Risks related to the execution of the business strategy:
One of Quality’s purposes is to continue growing on a large scale in the coming years. But this increase is dependent on numerous factors, many of them beyond the Company’s control, such as government actions and regulations;
Quality has been strongly investing in automation and in the qualification of its employees, and the actions performed reflect positively on the Company’s cash flow. Actions for the reorganization of the Company, cost reduction and operating expenses, has been leading to a relevant increase in productivity and profitability;
In addition, the basis for the Company’s organic growth is supported by the implementation of specific service packages by verticalizing business in the sectors where it operates, expanding the sales team and increasing the base of business partners;
Future performance will depend on the Company’s ability to manage the fast and significant growth of operations, otherwise the Company may not be able to maintain its market position, which may have a material adverse effect on its financial condition and results of operations;
Additionally, Quality’s growth strategy is also based on the premise that the sectors where the Company has a major presence (oil and gas, financial, insurance, legal and services) and others in full expansion (health, government, industry and communication) should experience expressive growth in the coming years, even because of public investments that are being made as a way to improve the infrastructure;
Events that negatively affect the business developed in such sectors, including macroeconomic factors, climate conditions, degradation of Brazilian social conditions, reduction of public investments, adverse changes introduced in the specific regulations for each of these sectors, credit restriction, problems with suppliers, reduction of the consumption capacity of the respective clients, and difficulties in the management of the clients’ own businesses, among others, are beyond the control of the Company’s management and may cause a material adverse effect on operations and results, as well as jeopardize the strategy adopted for the Company’s expansion;
Risks related to the implementation of the acquisition strategy
The Company may experience stronger growth based on the assumption of making acquisitions over the next few years, in order to quickly increase its revenues;
Quality considers it able to execute the growth process, through acquisitions, because it has a strong and efficient operational management process to receive these new assets within an acceptable time period, provided they are synergic to the Company’s business;
The non-achievement of the Company’s new acquisitions strategy may materially and adversely affect its financial condition and results;
Furthermore, any significant acquisitions the Company considers may be subject to authorization from the competent antitrust authorities and other Brazilian authorities. Quality may not be able to successfully obtain such necessary authorizations or to obtain them in a timely manner.
Risks related to the ability to develop new products and services and to adapt to fast technological changes
The IT market is defined by the accelerated development of new technologies related, for example, to the development of processing and storage capacity of computing equipment, the improvement of telecommunications and network infrastructure, making the life-cycle of products faster Besides, we still have the customers’ needs, which are becoming more and more complex every day;
To minimize these impacts, the Company must continue investing massively in automation, in the development and optimization of products and services, as well as in the training of its employees. It is also necessary to build long term partnerships with the main companies that manufacture technological tools, a fact that should allow the conquest and the confidence of the companies in our products and services;
Given the fast technological evolution in the segments where Quality operates, it is not possible to guarantee that the standards adopted in products and services can follow this evolution, which will make them discontinued compared to those offered by our competitors. Also, we cannot guarantee that the technologies we choose to develop our solutions will allow us to compete efficiently in the market;
Any of these events may adversely and substantially affect the Company’s revenues and cash generation;
Risks related to the ability to recruit, train and hold skilled professionals
Quality’s activity is based on a large number of professionals and on the Company’s capacity to recruit, train and hold qualified personnel who work mainly in commercial and technical teams. Due to its dependency on the knowledge of its employees, the loss of its services may significantly delay or prevent the achievement of the Company’s objectives and business;
Another relevant aspect is that there is currently very strong competition for professionals in the Information Technology market due to the lack of specialized labor and this scenario may even influence the Company’s ability to attract, hire and retain professionals, increasing the turnover rate;
Aware of this, Quality maintains a formal technology training unit in order to increase its attractiveness as professionals and its capacity to increase knowledge through a formal and professional structure for knowledge dissemination;
Even so, the Company may not be able to contract and maintain personnel with the required qualifications to serve its customers, which may materially affect its business, operating results and financial condition. For this reason, Quality believes that this is a key factor for business success and growth strategy.
