F-1/A: Registration statement for securities of certain foreign private issuers
Published on July 16, 2018
As filed with the Securities and Exchange Commission on July 16, 2018.
Registration No. 333-226010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________
Amendment No. 1
to
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________________________________________
ENDAVA PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Not Applicable
(Translation of Registrant’s Name into English)
England and Wales |
7371 |
Not Applicable |
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(State or other Jurisdiction of
Incorporation or Organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
125 Old Broad Street
London EC2N 1AR
United Kingdom
+44 20 7367 1000
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
______________________________________________________
Endava Inc.
441 Lexington Avenue, Suite 702
New York, NY 10017
(212) 920-7240
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Nicole Brookshire
Darren DeStefano
Richard Segal
Cooley LLP
500 Boylston Street, 14th Floor
Boston, MA 02116
(617) 937-2300
|
Ed Lukins
Ed Dyson
Cooley (UK) LLP
Dashwood
69 Old Broad Street
London EC2M 1QS
United Kingdom
+44 20 7785 9355
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Alan Denenberg
Reuven Young
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, CA 94025
(650) 757-2000
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Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ý
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period* for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
* |
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
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CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES
TO BE REGISTERED
|
AMOUNT TO BE REGISTERED(1)(2) |
PROPOSED MAXIMUM OFFERING PRICE PER SHARE |
PROPOSED
MAXIMUM
AGGREGATE
OFFERING
PRICE(1)(2)
|
AMOUNT OF
REGISTRATION
FEE(3)
|
||||
Class A ordinary shares, nominal value £0.02 per ordinary share(4) |
6,440,000 |
$19.00 |
$122,360,000 |
$15,234 |
(1) |
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended. |
(2) |
Includes Class A ordinary shares represented by American Depositary Shares, or ADSs, which the underwriters have the option to purchase, if any. |
(3) |
Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. Of this amount, a total of $9,338 was previously paid. |
(4) |
These Class A ordinary shares are represented by ADSs, each of which represents one Class A ordinary share of the registrant. ADSs issuable upon deposit of the Class A ordinary shares registered hereby are being registered pursuant to a separate registration statement on Form F-6 (File No. 333-226021). |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued July 16, 2018
5,600,000 American Depositary Shares
REPRESENTING 5,600,000 CLASS A ORDINARY SHARES
___________________________________
Endava plc is offering 2,890,000 American Depositary Shares, or ADSs. The selling shareholders identified in this prospectus are offering 2,710,000 ADSs. We will not receive any proceeds from the ADSs sold by the selling shareholders. E ach AD S represents one Class A ordinary share. The ADSs may be evidenced by American Depositary Receipts, or ADRs . This is our initial public offering and no public market currently exists for our ADSs. We anticipate that the initial public offering price will be between $17.00 and $19.00 per ADS.
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Following this offering, we will have three classes of ordinary shares, Class A ordinary shares, Class B ordinary shares and Class C ordinary shares. The rights of the holders of Class A ordinary shares, Class B ordinary shares and Class C ordinary shares will be identical, except with respect to voting, conversion and transfer rights. Each Class A ordinary share will be entitled to one vote per share. Each Class B ordinary share will be entitled to ten votes per share and is convertible into one Class A ordinary share, subject to certain restrictions. Each Class C ordinary share will be entitled to one vote per share and is convertible into one Class A ordinary share, subject to certain restrictions. Outstanding Class B ordinary shares will represent approximately 92.2% of the voting power of our outstanding share capital immediately following the closing of this offering.
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We have applied to list our ADSs on the New York Stock Exchange under the symbol “DAVA.”
We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this and future filings. Investing in our ADSs involves risk. See “Risk Factors” beginning on page 17.
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PRICE $ AN ADS
___________________________________
Price to Public |
Underwriting Discounts and Commissions(1)
|
Proceeds to Endava |
Proceeds to the Selling Shareholders |
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Per ADS |
$ |
$ |
$ |
$ |
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Total |
$ |
$ |
$ |
$ |
(1) |
See “Underwriters” for a description of the compensation payable to the underwriters.
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Certain of the selling shareholders have granted the underwriters the right to purchase up to an additional 840,000 ADSs at the initial offering price less the underwriting discounts and commissions.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the ADSs to purchasers on or about , 2018.
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MORGAN STANLEY |
CITIGROUP |
CREDIT SUISSE |
DEUTSCHE BANK SECURITIES |
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COWEN |
WILLIAM BLAIR |
___________________________________
, 2018
TABLE OF CONTENTS
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We are responsible for the information contained in this prospectus and any free-writing prospectus we prepare or authorize. We have not, and the underwriters and selling shareholders have not, authorized anyone to provide you with different information, and we, the underwriters and the selling shareholders take no responsibility for any other information others may give you. We are not, and the underwriters and selling shareholders are not, making an offer to sell our ADSs in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or the sale of any ADSs.
For investors outside the United States, neither we nor the underwriters nor the selling shareholders have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside the United States.
Following our corporate reorganization, we are a public limited company incorporated under the laws of England and Wales and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or SEC, we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended.
Through and including , 2018 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
ABOUT THIS PROSPECTUS
Unless otherwise indicated or the context otherwise requires, all references in this prospectus to the terms “Endava,” “Endava Limited,” “Endava plc,” the “Company,” “we,” “us,” and “our” refer to (i) Endava Limited and our wholly-owned subsidiaries prior to the completion of our corporate reorganization and (ii) Endava plc and our wholly-owned subsidiaries after the re-registration of Endava Limited as a public limited company.
On July 6, 2018, we re-registered Endava Limited as a public limited company and our name was changed from Endava Limited to Endava plc. See “Corporate Reorganization.”
PRESENTATION OF FINANCIAL INFORMATION
Our fiscal year ends on June 30. This prospectus includes our audited consolidated financial statements as of and for the years ended June 30, 2016 and 2017 and our unaudited condensed consolidated financial statements as of and for the nine months ended March 31, 2017 and 2018, which are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. None of our financial statements were prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
Our financial information is presented in British Pounds. For the convenience of the reader, in this prospectus, unless otherwise indicated, translations from British Pounds into U.S. dollars were made at the rate of £1.00 to $1.4032, which was the rate in effect on March 31, 2018. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of British Pounds at the dates indicated. All references in this prospectus to “$” mean U.S. dollars and all references to “£” and “GBP” mean British Pounds.
We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our ADSs, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Endava,” “company,” “our,” “us,” and “we” in this prospectus to refer to Endava plc and, where appropriate, our consolidated subsidiaries. Our fiscal year ends on June 30.
ENDAVA PLC
Overview
We are a leading next-generation technology services provider and help accelerate disruption by delivering rapid evolution to enterprises. We aid our clients in finding new ways to interact with their customers and users, enabling them to become more engaging, responsive and efficient. Using Distributed Enterprise Agile at scale, we collaborate with our clients, seamlessly integrating with their teams, catalyzing ideation and delivering robust solutions. Our approach to ideation comprises an empathy for user needs, curiosity, creativity and a deep understanding of technologies. From proof of concept, to prototype, to production, we use our engineering expertise to deliver enterprise platforms capable of handling millions of transactions per day. Our people, whom we call Endavans, synthesize creativity, technology and delivery at scale in multi-disciplinary teams, enabling us to support our clients from ideation to production.
Waves of technological change are disrupting the nature of competition in every industry. New technologies have enabled the growth and success of companies that leverage these technologies in every aspect of their businesses, or digital native companies, allowing them to be nimble, innovative, data driven and focused on user experience, often through an Agile development approach. Technology has also increased customer expectations, giving customers the ability to choose not only the products and services that they want, but also where, when and how they want them delivered. Incumbent enterprises must undertake digital transformation of their businesses by leveraging technology in order to meet ever-evolving customer expectations and compete with digital native disruptors.
Technological transformation poses numerous challenges for incumbent enterprises. Incumbent enterprises are often laden with legacy infrastructure and applications that are deeply embedded in core transactional systems. Incumbent enterprises are also often stymied by institutional constraints that impede their ability to solve complex problems and rapidly respond to shifting competitive dynamics, as well as ingrained traditional approaches to development. Likewise, internal IT teams at incumbent enterprises often struggle to absorb the rapid pace of technology development and its growing complexity. To effectively harness the power of technology, incumbent enterprises need talent in ideation, strategy, user experience, Agile development and next-generation technologies. While incumbent enterprises have historically looked to traditional information technology, or IT, service providers to undertake technology development projects, these traditional players were built to serve, and remain focused on serving, legacy systems using offshore delivery.
