Item 1A. Risk Factors
This Quarterly Report on Form 10-Q 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
Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
The impact of the COVID-19
pandemic has and may continue to affect our overall financial performance, business operations, and stock price.
|
|
●
|
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.
|
|
●
|
We face intense competition.
|
|
●
|
Damage to our reputation may
adversely impact our ability to generate and retain business.
|
|
●
|
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 business operations may
be severely disrupted if we lose the services of our senior executives and key employees.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
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 the three months ended March 2021, we generated a significant portion of our revenues from our largest clients. For example,
we generated approximately 67% and 86% of our revenue from our 10 largest clients during the three months ended March 31, 2021 and 2020,
respectively. Our top two clients each accounted for 10% or more of our revenue during the three months ended March 31, 2021 and our top
three clients each accounted for 10% or more of our revenue during the three months ended March 31, 2020. 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 vertical where
store closures resulted in sales being severely impacted. Although we witnessed sequential growth in this vertical 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
verticals 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, and
March 31, 2021 our allowance for doubtful accounts was $0.4 million and 0.2 million, respectively 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:
|
●
|
difficulty or cost in updating
services, applications, tools and software and in developing new services quickly enough to meet clients’ needs;
|
|
●
|
difficulty or cost in making
some features of software work effectively and securely over the Internet or with new or changed operating systems;
|
|
●
|
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
|
|
●
|
difficulty or cost in maintaining
a high level of quality and reliability as we implement new technologies and methodologies.
|
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:
|
●
|
financial
difficulties for the client;
|
|
●
|
a
change in strategic priorities, resulting in elimination of the impetus for the project or a reduced level of technology spending;
|
|
|
|
|
●
|
a
change in outsourcing strategy resulting in moving more work to the client’s in-house technology departments or to our competitors;
|
|
|
|
|
●
|
the
replacement by our clients of existing software with packaged software supported by licensors; and
|
|
|
|
|
●
|
mergers
and acquisitions or significant corporate restructurings.
|
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:
|
●
|
less established legal systems
and legal ambiguities, inconsistencies and anomalies;
|
|
●
|
changes in laws and regulations;
|
|
●
|
application and imposition of
protective legislation and regulations relating to import or export, including tariffs, quotas and other trade protection measures;
|
|
●
|
difficulties in enforcing intellectual
property and/or contractual rights;
|
|
●
|
bureaucratic obstacles and corruption;
|
|
●
|
compliance with a wide variety
of foreign laws, including those relating to privacy and data protection;
|
|
●
|
restrictions on the repatriation of dividends or profits;
|
|
●
|
expropriation or nationalization of property;
|
|
●
|
restrictions on currency convertibility
and exchange controls;
|
|
●
|
fluctuations in currency exchange
rates;
|
|
●
|
potentially adverse tax consequences;
|
|
●
|
competition from companies with
more experience in a particular country or with international operations;
|
|
●
|
unstable political and military
situations; and
|
|
●
|
overall foreign policy and variability
of foreign economic conditions, including the effects of the COVID-19 pandemic.
|
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 or to which we are a party. 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
intensive 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 with the exception of Daxx, which functional currency is EURO. 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 three months ended March 31, 2021, approximately 11%, 25% and 8% of Grid Dynamics’ $40.9 million of combined
cost of revenue and total operating expenses were denominated in the Russian ruble, Ukrainian hryvnia and Polish zloty, respectively.
Comparatively, the same foreign currencies accounted for approximately 18%, 11% and 10% of Grid Dynamics’ $39.5 million of combined
cost of revenue and total operating expenses in the three months ended March 31, 2020. 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 losses of our subsidiaries. Irrespective of incurring liability for losses of our subsidiaries, we may 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. 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, may be claimed,
inter alia, by the other stockholders of the effective subsidiary, the administrators and creditors in an insolvency proceeding. 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:
|
●
|
integrate and train new personnel;
|
|
●
|
efficiently transition personnel
from completed projects to new assignments;
|
|
●
|
forecast customer demand for
services; and
|
|
●
|
deploy personnel with appropriate
skills and seniority to projects.
