ITEM
1. BUSINESS
Business
Combination
On
March 5, 2020, a wholly-owned subsidiary (“Merger Sub 1”) of ChaSerg Technology Acquisition Corp., a Delaware corporation
(“ChaSerg”), merged with and into Grid Dynamics International, Inc., a California corporation (“GDI”),
with GDI surviving the merger (the “Initial Merger”). Immediately following the Initial Merger, GDI merged with and
into another wholly-owned subsidiary of ChaSerg (“Merger Sub 2”) with Merger Sub 2 surviving; Merger Sub 2 was then
renamed “Grid Dynamics International, LLC,” and ChaSerg was then renamed “Grid Dynamics Holdings, Inc.”
(the “Business Combination”). As of the open of trading on March 6, 2020, the common stock and warrants of Grid Dynamics
Holdings, Inc. (“Grid Dynamics,” “GDH,” the “Company,” “we,” “us,”
or “our”), formerly those of ChaSerg, began trading on the NASDAQ as “GDYN” and “GDYNW,” respectively.
Business
Overview
Grid
Dynamics is an emerging leader in enterprise-level digital transformations in Fortune 1000 companies. For enterprises that create
innovative digital products and experiences, Grid Dynamics offers close collaboration to provide digital transformation initiatives
that span strategy consulting, development of early prototypes and enterprise-scale delivery of new digital platforms. Since its
inception in 2006 in Menlo Park, California, as a grid and cloud consultancy firm, Grid Dynamics has been on the forefront of
digital transformation, working on big ideas like cloud computing, NOSQL, DevOps, microservices, big data and artificial intelligence
(“AI”), and quickly established itself as a provider of choice for technology and digital enterprise companies.
As
a leading global digital engineering and information technology (“IT”) services provider with its headquarters in
Silicon Valley and engineering centers in the United States and multiple Central and Eastern European countries, Grid Dynamics’
core business is to deliver focused and complex technical consulting, software design, development, testing and internet service
operations. Grid Dynamics also helps organizations become more agile and create innovative digital products and experiences through
its deep expertise in emerging technology, such as AI, data science, cloud computing, big data and DevOps, lean software development
practices and a high-performance product culture.
Grid Dynamics believes that the key to
its success is a business culture that puts products over projects, client success over contract terms and real business results
over pure technical innovation. By leveraging Grid Dynamics’ proprietary processes optimized for innovation, emphasis on
talent development and technical expertise, Grid Dynamics has been able to achieve significant growth, increasing our revenue from
$91.9 million for the year ended December 31, 2018 to $111.3 million for the year ended December 31, 2020, a 21% increase, although
revenue for 2020 decreased 6% from $118.3 million for the year ended December 31, 2019 mostly due to disruptions caused to our
Retail Vertical which was negatively impacted by the COVID-19 pandemic.
On December 14, 2020,
we acquired Netherland-based Daxx Web Industries B.V. (“Daxx”) in an all-cash transaction. Headquartered in Amsterdam,
and with 492 employees, Daxx has engineering centers situated in major tech hubs across Ukraine. Daxx has over 20 years of experience
in delivering software services to clients across a wide range of industry verticals that include high-tech, digital media, healthcare,
and education. Some of the key capabilities include consulting services spanning agile process reengineering, lean development,
and DevOps. Daxx serves customers in the Netherlands, Germany, U.K., and U.S., and has strong relationships with high-growth start-ups
and established software companies. We believe the acquisition of Daxx will enable our company to have a stronger foothold in Europe
and will enable us to continue diversifying our business.
Industry
Background and Market Opportunity
Digital
transformation is a rapidly expanding market which is still in its early stages. Enterprises strive to compete in the digital
world, facing the need to transform to survive attacks from the nimbler and more technologically advanced newcomers. Traditional
approaches to managing information technology as a mix of vendor solutions and outsourced services often break down in the face
of the imperative to innovate through technology.
Increasingly,
business executives are looking at use of technology as a competitive advantage rather than a way to cut costs. The rise of AI
signifies a shift from automation of business process to automation of decision making itself. In an effort to differentiate,
corporations are directing investments towards building digital new products and experiences, instead of buying off-the-shelf
software products. This drives demand for highly technical software development, creating an opportunity for pure-play software
development service providers such as Grid Dynamics.
As the demand for technical software development
talent continues to grow, the shortage of this talent in the United States and Europe, as well as the inability of non-technology-based
companies to attract and retain such talent, encourages organizations to look to third parties, such as Grid Dynamics, to satisfy
the demand.
Further, the growing acceptance of the offshore delivery model,
beyond the traditional India-based IT services provider, has created significant opportunities for software development service
providers delivering from CEE. CEE-based service providers now compete against the largest global IT service providers and are
capable of providing complex technology services. Grid Dynamics believes that CEE is increasingly known for the quality of its
software development talent, enabled in part by decades of focus on fundamental STEM disciplines in higher education. CEE-based
teams and individuals are frequent winners of programming contests such as the ones held by the Association for Computing Machinery,
or ACM, TopCoder and Kaggle.
Grid
Dynamics believes that this disparity between the supply and demand for technical talent can be a significant opportunity for
Grid Dynamics.
Strategies
and Strengths
Grid
Dynamics’ objective is to become a global leader in enabling digital transformation at Fortune 1000 companies. Grid Dynamics’
strategy to achieve such objective is based on leveraging the following core strengths.
Proprietary
Processes Optimized for Innovation
Grid
Dynamics recognizes the changing dynamics of IT outsourcing. Increasingly, corporations expect their service providers to participate
and help shape innovation programs, which are not addressed well by the traditional service models used by outsourcing providers.
Grid Dynamics melds technical consulting, engineering and analytics competencies into unified, cross-functional digital teams
which are designed to respond and adapt to the change in the client’s business. The effectiveness of such teams is further
increased by a close collaboration with the client’s technology leadership teams and active inquiry into client’s
business priorities on all levels.
Culture-First
Approach to Talent Development
The
ever-increasing role of digital transformation leads to the emergence of a new kind of business leader that combines a vision
of business transformation with deep understanding of information technology. Earning the trust of these leaders is one of the
pillars of Grid Dynamics’ success. Grid Dynamics selects, trains and promotes its technical leadership based on the following
cultural principles.
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Global
integration. Demands of modern businesses transcend cultural, political and language boundaries. Grid
Dynamics builds teams which are transparently distributed across countries, time zones and reporting lines. Decisions on hiring,
staffing and promotion are all managed centrally from Grid Dynamics’ U.S. offices, allowing Grid Dynamics to optimize for
quality rather than convenience.
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Partnership
with client. Grid Dynamics demands accountability and ownership of the client’s success, whether
or not such success is a contractual matter. Understanding Grid Dynamics clients’ goals and ability to manage such goals
across reporting lines is a must for any leadership role within Grid Dynamics. Therefore, Grid Dynamics places a significant proportion
of its IT personnel at client sites and offers team members temporary assignments to client locations through fellowships.
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Technological
innovation. Understanding digital transformation and successfully delivering IT programs is impossible
without a strong understanding of emerging technology. Deep knowledge of how new technology, such as cloud, big data and AI, transforms
the way corporations develop their businesses is a pre-requisite for leadership roles in Grid Dynamics.
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Education.
Grid Dynamics believes that technology changes rapidly, and it is critical for Grid Dynamics ‘employees to adapt even
more rapidly. Grid Dynamics offers many formal and informal training programs, such as Grid University, an online education
platform with thousands of hours of training videos, to ensure that professionals can expand and enhance their
capabilities.
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Technical Expertise
and Scalable Engineering
Grid
Dynamics believes in strong infrastructure underpinning mission-critical services. From its inception, Grid Dynamics has
been focusing on developing and using its expertise in the latest technologies, such as AI and conversational systems, cloud engineering
solutions, data platform, data science and analytical data platforms, DevOps, MLOps, microservices, mobile, QA automation, search
and user interfaces. By making such emerging technologies accessible to clients through the use of proprietary skill development
programs, industry experience and solution accelerators, Grid Dynamics seeks to strengthen its position as a technical leader
with its established clients and attract new clients.
Services
and Solutions
In
the rapidly evolving market of engineering and IT services, customers are increasingly looking for service providers that can
be a co-innovation partner rather than a cost saving measure. Grid Dynamics addresses this need by focusing on high value, high
impact services. The key service and solutions offerings are the following:
Technical
Consulting
Grid
Dynamics provides technical consulting services to help executives in charge of digital transformation define an ambitious, yet
achievable roadmap, quantify business value attained through new technology, select the right technology stack, develop reference
architecture and guide the transformational journey every step of the way.
Lean
Prototypes
Grid
Dynamics helps enterprises prototype and test new ideas. This includes both proof-of-concept implementations, which can be rapidly
put in front of the end users to verify business assumptions, as well as sophisticated, long-running labs that cross organizational
walls to establish feasibility and de-risk large transformational programs. Self-sufficient teams move quickly, use the latest
technologies and aim to solve the business use case to demonstrate measurable value to the business stakeholders.
Digital
Intelligence
Grid
Dynamics helps corporations transform from automation of business processes to automation of decision making. To this end, Grid
Dynamics deploys data science approaches to analyze client challenges and arrive at a strategy which produces measurable outcomes.
This continuous “analyze-assess-decide-measure” cycle becomes the foundation of AI programs, leveraging the latest
technologies to constantly react to real-time changes in consumer behavior.
Scalable
Engineering
Grid
Dynamics believes in strong infrastructure underpinning mission-critical services. From inception, Grid Dynamics engineers pushed
the boundaries of IT performance, developing a strong expertise in distributed systems. Grid Dynamics’ experience in cloud,
NoSQL, big data, grid computing and performance engineering helps its clients go beyond the capabilities provided by off-the-shelf
products.
Development
Culture
Grid
Dynamics helps clients to contain and rearchitect legacy platforms as a part of the digital transformation journey. A significant
factor in the success of legacy transformation is the robustness of the process of breaking down and reassembling monolithic systems
into smaller, more manageable pieces. Grid Dynamics has a deep expertise in building agile teams, which are adept at realizing
incremental value through a cycle of continuous delivery enabled by automated quality and security assurance. Grid Dynamics offers
its clients services that help enable continuous integration, continuous delivery and DevOps at enterprise scale.
Experience
Design
Grid
Dynamics helps clients achieve higher rates of conversion and end user satisfaction by improving the service experience across
engagement channels. This includes transformation of the web user interfaces to a responsive/adaptive model, design and development
of next-gen mobile applications as well as leveraging new channels of engagement such as conversational interfaces.
Verticals
Grid Dynamics has strong vertical-specific
domain knowledge backed by extensive experience. By merging technology with business processes, Grid Dynamics delivers tailored
solutions in several key industry verticals: Retail, Technology, Consumer Packaged goods (CPG)/manufacturing, and Finance.
Technology
Grid Dynamics has a strong presence in the digital technology
sector, particularly among analytics, SaaS and platform vendors which are driven by a constant need for innovation. Grid Dynamics’
long-lasting expertise in complex open-source technology and in building massively scalable distributed systems, the company-wide
culture of agile co-creation as well as a deep understanding of digital commerce have enabled Grid Dynamics to build strong business
relationships with the leading players in this sector. For example, Grid Dynamics has been providing software engineering, continuous
delivery and deployment automation, machine learning, internal tool development and quality engineering services to one of the
largest cloud services providers, becoming one of their key technological services partners.
Retail
By
utilizing Grid Dynamics’ deep expertise in the digital retail space and providing a mix of consulting and engineering services,
Grid Dynamics enables its clients to win market share, shorten time to market and reduce costs of digital operations. For example,
Grid Dynamics has worked closely with a large U.S. retail company over a span of many years to develop a strategic omnichannel
transformation program and became a key contributor to the development of a new omnichannel platform including consumer experience,
product discovery, analytics and inventory optimization.
CPG/Manufacturing
Grid
Dynamics helps its manufacturing customers to harness digital transformation by applying novel approaches to engage the consumers
directly and optimize the back-end supply chain. For example, Grid Dynamics accelerated digital transformation in a global CPG
company by building direct-to-consumer capabilities, modernizing an omnichannel pricing engine, and optimizing operational efficiency
with modern data analytics and AI.
Finance
In
the early days of Grid Dynamics, the financial sector recognized it for the ability to tackle high-end technology programs, such
as moving from the batch to real-time fraud detection. Today, Grid Dynamics has evolved from a niche provider to a proven partner
able to enable agility and time to market in the most challenging regulatory environments. For example, a major commercial bank
chose Grid Dynamics to solve the challenge of evolving its security frameworks to realize benefits from cloud and DevOps.