We help our clients become digital, experience-driven businesses by assisting them in their journey from idea generation to development and deployment of products, platforms and solutions. Our expertise spans the ideation-to-production spectrum across three broad solution areas – Digital Evolution, Agile Transformation and Automation. At the core of our approach is our proprietary Distributed Enterprise Agile scaling framework, known as The Endava Agile Scaling framework, or TEAS. TEAS utilizes common Agile scaling frameworks, but enhances them by balancing the requirements of delivering both quality and speed-to-market, helping our clients release higher-quality products to market faster, respond better to market changes and incorporate customer and user feedback through rapid releases and product iterations. Our deep familiarity with technologies developed over the last decade including mobile connectivity, social media, automation, big data analytics and cloud delivery, as well as next-generation technologies such as IoT, artificial intelligence, machine learning, augmented reality, virtual reality and blockchain, allows us to help our clients transform their businesses.
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We locate our nearshore delivery centers in countries that not only have abundant IT talent pools, but also offer us an opportunity to be a preferred employer. We provide services from our nearshore delivery centers, located in two European Union countries – Romania and Bulgaria, three other Central Europe countries – Macedonia, Moldova and Serbia, and four countries in Latin America – Argentina, Colombia, Uruguay and Venezuela. We have close-to-client offices in four Western European countries – Denmark, Germany, the Netherlands and the United Kingdom, as well as in the United States. As of March 31, 2018, we had 4,700 employees, approximately 53.7% of whom work in nearshore delivery centers in European Union countries.
As of March 31, 2018, we had 249 active clients, which we define as clients who paid us for services over the preceding 12-month period. We have achieved significant growth in recent periods. For the fiscal years ended June 30, 2015, 2016 and 2017, our revenue was £84.1 million, £115.4 million and £159.4 million, respectively, representing a compound annual growth rate of 37.7% over the three year period. For the nine months ended March 31, 2017 and 2018, our revenue was £116.3 million and £156.1 million, respectively. We generated 77.8%, 64.4% and 50.2% of our revenue for the three fiscal years ended June 30, 2015, 2016 and 2017, respectively, from clients located in the United Kingdom; we generated 12.0%, 17.5% and 33.6% of our revenue in each of those fiscal years, respectively, from clients located in Europe; and we generated the balance of our revenue for each of those fiscal years from clients located in North America. Our revenue growth rate at constant currency, which is a measure that is not calculated and presented in accordance with International Financial Reporting Standards, or IFRS, for the fiscal years ended June 30, 2015, 2016 and 2017 was 32.6%, 36.6% and 28.5% respectively. Our revenue growth rate at constant currency for the nine months ended March 31, 2017 and 2018 was 28.8% and 34.6%, respectively. Over the last five fiscal years, 91.2% of our revenue, on average, each fiscal year came from clients who purchased services from us during the prior fiscal year. Our profit before taxes was £15.2 million, £20.8 million and £21.7 million for the fiscal years ended June 30, 2015, 2016 and 2017, respectively, and our profit before taxes as a percentage of revenue was 18.1%, 18.0% and 13.6%, respectively, for the same periods. Our profit before taxes was £16.2 million and £18.0 million for the nine months ended March 31, 2017 and 2018, respectively, and our profit before taxes as a percentage of revenue was 13.9% and 11.5%, respectively, for the same periods. Our adjusted profit before taxes margin, or Adjusted PBT Margin, which is a measure that is not calculated and presented in accordance with IFRS, was 19.2%, 19.7% and 15.8%, respectively, for the fiscal years ended June 30, 2015, 2016 and 2017. Our Adjusted PBT Margin was 15.8% and 15.3%, respectively, for the nine months ended March 31, 2017 and 2018. See notes 1 and 6 in the section of this prospectus titled “Summary Consolidated Financial Data – Non-IFRS Measures and Other Management Metrics” for a reconciliation of revenue growth rate at constant currency revenue growth rate and for a reconciliation of Adjusted PBT to profit before taxes, respectively, the most directly comparable financial measures calculated and presented in accordance with IFRS.
Industry Background
Overview
Significant Technology Innovation
The use of mobile connectivity, social media, automation, big data analytics and cloud delivery have become integral to business execution and emerging trends and technologies hold the potential to significantly reshape industries. Because each new generation of technology builds on and advances the technology that came before it, the pace of technological innovation will continue to accelerate, increasing the pace at which enterprises will need to transform.
Empowered Customers and Users
The proliferation of new technologies has empowered customers and users across industries and increased their expectations. Empowered customers and users are increasingly discerning and their preferences keep changing as technology evolves.
Rise of the Digital Natives
These significant technological changes have enabled the emergence of digital native companies, which leverage emerging technologies in every aspect of their businesses and are nimble and innovative, data driven and focused on the user experience. Digital native companies have revolutionized the way technology is used across all functions in
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an organization, how technology infrastructure is built and maintained and how technology solutions are developed, deployed and continually improved.
Increasing Adoption of the Agile Approach
The adoption of Agile development, an iterative and incremental methodology premised on collaboration between cross-functional teams, has become pervasive. Agile is user driven and focused on continuous delivery of small upgrades, facilitating highly differentiated speeds of innovation and time to market.
Challenges to Transformation
There are several challenges that incumbent enterprises face in achieving technological transformation:
Significant Investment in Legacy Technology
Incumbent enterprises are often laden with legacy infrastructure and applications that are difficult and expensive to operate and maintain. For most incumbent enterprises, reorienting IT operations with new technology is expensive, time-consuming and risks service disruption.
Barriers to Innovation
Incumbent enterprises are fundamentally built to do what they are already doing and can struggle with innovation. They are often characterized by ingrained processes and cultural norms that can impede their ability to solve complex problems and rapidly respond to shifting competitive dynamics.
Not Built for Agile
Incumbent enterprises are often stymied by ingrained traditional approaches to development. The Agile methodology stands in stark contrast to the IT-department-driven, legacy approach often used by incumbent enterprises, which is premised on a sequential and siloed structure, involves long development cycles, fails to integrate user feedback and is often more costly.
Lack of Required Expertise and Talent
Internal IT teams at incumbent enterprises often struggle to absorb the rapid pace of technology development and its growing complexity. Incumbent enterprises need to acquire and retain talent in ideation, strategy, user experience, Agile development and next-generation technologies.
Limitations of Traditional IT Service Providers
Incumbent enterprises have historically looked to traditional IT service providers to undertake technology development projects. Traditional IT service providers are built for commoditized development, integration and maintenance engagements, where cost is key. While some of these traditional IT service providers have invested in capabilities to provide user experience strategy and design, as well as Agile development capabilities, they were built to serve, and remain focused on serving, legacy systems using offshore delivery.
Our Opportunity
According to International Data Corporation, or IDC, the worldwide market for digital transformation services is expected to be approximately $390 billion in 2018 and is expected to grow at a compound annual growth rate of 19.7% through 2021.
Our Competitive Strengths
We have distinguished ourselves as a leader in next-generation technology services by leveraging the following competitive strengths:
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Ideation through Production. We help our clients become digital, experience-driven businesses by assisting them in their journey from idea generation to development and deployment of products, platforms and solutions.
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Our expertise spans the ideation-to-production spectrum across three broad solution areas – Digital Evolution, Agile Transformation and Automation.
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Proprietary Framework for Distributed Enterprise Agile at Scale. To allow us to deliver Distributed Enterprise Agile at scale, we have developed a proprietary Agile scaling framework, TEAS. TEAS utilizes common Agile scaling frameworks, but enhances them by balancing the requirements of delivering both quality and speed-to-market.
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Expertise in Next-Generation Technologies. We have deep expertise in next-generation technologies that drives our ability to provide solutions for Digital Evolution, Agile Transformation and Automation. Our expertise ranges from technologies developed over the last decade including mobile connectivity, social media, automation, big data analytics and cloud delivery to next-generation technologies such as IoT, artificial intelligence, machine learning, augmented reality, virtual reality and blockchain.