Risks related to the removal of senior management members may affect the conduct of the Company’s business.
The Company’s ability to maintain its competitive position depends largely on the services of its executives. Therefore, the decease of services of any of the members or the inability to maintain additional personnel to integrate the senior management may cause a material adverse effect on the Company’s operating results;
Risks related to flaws, failures or delays in products and services.
Quality is aligned with the latest technologies and trends in the market, which is reflected in the solutions developed by its Project Factory, as well as in its BPO Unit, where there is outsourcing of information technology services, whether infrastructure or systems;
In each of the projects the Company focuses on the objectives and needs of its clients, offering solutions that increase their productivity and help them achieve their business goals, all within expected quality and safety standards;
The products and services offered by the Company are technically challenging which, when first introduced or launched as new versions, may contain flaws that are difficult to detect and correct at times deemed acceptable. The proper functioning of the information technology systems may also be compromised by failures in the telecommunication infrastructure, and a long-term interruption may jeopardize the continuous functioning of the Company’s customers’ operations;
Thus, the existence of any flaws, defects and delays in deliveries and corrections can cause the relationship with customers to be affected, resulting in the damage to reputation and strength of the brand, probable administrative or judicial proceedings, as well as financial disbursements. The existence of any of these factors may adversely affect the Company’s activities.
Risks related to the Company’s image
Negative impacts on the Company’s image may reflect on its credibility, affecting its operating and financial results. Its products and corporate identity may suffer a devaluation if any problem arises that causes damage to its institutional image;
Customers’ purchasing decisions can be affected by factors such as brand recognition, quality and product performance. If, for any reason, your customers believe that the Company does not provide a good corporate image, its activities, financial situation and operating results may be adversely and materially affected;
Risks related to unfavorable decisions in legal, administrative and arbitration proceedings
The Company is and may be a defendant in judicial, administrative and arbitral proceedings in the regular course of its business, whose results may be unfavorable. Decisions contrary to your interests, which eventually reach substantial amounts or prevent you from doing business as initially planned, may cause an adverse effect;
Thus, the final decision of these processes may exceed the Company’s reserves. If provisions are not sufficient to pay for such contingencies when due, they will incur higher than estimated costs, which, if significant, may adversely affect the operating and financial results.
Risks in relation to raising additional funds in the future
Quality may need additional resources and may choose to obtain them through public or private placement of debt securities, or of shares, or other convertible securities;
Therefore, if public or private financing is not available, or if the shareholders so decide, such additional resources may be acquired through an increase in its capital stock;
The raising of additional funds through public issue of shares may not provide for preemptive rights to current shareholders, which may result in the dilution of investor participation in their shares.
Safety related risks in transactions involving the Company’s products or services
Protection against fraud is fundamental for clients and for this reason the Company adopts security measures in its products and services in order to avoid them to ensure greater privacy and integrity in transactions;
Quality knows that these devices can be vulnerable to damage due to defaults in the security mechanisms, operating system, software applications, hardware platform or inappropriate use by users;
The raising of additional funds through public issue of shares may not provide for preemptive rights to current shareholders, which may result in the dilution of investor participation in their shares.
The controlling shareholders, as holders of the majority of the Company’s capital stock, have powers to, among other matters, elect the majority of the members of the Company’s Board of Directors and determine the result of resolutions that require shareholder approval, including in operations with related parties, corporate reorganizations, disposals of assets, partnerships and the time of payment of any future dividends, observing the requirements for payment of the mandatory dividend and other requirements and restrictions imposed by the Brazilian Corporate Law. Its interests may conflict with the interests of your investors.
The controlling shareholders may also be interested in making acquisitions, disposals of assets, partnerships, seeking financing or similar operations which, even if adopted in the best interest of the Company, may conflict with the interests of its investors.