The
following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:
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Year ended December 31,
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(dollars in thousands, except per share data)
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2020
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2019
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2018
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% of revenue
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% of revenue
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% of revenue
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Tech, Media and Telecom
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$
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45,362
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40.8
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%
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$
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32,337
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27.3
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%
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$
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23,485
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25.6
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%
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Retail
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33,975
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30.5
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%
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67,367
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56.9
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%
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58,544
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63.7
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%
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Finance
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13,589
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12.2
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%
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12,479
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10.6
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%
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8,089
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8.8
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%
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CPG/Manufacturing
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14,202
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12.8
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%
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4,850
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4.1
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%
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1,330
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1.4
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%
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Other (1)
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4,155
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3.7
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%
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1,293
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1.1
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%
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417
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0.5
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%
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Total
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$
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111,283
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100.0
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%
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$
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118,326
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100.0
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%
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$
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91,865
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100.0
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%
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Delivery
Model and Operating Structure
Our service delivery model involves using
an efficient mix of on-site, off-site and offshore staffing. We believe that the combination of our delivery model optimized for
co-innovation and the placement of our technology leaders at clients’ premises creates a key competitive advantage that enables
us to better understand and meet a client’s diverse needs.
The majority of Grid Dynamics’ engineering personnel is
located within Grid Dynamics’ engineering centers in the United States and CEE. As of December 31, 2020, Grid Dynamics had
1,894 full-time and part-time personnel and delivered services from 12 engineering centers in the following locations:
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San
Ramon, California, United States - Global Headquarters
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Plano,
Texas, United States
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Grid
Dynamics also places a significant proportion of its IT professionals at client premises and promotes temporary assignments to
client locations.
Quality
and Process Management
Grid Dynamics enforces stringent security standards and has
maintained a continuous ISO 27001:2013 certification since August 2014. All key company locations, departments and teams are within
the scope of the deployed information security management system.
Grid Dynamics policies, standards and procedures are reviewed
annually during both internal and external certification audits. Grid Dynamics has successfully passed seven ISO 27001:2013 audits,
as well as over a dozen exhaustive audits from top financial services customers.
Sales
and Marketing
Grid Dynamics’ sales and marketing
strategy focuses on increasing revenues from new and existing clients through a “land and expand” strategy. Grid Dynamics’
technology leaders deployed at clients’ premises play an integral role in identifying, developing and expanding potential
business opportunities. This strategy has been effective both in deepening relationships with existing clients and increasing the
number of Grid Dynamics’ clients.
Grid Dynamics has an “85/10/5”
strategy where 85% of projected revenue is expected from clients with whom we have worked for over two years, 10% from clients
with whom we have worked for one to two years and 5% from clients with whom we have worked for less than a year.
Grid Dynamics focuses its business development
efforts in the North American market. We believe the acquisition of Daxx will
enable our company to have a stronger foothold in Europe and to continue diversifying our business.
Grid Dynamics also maintains a dedicated
sales force as well as a marketing team, which coordinates corporate-level branding efforts that range from sponsorship of programming
competitions to participation in and hosting of industry conferences and events.
Customers
Grid Dynamics’ client base primarily consists of Fortune
1000 corporations based in North America. With the acquisition of Daxx in December 2020, we have gained customers
in the Netherlands, Germany, U.K., as well as the U.S.
Grid Dynamics has a high level of revenue concentration with
certain clients. In the year ended December 31, 2020 Grid Dynamics top two customers each accounted for 10% or more of Grid Dynamics
revenue. In the year ended December 31, 2019 Grid Dynamics top three customers each accounted for 10% or more of Grid Dynamics’
revenue.
Grid
Dynamics typically enters into a master services agreement with its clients, which provides a framework for services that is then
supplemented by statements of work, which specify the particulars of each individual engagement.
Competition
Grid
Dynamics faces competition from both global IT services providers as well as those based in CEE. Grid Dynamics believes that the
principal competitive factors in its business include technical expertise and industry knowledge, culture, reputation and track
record for high-quality and on-time delivery of work, effective employee recruiting, training and retention, responsiveness to
clients’ business needs and financial stability.
Grid
Dynamics faces competition primarily from:
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emerging mid-cap digital services companies, such as Globant and Endava;
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large global consulting and outsourcing firms, such as Accenture plc, Atos Origin, Capgemini SE, DXC and IBM, and EPAM Systems.
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India-based technology outsourcing IT services providers, such as Cognizant Technology Solutions Corporation, GlobalLogic, HCL Technologies, Infosys Technologies, Mindtree, Sapient, Symphony Technology Group, Tata Consultancy Services Limited, and Wipro; and
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in-house IT departments of Grid Dynamics’ clients and potential clients; and
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Daxx primary competitors are Andersen Lab, Ciklum, and SoftServe, Inc., with respect to our Daxx business
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Given
Grid Dynamics’ focus on complex digital transformation programs, technical employee base and the development and continuous
improvement in new software technology, Grid Dynamics believes that it is well positioned to compete effectively in the future.
Human
Capital and Employees
People
are critical to the success of Grid Dynamics. Accordingly, attracting and retaining employees is a key factor in Grid Dynamics’
ability to grow revenues and meet its clients’ needs. As of December 31, 2020, Grid Dynamics had 1,894 personnel across
six countries (the U.S., the Netherlands, Poland, Serbia, Russia and Ukraine).
Recruitment
and Retention
Grid Dynamics hires both for technical
skills and cultural fit. The reality of the changing technological landscape demands that our engineering personnel are able to
continuously acquire new proficiencies and skills.
Grid Dynamics’ hiring program is driven by demand within
current and projected clients. Projections of client demand are constantly reviewed to ensure that we maintain a proper recruiting
and training pipeline. The geographical spread helps Grid Dynamics to shorten the time to identify and recruit top technical talent.
Grid Dynamics targets the top 10% of technical talent from top technical universities. Nearly 100% of Grid Dynamics’ engineering
personnel have advanced degrees in computer science.
To
attract, retain and motivate IT professionals, Grid Dynamics seeks to provide an environment and culture that rewards entrepreneurial
initiative and performance. In addition, Grid Dynamics offers a challenging work environment, ongoing skills development initiatives
and attractive career advancement and promotion opportunities.
Grid
Dynamics believes that it maintains a good working relationship with its employees and has not experienced any labor disputes.
Grid Dynamics’ employees have not entered into any collective bargaining agreements.
Training
and Development
Grid
Dynamics dedicates significant resources to the training and development of its technical leaders. The company believes in the
importance of supporting educational initiatives and sponsors employees’ participation in internal and external training
and certifications.
Every
year Grid Dynamics delivers hundreds of courses in emerging technologies to its engineers using the Grid University online education
platform. Employees can also take advantage of educational and certification programs offered by the technology leaders both in
open-source as well as in proprietary spaces.
Furthermore,
through Grid Dynamics, deep relationships with top local universities, forged over years of collaboration, and specialized recruiting
programs, Grid Dynamics can scale the hiring and staffing of new engineering teams to support complex technical programs.
Grid
Dynamics also provides ongoing English language training at all of its delivery centers to maintain and enhance the English language
skills of its IT professionals.
Management
Training Programs
Grid
Dynamics offers support, training and mentoring programs to managers through the Grid Dynamics Manager Training School. Various
courses in project management and leadership skills help managers build strong teams through positive work environment, group
inspiration and individual motivation.
Internships
Grid
Dynamics has a long-standing tradition of running internship programs for students and junior engineers. The company opens its
doors to young, promising engineers who are ready for a life-changing career of working on complex projects in big data, machine
learning, AI and other emerging technologies.
Each
intern works with a mentor who helps them adapt, shares knowledge and supports them in developing the necessary skills.
Intellectual
Property
Protection
of intellectual property rights is paramount to Grid Dynamics and its clients. Grid Dynamics relies on a combination of trade
secret, patent, copyright and trademark laws as well as confidentiality procedures and contractual provisions to protect its intellectual
property. Grid Dynamics requires its employees, independent contractors, vendors and clients to enter into written confidentiality
agreements upon the commencement of their relationships with Grid Dynamics. These agreements generally provide that any confidential
or proprietary information disclosed or otherwise made available by Grid Dynamics must be kept confidential.
Grid
Dynamics customarily enters into non-disclosure agreements with its clients with respect to the use of their software systems
and platforms. Grid Dynamics’ clients usually own the intellectual property in the software or systems Grid Dynamics develops
for them. Furthermore, Grid Dynamics usually grants a perpetual, worldwide, royalty-free, nonexclusive, transferable and non-revocable
license to its clients to use its preexisting intellectual property to the extent necessary in order to use the software or systems
Grid Dynamics developed for them.
Grid
Dynamics and its clients often use open-source software to improve quality and reduce time-to-market. Grid Dynamics works with
the compliance departments of its clients to comply with the client’s open-source licensing policies.
Regulations
Due
to the industry and geographic diversity of Grid Dynamics’ operations and services, Grid Dynamics’ operations are
subject to a variety of laws and regulations in the United States, Russia, Ukraine and other CEE countries. See Item 1A, “Risk
Factors—Risks Related to Government Regulations”.
Available Information
We are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, file Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, with the Securities and Exchange Commission (the “SEC”). In addition, the
SEC maintains a website (http://www.sec.gov) that contains material regarding issuers that file electronically, such as ourselves,
with the SEC.
We maintain a website at www.griddynamics.com, to which we regularly
post copies of our press releases as well as additional information about us. Our filings with the SEC will be available free of
charge through the website as soon as reasonably practicable after being electronically filed with or furnished to the SEC. Information
contained in our website is not a part of, nor incorporated by reference into, this Report or our other filings with the SEC, and
should not be relied upon.
ITEM
1A. RISK FACTORS
This
Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risk factors
set forth below. The risks and uncertainties described in this Annual Report on Form 10-K are not the only ones we face. Additional
risks and uncertainties not presently known to us or that we currently believe are immaterial may also affect our business. See
the section titled “Special Note Regarding Forward-Looking Statements” of this Annual Report on Form 10-K for a discussion
of the forward-looking statements that are qualified by these risk factors. If any of these known or unknown risks or uncertainties
actually occurs and have a material adverse effect on us, our business, financial condition and results of operations could be
seriously harmed.
Summary
of Risk Factors
Our
business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described
below. The principal factors and uncertainties that make investing in our company risky include, among others:
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We
have a relatively short operating history and operate in a rapidly evolving industry, which makes it difficult to evaluate our
future prospects and may increase the risk that we will not continue to be successful and may adversely impact our stock price.
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We
may be unable to effectively manage our growth or achieve anticipated growth, which could place significant strain on our management
personnel, systems and resources.
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Our
revenues have historically been highly dependent on a limited number of clients and industries that are affected by seasonal trends,
and any decrease in demand for outsourced services in these industries may reduce our revenues and adversely affect our business,
financial condition and results of operations.
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The
impact of the COVID-19 pandemic has and may continue to affect our overall financial performance, business operations, and stock
price.
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Our
revenues are highly dependent on clients primarily located in the U.S. Any economic downturn in the U.S. or in other parts of
the world, including Europe, or disruptions in the credit markets may have a material adverse effect on our business, financial
condition and results of operations.
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We
face intense competition.
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Damage
to our reputation may adversely impact our ability to generate and retain business.
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Our
failure to successfully attract, hire, develop, motivate and retain highly skilled personnel could have a significant adverse
effect on our business, financial condition, and results of operations.
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Our
business operations may be severely disrupted if we lose the services of our senior executives and key employees.
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Failure
to adapt to changing technologies, methodologies, and evolving industry standards may have a material adverse effect on our business,
financial condition, and results of operations.
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Security
breaches, system failures or errors, and other disruptions to our network could result in disclosure of confidential information
and expose us to liability, which would cause our business and reputation to suffer.
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Undetected
software design defects, errors or failures may result in loss of business or in liabilities that could have a material adverse
effect on our reputation, business and results of operations.
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Acquisitions,
strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management,
disrupt our business, dilute stockholder value and adversely affect our financial condition and results of operations, we may
not achieve the financial and strategic goals that were contemplated at the time of a transaction, and we may be exposed to claims,
liabilities and disputes as a result of the transaction that may adversely impact our business, operating results and financial
condition.
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Risks
Related to Our Business, Operations and Industry
We
have a relatively short operating history and operate in a rapidly evolving industry, which makes it difficult to evaluate future
prospects and may increase the risk that we will not continue to be successful and may adversely impact our stock price.