|
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:
|
●
|
maintaining high quality control
and process execution standards;
|
|
●
|
maintaining planned resource utilization
rates on a consistent basis;
|
|
●
|
using an efficient mix of on-site,
off-site and offshore staffing;
|
|
●
|
maintaining productivity levels;
|
|
●
|
implementing necessary process
improvements;
|
|
●
|
recruiting and retaining sufficient
numbers of highly skilled IT personnel; and
|
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 three months ended March 31, 2021 and 2020, we recorded
$5.7 million and $4.8 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 $0.2 million in the first quarter of 2021. 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:
|
●
|
inability to integrate or benefit
from acquired technologies or services;
|
|
●
|
product synergies, cost reductions,
increases in revenue and economies of scale may not materialize as expected;
|
|
●
|
the business culture of the acquired
entity may not match well with our culture;
|
|
●
|
unforeseen delays, unanticipated
costs and liabilities may arise when integrating operations, processes and systems in geographies where we have not conducted business;
|
|
●
|
unanticipated costs or liabilities
associated with the strategic transactions;
|
|
●
|
incurrence of transaction-related
costs;
|
|
●
|
assumption of the existing obligations
or unforeseen liabilities of the acquired business;
|
|
●
|
difficulty integrating the accounting
systems, security infrastructure, operations, and personnel of the acquired business;
|
|
●
|
difficulties and additional expenses
associated with supporting legacy products and hosting infrastructure of the acquired business;
|
|
●
|
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;
|
|
●
|
diversion of management’s
attention from other business concerns;
|
|
●
|
adverse effects to our existing
business relationships with business partners and customers as a result of the strategic transactions;
|
|
●
|
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;
|
|
●
|
difficulty in retaining, motivating
and integrating key management and other employees of the acquired business;
|
|
●
|
use of resources that are needed
in other parts of our business; and
|
|
●
|
use of substantial portions of
our available cash to consummate the strategic transaction.
|
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.
For example, on April 12, 2021, the Staff of
the SEC issued the “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition
Companies (“SPACs”)” (the “Staff Statement”). The Staff Statement provided new guidance for all SPAC-related
companies regarding the accounting and reporting for their warrants that could result in the warrants issued by SPACs being classified
as a liability measured at fair value, with non-cash fair value adjustments reported in earnings at each reporting period.
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.
In addition, regulatory, judicial or other developments
regarding SPACs or companies, such as us, that have merged with a SPAC, could have an adverse effect on us. For example, the SEC has recently
issued several statements regarding regulatory matters involving SPACS, and there can be no assurances that future statements would not
have 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, provided certain requirements are complied with. 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):
|
●
|
any derivative action or proceeding
brought on our behalf;
|
|
●
|
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;
|
|
●
|
any action arising pursuant to
any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or bylaws;
|
|
●
|
any action to interpret, apply,
enforce or determine the validity of our certificate of incorporation or bylaws; and
|
|
●
|
any other action asserting a claim
that is governed by the internal affairs doctrine.
|
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:
|
●
|
our ability to effectively service
any current and future outstanding debt obligations;
|
|
●
|
the announcement the introduction
of new products or services, or enhancements thereto, by us or our competitors;
|
|
●
|
developments concerning intellectual
property rights;
|
|
●
|
changes in legal, regulatory and
enforcement frameworks impacting our products;
|
|
●
|
variations in our and our competitors’
results of operations;
|
|
●
|
the addition or departure of key
personnel;
|
|
●
|
announcements by us or our competitors
of acquisitions, investments or strategic alliances;
|
|
●
|
actual or perceived data security
incidents or breaches;
|
|
●
|
actual or anticipated fluctuations
in our quarterly and annual results and those of other public companies in our industry;
|
|
●
|
the failure of securities analysts
to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;
|
|
●
|
any delisting of our common stock
or warrants from NASDAQ due to any failure to meet listing requirements;
|
|
●
|
adverse developments from litigation;
and
|
|
●
|
the general state of the securities
market.
|
These market and industry factors may materially
reduce the market price of our common stock and warrants, regardless of our operating performance.
As of March 31, 2021, over one-third of
our outstanding common stock was held by our executive officers and directors, or by stockholders controlled by our executive officers
or directors. The concentration of ownership provides such persons 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 such persons
may cause the market price of our common stock to drop significantly.
As a result, such persons, 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 such persons 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 per share, and in March 2021, the price of our common stock reached $13.50
and $15.00 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 100% 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:
|
●
|
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;
|
|
●
|
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;
|
|
●
|
the limitation of the liability
of, and the indemnification of our directors and officers;
|
|
●
|
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;
|
|
●
|
the requirement that directors
may only be removed from our board of directors for cause;
|
|
●
|
a prohibition on stockholder action by written consent, which forces
stockholder action to be taken at an annual or special meetings 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;
|
|
●
|
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;
|
|
●
|
controlling the procedures for
the conduct and scheduling of board of directors and stockholder meetings;
|
|
●
|
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;
|
|
●
|
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
|
|
●
|
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.
|
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.