Risks related to the market price of the Company’s shares.
The market price of the Company’s shares reflects certain expectations about future performance and growth, particularly each quarter. However, their revenues may differ between quarters causing significant variations in operating and financial results and the rate of growth in relation to previous periods. Any decline in revenues or profits relative to your projections, or market analyst projections, may have an immediate adverse effect on stock prices. Additionally, pricing may be subject to changes not directly related to Quality’s individual performance, but to the performance of other comparable Companies.
Quality’s share price may vary significantly in response to several factors, including: i) announcement of new products and/or improvements to existing products of the Company and/or its competitors; ii) technological innovations of the Company and/or its competitors; iii) quarterly variations in the operating results of the Company and/or its competitors; iv) changes in revenues and growth rates of certain business units or specific products, or even product categories; v) speculation of the media and/or the financial market; vi) general market conditions related to the market; and vii) announcement and conclusion of merger or other significant transactions by the Company or its competitors.
Risks related to the non-development of a liquid market for Quality’s shares
The Brazilian stock market is significantly less liquid than the main international stock markets. Some characteristics of the Brazilian stock market may limit substantially the liquidity of this market. If a liquid market for Quality’s shares is not developed, its shareholders may face difficulties to offer their issued shares at the price and at the time they prefer.
Risks related to raising funds through the issuance of new shares.
The Company may raise funds through the public or private issuance of new shares, either to continue its growth plan or for other reasons. Should the issue price of such shares exceed the book value, the shareholders subscribing to such shares may suffer the dilution of the equity value of their investment.
Risks related to the necessity of additional resources in the future.
The Company may need additional resources in the future, either to continue its growth plan or for other reasons. These resources may not be available in amounts compatible with your needs or under conditions favorable to your interests. If the Company needs resources from third parties, such as loans and financing, it cannot guarantee that conditions such as term, cost and guarantees are favorable.
The eventual raising of funds from third parties under unfavorable conditions may adversely affect their results and, consequently, reduce the value of their shares.
Risks related to non-payment of dividends or interest on equity to shareholders
According to its Bylaws, Quality shall distribute to its shareholders at least 25% of the adjusted net income in accordance with the Brazilian Corporate Law. However, the Company may not distribute dividends or interest on equity in some cases, such as the inexistence of net income in the fiscal year or the inexistence of a positive balance in the retained earnings and profit reserves accounts.
According to the Brazilian Corporate Law, the distribution of dividends shall no longer be mandatory in the fiscal year in which the management bodies inform the ordinary general meeting that the dividends are incompatible with the Company’s financial condition.
Quality Software S.A. has no subsidiaries or affiliates and therefore there are no risks associated with them.
In order to provide its services, the Company depends, in part, on the technology that it licenses from third parties in a non-exclusive manner. These technologies may be terminated or not renewed, reflecting the development of the Company’s products and services and consequently the increase in costs and reduction in service performance.
Also, delays and/or inability of suppliers to comply with contractual obligations may adversely affect Quality’s production, sales and revenues.
The Company may not be able to maintain or renew existing contracts with its major clients. Its success depends on the ability to retain its significant customers and maintain or increase the level of its revenues from these customers, including, in particular, revenues from certain medium and long-term contracts.
A significant portion of the Company’s revenue is concentrated in twenty clients, representing, in the fiscal year ended 2019, approximately 49% of the Company’s annual gross revenue.
Although the Company has medium and long-term contracts with clients, there is no guarantee that the contracts with the main clients will be renewed or extended or that the Company will obtain an equivalent revenue from the main clients in the future.
Additionally, if Quality fails to anticipate technological changes or improve, integrate and update its products and services quickly and in accordance with the regulatory and economic environment of its customers, or position or price of its products and services to attend the market demand, customers may choose not to purchase new products and services, which may have a significant adverse impact on business, financial condition, results of operations and cash flows.