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Strong Domain Expertise. We have deep expertise in industry verticals that are being disrupted by technological change, particularly Payments and Financial Services and Technology, Media and Telecommunications.
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Employer of Choice in Regions with Deep Pools of Talent. We strive to be one of the leading employers of IT professionals in the regions in which we operate. We locate our nearshore delivery centers in countries that not only have abundant IT talent pools, but also offer us an opportunity to be a preferred employer. For example, a majority of our employees are located in Romania, where we have been identified as a top employer for each of the last five years.
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Distinctive Culture and Values. We believe that our people are our most important asset. We provide Endavans with training to develop their technical and soft skills, in an environment where they are continually challenged and given opportunities to grow as professionals. We believe that we have built an organization deeply committed to helping people succeed and that our culture fosters our core values of openness, thoughtfulness and adaptability.
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Founder Led, Experienced and Motivated Management Team. Our management team, led by John Cotterell, our founder and chief executive officer, has significant experience in the global technology and services industries. Our most senior 38 employees have an average tenure at Endava of 11 years.
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Our Strategy
We are focused on continuing to distinguish ourselves as a leader in next-generation technology services. The key elements of our strategy include:
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Expand Relationships with Existing Clients. We are focused on continuing to expand our relationships with existing clients by helping them solve new problems and become more engaging, responsive and efficient.
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Establish New Client Relationships. We believe that we have a significant opportunity to add new clients in our existing core industry verticals and geographies, and to expand our client base to new industry verticals and geographies.
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Lead Adoption of Next-Generation Technologies. We seek to apply our creative skills and deep digital technical engineering capabilities to enhance our clients’ value to their end customers and users. As a result, we are highly focused on remaining at the forefront of emerging technology trends.
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Expand Scale in Nearshore Delivery. As we continue to expand our relationships with existing clients and attract new clients, we plan to expand our teams at existing delivery centers and open new delivery centers in nearshore locations with an abundance of technical talent.
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Selectively Pursue “Tuck-In” Acquisitions. We have a demonstrated track record of successfully identifying, acquiring and integrating complementary business and plan to leverage this experience as we pursue our “tuck-in” acquisition strategy.
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Selected Risks Affecting Our Business
Investing in our ADSs involves risk. You should carefully consider all the information in this prospectus prior to investing in our ADSs. These risks are discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These risks and uncertainties include, but are not limited to, the following:
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We may not be able to sustain our revenue growth rate in the future. |
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We are dependent on our largest clients. |
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We must attract and retain highly-skilled IT professionals. |
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Our revenue is dependent on a limited number of industry verticals. |
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Our profitability could suffer if we are not able to maintain favorable pricing. |
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Recent acquisitions and potential future acquisitions could prove difficult to integrate, disrupt our business, dilute shareholder value and strain our resources. |
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We are focused on growing our client base in North America and may not be successful. |
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We face intense competition. |
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We are dependent on our senior management team and key employees. |
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If we are unable to comply with our security obligations or our computer systems are or become vulnerable to security breaches, we may face reputational damage and lose clients and revenue. |
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The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business. |
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Fluctuations in currency exchange rates and increased inflation could materially adversely affect our financial condition and results of operations. |
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Our international operations involve risks that could increase our expenses, adversely affect our results of operations and require increased time and attention from our management. |
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The three class structure of our ordinary shares has the effect of concentrating voting control for the foreseeable future, which will limit your ability to influence corporate matters. Following the completion of this offering, holders of our Class B ordinary shares will collectively beneficially hold shares representing approximately 92.2% of the voting rights of our outstanding share capital assuming the issuance by us of 2,890,000 ADSs in this offering and the sale by the selling shareholders of 2,710,000 ADSs in this offering (or 91.7% of the voting rights of our outstanding share capital if the underwriters exercise their over-allotment option in full) and John Cotterell, our Chief Executive Officer, will beneficially hold Class B ordinary shares representing approximately 32.8% of the voting rights of our outstanding share capital assuming the issuance by us of 2,890,000 ADSs in this offering and the sale by the selling shareholders of 2,710,000 ADSs in this offering. Notwithstanding this concentration of control, we do not expect that we will qualify as a “controlled company” under New York Stock Exchange listing rules. |
Corp orate Information
The legal and commercial name of our company is Endava plc. We were registered under the laws of England and Wales in 2006 with an indefinite life.
Our principal executive office is located at 125 Old Broad Street, London EC2N 1AR, United Kingdom and our telephone number is +44 20 7367 1000. Our agent for service of process in the United States is Endava Inc. Our website address is www.endava.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.
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“Endava,” the Endava logo and other trademarks or service marks of Endava plc appearing in this prospectus are the property of Endava or our subsidiaries. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols.
Corporate Reorganization
We have completed a corporate reorganization, pursuant to which all shareholders of Endava Limited were given the choice to elect to accept redesignation of all existing ordinary shares in the capital of Endava Limited held by them into the same number of either (i) Class B ordinary shares of Endava Limited, where each Class B ordinary share is entitled to 10 votes per share and is subject to certain restrictions on transfer for a period of five years following the date of this prospectus or (ii) Class C ordinary shares of Endava Limited, where each Class C ordinary share is entitled to one vote per share and is subject to certain restrictions on transfer for a period of 18 months following the date of this prospectus, and with each Class B ordinary share and each Class C ordinary share being capable of conversion into one Class A ordinary share; provided, that the Endava Limited Guernsey Employee Benefit Trust was required to redesignate all of the existing ordinary shares held by it into the same number of Class A ordinary shares, each entitled to one vote per share. Endava Limited has re-registered as a public limited company and changed its name to Endava plc. See “Corporate Reorganization.”
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we may take advantage of certain exemptions from various reporting requirements that are applicable to other publicly traded entities that are not emerging growth companies. These exemptions include:
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the option to present only two years of audited financial statements and related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus; |
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and |
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis). |
As a result, we do not know if some investors will find our ADSs less attractive. The result may be a less active trading market for our ADSs, and the price of our ADSs may become more volatile.
Section 107 of the JOBS Act also provides that an emerging growth company that prepares its financial statements in accordance with U.S. GAAP can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain U.S. GAAP accounting standards until those standards would otherwise apply to private companies. We will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB.
We will remain an emerging growth company until the earliest of: (1) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (2) the last day of 2023; (3) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of any fiscal year that the aggregate worldwide market value of our common equity held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during any three-year period.
Implications of Being a Foreign Private Issuer
Upon the completion of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign
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private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
• |
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; |
• |
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and |
• |
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specific information, and current reports on Form 8-K upon the occurrence of specified significant events. |
Foreign private issuers are also are exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.