We
were founded in 2006 and have a relatively short operating history in the technology services industry, which is competitive and
continuously evolving, subject to rapidly changing demands and constant technological developments. As a result, success and performance
metrics are difficult to predict and measure. Since services and technologies are rapidly evolving and each company within the
industry can vary greatly in terms of the services it provides, its business model and its results of operations, it can be difficult
to predict how any company’s services, including ours, will be received in the market.
While
many Fortune 1000 enterprises, including our clients, have been willing to devote significant resources to incorporate emerging
technologies and related market trends into their business models, they may not continue to spend any significant portion of their
budgets on services like those provided by us in the future. Neither our past financial performance nor the past financial performance
of any other company in the technology services industry is indicative of how we will fare financially in the future. Our future
profits may vary substantially from those of other companies and our past profits, making an investment in us risky and speculative.
If clients’ demand for our services declines as a result of economic conditions, market factors or shifts in the technology
industry, our business, financial condition and results of operations would be adversely affected.
As
a recently formed public company, our stock performance is highly dependent on our ability to successfully execute and grow the
business. Consequently, our stock price may be adversely impacted by our inability to execute to our plan, our inability to meet
or exceed forward looking financial forecasts, and our inability to achieve our stated short-term and long-term goals.
We
may be unable to effectively manage our growth or achieve anticipated growth, which could place significant strain on our management
personnel, systems and resources.
Continued
growth and expansion may increase challenges we face in recruiting, training and retaining sufficiently skilled professionals
and management personnel, maintaining effective oversight of personnel and delivery centers, developing financial and management
controls, coordinating effectively across geographies and business units, and preserving our culture and values. Failure to manage
growth effectively could have a material adverse effect on the quality of the execution of our engagements, our ability to attract
and retain IT professionals, as well as our business, financial condition and results of operations.
In
addition, as we increase the size and complexity of projects that we undertake with clients, add new delivery sites, introduce
new services or enter into new markets, we may face new market, technological, operational, compliance and administrative risks
and challenges, including risks and challenges unfamiliar to us. We may not be able to mitigate these risks and challenges to
achieve our anticipated growth or successfully execute large and complex projects, which could materially adversely affect our
business, prospects, financial condition and results of operations.
Our
revenues have historically been highly dependent on a limited number of clients and industries that are affected by seasonal
trends, and any decrease in demand for outsourced services in these industries may reduce our revenues and adversely affect
our business, financial condition and results of operations.
Our
revenues have historically been highly dependent on a limited number of clients. In 2020, we generated a significant portion of
our revenues from our largest clients. For example, we generated approximately 79% and 87% of our revenue from our 10 largest
clients during the year ended December 31, 2020 and 2019. Our top two clients each accounted for 10% or more of our revenue during
the year ended December 31, 2020 and our top three clients each accounted for 10% or more of our revenue during the year ended
December 31, 2019. Since a substantial portion of our revenue is derived through time and materials contracts, which are mostly
short-term in nature, a major client in one year may not provide the same level of revenues for us in any subsequent year. In
addition, a significant portion of our revenues is concentrated in our top two industry verticals: technology and retail. Our
growth largely depends on our ability to diversify the industries in which we serve, continued demand for our services from clients
in these industry verticals and other industries that we may target in the future, as well as on trends in these industries to
outsource the type of services we provide.
Our
business is also subject to seasonal trends that impact our revenues and profitability between quarters, driven by the timing
of holidays in the countries in which we operate and the U.S. retail cycle, which drives the behavior of several of our retail
clients. Excluding the impact of growth in our book of business, we have historically recorded higher revenue and gross profit
in the second and third quarters of each year compared to the first and fourth quarters of each year. The Christmas holiday season
in Russia and Ukraine, for example, falls in the first quarter of the calendar year, resulting in reduced activity and billable
hours of our engineering personnel. In addition, many of our retail sector clients tend to slow their discretionary spending during
the holiday sale season, which typically lasts from late November (before Thanksgiving) through late December (after Christmas).
Such seasonal trends may cause reductions in our profitability and profit margins during periods affected.
A
reduction in demand for our services and solutions caused by seasonal trends, downturns in any of our targeted industries, a slowdown
or reversal of the trend to outsource IT services in any of these industries or the introduction of regulations that restrict
or discourage companies from outsourcing may result in a decrease in the demand for our services and could have a material adverse
effect on our business, financial condition and results of operations.
The
impact of the COVID-19 pandemic has and may continue to affect our overall financial performance, business operations, and stock
price.
In December 2019, a novel coronavirus COVID-19
was reported in China, and in March 2020, the World Health Organization declared it a pandemic. This contagious disease pandemic
has continued to spread across the globe and is impacting worldwide economic activity and financial markets, significantly increasing
economic volatility and uncertainty. In response to this global pandemic, local, state, and federal governments have been prompted
to take unprecedented steps that include, but are not limited to, travel restrictions, closure of businesses, social distancing,
and quarantines.
From March 2020 onwards, we started witnessing
the impacts of the COVID-19 pandemic to our revenues, largely as a consequence of the effect of the pandemic on the business conditions
at some of our customers’ operations. The impacts have been more pronounced at our customers exposed to the retail segment
where store closures resulted in sales being severely impacted. Although we witnessed sequential
growth in this segment in the second half of 2020, revenues from most of our retail customers have not come back to pre-COVID-19
levels. The impact of the pandemic to other segments of our business has largely been determined by customer-specific dynamics.
The ongoing COVID-19 pandemic may pose risks in the future to our business as some of our customers are unable to recover to pre-COVID
19 levels of operation. Examples of the COVID-19 pandemic’s impact to our business have included a temporary scale back to
our personnel on projects, our customers placing projects and SOWs on temporary hold, and request for longer payment terms. Additionally,
because more of our personnel are working remotely, we face increased cyber threats that may affect our systems and networks or
those of our clients and contractors, and we anticipate the potential for increased costs to maintain and help secure our infrastructure
and data.
There are no comparable recent events which
may provide guidance as to the effect of the spread and the ultimate impact of the COVID-19 pandemic. Consequently, the total magnitude
of impact to our business and duration of impact is uncertain and difficult to reasonably estimate at this time.
We continue to take precautionary measures
intended to minimize the risk of the virus to our employees, our customers, and the communities in which we operate that include
suspension of all non-essential travel. All of our facilities in the Central and Eastern Europe (“CEE”) region have
been opened for employees to work following local government guidelines. That said, the COVID-19 pandemic has placed restrictions
in movement, and the majority of our employees continue to work remotely. Additionally, we have been successful in transitioning
the majority of our workforce to work remotely and this has resulted in minimal disruption in our ability to deliver services to
our customers.
In the three months ended December 31, 2020, our allowance for
doubtful accounts was $0.4 million and we continue to be engaged with all of our customers regarding their ability to fulfill their
payment obligations. We continue to review our accounts receivable on a regular basis and have put in place regular review and
processes to ensure payments from our customers.
Our
revenues are highly dependent on clients primarily located in the U.S. Any economic downturn in the U.S. or in other parts of
the world, including Europe, or disruptions in the credit markets may have a material adverse effect on our business, financial
condition and results of operations.
The
IT services industry is particularly sensitive to the economic environment and tends to decline during general economic downturns.
We derive the majority of our revenues from clients in the U.S. In the event of an economic downturn in the U.S. or in other parts
of the world, including Europe (where we have gained customers in the Netherlands, Germany
and the U.K. through our acquisition of Daxx in December 2020), our existing and prospective clients may reduce or postpone
their technology spending significantly, which may in turn lower the demand for our services and may have a material adverse effect
on our business, financial condition and results of operations. In addition, if a disruption in the credit markets were to occur,
it could pose a risk to our business if clients or vendors are unable to obtain financing to meet payment or delivery obligations
to us or if we are unable to obtain necessary financing. The COVID-19 pandemic has had adverse effects on economies and financial
markets globally, which have particularly impacted many small, medium as well as large-sized businesses. Although the U.S. government
and others throughout the world have or have taken steps to provide monetary and fiscal assistance to individuals and businesses
affected by the pandemic, it is unclear whether these government actions will be sufficient to successfully avert or mitigate
any economic downturn. Any economic downturn resulting from the COVID-19 pandemic and preventative measures taken by governments
and private business worldwide could decrease technology spending and negatively affect demand for our offerings, which could
materially adversely affect our business, prospects, financial condition and results of operations.
We
face intense competition.
The market for technology and IT services
is highly competitive and subject to rapid change and evolving industry standards and we expect competition to persist and intensify.
We face competition from offshore IT services providers in other outsourcing destinations with low wage costs such as India, China,
CEE countries and Latin America, as well as competition from large, global consulting and outsourcing firms and in-house IT departments
of large corporations. Industry clients tend to engage multiple IT services providers instead of using an exclusive IT services
provider, which could reduce our revenues to the extent that our clients obtain services from competing companies. Industry clients
may prefer IT services providers that have more locations or that are based in countries that are more cost-competitive, stable
and/or secure than some of the emerging markets in which we operate.
Our primary competitors include IT service providers such as
Andersen Lab, Ciklum, EPAM Systems, Inc., Globant S.A. and Endava plc; global consulting and traditional IT services companies,
such as Accenture plc, Capgemini SE, Cognizant Technology Solutions Corporation, SoftServe, Inc. and Tata Consultancy Services
Limited; and in-house development departments of our clients. Many of our present and potential competitors have substantially
greater financial, marketing and technical resources, and name recognition than we do. Therefore, they may be able to compete more
aggressively on pricing or devote greater resources to the development and promotion of technology and IT services and we may be
unable to retain our clients while competing against such competitors. Increased competition as well as our inability to compete
successfully may have a material adverse effect on our business, prospects, financial condition and results of operations.
Damage
to our reputation may adversely impact our ability to generate and retain business.
Since
our business involves providing tailored services and solutions to clients, we believe that our corporate reputation is a significant
factor when an existing or prospective client is evaluating whether to engage our services as opposed to those of our competitors.
In addition, we believe that our brand name and reputation also play an important role in recruiting, hiring and retaining highly
skilled personnel.
However,
our brand name and reputation is potentially susceptible to damage by factors beyond our control, including actions or statements
made by current or former clients and employees, competitors, vendors, adversaries in legal proceedings, government regulators
and the media. There is a risk that negative information about us, even if untrue, could adversely affect our business. Any damage
to our reputation could be challenging to repair, could make potential or existing clients reluctant to select us for new engagements,
could adversely affect our recruitment and retention efforts, and could also reduce investor confidence.
Our
failure to successfully attract, hire, develop, motivate and retain highly skilled personnel could have a significant adverse
effect on our business, financial condition, and results of operations.
Our continued growth and success and operational
efficiency is dependent on our ability to attract, hire, develop, motivate and retain highly skilled personnel, including IT engineers
and other technical personnel, in the geographically diverse locations in which we operate. Competition for highly skilled IT professionals
can be intense in the regions in which we operate, and we may experience significant employee attrition rates due to such competition.
While our management targets a voluntary attrition rate (expressed as a percentage) no higher than in the low-twenties, the significant
market demand for highly skilled IT personnel and competitors’ activities may induce our qualified personnel to leave and
make it more difficult for us to recruit new employees with suitable knowledge, experience and professional qualifications. High
attrition rates of IT personnel would increase our operating costs, including hiring and training costs, and could have an adverse
effect on our ability to complete existing contracts in a timely manner, meet client objectives and expand our business. Failure
to attract, hire, develop, motivate and retain personnel with the skills necessary to serve our clients could decrease our ability
to meet and develop ongoing and future business and could materially adversely affect our business, financial condition and results
of operations.
Our
business operations may be severely disrupted if we lose the services of our senior executives and key employees.
Our
success depends substantially upon the continued services of our senior executives and other key employees. If we lose the services
of one or more of such senior executives or key employees, our business operations can be disrupted, and we may not be able to
replace them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and
we may be unable to retain our senior executives and key personnel or attract and retain new senior executives and key personnel
in the future, in which case our business may be severely disrupted.
Failure
to adapt to changing technologies, methodologies, and evolving industry standards may have a material adverse effect on our business,
financial condition, and results of operations.
We
operate in an industry characterized by rapidly changing technologies, methodologies and evolving industry standards. Our future
success depends in part upon our ability to anticipate developments in our industry, enhance our existing services and to develop
and introduce new services to keep pace with such changes and developments and to meet changing client needs.
Development
and introduction of new services and products is expected to become increasingly complex and expensive, involve a significant
commitment of time and resources, and subject to a number of risks and challenges, including:
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difficulty
or cost in updating services, applications, tools and software and in developing new services quickly enough to meet clients’
needs;
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difficulty
or cost in making some features of software work effectively and securely over the Internet or with new or changed operating systems;
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difficulty
or cost in updating software and services to keep pace with evolving industry standards, methodologies, regulatory and other developments
in the industries where our clients operate; and
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difficulty
or cost in maintaining a high level of quality and reliability as we implement new technologies and methodologies.