Risks related to competitiveness
Quality competes locally and internationally in all areas of its business and may also face competition from new participants. Its market share may be reduced if it is unable to remain competitive. This may occur if it does not maintain prices and sales compatible with its competitors or if its competitors acquire or introduce new products or add new functionality to existing products through technological advances or modernizations driven by regulatory or economic requirements.
The high level of competition in this market may limit the Company’s ability to grow or apply pressure on the prices of its products and services, reducing its revenues and adversely affecting its business.
Risks related to technological evolution
The Company’s success depends on its ability to implement and integrate new services and align them with customer demand. Given the continuing technological advances in the IT and BPO market, customers’ needs are increasingly complex and they constantly demand new services.
The ability to maintain a leading position in the market in the future will depend on Quality’s ability to develop new solutions or adapt to changes in technology and market standards, as well as to improve the performance of its services and their reliability. Adjustments to technological changes may involve substantial investments, which may affect your operating results and financial situation.
Risks related to the markets of operation
Quality operates mainly in the oil and gas, financial, insurance, legal and service sectors. Therefore, any events that negatively affect these sectors, including macroeconomic factors, reduction of public investments, credit restriction, issues with suppliers, reduction of customers’ consumption power, among others, will be beyond the control of the Company’s management and may cause a material adverse effect on the Company’s operating results and financial situation.
Any amendment to the legislation related to the Company’s business may adversely affect its operations, costs, profitability and competitiveness, given the potential difficulties that Quality may have in updating and/or creating new versions of its products.
Currently, Quality has operated only in the Brazilian market, but may experience difficulties from the moment it operates in foreign countries, such as: i) unforeseen regulatory changes; ii) inability to attract employees and manage operations outside Brazil; iii) changes in tax legislation; iv) changes in commercial and investment policies and regulations; v) obstacles in registering and protecting trademarks and software; vi) adoption of protection measures, subsidies and other forms of government favoring competitors from such foreign markets; and vii) cultural and language obstacles.
In case one or more of these risks is materialized, and the Company is not able to overcome them, the Company may not be able to implement its international expansion strategy.
The Company is subject to market risks arising from the natural flow of its business and corresponding to the possibility of financial or economic variations resulting from changes in the market values of positions held by the Company. Such market risks, that are beyond the Company’s control, relate mainly to the possibility of foreign exchange variations, inflation and interest rate fluctuations that may adversely affect the value of its financial assets and liabilities or cash flows and future profits.
Interest rate risk
The interest rate risk arises from the potential for us to incur losses inherent in fluctuations in interest rates. We are exposed to the oscillation of the CDI (Interbank Deposit Certificate) rate and the TLP (Long Term Rate), since this rate is used to remunerate our financial investments, as well as it is the principal indexer of our indebtedness. Thus, any increase/decrease in interest rates in the Brazilian market will directly impact the profitability of our investments and, especially, our indebtedness.
The company has a large part of its revenues linked to the delivery of services. A large part of the cost of this service is linked to the cost of the payroll, which is adjusted according to inflation rates. If there is a significant increase in inflation and the Company is not able to fully or partially transfer the increase in the cost of its payroll services to its customers or is not able to functionally absorb this increase, its operating margins may be materially affected, reducing its profitability. In addition to costs, most of its contracts are readjusted according to inflation indexes. If there is a significant increase in inflation indexes and clients do not accept the proposed adjustments, the Company may also have its margin reduced.
Exchange Rate Risk
The Company is subject to foreign currency exchange variation, mainly the dollar, since it purchases foreign products associated with this currency. The depreciation of the real against foreign currencies may have an adverse effect on the Company’s business and results, especially in the GRC and 4AUT business lines.
Credit and liquidity risks of assets
The liquidity risk of assets arises as the Company may not be able to reach a balance and/or credit limit with financial institutions sufficient to meet its cash requirements. The Company’s credit risk arises mainly from cash, banks and financial investments.