8
THE OFFERING
ADSs offered by us |
2,890,000 ADSs, each ADS representing one Class A ordinary share |
|
ADSs offered by the selling shareholders |
2,710,000 ADSs, each ADS representing one Class A ordinary share |
|
Class A ordinary shares to be outstanding after
this offering
|
10,303,980 shares
|
|
Class B ordinary shares to be outstanding after
this offering
|
28,500,125 shares |
|
Class C ordinary shares to be outstanding after this offering |
13,890,040 shares |
|
Total Class A ordinary shares, Class B ordinary
shares and Class C ordinary shares to be outstanding after this offering
|
52,694,145 shares
|
|
American Depositary Shares |
Each ADS represents one Class A ordinary share, with a nominal value of £0.02 per share. The ADSs may be evidenced by American Depositary Receipts, or ADRs. The depositary will hold the Class A ordinary shares underlying the ADSs, and you will have the rights of an ADS holder or beneficial owner (as applicable) as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of our ADSs, see “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. |
|
Depositary |
Citibank, N.A. |
|
Over-allotment option |
Certain of the selling shareholders have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to an additional 840,000 ADSs. |
|
9
Voting rights |
Following this offering we will have three classes of authorized ordinary shares: Class A ordinary shares, Class B ordinary shares and Class C ordinary shares. The rights of the holders of Class A ordinary shares, Class B ordinary and Class C ordinary shares are identical, except with respect to voting, conversion and transfer. The holders of Class A ordinary shares are entitled to one vote per share, the holders of Class B ordinary shares are entitled to ten votes per share and the holders of Class C ordinary shares are entitled to one vote per share on all matters that are subject to shareholder vote. Each Class B ordinary share and Class C ordinary share may be converted into one Class A ordinary share at the option of its holder, subject to certain restrictions, and will be automatically converted into one Class A ordinary share upon transfer thereof, subject to certain exceptions. In addition, (i) on the date that the outstanding Class B ordinary shares represent less than 10% of the aggregate voting power of our share capital, all outstanding Class B ordinary shares will convert automatically into Class A ordinary shares and (ii) on the date that is two years from the date of this prospectus, all Class C ordinary shares will convert automatically into Class A ordinary shares. See “Description of Share Capital and Articles of Association.” |
|
Restriction on transfer |
We, our executive officers, directors and holders of substantially all of our outstanding ordinary shares (including all of the selling shareholders) have agreed that, subject to certain exceptions, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Morgan Stanley & Co. LLC, dispose of or hedge any ADSs or shares or any securities convertible into or exchangeable for shares of our company. Morgan Stanley & Co. LLC may, at its discretion, release or waive any of the securities subject to these lock-up agreements at any time. |
|
In addition, our articles of association provide that (i) each holder of Class B ordinary shares may not dispose of (a) any Class B ordinary shares during the period ending 180 days from the date of this prospectus, (b) more than 25% of the Class B ordinary shares held by such holder as of the date of this prospectus in the 18-month period following the date of this prospectus (including by conversion to Class A ordinary shares), (c) more than 40% of the Class B ordinary shares held by such holder as of the date of this prospectus in the three-year period following the date of this prospectus (including by conversion to Class A ordinary shares) and (d) more than 60% of the Class B ordinary shares held by such holder as of the date of this prospectus in the five-year period following the date of this prospectus (including by conversion to Class A ordinary shares) and (ii) each holder of Class C ordinary shares may not dispose of (a) any Class C ordinary shares during the period ending 180 days from the date of this prospectus or (b) more than 25% of the Class C ordinary shares held by such holder as of the date of this prospectus in the 18-month period following the date of this prospectus (including by conversion to Class A ordinary shares). |
10
All of our directors and officers and certain of our other employees have agreed to receive Class B ordinary shares in exchange for all ordinary shares currently held by them. See “Description of Share Capital and Articles of Association.” |
||
Use of proceeds |
We estimate that the net proceeds from our sale of ADSs in this offering will be approximately $40.6 million (£28.9 million), assuming an initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our ADSs. We intend to use the net proceeds we receive from this offering to repay in full amounts outstanding under our revolving credit facility with HSBC Bank PLC and for general corporate purposes, including working capital, selling, general and administrative expenses and capital expenditures.
See “Use of Proceeds” for additional information.
We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
|
|
Risk factors |
See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ADSs. |
|
Proposed New York Stock Exchange symbol |
“DAVA” |
The number of our Class A ordinary shares, Class B ordinary shares and Class C ordinary shares that will be outstanding after this offering is based on 49,804,145 ordinary shares outstanding as of March 31, 2018, and excludes:
• |
669,230 Class A ordinary shares issuable upon the exercise of share options outstanding as of March 31, 2018, at a weighted average exercise price of £0.22 per share, with the balance of the total number of 4,873,210 Class A ordinary shares subject to share options outstanding as of March 31, 2018 being currently issued and outstanding and held by the Endava Limited Guernsey Employee Benefit Trust; |
• |
1,125,035 Class A ordinary shares that will be issued, following the completion of this offering, in connection with our acquisition of Velocity Partners LLC, or Velocity Partners; |
• |
360,340 Class A ordinary shares that we will be required to issue to certain continuing employees of Velocity Partners over a period of three years following the completion of this offering; |
• |
5,530,000 Class A ordinary shares reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and which number of reserved shares includes up to 936,667 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering; and |
• |
2,675,000 Class A ordinary shares reserved for future issuance pursuant to the Endava plc 2018 Sharesave Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and |
11
which number of reserved shares includes 1,189,040 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering.
Unless otherwise indicated, this prospectus reflects and assumes the following:
• |
the redesignation of an aggregate of 4,703,980 of our outstanding ordinary shares as of March 31, 2018 into an aggregate of 4,703,980 Class A ordinary shares; |
• |
the redesignation of an aggregate of 28,822,625 of our outstanding ordinary shares as of March 31, 2018 into an aggregate of 28,822,625 Class B ordinary shares; |
• |
the redesignation of an aggregate of 16,277,540 of our outstanding ordinary shares as of March 31, 2018 into an aggregate of 16,277,540 Class C ordinary shares; |
• |
the conversion, immediately prior to the completion of this offering and/or the completion of the sale of the securities subject to the underwriters' over-allotment option, as applicable, of 322,500 Class B ordinary shares (or 1,156,136 Class B ordinary shares if the underwriters exercise their over-allotment option in full) and 2,387,500 Class C ordinary shares (or 2,393,864 Class C ordinary shares if the underwriters exercise their over-allotment option in full) into an aggregate of 2,710,000 Class A ordinary shares (or 3,550,000 Class A ordinary shares if the underwriters exercise their over-allotment option in full), which Class A ordinary shares are to be offered in the form of ADSs by the selling shareholders; |
• |
the modification of all outstanding options to acquire ordinary shares into options to acquire an equal number of redesignated Class A ordinary shares prior to the completion of this offering; |
• |
the completion of the transactions described in the section of this prospectus titled “Corporate Reorganization”; |
• |
a five-for-one share split of each class of our ordinary shares effected on July 6, 2018; |
• |
no exercise of outstanding share options after March 31, 2018; and |
• |
no exercise of the underwriters’ over-allotment option. |
12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth our summary consolidated financial data for the periods indicated. We have derived the consolidated statement of comprehensive income for the fiscal years ended June 30, 2016 and 2017 and the consolidated balance sheet data as of June 30, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. In order to provide additional historical financial information, we have included supplemental unaudited consolidated statements of operation data for the fiscal year ended June 30, 2015, which is derived from the consolidated statement of comprehensive income for the fiscal year ended June 30, 2015 from our unaudited financial statements not included elsewhere in this prospectus. We derived the consolidated statement of comprehensive income for the nine months ended March 31, 2017 and 2018 and the consolidated balance sheet as of March 31, 2018 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited financial statements reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected for any future period, and our results for the nine months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year. You should read the following summary consolidated financial data together with the audited consolidated financial statements included elsewhere in this prospectus and the sections titled “Exchange Rate Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We maintain our books and records in British Pounds, and we prepare our financial statements in accordance with IFRS as issued by the IASB. We report our financial results in British Pounds.