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We
may not be successful in anticipating or responding to these developments in a timely manner, and even if we do so, the services,
technologies or methodologies we develop or implement may not be successful in the marketplace. Furthermore, services, technologies
or methodologies that are developed by competitors may render our services non-competitive or obsolete. Our failure to adapt and
enhance our existing services and to develop and introduce new services to promptly address the needs of our clients may have
a material adverse effect on our business, financial condition and results of operations.
Security
breaches, system failures or errors, and other disruptions to our network could result in disclosure of confidential information
and expose us to liability, which would cause our business and reputation to suffer.
We
often have access, or are required, to collect, process, transmit and store sensitive or confidential client and customer data,
including intellectual property, proprietary business information of Grid Dynamics and our clients, and personally identifiable
information of our clients, customers, employees, contractors, service providers, and others. We use our data centers and networks,
and certain networks and other facilities and equipment of our contractors and service providers, for these purposes. Despite
our security measures, our information technology and infrastructure may be vulnerable to attacks and disruptions by hackers or
other third parties or otherwise may be breached due to human error, phishing attacks, social engineering, malfeasance or other
disruptions. During the COVID-19 pandemic, because more of our personnel are working remotely, we face increased risks of such
attacks and disruptions that may affect our systems and networks or those of our clients and contractors. Any such breach or disruption
could compromise our data centers, networks and other equipment and the information stored or processed there could be accessed,
disclosed, altered, misappropriated, lost or stolen. In addition, any failure or breach of security in a client’s system
relating to the services we provide could also result in loss or misappropriation of, or unauthorized access, alteration, use,
acquisition or disclosure of sensitive or confidential information, and may result in a perception that we or our contractors
or service providers caused such an incident, even if Grid Dynamics’ and our contractors’ networks and other facilities
and equipment were not compromised.
Our
contractors and service providers face similar risks with respect to their facilities and networks used by us, and they also may
suffer outages, disruptions, and security incidents and breaches. Breaches and security incidents suffered by us and our contractors
and service providers may remain undetected for an extended period. Any such breach, disruption or other circumstance leading
to loss, alteration, misappropriation, or unauthorized use, access, acquisition, or disclosure of sensitive or confidential client
or customer data suffered by us or our contractors or service providers, or the perception that any may have occurred, could expose
us to claims, litigation, and liability, regulatory investigations and proceedings, cause us to lose clients and revenue, disrupt
our operations and the services provided to clients, damage our reputation, cause a loss of confidence in our products and services,
require us to expend significant resources to protect against further breaches and to rectify problems caused by these events,
and result in significant financial and other potential losses.
Our errors and omissions insurance covering
certain damages and expenses may not be sufficient to compensate for all liability. Although we maintain insurance for liabilities
incurred as a result of certain security-related damages, we cannot be certain that our coverage will be adequate for liabilities
actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any
insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds
available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition
of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial
condition, results of operations, and reputation.
Undetected
software design defects, errors or failures may result in loss of business or in liabilities that could have a material adverse
effect on our reputation, business and results of operations.
Our services involve developing software
solutions for our clients and we may be required to make certain representations and warranties to our clients regarding the quality
and functionality of our software. Given that our software solutions have a high degree of technological complexity, they could
contain design defects or errors that are difficult to detect or correct. We cannot provide assurances that, despite testing by
us, errors or defects will not be found in our software solutions. Any such errors or defects could result in litigation, other
claims for damages against us, the loss of current clients and loss of, or delay in, revenues, loss of market share, a failure
to attract new clients or achieve market acceptance, diversion of development resources, increased support or service costs, as
well as reputational harm and thus could have a material adverse effect on our reputation, business, prospects, financial condition
and results of operations.
We do not have long-term commitments
from our clients, and our clients may terminate contracts before completion or choose not to renew contracts.
Our
clients are generally not obligated for any long-term commitments to us. Although a substantial majority of our revenues are generated
from repeated business, which we define as revenues from a client who also contributed to our revenues during the prior year,
our engagements with our clients are typically for projects that are singular in nature. In addition, our clients can terminate
many of our master services agreements and work orders with or without cause, and in most cases without any cancellation charge.
Therefore, we must seek to obtain new engagements when our current engagements are successfully completed or are terminated as
well as maintain relationships with existing clients and secure new clients to expand our business.
There are a number
of factors relating to our clients that are outside of our control which might lead them to terminate a contract or project with
us, including:
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financial difficulties for the client;
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a change in strategic priorities, resulting in elimination of the impetus for the project or a reduced level of technology spending;
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a change in outsourcing strategy resulting in moving more work to the client’s in-house technology departments or to our competitors;
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the replacement by our clients of existing software with packaged software supported by licensors; and
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mergers and acquisitions or significant corporate restructurings.
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Failure
to perform or observe any contractual obligations could result in cancellation or non-renewal of a contract, which could cause
us to experience a higher than expected number of unassigned employees and an increase in our cost of revenues as a percentage
of revenues, until we are able to reduce or reallocate our headcount. The ability of our clients to terminate agreements makes
our future revenues uncertain. We may not be able to replace any client that elects to terminate or not renew its contract with
us, which could materially adversely affect our revenues and thus our results of operations.
In addition, some of our agreements specify that if a change
of control of our company occurs during the term of the agreement, the client has the right to terminate the agreement. If any
future event triggers any change-of- control provision in our client contracts, these master services agreements may be terminated,
which would result in loss of revenues.
Failure
to successfully deliver contracted services or causing disruptions to clients’ businesses may have a material adverse effect
on our reputation, business, financial condition, and results of operations.
Our business is dependent on our ability
to successfully deliver contracted services in a timely manner. Any partial or complete failure of our equipment or systems, or
any major disruption to basic infrastructure like power and telecommunications in the locations in which we operate, could impede
our ability to provide contracted services to our clients. In addition, if our professionals make errors in the course of delivering
services to our clients or fail to consistently meet the service requirements of a client, these errors or failures could disrupt
the client’s business. Any failure to successfully deliver contracted services or causing disruptions to a client’s
business, including the occurrence of any failure in a client’s system or breach of security relating to the services provided
by us, may expose us to substantial liabilities and have a material adverse effect on our reputation, business, financial condition
and results of operations.
Additionally, our clients may perform audits
or require us to perform audits and provide audit reports with respect to the IT and financial controls and procedures that we
use in the performance of services for our clients. Our ability to acquire new clients and retain existing clients may be adversely
affected and our reputation could be harmed if we receive a qualified opinion, or if we cannot obtain an unqualified opinion in
a timely manner, with respect to our controls and procedures in connection with any such audit. We could also incur liability if
our controls and procedures, or the controls and procedures we manage for a client, were to result in an internal control failure
or impair our client’s ability to comply with its own internal control requirements. If we or our partners fail to meet our
contractual obligations or otherwise breach obligations to our clients, we could be subject to legal liability, which may have
a material and adverse effect on our reputation, business, financial condition, and results of operations.
We
rely on software, hardware and SaaS technologies from third parties that may be difficult to replace or that may cause errors
or defects in, or failures of, our services or solutions.
We
rely on software and hardware from various third parties as well as hosted SaaS applications from third parties to deliver our
services and solutions. If any of these software, hardware or SaaS applications become unavailable due to loss of license, extended
outages, interruptions, or because they are no longer available on commercially reasonable terms, there may be delays in the provisioning
of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated,
which could increase our expenses or otherwise harm our business. Furthermore, any errors or defects in or failures of third-party
software, hardware or SaaS applications could result in errors or defects in or failures of our services and solutions, which
could be costly to correct and have an adverse effect on our reputation, business, financial condition and results of operations.
Existing
insurance coverage and limitation of liability provisions in service contracts may be inadequate to protect us against losses.
We
maintain certain insurance coverage, including professional liability insurance, director and officer insurance, property insurance
for certain of our facilities and equipment, and business interruption insurance for certain of our operations. However, we do
not insure for all risks in our operations and if any claims for injury are brought against us, or if we experience any business
disruption, litigation or natural disaster, we might incur substantial costs and diversion of resources.
Most
of the agreements we have entered into with our clients require us to purchase and maintain specified insurance coverage during
the terms of the agreements, including commercial general insurance or public liability insurance, umbrella insurance, product
liability insurance, and workers’ compensation insurance. Some of these types of insurance are not available on reasonable
terms or at all in some countries in which we operate.
Our
liability for breach of our obligations is in some cases limited under client contracts. Such limitations may be unenforceable
or otherwise may not protect us from liability for damages. In addition, our existing contracts may not limit certain liabilities,
such as claims of third parties for which we may be required to indemnify our clients. The successful assertion of one or more
large claims against us in amounts greater than those covered by our current insurance policies could materially adversely affect
our business, financial condition and results of operations. Even if such assertions against us are unsuccessful, we may incur
reputational harm and substantial legal fees.
If we are not able to maintain an
effective system of internal control over financial reporting, current and potential investors could lose confidence in our financial
reporting, which could harm our business and have an adverse effect on our stock price. Management identified a material weakness
in our internal controls over financial reporting in 2019 and although this material weakness has since been remediated, we cannot
provide assurances that additional material weaknesses, or significant deficiencies, will not occur in the future.
Any
failure to maintain effective internal controls over our financial reporting could materially and adversely affect us. Section
404 of the Sarbanes-Oxley Act requires us to include in our annual reports on Form 10-K an assessment by management of the effectiveness
of our internal controls over financial reporting. In addition, we will be required to have our independent public accounting
firm attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting
when we cease qualifying as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act (the
“JOBS Act”). If we are unable to conclude that we have effective internal control over financial reporting or, if
our independent auditors are unable to provide us with an attestation and an unqualified report as to the effectiveness of our
internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which
could result in a decrease in the value of our securities.
In
2019, management identified a material weakness in our internal control over financial reporting. A material weakness is defined
as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Subsequent
to the original issuance of the private company financial statements for the year ended December 31, 2018, we identified balances
that were accounted for or presented incorrectly under U.S. GAAP relating to stock-based compensation and the presentation of
retention bonuses and depreciation on the consolidated statement of income and comprehensive income.
The
material weakness identified was a lack of sufficient resources with appropriate depth and experience to interpret complex accounting
guidance and prepare financial statements and related disclosures in accordance with U.S. GAAP.
We
have taken steps to enhance our internal control environment, including hiring a new Chief Financial Officer in December 2019,
hiring a Global Controller in May 2020, and hiring additional qualified accounting and financial reporting personnel. Additionally,
our new enterprise resource planning system, which has been implemented in phases since January 2020, has enhanced our internal
controls over financial reporting. Given a combination of increased personnel, greater automation with software systems, and implementation
of more detailed processes and procedures over the course of the year ended December 31, 2020, management considers this material
weakness to have been remediated as of December 31, 2020.
If
additional material weaknesses, or significant deficiencies, in internal controls are discovered in the future, they may adversely
affect our ability to record, process, summarize and report financial information in a timely and accurate manner and, as a result,
our financial statements may contain material misstatements or omissions.
Our
global business, especially in CIS and CEE countries, exposes us to significant legal, economic, tax and political risks.
We
have significant operations in certain emerging market economies, which creates legal, economic, tax and political risks. Risks
inherent in conducting international operations include:
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less
established legal systems and legal ambiguities, inconsistencies and anomalies;
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changes in laws and regulations;
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application
and imposition of protective legislation and regulations relating to import or export, including tariffs, quotas and other trade
protection measures;
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difficulties
in enforcing intellectual property and/or contractual rights;
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bureaucratic
obstacles and corruption;
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compliance
with a wide variety of foreign laws, including those relating to privacy and data protection;
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restrictions on the repatriation of dividends
or profits;
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expropriation or nationalization of property;
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restrictions on currency convertibility
and exchange controls;
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fluctuations
in currency exchange rates;
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potentially
adverse tax consequences;
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competition
from companies with more experience in a particular country or with international operations;
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civil strife;
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unstable
political and military situations; and
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overall
foreign policy and variability of foreign economic conditions, including the effects of the COVID-19 pandemic.
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The
legal systems of Russia, Ukraine, Poland and Serbia, where we have significant operations, are often beset by legal ambiguities
as well as inconsistencies and anomalies due to the relatively recent enactment of many laws that may not always coincide with
market developments. Furthermore, legal and bureaucratic obstacles and corruption exist to varying degrees in each of these countries.
