentina, Armenia, Mexico, Moldova, Poland and other countries. We did not have any debt outstanding under the revolving credit facility as of March 31, 2025. We believe that our cash and cash equivalents balance, cash generated from operating activities and proceeds from our November 2024 offering will be sufficient to fund currently expected levels of operating, investing and financing expenditures for a period of twelve months from the date of this filing. However, if our resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing, which may be subject to conditions outside of our control and may not be available on terms acceptable to our management or at all.

See Note 7 “Debt”, Note 9 “Leases” and Note 14 “Commitments and contingencies” in the notes to our condensed consolidated financial statements in “Part I. Item 1. Financial Statements (Unaudited)” of this Quarterly Report for detailed information on our contractual obligations and commitments.

Cash Flows

The following table summarizes Grid Dynamics’ cash flows for the periods indicated:

(in thousands)

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2025 increased by $6.1 million to $9.4 million from $3.2 million provided in the same period of 2024, driven by changes in working capital, including the timing of compensation payments to our employees and collections from customers.

Investing Activities. Net cash used in investing activities showed minimal changes year-over year, amounting to $3.3 million for the three months ended March 31, 2025 compared to $3.9 million in the same period of 2024. The majority of cash outflow was related to our capital expenditures and capitalized projects.

Financing Activities. Net cash used in financing activities in the three months ended March 31, 2025 was $15.8 million, and mainly reflected the tax withholding obligations due to the issuance of shares in connection with vested awards that were $8.7 million higher as compared to the first quarter of 2024.

Off-Balance Sheet Arrangements and Commitments

We do not have any material off-balance sheet commitments or contractual arrangements other than those disclosed in Note 9 “Leases” and Note 14 “Commitments and contingencies” of our condensed consolidated financial statements in “Part I. Item 1. Financial Statements (Unaudited)” of this Quarterly Report.

As a result of analysis related to Grid Dynamics’ functional control of its subcontractors, one subcontractor was determined to be a variable interest entity (“VIE”) and is therefore consolidated in Grid Dynamics’ financial statements. The assets and liabilities of this VIE consist primarily of intercompany balances and transactions, all of which have been eliminated in consolidation.

Recently Adopted and Issued Accounting Pronouncements

Recently issued and adopted accounting pronouncements are described in Note 1 to Grid Dynamics’ condensed consolidated financial statements in “Part I. Item 1. Financial Statements (Unaudited)” of this Quarterly Report.

Grid Dynamics has in the past and may in the future be exposed to certain market and credit risks in the ordinary course of business, including exposure related to fluctuations in foreign currency rates, and on occasion and to a lesser extent, changes in interest rates and concentration of credit risk. In addition, Grid Dynamics’ international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions. See "Part I. Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for additional information.

Foreign Currency Exchange Rate Risk

Grid Dynamics is exposed to foreign currency exchange transaction risk related to funding its non-US operations and to foreign currency translation risk related to certain of its subsidiaries’ cash balances that are denominated in currencies other than the U.S. dollar. In addition, Grid Dynamics’ profit margins are subject to volatility as a result of changes in foreign exchange rates. Grid Dynamics’ functional currency apart from the U.S. dollar includes Euro, British pounds, Mexican pesos, Moldovan leu, Polish zloty and Indian rupees. When and where possible, Grid Dynamics seeks to match expenses of each entity to currencies in which revenues are generated, creating a natural hedge. In future periods, Grid Dynamics may also become materially exposed to changes in the value of Serbian dinars and Moldovan leu against the U.S. dollar, due to expansion of operations in these countries.

In the three months ended March 31, 2025, approximately 46.1% of Grid Dynamics’ $102.5 million combined cost of revenues and total operating expenses were denominated in currencies other than the U.S. dollar. Comparatively, approximately 39.1% of Grid Dynamics’ $85.4 million of combined cost of revenues and total operating expenses were denominated in currencies other than the U.S. dollar in the three months ended March 31, 2024.

In the three months ended March 31, 2025:

• a 10% decrease in the value of the Polish zloty against the U.S. dollar would have resulted in a $1.4 million increase in Grid Dynamics’ income from operations, while a 10% increase in the zloty’s value would have resulted in a $1.7 million decrease in income from operations.
• a 10% decrease in the value of the Mexican peso against the U.S. dollar would have resulted in a $0.3 million increase in Grid Dynamics’ income from operations, while a 10% increase in the peso's value would have resulted in a $0.4 million decrease in income from operations.

In the three months ended March 31, 2024:

• a 10% decrease in the value of the Polish zloty against the U.S. dollar would have resulted in a $1.3 million increase in Grid Dynamics’ income from operations, while a 10% increase in the zloty’s value would have resulted in a $1.5 million decrease in income from operations.
• a 10% decrease in the value of the Mexican peso against the U.S. dollar would have resulted in a $0.4 million increase in Grid Dynamics’ income from operations, while a 10% increase in the peso’s value would have resulted in a $0.4 million decrease in income from operations.

Grid Dynamics analyzes sensitivity to the zloty and peso separately because, in management’s experience, fluctuations in the value of these currencies against the U.S. dollar are frequently driven by distinct macroeconomic and geopolitical factors and have the largest effect on our results.

Grid Dynamics does not currently hedge its foreign currency exposure, although it seeks minimize it by limiting cash transfers to amounts necessary to fund subsidiary operating expenses for a short period, typically one week. However, following a review of its foreign currency exposure, Grid Dynamics’ management expects to adopt and implement new hedging strategies in future periods.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Our management, including the Chief Executive Officer and Chief Financial Officer, confirmed there have been no changes in our internal control over financial reporting during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management to override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

For a discussion of our potential risks and uncertainties, see the risk factor below and the risk factors disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the SEC on February 27, 2025.

Trade Policy and Tariffs

While our operations are not directly impacted by recent tariffs, trade restrictions, or geopolitical tensions, many of our customers operate in the retail, CPG and technology sectors. Uncertainty in global trade policies, the imposition of significant tariffs, the escalation of trade disputes and the risk of recession could adversely affect our customers' business performance, budgets, and demand for our services, which in turn could negatively impact our business, financial condition, and results of operations.

The risks and uncertainties that we face are not limited to those set forth above and in our Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.