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||||||||||
2015 (£) |
2016 (£) |
2017 (£) |
2017 ($)(1)
|
2017 (£) |
2018 (£) |
2018 ($)(1)
|
|||||||||||||||||||||
(in thousands, except for share and per share amounts) |
|||||||||||||||||||||||||||
Consolidated Statements of Operations Data: |
|||||||||||||||||||||||||||
Revenue |
£ |
84,107 |
£ |
115,432 |
£ |
159,368 |
$ |
223,625 |
£ |
116,322 |
£ |
156,140 |
$ |
219,096 |
|||||||||||||
Cost of sales: |
|||||||||||||||||||||||||||
Direct cost of sales(2)
|
(49,717 |
) |
(68,517 |
) |
(98,853 |
) |
(138,711 |
) |
(72,692 |
) |
(96,104 |
) |
(134,853 |
) |
|||||||||||||
Allocated cost of sales |
(3,674 |
) |
(6,529 |
) |
(9,907 |
) |
(13,902 |
) |
(6,943 |
) |
(9,281 |
) |
(13,023 |
) |
|||||||||||||
Total cost of sales |
(53,391 |
) |
(75,046 |
) |
(108,760 |
) |
(152,613 |
) |
(79,635 |
) |
(105,385 |
) |
(147,876 |
) |
|||||||||||||
Gross profit |
30,716 |
40,386 |
50,608 |
71,012 |
36,687 |
50,755 |
71,220 |
||||||||||||||||||||
Selling, general and administrative expenses(2)
|
(13,729 |
) |
(20,453 |
) |
(27,551 |
) |
(38,660 |
) |
(19,993 |
) |
(31,755 |
) |
(44,559 |
) |
|||||||||||||
Operating profit |
16,987 |
19,933 |
23,057 |
32,352 |
16,694 |
19,000 |
26,661 |
||||||||||||||||||||
Net finance (costs)/income |
(1,781 |
) |
898 |
(1,357 |
) |
(1,904 |
) |
(515 |
) |
(1,030 |
) |
(1,445 |
) |
||||||||||||||
Profit before tax |
15,206 |
20,831 |
21,700 |
30,448 |
16,179 |
17,970 |
25,216 |
||||||||||||||||||||
Tax on profit on ordinary activities |
(1,659 |
) |
(4,125 |
) |
(4,868 |
) |
(6,831 |
) |
(3,629 |
) |
(3,893 |
) |
(5,463 |
) |
|||||||||||||
Net profit |
£ |
13,547 |
£ |
16,706 |
£ |
16,832 |
$ |
23,617 |
£ |
12,550 |
£ |
14,077 |
$ |
19,753 |
|||||||||||||
Earnings per share, basic |
£ |
0.35 |
£ |
0.37 |
£ |
0.37 |
$ |
0.52 |
£ |
0.28 |
£ |
0.31 |
$ |
0.44 |
|||||||||||||
Earnings per share, diluted |
£ |
0.29 |
£ |
0.34 |
£ |
0.34 |
$ |
0.48 |
£ |
0.25 |
£ |
0.28 |
$ |
0.40 |
|||||||||||||
Weighted average number of shares outstanding, basic |
38,482,460 |
45,389,210 |
45,258,750 |
45,258,750 |
45,300,500 |
45,100,165 |
45,100,165 |
||||||||||||||||||||
Weighted average number of shares outstanding, diluted |
46,150,255 |
49,318,045 |
49,292,520 |
49,292,520 |
49,374,805 |
49,557,130 |
49,557,130 |
||||||||||||||||||||
Other Financial Data: |
|||||||||||||||||||||||||||
Revenue period-over-period growth rate |
31.6 |
% |
37.2 |
% |
38.1 |
% |
39.4 |
% |
34.2 |
% |
|||||||||||||||||
Profit before tax margin |
18.1% |
18.0% |
13.6% |
13.9% |
11.5% |
||||||||||||||||||||||
Net cash provided by (used in) operating activities |
£11,107 |
£10,897 |
£14,740 |
£3,788 |
£20,374 |
13
________________
(1) |
Translated solely for convenience into dollars at the rate of £1.00 = $1.4032. |
(2) |
Includes share-based compensation expenses as follows: |
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(in thousands) |
|||||||||||||||||||
Direct cost of sales |
£ |
115 |
£ |
587 |
£ |
560 |
£ |
448 |
£ |
686 |
|||||||||
Selling, general and administrative expenses |
65 |
181 |
294 |
228 |
340 |
||||||||||||||
Total |
£ |
180 |
£ |
768 |
£ |
854 |
£ |
676 |
£ |
1,026 |
As of March 31, 2018 |
|||||||
Actual |
As Adjusted(1)(2)
|
||||||
(in thousands) |
|||||||
Consolidated Balance Sheet Data: |
|||||||
Cash and cash equivalents |
£ |
9,462 |
£ |
17,247 |
|||
Working capital (3)
|
(5,197 |
) |
26,200 |
||||
Total assets |
138,303 |
146,088 |
|||||
Total liabilities |
75,808 |
52,196 |
|||||
Total shareholders’ equity |
62,495 |
93,892 |
________________
(1) |
As adjusted consolidated balance sheet data reflects (i) the sale by us of 2,890,000 ADSs in this offering at an assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated unpaid offering expenses payable by us and (ii) our repayment of £23.6 million of principal and accrued interest outstanding under our revolving credit facility with HSBC Bank PLC, representing all of our outstanding obligations thereunder. As of March 31, 2018, approximately £2.5 million of our aggregate estimated offering expenses of £5.6 million had been paid or accrued on the balance sheet. |
(2) |
As adjusted consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease each of as adjusted cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately £1.9 million ($2.7 million), assuming that the number of ADSs offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of ADS we are offering. Each 1,000,000 share increase or decrease in the number of ADSs offered by us would increase or decrease each of as adjusted cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately £11.9 million ($16.7 million). |
(3) |
Working capital is defined as total current assets minus total current liabilities. |
14
Non-IFRS Measures and Other Management Metrics
We regularly monitor a number of financial and operating metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our management metrics may be calculated in a different manner than similarly titled metrics used by other companies.
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(pounds in thousands) |
|||||||||||||||||||
Revenue growth rate at constant currency(1)
|
32.6 |
% |
36.6 |
% |
28.5 |
% |
28.8 |
% |
34.6 |
% |
|||||||||
Average number of employees involved in delivery of our services(2)
|
1,645 |
2,336 |
3,181 |
3,115 |
3,829 |
||||||||||||||
Revenue concentration(3)
|
65.5 |
% |
53.7 |
% |
49.1 |
% |
50.4 |
% |
43.1 |
% |
|||||||||
Number of large clients(4)
|
18 |
26 |
34 |
36 |
42 |
||||||||||||||
Adjusted profit before taxes margin(5)
|
19.2 |
% |
19.7 |
% |
15.8 |
% |
15.8 |
% |
15.3 |
% |
|||||||||
Free cash flow(6)
|
£ |
9,492 |
£ |
10,115 |
£ |
11,186 |
£ |
370 |
£ |
17,500 |
(1) |
We monitor our revenue growth rate at constant currency. As the impact of foreign currency exchange rates is highly variable and difficult to predict, we believe revenue growth rate at constant currency allows us to better understand the underlying business trends and performance of our ongoing operations on a period-over-period basis. We calculate revenue growth rate at constant currency by translating revenue from entities reporting in foreign currencies into British Pounds using the comparable foreign currency exchange rates from the prior period. For example, the average rates in effect for the fiscal year ended June 30, 2016 were used to convert revenue for the fiscal year ended June 30, 2017 and the revenue for the comparable prior period ended June 30, 2016, rather than the actual exchange rates in effect during the respective period. Revenue growth rate at constant currency is not a measure calculated in accordance with IFRS. While we believe that revenue growth rate at constant currency provides useful information to investors in understanding and evaluating our results of operations in the same manner as our management, our use of revenue growth rate at constant currency has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Further, other companies, including companies in our industry, may report the impact of fluctuations in foreign currency exchange rates differently, which may reduce the value of our revenue growth rate at constant currency as a comparative measure. The following table presents a reconciliation of revenue growth rate at constant currency to revenue growth rate, the most directly comparable financial measure calculated and presented in accordance with IFRS, for each of the periods indicated: |
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(pounds in thousands) |
|||||||||||||||||||
Revenue |
£ |
84,107 |
£ |
115,432 |
£ |
159,368 |
£ |
116,322 |
£ |
156,140 |
|||||||||
Revenue period-over-period growth rate |
31.6 |
% |
37.2 |
% |
38.1 |
% |
39.4 |
% |
34.2 |
% |
|||||||||
Estimated impact of foreign currency exchange rate fluctuations |
1.0 |
% |
(0.6 |
)% |
(9.6 |
)% |
(10.6 |
)% |
0.4 |
% |
|||||||||
Revenue growth rate at constant currency |
32.6 |
% |
36.6 |
% |
28.5 |
% |
28.8 |
% |
34.6 |
% |
(2) |
We monitor our average number of employees involved in delivery of our services because we believe it gives us visibility to the size of both our revenue-producing base and our most significant cost base, which in turn allows us better understand changes in our utilization rates and gross margins on a period-over-period basis. We calculate average number of employees involved in delivery of our services as the average of our number of full-time employees involved in delivery of our services on the last day of each month in the relevant period. |
(3) |
We monitor our revenue concentration to better understand our dependence on large clients on a period-over-period basis and to monitor our success in diversifying our revenue basis. We define revenue concentration as the percent of our total revenue derived from our 10 largest clients by revenue in each period presented. |
(4) |
We monitor our number of large clients to better understand our progress in winning large contracts on a period-over-period basis. We define number of large clients as the number of clients from whom we generated more than £1.0 million of revenue in the prior 12-month period. |
(5) |
We monitor our adjusted profit before taxes margin, or Adjusted PBT Margin, to better understand our ability to manage operational costs, to evaluate our core operating performance and trends and to develop future operating plans. In particular, |
15
we believe that the exclusion of certain expenses in calculating Adjusted PBT Margin facilitates comparisons of our operating performance on a period-over-period basis. Our Adjusted PBT Margin is our Adjusted PBT, which is our profit before taxes adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses and initial public offering expenses incurred (all of which are non-cash other than realized foreign currency exchange gains and losses and initial public offering expenses), as a percentage of our total revenue. We do not consider these excluded items to be indicative of our core operating performance. Adjusted PBT Margin is not a measure calculated in accordance with IFRS. While we believe that Adjusted PBT Margin provides useful information to investors in understanding and evaluating our results of operations in the same manner as our management, our use of Adjusted PBT Margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. For example, Adjusted PBT Margin does not reflect the potentially dilutive impact of share-based compensation nor does it reflect the potentially significant impact of foreign currency exchange rate fluctuations on our working capital. Further, other companies, including companies in our industry, may adjust their profit differently to capture their operating performance, which may reduce the value of Adjusted PBT Margin as a comparative measure. The following table presents a reconciliation of Adjusted PBT to profit before taxes, the most directly comparable financial measure calculated and presented in accordance with IFRS, for each of the periods indicated:
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(in thousands) |
|||||||||||||||||||
Profit before taxes |
£ |
15,206 |
£ |
20,831 |
£ |
21,700 |
£ |
16,179 |
£ |
17,970 |
|||||||||
Share-based compensation expense |
180 |
768 |
854 |
676 |
1,026 |
||||||||||||||
Amortization of acquired intangible assets |
— |
1,165 |
1,715 |
1,256 |
1,804 |
||||||||||||||
Foreign currency exchange (gains) losses, net |
754 |
(4 |
) |
967 |
213 |
545 |
|||||||||||||
Initial public offering expenses incurred |
— |
— |
— |
— |
2,472 |
||||||||||||||
Adjusted PBT |
£ |
16,140 |
£ |
22,760 |
£ |
25,236 |
£ |
18,324 |
£ |
23,817 |
(6) |
We monitor our free cash flow to better understand and evaluate our liquidity position and to develop future operating plans. Our free cash flow is our net cash provided by (used in) operating activities, plus grant received, less purchases of non-current tangible and intangible assets and plus initial public offering expenses paid. For a discussion of grant received, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Cost of Sales.” Free cash flow is not a measure calculated in accordance with IFRS. While we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity position in the same manner as our management, our use of free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Further, other companies, including companies in our industry, may adjust their cash flows differently to capture their liquidity, which may reduce the value of free cash flow as a comparative measure. The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with IFRS, for each of the periods indicated: |
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(in thousands) |
|||||||||||||||||||
Net cash provided by (used in) operating activities |
£ |
11,107 |
£ |
10,897 |
£ |
14,740 |
£ |
3,788 |
£ |
20,374 |
|||||||||
Grant received |
468 |
1,948 |
2,924 |
— |
147 |
||||||||||||||
Purchases of non-current assets (tangible and intangible) |
(2,083 |
) |
(2,730 |
) |
(6,478 |
) |
(3,418 |
) |
(3,678 |
) |
|||||||||
Initial public offering expenses paid |
— |
— |
— |
— |
657 |
||||||||||||||
Free cash flow |
£ |
9,492 |
£ |
10,115 |
£ |
11,186 |
£ |
370 |
£ |
17,500 |
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RISK FACTORS
Investing in our ADSs involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase our ADSs. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our ADSs could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We may not be able to sustain our revenue growth rate in the future.
We have experienced rapid revenue growth in recent periods. Our revenue increased by 38.1% from £115.4 million in the fiscal year ended June 30, 2016 to £159.4 million in the fiscal year ended June 30, 2017. We may not be able to sustain revenue growth consistent with our recent history or at all. You should not consider our revenue growth in recent periods as indicative of our future performance. As we grow our business, we expect our revenue growth rates to slow in future periods due to a number of factors, which may include slowing demand for our services, increasing competition, decreasing growth of our overall market, our inability to engage and retain a sufficient number of IT professionals or otherwise scale our business, prevailing wages in the markets in which we operate or our failure, for any reason, to capitalize on growth opportunities.
We are dependent on our largest clients.
Historically, a significant percentage of our revenue has come from our existing client base. For example, during the fiscal year ended June 30, 2017, 90.5% of our revenue came from clients from whom we generated revenue during the prior fiscal year. However, the volume of work performed for a specific client is likely to vary from year to year, especially since we generally do not have long-term commitments from our clients’ and are often not our clients’ exclusive technology services provider. A major client in one year may not provide the same level of revenue for us in any subsequent year. Further, one or more of our significant clients could get acquired and there can be no assurance that the acquirer would choose to use our services in respect of such client to the same degree as previously, if at all. In particular, some of our clients are owned by private equity firms and are therefore inherently more likely to be sold at some point in the future.
In addition, the services we provide to our clients, and the revenue and income from those services, may decline or vary as the type and quantity of services we provide changes over time. In addition, our reliance on any individual client for a significant portion of our revenue may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of service. In order to successfully perform and market our services, we must establish and maintain multi-year close relationships with our clients and develop a thorough understanding of their businesses. Our ability to maintain these close relationships is essential to the growth and profitability of our business. If we fail to maintain these relationships and successfully obtain new engagements from our existing clients, we may not achieve our revenue growth and other financial goals.
During the fiscal years ended June 30, 2016 and June 30, 2017 and the nine months ended March 31, 2017 and 2018, our ten largest clients accounted for 53.7%, 49.1%, 50.4% and 43.1% of our revenue, respectively. Our largest client for the fiscal years ended June 30, 2016 and June 30, 2017 and the nine months ended March 31, 2017 and 2018, Worldpay (UK) Limited, or Worldpay, accounted for 15.6%, 13.0%, 13.2% and 11.4% of our revenue, respectively. We are party to two principal agreements with Worldpay: a master services agreement and a build and operate agreement. Under the master services agreement, Worldpay committed to spend an aggregate of £55.7 million, after giving effect to certain discounts, with us during the period from January 1, 2017 to December 31, 2021, with annual discounted commitments ranging from £9.7 million to £12.2 million. Either we or Worldpay may terminate the master services agreement for cause (including material breach by the other party) and Worldpay may terminate the master services agreement if we undergo a change of control or due to regulatory requirements. In addition, following July 1, 2018, Worldpay may terminate the master services agreement for convenience subject to six months prior notice and payment of 30% of the minimum undiscounted commitment amount for the 12-month period following termination.
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Under the build and operate agreement, we created and staffed a captive Romanian subsidiary for Worldpay. Worldpay issues us orders to hire personnel to the captive Romanian subsidiary and we bill Worldpay for the cost of such personnel throughout the term of the build and operate agreement. Pursuant to an option and transfer agreement, Worldpay has an option to acquire the captive Romanian subsidiary from us, which may be exercised in either September 2019 or January 2020 by Worldpay giving us three months’ notice and paying us fair market value for the shares of the captive Romanian subsidiary; provided, that the aggregate purchase price will not be less than £2.5 million nor more than £6.0 million. To the extent both parties deem commercially beneficial, Worldpay may also exercise the option prior to September 2019. If Worldpay exercises its option under the option and transfer agreement, the build and operate agreement would terminate upon consummation of the option exercise. If Worldpay does not exercise its option under the option and transfer agreement, the build and operate agreement would terminate on July 31, 2020, subject to earlier termination as set forth below, following which we would be solely responsible for all costs associated with the captive Romanian subsidiary. Either we or Worldpay may terminate the build and operate agreement for cause (including material breach) and Worldpay may terminate the build and operate agreement if we undergo a change of control to a Worldpay competitor. If we terminate the build and operate agreement as a result of Worldpay’s material breach, Worldpay is required to pay us €2.0 million. In addition, Worldpay may terminate the build and operate agreement for convenience subject to six months prior notice and, if such termination occurs in 2018 or 2019, payment of between €2.0 million and €650,000. As of March 31, 2018, the captive Romanian subsidiary employed approximately 100 people, representing approximately one quarter of our total number of employees working on various projects for Worldpay as of March 31, 2018. The captive Romanian subsidiary contributed approximately 1.5% of our total revenue in the fiscal year ended June 30, 2017. If Worldpay were to exercise its option to acquire the captive Romanian subsidiary, we would immediately lose future revenue and associated cost from this captive subsidiary. In addition, the exercise of this option may increase the likelihood that Worldpay would cease engaging us for new projects, which could affect our revenue, business, results of operations and financial condition and the market price of our ADSs. In January 2018, Worldpay was acquired by Vantiv. There can be no assurance that our relationship will not be adversely affected as a result of this acquisition.