In such environments, our competitors may receive preferential treatment from governments, potentially giving them a competitive
advantage. Governments may also revise existing contract rules and regulations or adopt new ones at any time and for any reason,
and government officials may apply contradictory or ambiguous laws or regulations in ways that could materially adversely affect
our business and operations in such countries. Any of these changes could impair our ability to obtain new contracts or renew
or enforce contracts under which we currently provide services. Any new contracting methods could be costly or administratively
difficult for us to implement, which could materially adversely affect our business and operations. We cannot guarantee that regulators,
judicial authorities or third parties in Russia, Ukraine, Poland and Serbia will not challenge our (including our subsidiaries’)
compliance with applicable laws, decrees and regulations. In addition to the foregoing, selective or arbitrary government actions
may include withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions, all of which could
have a material adverse effect on our business, financial condition and results of operations.
The
banking and other financial systems in certain Commonwealth of Independent States (“CIS”) and CEE countries where
we operate remain subject to periodic instability and generally do not meet the banking standards of more developed markets. A
financial crisis or the bankruptcy or insolvency of banks through which we receive, or with which we hold, funds may result in
the loss of our deposits or adversely affect our ability to complete banking transactions in that region, which could materially
adversely affect our business and financial condition.
Furthermore,
existing tensions and the emergence of new or escalated tensions in CIS and CEE countries could further exacerbate tensions between
such countries and the U.S. Such tensions, concerns regarding information security, and potential imposition of additional sanctions
by the U.S. and other countries may discourage existing or prospective clients to engage our services, have a negative effect
on our ability to develop or maintain our operations in the countries where we currently operate, and disrupt our ability to attract,
hire and retain employees. The occurrence of any such event may have a material adverse effect on our business, financial condition
and results of operations.
The
extent to which the COVID-19 pandemic continues to impact our results will depend on future developments, which are highly uncertain
and cannot be predicted, including the duration of the pandemic, travel restrictions and social distancing in the CIS and CEE
countries, the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken by governments
and private businesses to attempt to contain and treat the disease. Any prolonged shut down of a significant portion of global
economic activity or downturn in the global economy, along with any adverse effects on industries in which our customers operate,
could materially and adversely impact our business, results of operations and financial condition.
Our
effective tax rate could be adversely affected by several factors.
We
conduct business globally and file income tax returns in multiple jurisdictions. Our effective tax rate could be materially adversely
affected by several factors, including changes in the amount of income taxed by, or allocated to, the various jurisdictions in
which we operate that have differing statutory tax rates; changing tax laws, regulations and interpretations of such tax laws
in multiple jurisdictions; and the resolution of issues arising from tax audits or examinations and any related interest or penalties.
In particular, there have been significant changes to the taxation systems in CEE countries in recent years as the authorities
have gradually replaced or introduced new legislation regulating the application of major taxes such as corporate income tax,
value-added tax, corporate property tax, personal income taxes and payroll taxes. Furthermore, any significant changes to the
Tax Cuts and Jobs Act (“U.S. Tax Act”) enacted in 2017, or to regulatory guidance associated with the U.S. Tax Act,
could materially adversely affect our effective tax rate.
The
determination of our provision for income taxes and other tax liabilities requires estimation, judgment and calculations where
the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination
by authorities in various jurisdictions. If a tax authority in any jurisdiction reviews any of our tax returns and proposes an
adjustment, including a determination that the transfer prices and terms we have applied are not appropriate, such an adjustment
could have an adverse effect on our business, financial condition and results of operations.
We
are unable to predict what tax reforms may be proposed or enacted in the future or what effect such changes would have on our
business, but such changes, to the extent they are brought into tax legislation, regulations, policies or practices in jurisdictions
in which we operate, could increase the estimated tax liability that we have expensed to date and paid or accrued on our balance
sheets, and otherwise affect our financial position, future results of operations, cash flows in a particular period and overall
or effective tax rates in the future in countries where we have operations, reduce post-tax returns to our stockholders and increase
the complexity, burden and cost of tax compliance.
There
may be adverse tax and employment law consequences if the independent contractor status of some of our personnel or the exempt
status of our employees is successfully challenged.
Certain
of our personnel are retained as independent contractors. The criteria to determine whether an individual is considered an independent
contractor or an employee are typically fact sensitive and vary by jurisdiction, as can the interpretation of the applicable laws.
If a government authority or court makes any adverse determination with respect to some or all of our independent contractors,
we could incur significant costs, including for prior periods, in respect of tax withholding, social security taxes or payments,
workers’ compensation and unemployment contributions, and recordkeeping, or we may be required to modify our business model,
any of which could materially adversely affect our business, financial condition and results of operations.
Global
mobility of employees may potentially create additional tax liabilities for us in different jurisdictions.
In
performing services to clients, our employees may be required to travel to various locations. Depending on the length of the required
travel and the nature of employees’ activities the tax implications of travel arrangements vary, with generally more extensive
tax consequences in cases of longer travel. Such tax consequences mainly include payroll tax liabilities related to employee compensation
and, in cases envisaged by international tax legislation, taxation of profits generated by employees during their time of travel.
We
have internal procedures, policies and systems, including an internal mobility program, for monitoring our tax liabilities arising
in connection with the business travel. However, considering that the tax authorities worldwide are paying closer attention to
global mobility issues, our operations may be adversely affected by additional tax charges related to the activity of our mobile
employees.
Loss
of taxation benefits related to our employment-related taxes that are enjoyed in Russia could have a negative impact on our operating
results and profitability.
The
Russian government provides qualified Russian IT companies with substantial tax benefits through a reduced social contribution
charge rate program. This program resulted in savings for us of approximately $1.8 million in the fiscal year ended December 31,
2020 and approximately $2.3 million in the fiscal year ended December 31, 2019. However, the reduced tax rates for social contributions
(16% in total) are a temporary measure. In 2016, application of reduced rates was prolonged until 2023, after which the Russian
government may take the decision to gradually increase the tax rates. If the Russian government were to change its favorable treatment
of Russian IT companies by modifying or repealing its current favorable tax measures, or if we become ineligible for such favorable
treatment, it would significantly impact our financial condition and results of operations.
Tax authorities may disagree with
our positions and conclusions regarding certain tax positions, or may apply existing rules in an arbitrary or unforeseen manner,
resulting in unanticipated costs, taxes or non-realization of expected benefits.
A tax authority may disagree with tax positions
that we have taken, which could result in increased tax liabilities. For example, a tax authority could challenge our allocation
of income by tax jurisdiction and the amounts paid between our affiliated companies pursuant to our intercompany arrangements and
transfer pricing policies, including methodologies for valuing developed technology and amounts paid with respect to our intellectual
property development.
A tax authority may take the position that material income tax
liabilities, interest and penalties are payable by us, where there has been a technical violation of contradictory laws and regulations
that are relatively new and have not been subject to extensive review or interpretation, in which case we expect that we might
contest such assessment. High-profile companies can be particularly vulnerable to aggressive application of unclear requirements.
Many companies must negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide.
Contesting such an assessment may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications
could increase our anticipated effective tax rate, where applicable.
Our
business, financial condition and results of operations may be adversely affected by fluctuations in foreign currency exchange
rates.
Our
functional currency, as well as the functional currency of all of our subsidiaries, is the U.S. dollar. However, we are exposed
to foreign currency exchange transaction risk related to funding our non-U.S. operations and to foreign currency translation risk
related to certain of our subsidiaries’ cash balances that are denominated in currencies other than the U.S. dollar as we
do not currently hedge our foreign currency exposure. In addition, our profit margins are subject to volatility as a result of
changes in foreign exchange rates. In the year ended December 31, 2020, approximately 14%, 12% and 10% of our $126.7 million of
combined cost of revenue and total operating expenses were denominated in the Russian rouble, Ukrainian hryvnia and Polish zloty,
respectively, compared to approximately 22%, 13%, and 12% of our $102.7 million of combined cost of revenue and total operating
expenses in the year ended December 31, 2019. Any significant fluctuations in currency exchange rates may have a material impact
on our business and results of operations. In some countries, we may be subject to regulatory or practical restrictions on the
movement of cash and the exchange of foreign currencies, which would limit our ability to use cash across our global operations
and increase our exposure to currency fluctuations. This risk could increase as we continue expanding our global operations, which
may include entering emerging markets that may be more likely to impose these types of restrictions. Currency exchange volatility
caused by political or economic instability or other factors, could also materially impact our results. See Item 7A, “Quantitative
and Qualitative Disclosures about Market Risk—Foreign Currency Exchange Rate Risk” for more information about
our exposure to foreign currency exchange rates.
We
may be exposed to liability for actions taken by its subsidiaries.
In
certain cases, we may be jointly and severally liable for obligations of our subsidiaries. We may also incur secondary liability
and, in certain cases, liability to creditors for obligations of our subsidiaries in certain instances involving bankruptcy or
insolvency.
In
particular, under Article 53, Part 1 of the Russian Civil Code, a “controlling person” of a legal entity may be held
directly liable for losses that the entity suffers because of his or her “fault,” and any agreement that seeks to
limit or waive such liability will not be valid. Generally, a controlling person is anyone who holds the power to determine the
entity’s actions, including the right to direct the actions of officers or executives. When a controlling person causes
losses, officers and executives may all be held jointly and severally liable (a parent entity may also be held jointly liable
with a subsidiary for actions directed by the parent or made with its consent). Liability may also apply to stockholders or controlling
persons when the company is a foreign legal entity but conducts its business primarily in Russia.
Further,
an effective parent is secondarily liable for an effective subsidiary’s debts if the effective subsidiary becomes insolvent
or bankrupt as a result of the action or inaction of the effective parent. In these instances, the other stockholders of the effective
subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent that caused the effective
subsidiary to take action or fail to take action, knowing that such action or failure to take action would result in losses. We
could be found to be the effective parent of the subsidiaries, in which case we could become liable for their debts, which could
have a material adverse effect on our business, financial condition and results of operations or prospects.
Our
profitability may suffer if we are unable to maintain our resource utilization and productivity levels.
As
most of our client projects are performed and invoiced on a time and materials basis, our management tracks and projects billable
hours as an indicator of business volume and corresponding resource needs for IT professionals. To maintain our gross profit margins,
we must effectively utilize our IT professionals, which depends on our ability to:
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integrate
and train new personnel;
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efficiently
transition personnel from completed projects to new assignments;
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forecast
customer demand for services; and
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deploy
personnel with appropriate skills and seniority to projects.
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If
we experience a slowdown or stoppage of work for any client, or on any project for which we have dedicated personnel or facilities,
including any adverse impacts from the COVID-19 pandemic, which occurred in the second quarter, and to a lesser extent, in the
third quarter of 2020, we may be unable to reallocate these personnel or assets to other clients and projects to keep their utilization
and productivity levels high. If we are unable to maintain appropriate resource utilization levels, our profitability may suffer.
If
we are unable to accurately estimate the cost of service or fail to maintain favorable pricing for our services, our contracts
may be unprofitable.
While
fixed-fee contracts currently represent an immaterial portion of overall revenue for the periods presented, Grid Dynamics expects
proportionate revenue from fixed-fee contracts to increase in future periods. In order for our contracts to be profitable, we
must be able to accurately estimate our costs to provide the services required by the applicable contract and appropriately price
our contracts. Such estimates and pricing structures used by us for our contracts are highly dependent on internal forecasts,
assumptions and predictions about our projects, the marketplace, global economic conditions (including foreign exchange volatility)
and the coordination of operations and personnel in multiple locations with different skill sets and competencies. Due to the
inherent uncertainties that are beyond our control, we may underprice our projects, fail to accurately estimate the costs of performing
the work or fail to accurately assess the risks associated with potential contracts. In select cases, we also offer volume discounts
once a client reaches certain contractual spend thresholds, which may lower the reference price for a client or result in a loss
of profits if we do not accurately estimate the amount of discounts to be provided. We may not be able to recognize revenues from
fixed-fee contracts in the period in which our services are performed, which may cause our margins to fluctuate. Any increased
or unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with
the performance of our contracts, including those caused by factors outside our control, could make these contracts less profitable
or unprofitable.
We
face risks associated with the long selling and implementation cycle for our services that require significant resource
commitments prior to realizing revenues for those services.
We
have a long selling cycle for our services, which requires us to expend substantial time and resources to educate clients on the
value of our services and our ability to meet their requirements. In certain cases, we may begin work and incur costs prior to
executing a contract. Our selling cycle is subject to many risks and delays over which we have little or no control, including
clients’ decisions to choose alternatives to our services (such as other IT services providers or in-house resources) and
the timing of clients’ budget cycles and approval processes. Therefore, selling cycles for new clients can be especially
unpredictable and we may fail to close sales with prospective clients to whom we have devoted significant time and resources.