We generally do not have long-term commitments from our clients, and our clients may terminate engagements before completion or choose not to enter into new engagements with us.
Our clients are generally not obligated for any long-term commitments to us. Our clients can terminate many of our master services agreements and work orders with or without cause, in some cases subject only to 15 days’ prior notice in the case of termination without cause. Although a substantial majority of our revenue is typically generated from clients who also contributed to our revenue during the prior year, our engagements with our clients are typically for projects that are singular in nature. In addition, large and complex projects may involve multiple engagements or stages, and a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements. 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 maintain and expand our business.
Even if we successfully deliver on contracted services and maintain close relationships with our clients, a number of factors outside of our control could cause the loss of or reduction in business or revenue from our existing clients. These factors include, among other things:
• |
the business or financial condition of that client or the economy generally; |
• |
a change in strategic priorities by that client, resulting in a reduced level of spending on technology services; |
• |
changes in the personnel at our clients who are responsible for procurement of information technology, or IT, services or with whom we primarily interact; |
• |
a demand for price reductions by that client; |
• |
mergers, acquisitions or significant corporate restructurings involving that client; and |
• |
a decision by that client to move work in-house or to one or several of our competitors. |
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The loss or diminution in business from any of our major clients could have a material adverse effect on our revenue and results of operations. The ability of our clients to terminate agreements makes our future revenue 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 revenue and thus our results of operations. Further, terminations or delays in engagements may make it difficult to plan our project resource requirements.
We must attract and retain highly-skilled IT professionals.
In order to sustain our growth, we must attract and retain a large number of highly-skilled and talented IT professionals. During the fiscal year ended June 30, 2017, we increased our headcount by 949 employees, or 34.0%. Our business is people driven and, accordingly, our success depends upon our ability to attract, develop, motivate, retain and effectively utilize highly-skilled IT professionals in our delivery locations, which are principally located in Bulgaria, Macedonia, Moldova, Romania and Serbia, which we collectively refer to as Central Europe, and Argentina, Colombia, Uruguay and Venezuela in Latin America. We believe that there is significant competition for technology professionals in the geographic regions in which our delivery centers are located and that such competition is likely to continue for the foreseeable future. Increased hiring by technology companies and increasing worldwide competition for skilled technology professionals may lead to a shortage in the availability of suitable personnel in the locations where we operate and hire. Our ability to properly staff projects, maintain and renew existing engagements and win new business depends, in large part, on our ability to recruit, train and retain IT professionals. Failure to hire, train and retain IT professionals in sufficient numbers could have a material adverse effect on our business, results of operations and financial condition.
Increases in our current levels of attrition may increase our operating costs and adversely affect our future business prospects.
The technology industry generally experiences a significant rate of turnover of its workforce. There is a limited pool of individuals who have the skills and training needed to help us grow our company. We compete for such talented individuals not only with other companies in our industry but also with companies in other industries, such as software services, engineering services, financial services and technology generally, among others. High attrition rates of IT personnel would increase our 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.
Our revenue is dependent on a limited number of industry verticals, and any decrease in demand for technology services in these verticals or our failure to effectively penetrate new verticals could adversely affect our results of operations.
Historically, we have focused on developing industry expertise and deep client relationships in a limited number of industry verticals. As a result, a substantial portion of our revenue has been generated by clients operating in the Payments and Financial Services vertical and the technology, media and telecommunications, or TMT, vertical. Payments and Financial Services and TMT constituted 55.1% and 36.8% of our revenue, respectively, for the fiscal year ended June 30, 2016, 57.1% and 30.5% of our revenue, respectively, for the fiscal year ended June 30, 2017 and 58.3% and 28.0% of our revenue, respectively, for the nine months ended March 31, 2018. Our business growth largely depends on continued demand for our services from clients in Payments and Financial Services and TMT, and any slowdown or reversal of the trend to spend on technology services in these verticals could result in a decrease in the demand for our services and materially adversely affect our revenue, financial condition and results of operations.
We have also recently begun expanding our business into other verticals, such as consumer products, healthcare, logistics and retail. However, we have less experience in these verticals and there can be no assurance that we will be successful in penetrating these verticals. There may be competitors in these verticals that may be entrenched and difficult to dislodge. As a result of these and other factors, our efforts to expand our client base may be expensive and may not succeed, and we therefore may be unable to grow our revenue. If we fail to further penetrate our existing industry verticals or expand our client base in new verticals, we may be unable to grow our revenue and our operating results may be harmed.
Other developments in the industries in which we operate may also lead to a decline in the demand for our services, and we may not be able to successfully anticipate and prepare for any such changes. For example, consolidation or
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acquisitions, particularly involving our clients, may adversely affect our business. Our clients and potential clients may experience rapid changes in their prospects, substantial price competition and pressure on their profitability. This, in turn, may result in increasing pressure on us from clients and potential clients to lower our prices, which could adversely affect our revenue, results of operations and financial condition.
Our contracts could be unprofitable.
We perform our services primarily under time-and-materials contracts (where materials costs consist of travel and out-of-pocket expenses). We charge out the services performed by our employees under these contracts at daily or hourly rates that are agreed at the time at which the contract is entered. The rates and other pricing terms negotiated with our clients are highly dependent on our internal forecasts of our operating costs and predictions of increases in those costs influenced by wage inflation and other marketplace factors, as well as the volume of work provided by the client. Our predictions are based on limited data and could turn out to be inaccurate, resulting in contracts that may not be profitable. Typically, we do not have the ability to increase the rates established at the outset of a client project, other than on an annual basis and often subject to caps. Independent of our right to increase our rates on an annual basis, client expectations regarding the anticipated cost of a project may limit our practical ability to increase our rates for ongoing work.
In addition to our time-and-materials contracts, we undertake some engagements on a fixed-price basis and also provide managed services in certain cases. Revenue from our fixed-price contracts represented 5.4% of total revenue for the fiscal year ended June 30, 2017. Revenue from our managed service contracts represented 10.0% of total revenue for the fiscal year ended June 30, 2017. Our pricing in fixed-price and managed service contracts is highly dependent on our assumptions and forecasts about the costs we expect to incur to complete the related project, which are based on limited data and could turn out to be inaccurate. Any failure by us to accurately estimate the resources, including the skills and seniority of our employees, required to complete a fixed-price or managed service contracts on time and on budget or meet a service level on a managed service contract, or any unexpected increase in the cost of our employees assigned to the related project, office space or materials could expose us to risks associated with cost overruns and could have a material adverse effect on our business, results of operations and financial condition. In addition, any unexpected changes in economic conditions that affect any of the foregoing assumptions and predictions could render contracts that would have been favorable to us when signed unfavorable.
Our profitability could suffer if we are not able to maintain favorable pricing.
Our profitability and operating results are dependent on the rates we are able to charge for our services. Our rates are affected by a number of factors, including:
• |
our clients’ perception of our ability to add value through our services; |
• |
our competitors’ pricing policies; |
• |
bid practices of clients and their use of third-party advisors; |
• |
the ability of large clients to exert pricing pressure; |
• |
employee wage levels and increases in compensation costs; |
• |
employee utilization levels; |
• |
our ability to charge premium prices when justified by market demand or the type of service; and |
• |
general economic conditions. |
If we are not able to maintain favorable pricing for our services, our profitability could suffer.
We must maintain adequate resource utilization rates and productivity levels.
Our profitability and the cost of providing our services are affected by our utilization rates of our employees in our delivery locations. If we are not able to maintain appropriate utilization rates for our employees involved in delivery
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of our services, our profit margin and our profitability may suffer. Our utilization rates are affected by a number of factors, including:
• |
our ability to promptly transition our employees from completed projects to new assignments and to hire and integrate new employees; |
• |
our ability to forecast demand for our services and thereby maintain an appropriate number of employees in each of our delivery locations; |
• |
our ability to deploy employees with appropriate skills and seniority to projects; |
• |
our ability to manage the attrition of our employees; and |
• |
our need to devote time and resources to training, professional development and other activities that cannot be billed to our clients. |
Our revenue could also suffer if we misjudge demand patterns and do not recruit sufficient employees to satisfy demand. Employee shortages could prevent us from completing our contractual commitments in a timely manner and cause us to lose contracts or clients. Further, to the extent that we lack sufficient employees with lower levels of seniority and daily or hourly rates, we may be required to deploy more senior employees with higher rates on projects without the ability to pass such higher rates along to our clients, which could adversely affect our profit margin and profitability.