Any significant failure to generate revenues or delays in recognizing revenues after incurring costs related to sales processes
could have a material adverse effect on our business, financial condition and results of operations.
Failure
to obtain engagements for and effectively manage increasingly large and complex projects may have an adverse effect on our business,
financial condition and results of operations.
Our
operating results are dependent on the scale of our projects and the prices we are able to charge for our services. In order to
successfully perform larger and more complex projects, we need to establish and maintain effective, close relationships with our
clients, continue high levels of client satisfaction and develop a thorough understanding of our clients’ needs. We may
also face a number of challenges managing larger and more complex projects, including:
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maintaining
high quality control and process execution standards;
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maintaining
planned resource utilization rates on a consistent basis;
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using
an efficient mix of on-site, off-site and offshore staffing;
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maintaining
productivity levels;
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implementing
necessary process improvements;
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recruiting
and retaining sufficient numbers of highly skilled IT personnel; and
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There
is no guarantee that we may be able to overcome such challenges. In addition, large and complex projects may involve multiple
engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay
additional planned engagements. Our failure to successfully obtain engagements for and effectively manage large and complex projects
may have an adverse effect on our business, financial condition and results of operations.
Increases
in compensation expenses, including stock-based compensation expenses, could lower our profitability, and dilute our existing
stockholders.
Wages and other compensation costs in the
countries in which we maintain significant operations and delivery centers are lower than comparable wage costs in more developed
countries. However, wages in the technology industry in these countries may increase at a faster rate than in the past, which may
make us less competitive unless we are able to increase the efficiency and productivity of our people. If we increase operations
and hiring in more developed economies, our compensation expenses will increase because of the higher wages demanded by technology
professionals in those markets. Wage inflation, whether driven by competition for talent or ordinary course pay increases, could
increase our cost of services as well as selling, general and administrative expenses and reduce our profitability if we are not
able to pass those costs on to our customers or charge premium prices when justified by market demand.
In addition, we have granted certain equity-based awards under
our equity incentive plans and expect to continue doing so. For the years ended December 31, 2020 and 2019, we recorded $20.0 million
and $2.4 million, respectively, of stock-based compensation expense related to the grant of stock options and awards. If we do
not grant equity awards, or if we reduce the value of equity awards we grant, we may not be able to attract, hire and retain key
personnel. If we grant more equity awards to attract, hire and retain key personnel, the expenses associated with such additional
equity awards could materially adversely affect our results of operations. If the anticipated value of these equity awards does
not materialize because of volatility or lack of positive performance in our stock price, we may be unable to retain our key personnel
or attract and retain new key employees in the future, in which case our business may be severely disrupted our ability to attract
and retain personnel could be adversely affected. The issuance of equity-based compensation may also result in dilution to stockholders.
Failure
to collect receivables from, or bill for unbilled services to, clients may have a material adverse effect on our results of operations
and cash flows.
Our
business depends on our ability to successfully obtain payment from our clients of the amounts they owe for work performed. We
usually bill and collect such amounts on relatively short cycles and maintain allowances for doubtful accounts. However, actual
losses on client balances could differ from those that we anticipate and, as a result, we might need to adjust our allowances.
There is no guarantee that we will accurately
assess the creditworthiness of our clients. If clients suffer financial difficulties, it could cause them to delay payments, request
modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations,
which has happened as a result of the COVID-19 pandemic. Given the risks associated with the pandemic at some of our customers
and their ability to fulfill their payment obligations, our allowance for doubtful accounts was $0.9 million, $0.8 million, $0.4
million and $0.4 million in the first, second, third and fourth quarters of 2020, respectively. We review our accounts receivable
on a regular basis and have put in place processes to ensure payments from our customers.
In addition, some of our clients may delay payments due to changes
in internal payment procedures driven by rules and regulations to which they are subject. Timely collection of client balances
also depends on our ability to complete our contractual commitments and bill and collect contracted revenues. If we are unable
to meet our contractual requirements, we may experience delays in collection of or inability to collect accounts receivable. If
this occurs, our financial condition, results of operations and cash flows could be materially adversely affected.
We
may need additional capital and failure to raise additional capital on terms favorable to us, or at all, could limit our ability
to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We
may require additional cash resources due to changed business conditions or other future developments. If existing resources are
insufficient to satisfy cash requirements, we may seek to sell additional equity or debt securities or obtain one or more credit
facilities. The sale of additional equity securities could result in dilution to stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could require us to agree to operating and financing covenants that would
restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties,
including investors’ perception of, and demand for, securities of IT services companies, conditions in the capital markets
in which we may seek to raise funds, our future results of operations and financial condition, and general economic and political
conditions. Financing may not be available in amounts or on terms acceptable to us, or at all, which could limit our ability to
grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
War,
terrorism, other acts of violence, or natural or manmade disasters may affect the markets in which we operate, our clients and
our service delivery.
Our
business may be adversely affected by instability, disruption or destruction in a geographic region in which we operate, regardless
of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine,
flood, fire, earthquake, storm or pandemic events and spread of disease, such as the COVID-19 pandemic. Such events may cause
clients to delay their decisions on spending for the services provided by us and give rise to sudden significant changes in regional
and global economic conditions and cycles. These events also pose significant risks to our personnel and to physical facilities
and operations, which could materially adversely affect our financial results.
Acquisitions could be difficult to
identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect
our financial condition and results of operations, we may not achieve the financial and strategic goals that were contemplated
at the time of a transaction, and we may be exposed to claims, liabilities and disputes as a result of the transaction that may
adversely impact our business, operating results and financial condition.
We continuously review and consider strategic
acquisitions of businesses, products or technologies. We recently acquired Daxx Web Industries B.V., a Netherlands-based software
development and technology consulting company, and we may in the future seek to acquire or invest in other businesses, products
or technologies that we believe could complement or expand our services, enhance our technical capabilities or otherwise offer
growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various
expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisition purchases are completed.
Additionally, we may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement
with any particular target or obtain adequate financing to complete such acquisitions. If we acquire businesses, we may not be
able to successfully integrate the acquired personnel, operations, and technologies, or effectively manage the combined business
following the acquisition.
Additionally, we may not be able to find
and identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain
adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or
the incurrence of debt, which could adversely affect our financial condition, cash flows and results of operations. In addition,
if an acquired business fails to meet our expectations, we may not achieve the financial and strategic goals that were contemplated
at the time of a transaction, and our business, financial condition and results of operations may be adversely affected. Furthermore,
we may acquire businesses that have inferior margins and profitability levels in comparison to our existing business and this may
dilute our overall profitability of the company. This, in turn, may result in adverse financial results and dilution to existing
stockholders.
Our operating results or financial condition
may be adversely impacted by claims or liabilities that we assume from an acquired company or technology or other claims or liabilities
otherwise related to an acquisition, including, among others, claims from governmental and regulatory agencies or bodies, terminated
employees, current or former customers, current or former stockholders or other third parties, or arising from contingent payments
related to the acquisition; pre-existing contractual relationships that we assume from an acquired company that we would not have
otherwise entered into, the termination or modification of which may be costly or disruptive to our business; unfavorable revenue
recognition or other accounting treatment as a result of an acquired company’s practices; and intellectual property claims
or disputes. We may fail to identify or assess the magnitude of certain liabilities, shortcomings or other circumstances prior
to acquiring a company or technology, which could result in unexpected litigation or regulatory exposure and other adverse effects
on our business, operating results and financial condition.
We face risks associated with the
transparency, quality, and reliability of financial information of a business we acquire.
Although we perform due diligence on a
targeted business that we intend to acquire, we are exposed to risks associated with the quality and reliability of the financial
statements of the acquired business. This risk may be higher with smaller businesses and businesses that are operated in jurisdictions
and countries with poorer regulatory and compliance requirements. In such situation where we acquire a target with unreliable financial
statements, we are exposed to material risks that may impact the reliability of our overall financial statements and may adversely
impact our stock price.
We
also cannot assure you that the diligence we conduct when evaluating future acquisitions will reveal all material issues that may
be present, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors
outside of our control will not later arise. Even if our due diligence successfully identifies certain risks, unexpected risks
may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Further, as
a result of a completed acquisition, purchase accounting, and integration of the acquired business, we may be required to take
write-offs or write-downs, restructuring and impairment or other charges that could negatively affect our business, assets, liabilities,
prospects, outlook, financial condition and results of operations.
Some
of the additional risks associated with acquiring a business include, but not limited to the following:
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inability
to integrate or benefit from acquired technologies or services;
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product
synergies, cost reductions, increases in revenue and economies of scale may not materialize as expected;
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the
business culture of the acquired entity may not match well with our culture;
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unforeseen
delays, unanticipated costs and liabilities may arise when integrating operations, processes and systems in geographies where
we have not conducted business;
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unanticipated
costs or liabilities associated with the strategic transactions;
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incurrence
of transaction-related costs;
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assumption
of the existing obligations or unforeseen liabilities of the acquired business;
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difficulty
integrating the accounting systems, security infrastructure, operations, and personnel of the acquired business;
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difficulties
and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;
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difficulty
converting the current and prospective customers of the acquired business onto our platform and contract terms, including disparities
in the revenue, licensing, support, or professional services model of the acquired company;
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diversion
of management’s attention from other business concerns;
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adverse
effects to our existing business relationships with business partners and customers as a result of the strategic transactions;
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unexpected
costs may arise due to unforeseen changes in tax, payroll, pension, labor, trade, environmental and safety policies in new jurisdictions
where the acquired entity operates;
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difficulty
in retaining, motivating and integrating key management and other employees of the acquired business;
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use
of resources that are needed in other parts of our business; and
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use
of substantial portions of our available cash to consummate the strategic transaction.
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We
are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure
requirements available to emerging growth companies, this could make our securities less attractive to investors and may make
it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we may
take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are
not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access
to certain information they may deem important. We could be an emerging growth company for the first five years after the completion
of our initial public offering, although circumstances could cause us to lose that status earlier, including if the market value
of our ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would
no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our securities
less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of
our reliance on these exemptions, the market prices of our securities may be lower than they otherwise would be, there may be
a less active trading market for our securities and the market prices of our securities may be more volatile.
Further, Section 102(b)(1) of the JOBS
Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private
companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of
securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The
JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply
to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended
transition period, which means that when a standard is issued or revised and it has different application dates for public or private
companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new
or revised standard. This may make comparison of our financial statements with certain other public companies difficult or impossible
because of the potential differences in accounting standards used.
Changes
in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported
results of operations.
Generally
accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board (“FASB”),
the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards
or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed
before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred
and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported
financial results or the way we conduct our business.
Reports
published by analysts, including projections in those reports that differ from our actual results, could adversely affect the
price and trading volume of our common stock and warrants.
Securities
research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not
accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections
of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock
or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts
ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline and demand
for our shares could decrease.
Risks
Related to Government Regulations
Failure
to comply with privacy and data protection laws and regulations could lead to government enforcement actions, private litigation
and adverse publicity.
We
receive, store and process personal information and other data from and about customers in addition to our employees and contractors.
Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies and
various state, local and foreign agencies. Our data handling also is subject to contractual obligations and may be deemed to be
subject to industry standards, including certain industry standards that we undertake to comply with. The laws and regulations
relating to privacy and data security are evolving, can be subject to significant change and may result in ever-increasing regulatory
and public scrutiny and escalating levels of enforcement and sanctions.
For
example, the European Union has implemented the General Data Protection Regulation (“GDPR”), which came into effect
on May 25, 2018. The GDPR has a significant impact on how businesses can collect and process the personal data of individuals
in the European Economic Area (“EEA”). The regulation includes stringent operational requirements for processors and
controllers of personal data and imposes significant penalties for non-compliance of up to the greater of €20 million or
4% of global annual revenues. With regard to transfers to the U.S. of personal data from our employees and European customers
and users, we rely upon standard contractual clauses approved by the European Commission (the “SCCs”). The SCCs have been
subject to legal challenge and may be modified or invalidated, and we may be unsuccessful in maintaining legitimate means for
the transfer and receipt of personal data from the EEA. We are in the process of assessing the “Schrems II” decision
issued by the Court of Justice of the European Union (the “CJEU”) on July 16, 2020, and its impact on our data transfer
mechanisms. In the Schrems II decision, the CJEU deemed the SCCs valid, but ruled that transfers made pursuant to the SCCs
and other alternative transfer mechanisms must be analyzed on a case-by-case basis to ensure EU standards of data protection are
met in the jurisdiction where the data importer is based. Subsequent guidance from EU regulators has stated that in certain
cases, the SCCs must be accompanied by the use of supplementary measures. Concerns remain about the potential for the SCCs and
other mechanisms to face additional challenges. We may, in addition to other impacts of the Schrems II decision and other developments
relating to cross-border transfer, experience additional costs associated with increased compliance burdens, and we and our customers
face the potential for regulators in the EEA to apply different standards to the transfer of personal data from the EEA to the
U.S., and to block, or require ad hoc verification of measures taken with respect to, certain data flows from the EEA to the U.S.
We also may be required to engage in new contract negotiations with third parties that aid in processing data on our behalf. We
may experience reluctance or refusal by current or prospective European customers to use our products, and may find it necessary
or desirable to make further changes to our handling of personal data of EEA residents. The regulatory environment applicable
to the handling of EEA residents’ personal data, and our actions taken in response, may cause us to assume additional liabilities
or incur additional costs and obligations and could result in our business, operating results and financial condition being harmed.
Additionally, we and our customers may face a risk of enforcement actions by data protection authorities in the EEA relating to
personal data transfers to and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion
of resources, distract management and technical personnel and negatively affect our business, operating results and financial
condition.
In
addition, California has enacted legislation that has been described as the first “GDPR-like” law in the U.S. The
California state legislature passed the California Consumer Privacy Act (“CCPA”) in 2018 and California voters approved
a ballot measure subsequently establishing the California Privacy Rights Act (“CPRA”) in 2020, which will jointly
regulate the processing of personal information of California residents and increase the privacy and security obligations of entities
handling certain personal information of California residents, including requiring covered companies to provide new disclosures
to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information. The CCPA
came into effect on January 1, 2020, and the California Attorney General may bring enforcement actions, with penalties for violations
of the CCPA. The CPRA will go into effect on January 1, 2023 instilling enforcement authority in a new dedicated
regulatory body, the California Privacy Protection Agency, which will begin carrying out enforcement actions as soon as six months
after the enactment date. While aspects of both the CCPA and CPRA and their interpretations remain to be determined in practice,
we are committed to comply with their obligations. We cannot yet fully predict the impact of the CCPA and CPRA on our business
or operations, but developments regarding these and all privacy and data protection laws and regulations around the world may
require us to modify our data processing practices and policies and to incur substantial additional costs and expenses in an effort
to maintain compliance on an ongoing basis. Other countries and jurisdictions throughout the world are considering or enacting
laws and regulations requiring the local storage of data. For example, under Russian law, all data operators collecting personal
data of Russian citizens through electronic communications, including the Internet, must comply with Russian laws regulating the
local storage of such data in databases located in the territory of Russia. This law applies not only to local data controllers
but also to data controllers established outside Russia to the extent they gather personal data relating to Russian nationals
through websites aimed at the territory of Russia.
We
have been undertaking measures in an effort to comply with the GDPR, CCPA, CPRA and other applicable privacy and data protection
laws and regulations, and complying with these laws and regulations may require us to incur substantial operational costs and
to require its data handling practices. The costs of compliance with, and other burdens imposed by, such laws, regulations and
policies that are applicable to us may limit the use and adoption of our products and solutions, alter the way we conduct business
and/or could otherwise have a material adverse impact on our results of operations. For example, we may find it necessary to establish
systems to maintain data originated in certain jurisdictions within those jurisdictions, which may involve substantial expense
and distraction from other aspects of our business. Further, the costs of compliance with, and other burdens imposed by, such
laws, regulations and policies that are applicable to us, may limit the use and adoption of our products and solutions and could
have a material adverse impact on our results of operations.
Any
failure or perceived failure (including as a result of deficiencies in our policies, procedures or measures relating to privacy,
data protection, data security, marketing or client communications) by us to comply with laws, regulations, policies, legal or
contractual obligations, industry standards, or regulatory guidance relating to privacy, data protection or data security may
result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity and could
cause our clients to lose trust in us, which could have a material adverse effect on our reputation, business, financial condition
and results of operations.
We
expect that there will continue to be new proposed laws, regulations and industry standards relating to privacy, data protection,
data security, marketing, consumer communications and information security in the U.S., the European Union, Russia and other jurisdictions,
and we cannot determine the impact such future laws, regulations and standards may have on our business. Future laws, regulations,
standards and other obligations or any changed interpretation or enforcement of existing laws or regulations could impair our
ability to develop and market new services and maintain and grow our client base and increase revenue.
We
are subject to laws and regulations restricting our operations, including export restrictions, economic sanctions and the Foreign
Corrupt Practices Act and similar anti-corruption laws. If we are not in compliance with applicable legal requirements, we may
be subject to civil or criminal penalties and other remedial measures.
Our
operations are subject to laws and regulations restricting our operations, including activities involving restricted countries,
organizations, entities and persons that have been identified as unlawful actors or that are subject to U.S. sanctions imposed
by the Office of Foreign Assets Control (“OFAC”) or other international economic sanctions that prohibit us from engaging
in trade or financial transactions with certain countries, businesses, organizations and individuals. We are subject to the Foreign
Corrupt Practices Act (“FCPA”), which prohibits U.S. companies and their intermediaries from bribing foreign officials
for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and other laws concerning our international
operations. The FCPA’s foreign counterparts contain similar prohibitions, although varying in both scope and jurisdiction.
We operate in many parts of the world that have experienced governmental corruption to some degree, and, in certain circumstances,
strict compliance with anti-bribery laws may conflict with local customs and practices.
We
are currently in the process of developing and implementing formal controls and procedures to ensure that we are in compliance
with the FCPA, OFAC sanctions, and similar sanctions, laws and regulations. The implementation of such procedures may be time
consuming and expensive and could result in the discovery of issues or violations with respect to the foregoing by us or our employees,
independent contractors, subcontractors or agents of which we were previously unaware.
If we are not completely effective in ensuring
our compliance with all such applicable laws, it could result in us being subject to criminal and civil penalties, disgorgement
and other sanctions and remedial measures, and legal expenses. Likewise, any investigation of any potential violations of such
laws by the U.S. or other jurisdictions could also have an adverse impact on our reputation, business, financial condition and
results of operations.
Changes
to the U.S. administration’s fiscal, political, regulatory and other policies may adversely affect our business, financial
condition and results of operations.
Recent events, including new policy introductions
following the 2020 U.S presidential election, may result in substantial regulatory uncertainty regarding international trade and
trade policy. U.S. policies have called for substantial changes to trade agreements, have increased tariffs on certain goods imported
into the U.S. and have raised the possibility of imposing significant, additional tariff increases. In the past, unilateral tariffs
on imported products by the U.S. have triggered retaliatory actions from certain foreign governments, including China and Russia,
and may trigger retaliatory actions by other foreign governments, potentially resulting in a “trade war.” While we
cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions
upon the import or export of our products in the future, a “trade war” of this nature or other governmental action
related to tariffs or international trade agreements could have an adverse impact on demand for our services, sales and clients
and affect the economies of the U.S. and various countries, having an adverse effect on our business, financial condition and results
of operations.
Negative
publicity about offshore outsourcing or anti-outsourcing legislation and restriction on immigration may have an adverse effect
on our business.
The
issue of companies outsourcing services to organizations operating in other countries is a topic of political discussion in many
countries, including the U.S., which is our largest source of revenues. Many organizations and public figures in the U.S. and
Europe have publicly expressed concern about a perceived association between offshore outsourcing IT services providers and the
loss of jobs in their home countries. For example, measures aimed at limiting or restricting outsourcing by U.S. companies are
periodically considered in Congress and in numerous state legislatures to address concerns over the perceived association between
offshore outsourcing and the loss of jobs in the U.S. A number of U.S. states have passed legislation that restricts state government
entities from outsourcing certain work to offshore IT services providers. Given the ongoing debate over this issue, the introduction
and consideration of other restrictive legislation is possible. If enacted, such measures may broaden restrictions on outsourcing
by federal and state government agencies and on government contracts with firms that outsource services directly or indirectly,
impact private industry with measures such as tax disincentives or intellectual property transfer restrictions, and/or restrict
the use of certain business visas. In addition, current or prospective clients may be discouraged from transferring services to
providers that utilize offshore delivery centers such as us to avoid any negative perceptions that may be associated with using
an offshore provider or for data privacy and security concerns. As a result, our ability to service our clients could be impaired
and we may not be able to compete effectively with competitors that operate primarily from within the countries in which our clients
operate. Any such slowdown or reversal of the existing industry trends toward offshore outsourcing may have a material adverse
effect on our business, financial condition and results of operations.
Some of our projects may involve our personnel
obtaining visas to travel and work at customer sites outside of our personnel’s home countries and often in the United States.
Our reliance on visas to staff projects with employees who are not citizens of the country where the work is to be performed makes
us vulnerable to legislative and administrative changes in the number of visas to be issued in any particular year and other work
permit laws and regulations. The process to obtain the required visas and work permits can be lengthy and difficult and variations
due to political forces and economic conditions in the number of permitted applications, as well as application and enforcement
processes, may cause delays or rejections when trying to obtain visas. Delays in obtaining visas may result in delays in the ability
of our personnel to travel to meet with and provide services to our customers or to continue to provide services on a timely basis.
In addition, the availability of a sufficient number of visas without significant additional costs could limit our ability to provide
services to our customers on a timely and cost-effective basis or manage our sales and delivery centers as efficiently as we otherwise
could. Delays in or the unavailability of visas and work permits could have a material adverse effect on our business, results
of operations, financial condition and cash flows.
Our
subsidiaries in CEE can be forced into liquidation on the basis of formal noncompliance with certain legal requirements.
We
operate in CEE primarily through locally organized subsidiaries. Certain provisions of local laws may allow a court to order liquidation
of a locally organized legal entity on the basis of its formal noncompliance with certain requirements during formation, reorganization
or during its operations. If a company fails to comply with certain requirements including those relating to minimum net assets,
governmental or local authorities can seek the involuntary liquidation of such company in court, and the company’s creditors
will have the right to accelerate their claims or demand early performance of the company’s obligations as well as demand
compensation for any damages. If involuntary liquidation of any of our subsidiaries were to occur, such liquidation could materially
adversely affect our business, financial condition and results of operations.
Risks
Associated with Intellectual Property
We
may not be able to prevent unauthorized use of our intellectual property and our intellectual property rights may not be adequate
to protect our business, financial condition and results of operations.
Our
success largely depends on methodologies, practices, tools and technical expertise and other intellectual property that we use
in designing, developing, implementing and maintaining our services and solutions. We rely upon a combination of nondisclosure,
confidentiality, assignment of invention and other contractual arrangements as well as trade secret, patent, copyright and trademark
laws to protect our intellectual property rights. We may also rely on litigation to enforce our intellectual property rights and
contractual rights.
The
nondisclosure and confidentiality agreements that we enter into with our employees, independent contractors, vendors and clients
in order to protect our proprietary information may not provide meaningful protection against unauthorized use, misappropriation
or disclosure for trade secrets, know-how or other proprietary information and there can be no assurance that others will not
independently develop the know-how and trade secrets or develop better methods than us. Policing unauthorized use of such proprietary
information is difficult and expensive. We may not be able to deter current and former employees, contractors, vendors, clients
and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that
third parties may copy, reverse engineer, or otherwise obtain and use our information and proprietary technology without authorization
or otherwise infringing on our intellectual property rights.
In
addition, our current and former employees or contractors could challenge our exclusive rights in the intellectual property they
have developed in the course of their employment. In Russia and certain other countries in which we operate, an employer is deemed
to own the copyright in works created by its employees during the course, and within the scope, of their employment, but the employer
may be required to satisfy additional legal requirements in order to make further use and dispose of such works. While we believe
that we have complied with all such requirements and have fulfilled all requirements necessary to acquire all rights in intellectual
property developed by our contractors and subcontractors, these requirements are often ambiguously defined and enforced.
Implementation
of intellectual property-related laws in CIS and CEE countries in which we operate has historically been lacking and there is
no assurance that we will be able to enforce or defend our rights under our non-disclosure, confidentiality or assignment of invention
agreements or that protection of intellectual property rights in such countries will be as effective as that in the U.S. Any litigation
relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources
and management attention.
In
some cases, litigation may be necessary to enforce our intellectual property rights or to protect our trade secrets. Litigation
could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual
property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits
attacking the validity and enforceability of our intellectual property rights and exposing us to significant damages or injunctions.
Our inability to protect our intellectual property against unauthorized copying or use, as well as any costly litigation or diversion
of our management’s attention and resources, could delay sales or the implementation of our products, impair the functionality
of our products, delay introductions of new products, result in our substituting less-advanced or more-costly technologies into
our products or harm our reputation. In addition, we may be required to license additional intellectual property from third parties
to develop and market new products, and we cannot assure you that we could license that intellectual property on commercially
reasonable terms or at all.
Due
to the foregoing reasons, we cannot guarantee that we will be successful in maintaining existing or obtaining future intellectual
property rights or registrations, be able to detect unauthorized use of our intellectual property and take appropriate steps to
enforce and protect our rights, or that any such steps will be successful. We can also neither guarantee that we have taken all
necessary steps to enforce our intellectual property rights in each jurisdiction in which we operate nor that the intellectual
property laws of any jurisdiction in which we operate are adequate to protect our interest or that any favorable judgment obtained
by us with respect thereto will be enforced in the courts. Unauthorized use by third parties of, or other failure to protect,
our intellectual property, including the costs of enforcing intellectual property rights, could have a material adverse effect
on our business, financial condition and results of operations.
We
may face intellectual property infringement claims that could be time-consuming and costly to defend and failure to defend against
such claims may have a material adverse effect on our reputation, business, financial condition and results of operations.
Our
success largely depends on our ability to use and develop our technology, tools, code, methodologies and services without infringing
the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. We may be subject
to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties.
We
typically indemnify clients who purchase our services and solutions against potential infringement of intellectual property rights,
which subjects us to the risk of indemnification claims. These claims may require us to initiate or defend protracted and costly
litigation on behalf of our clients, regardless of the merits of these claims and are often not subject to liability limits or
exclusion of consequential, indirect or punitive damages. If any of these claims succeed, we may be forced to pay damages on behalf
of our clients, redesign or cease offering our allegedly infringing services or solutions or obtain licenses for the intellectual
property such services or solutions allegedly infringe. If we cannot obtain all necessary licenses on commercially reasonable
terms, our clients may be forced to stop using our services or solutions.
The
holders of patents and other intellectual property rights potentially relevant to our service offerings may make it difficult
for us to acquire a license on commercially acceptable terms. Also, we may be unaware of intellectual property registrations or
applications relating to our services that may give rise to potential infringement claims against us. There may also be technologies
licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties
which may damage our ability to rely on such technologies.
Parties
making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology
involving the allegedly infringing intellectual property. Intellectual property litigation is expensive and time-consuming and
could divert management’s attention from our business. A successful infringement claim against us, whether with or without
merit, could, among other things, require us to pay substantial damages, develop non-infringing technology, or rebrand our name
or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and would require us to
cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation
could also result in existing or prospective clients deferring or limiting their purchase or use of our software product development
services or solutions until resolution of such litigation or could require us to indemnify our clients against infringement claims
in certain instances. Any intellectual property claims or litigation in this area, whether or not we ultimately win or lose, could
damage our reputation and materially adversely affect our business, financial condition and results of operations.
Our
use of open source software may lead to possible litigation, negatively affect sales and create liability.
We
often incorporate software licensed by third parties under so-called “open source” licenses, which may expose us to
liability and have a material impact on our software development services. Use of open source software may entail greater risks
than use of third-party commercial software, as open source licensors generally do not provide support, warranties, indemnification,
or other contractual protections regarding infringement claims or the quality of the code. In addition, the public availability
of such software may make it easier for others to compromise our services. Although we monitor our use of open source software
in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our client deliverables
to conditions we do not intend, the terms of many open source licenses have not been interpreted by courts in relevant jurisdictions,
and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions
on our clients’ ability to use the software that we develop for them and operate their businesses as they intend. Moreover,
we cannot assure you that our processes for controlling our use of open source software in our products will be effective. From
time to time, there have been claims challenging the ownership of open source software against companies that incorporate it into
their products.
Therefore,
there is a possibility that our clients could be subject to actions by third parties claiming that what we believe to be licensed
open source software infringes such third parties’ intellectual property rights, and we would generally be required to indemnify
our clients against such claims. In addition, in the event that portions of client deliverables are determined to be subject to
an open source license, we or our clients could be required to publicly release the affected portions of source code or re-engineer
all, or a portion of, the applicable software. Disclosing our proprietary source code could allow our clients’ competitors
to create similar products with lower development effort and time and ultimately could result in a loss of sales for our clients.
Furthermore, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional
costs. Any of these events could create liability for us to our clients and damage our reputation, which could have a material
adverse effect on our business, financial condition and results of operations.
Risks
Related to Our Common Stock
Our
bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction,
another State court in Delaware or the federal district court for the District of Delaware) shall, to the fullest extent
permitted by law, be the sole and exclusive forum for substantially all disputes between us and our stockholders (other than
claims arising under federal securities laws, including the Securities Act or the Exchange Act and any successors thereto),
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers or employees.
Our
bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another
State court in Delaware or the federal district court for the District of Delaware) shall, to the fullest extent permitted by
law, be the sole and exclusive forum for the following (except for any claim as to which such court determines that there is an
indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal
jurisdiction of such court within 10 days following such determination), which is vested in the exclusive jurisdiction of a court
or forum other than such court or for which such court does not have subject matter jurisdiction):
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any
derivative action or proceeding brought on our behalf;
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any
action asserting a claim of breach of a fiduciary duty owed by, or otherwise wrongdoing by, any of our directors, officers or
other employees to us or our stockholders;
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any
action arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of
incorporation or bylaws;
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any
action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; and
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any
other action asserting a claim that is governed by the internal affairs doctrine.
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However,
notwithstanding the exclusive forum provisions, our bylaws explicitly state that they would not preclude the filing of claims
brought to enforce any liability or duty created under federal securities laws, including the Exchange Act or Securities Act.
Our
amended and restated bylaws also provide that, unless we consent in writing to the selection of an alternative forum, the federal
district courts of the United States shall be the sole and exclusive forum for any action asserting a claim arising pursuant to
the Securities Act, such a provision known as a “Federal Forum Provision.” Any person or entity purchasing or otherwise
acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to these provisions.
These
exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable
for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors,
officers and other employees. Additionally, a court could determine that the exclusive forum provision is unenforceable. If a
court were to find the exclusive forum provision in our bylaws to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.
The
price of our common stock and warrants may be volatile.
The
price of our common stock and warrants may fluctuate due to a variety of factors, including:
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our
ability to effectively service any current and future outstanding debt obligations;
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the
announcement the introduction of new products or services, or enhancements thereto, by us or our competitors;
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developments
concerning intellectual property rights;
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changes
in legal, regulatory and enforcement frameworks impacting our products;
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variations
in our and our competitors’ results of operations;
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the
addition or departure of key personnel;
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announcements
by us or our competitors of acquisitions, investments or strategic alliances;
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actual
or perceived data security incidents or breaches;
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actual
or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
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the
failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast
by securities analysts;
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any
delisting of our common stock or warrants from NASDAQ due to any failure to meet listing requirements;
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adverse
developments from litigation; and
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the
general state of the securities market.
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These
market and industry factors may materially reduce the market price of our common stock and warrants, regardless of our operating
performance.
As of December 31, 2020, approximately
46% of our outstanding common stock was held or beneficially owned by the Major Stockholders (as defined below). The concentration
of beneficial ownership provides the Major Stockholders with substantial control over us, which could limit your ability to influence
the outcome of key transactions, including a change of control, and future resales of our common stock held by these significant
stockholders may cause the market price of our common stock to drop significantly.
As of December 31, 2020, approximately
46% of our outstanding common stock was held or beneficially owned by Automated Systems Holdings Limited, Teamsun Technology
(HK) Limited, Beijing Teamsun Technology Co. Ltd., Benhamou Global Ventures, BGV Opportunity Fund LP, Renascia Fund B LLC, VLSK2019
LLC, Livschitz Children’s Charitable Trust, Victoria Livschitz Charitable Trust, O. Fox Charitable Trust, and GDD International
Holdings Company (together, the “Major Stockholders”) and approximately 16% of our outstanding common stock is held
or beneficially owned by our directors and officers or persons affiliated with our directors and officers (including shares owned
by the Major Stockholders).
As a result, these stockholders, acting
together, have significant influence over all matters that require approval by our stockholders, including the election of directors
and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This
concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders
may view as beneficial.
To
the extent that the Major Stockholders purchase additional shares of ours, the percentage of shares that will be held by them
will increase, decreasing the percentage of shares that are held by public stockholders.
In connection with the Business Combination,
ChaSerg Technology Acquisition Corp. (the “Sponsor”) and Cantor Fitzgerald & Co. (“Cantor”) have entered
into a side letter with us pursuant to which, among other things, each of the Sponsor and Cantor agreed to refrain from selling,
transferring or otherwise disposing of up to 1,090,000 and 110,000 shares, respectively, of our common stock (such portion, the
“Earnout Shares”) that it holds, until certain release events have been realized. Under the terms of the side letter,
each of the Sponsor and Cantor will be able to sell or transfer one-third of its respective Earnout Shares upon the price of our
common stock reaching a price of $12.00 per share, an additional one-third of its respective Earnout Shares upon the stock price
reaching a price of $13.50 per share and the final one-third of its respective Earnout Shares upon the stock price reaching a price
of $15.00 per share, in each case where such price targets were achieved for a minimum of 20 days out of a 30-day trading period
during the applicable earn out period. In January 2021 and March 2021, the price of our common stock reached a price of $12.00
and $13.50 per share, respectively, per share for the required period and each of the Sponsor and Cantor became able to sell or
transfer an aggregate of two-thirds of its respective Earnout Shares.
If any significant stockholder sells large
amounts of our common stock in the open market or in privately negotiated transactions, or if warrant holders exercise their warrant
and sell the shares acquired upon exercise, this could have the effect of increasing the volatility in the price of our common
stock or putting significant downward pressure on the price of our common stock.
We
do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment
will depend on appreciation in the price of our common stock.
We have not paid any cash dividends on
our common stock since our merger with ChaSerg Technology Acquisition Corp. The payment of any cash dividends will be dependent
upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion
of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly,
it is not expected that our board of directors will declare any dividends in the foreseeable future. Our ability to declare dividends
may be limited by the terms of any financing and/or other agreements entered into by us or our subsidiaries from time to time and
by requirements under the laws of our subsidiaries’ respective jurisdictions of incorporation to set aside a portion of their
net income in each year to legal reserves. Therefore, you are not likely to receive any dividends on your common stock for the
foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its
value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which
may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common
stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Delaware
law and our certificate of incorporation and bylaws contain certain provisions, including anti-takeover provisions, that limit
the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider
favorable.
Our
certificate of incorporation and bylaws, and the DGCL, contain provisions that could have the effect of rendering more difficult,
delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore depress the trading price of
our common stock and warrants. These provisions could also make it difficult for stockholders to take certain actions, including
electing directors who are not nominated by the current members of our board of directors or taking other corporate actions, including
effecting changes in our management. Among other things, our certificate of incorporation and bylaws include provisions regarding:
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a
classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership
of a majority of our board of directors;
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the
ability of our board of directors to issue shares of preferred stock, including “blank check” preferred stock, and
to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval,
which could be used to significantly dilute the ownership of a hostile acquirer;
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the
limitation of the liability of, and the indemnification of our directors and officers;
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the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board
of directors;
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the
requirement that directors may only be removed from our board of directors for cause;
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a
prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting
of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action,
including the removal of directors;
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the
requirement that a special meeting of stockholders may be called only by our board of directors, the chairman of our board of
directors, or our chief executive officer, which could delay the ability of stockholders to force consideration of a proposal
or to take action, including the removal of directors;
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controlling
the procedures for the conduct and scheduling of board of directors and stockholder meetings;
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the
requirement for the affirmative vote of holders of at least a majority of the voting power of all of the then outstanding shares
of the voting stock, voting together as a single class, to amend, alter, change or repeal any provision of our certificate of
incorporation or our bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders
and delay changes in our board of directors and also may inhibit the ability of an acquirer to effect such amendments to facilitate
an unsolicited takeover attempt;
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the
ability of our board of directors to amend the bylaws, which may allow our board of directors to take additional actions to prevent
an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt;
and
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advance
notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to
be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special
meetings of stockholders and delay changes in our board of directors and also may discourage or deter a potential acquirer from
conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control
of our company.
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These
provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our board of directors
or management.
In
addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the DGCL, which may
prohibit certain stockholders holding 15% or more of our outstanding capital stock from engaging in certain business combinations
with us for a specified period of time.
Any
provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or preventing a change in
control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could
also affect the price that some investors are willing to pay for our common stock and warrants.