Recent acquisitions and potential future acquisitions could prove difficult to integrate, disrupt our business, dilute shareholder value and strain our resources.
We recently completed our acquisition of Velocity Partners expanding our client base in North America and our business operations in North and Latin America. In addition, we have completed four other acquisitions during the last five fiscal years. In the future, we may acquire additional businesses that we believe could complement or expand our business. Integrating the operations of acquired businesses successfully or otherwise realizing any of the anticipated benefits of acquisitions, including anticipated cost savings and additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration challenges could seriously harm our financial condition and results of operations. Realizing the benefits of acquisitions depends in part on the integration of operations and personnel. These integration activities are complex and time-consuming, and we may encounter unexpected difficulties or incur unexpected costs, including:
• |
our inability to achieve the operating synergies anticipated in the acquisitions; |
• |
diversion of management attention from ongoing business concerns to integration matters; |
• |
consolidating and rationalizing information technology platforms and administrative infrastructures; |
• |
complexities associated with managing the geographic separation of the combined businesses and consolidating multiple physical locations; |
• |
retaining IT professionals and other key employees and achieving minimal unplanned attrition; |
• |
integrating personnel from different corporate cultures while maintaining focus on providing consistent, high quality service; |
• |
demonstrating to our clients and to clients of acquired businesses that the acquisition will not result in adverse changes in client service standards or business focus; |
• |
possible cash flow interruption or loss of revenue as a result of transitional matters; and |
• |
inability to generate sufficient revenue to offset acquisition costs. |
Acquired businesses may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. In particular, to the extent that prior owners of any acquired businesses or properties failed to
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comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations to clients, we, as the successor owner, may be financially responsible for these violations and failures and may suffer financial or reputational harm or otherwise be adversely affected. Similarly, our acquisition targets may not have as robust internal controls over financial reporting as would be expected of a public company. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future that could harm our financial results. We may also become subject to new regulations as a result of an acquisition, including if we acquire a business serving clients in a regulated industry or acquire a business with clients or operations in a country in which we do not already operate. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing shareholders may be diluted, which could affect the market price of our ADSs. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. Acquisitions frequently involve benefits related to the integration of operations of the acquired business. The failure to successfully integrate the operations or otherwise to realize any of the anticipated benefits of the acquisition could seriously harm our results of operations.
We are focused on growing our client base in North America and may not be successful.
We are focused on geographic expansion, particularly in North America. In fiscal year 2017, 16.3% of our revenue came from clients in North America and in the nine months ended March 31, 2018, 18.9% of our revenue came from clients in North America. From fiscal year 2016 to fiscal year 2017, our revenue from clients in North America increased by 24.1%. We have made significant investments to expand in North America, including our recent acquisition of Velocity Partners in December 2017, which increased our sales presence in North America and added nearshore delivery capacity in Latin America. However, our ability to add new clients will depend on a number of factors, including our ability to successfully integrate our acquisition of Velocity Partners, market perception of our services, our ability to successfully add nearshore delivery center capacity and pricing, competition and overall economic conditions. If we are unable to retain existing clients and attract new clients in North America, we may be unable to grow our revenue and our business and results of operations could be adversely affected.
We may be unable to effectively manage our rapid growth or achieve anticipated growth, which could place significant strain on our management personnel, systems and resources.
We have experienced rapid growth and significantly expanded our business over the past several years, both organically and through acquisitions. We intend to continue to grow our business in the foreseeable future and to pursue existing and potential market opportunities. We have also increased the size and complexity of the projects that we undertake for our clients and hope to continue being engaged for larger and more complex projects in the future. As we add new delivery sites, introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar, and we may not be able to mitigate these risks and challenges to successfully grow those services or markets. We may not be able to achieve our anticipated growth or successfully execute large and complex projects, which could materially adversely affect our revenue, results of operations, business and prospects.
Our future growth depends on us successfully recruiting, hiring and training IT professionals, expanding our delivery capabilities, adding effective sales staff and management personnel, adding service offerings, maintaining existing clients and winning new business. Effective management of these and other growth initiatives will require us to continue to improve our infrastructure, execution standards and ability to expand services. As our company grows, and we are required to add more employees and infrastructure to support our growth, we may find it increasingly difficult to maintain our corporate culture. If we fail to maintain a culture that fosters career development, innovation, creativity and teamwork, we could experience difficulty in hiring and retaining IT professionals. 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 and our business, results of operations and financial condition.
We face intense competition.
The market for technology and IT services is intensely competitive, highly fragmented and subject to rapid change and evolving industry standards and we expect competition to intensify. We believe that the principal competitive factors that we face are the ability to innovate; technical expertise and industry knowledge; end-to-end solution offerings;
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delivery location; price; reputation and track record for high-quality and on-time delivery of work; effective employee recruiting; training and retention; responsiveness to clients’ business needs; scale; and financial stability.
Our primary competitors include next-generation IT service providers, such as Globant S.A. and EPAM Systems; digital agencies and consulting companies, such as Ideo, McKinsey & Company, The Omnicom Group, Sapient Corporation and WPP plc; global consulting and traditional IT services companies, such as Accenture PLC, Capgemini SE, Cognizant Technology Solutions Corporation and Tata Consultancy Services Limited; and in-house development departments of our clients. Many of our competitors have substantially greater financial, technical and marketing resources and greater name recognition than we do. As a result, they may be able to compete more aggressively on pricing or devote greater resources to the development and promotion of technology and IT services. Companies based in some emerging markets also present significant price competition due to their competitive cost structures and tax advantages.
In addition, there are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new market entrants. Further, there is a risk that our clients may elect to increase their internal resources to satisfy their services needs as opposed to relying on a third-party service providers, such as us. The technology services industry may also undergo consolidation, which may result in increased competition in our target markets from larger firms that may have substantially greater financial, marketing or technical resources, may be able to respond more quickly to new technologies or processes and changes in client demands, and may be able to devote greater resources to the development, promotion and sale of their services than we can. Increased competition could also result in price reductions, reduced operating margins and loss of our market share. We cannot assure you that we will be able to compete successfully with existing or new competitors or that competitive pressures will not materially adversely affect our business, results of operations and financial condition.
We are dependent on members of our senior management team and other key employees.
Our future success heavily depends upon the continued services of our senior management team, particularly John Cotterell, our Chief Executive Officer, and other key employees. We currently do not maintain key man life insurance for any of the members of our senior management team or other key employees. We also do not have long-term employment contracts with all of our key employees. We are only entitled to 12 months’ prior notice if our executive officers intend to terminate their respective employment with us and three months’ prior notice if any of our other senior executives intend to terminate their respective employment with us. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily, on a timely basis or at all. In addition, competition for senior executives and key employees in our industry is intense, and we may be unable to retain our senior executives and key employees or attract and retain new senior executives and key employees in the future, in which case our business may be severely disrupted.
If any of our senior management team or key employees joins a competitor or forms a competing company, we may lose clients, suppliers, know-how and IT professionals and staff members to them. Also, if any of our sales executives or other sales personnel, who generally maintain close relationships with our clients, joins a competitor or forms a competing company, we may lose clients to that company, and our revenue may be materially adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, business practices or procedures by such personnel. Any non-competition, non-solicitation or non-disclosure agreements we have with our senior executives or key employees might not provide effective protection to us in light of legal uncertainties associated with the enforceability of such agreements.
Additionally, we have a number of current employees whose equity ownership in our company gives them a substantial amount of personal wealth. As a result, it may be difficult for us to continue to retain and motivate these employees, and this wealth could affect their decisions about whether or not they continue to work for us. Further, although the Class B ordinary shares and Class C ordinary shares that are held by our employees will be subject to certain restrictions on disposition for periods of up to five years and two years, respectively, following the completion of this offering, sales of our ADSs by our employees in the open market or the perception that such sales may occur may negatively impact the market price of our ADSs. The risk that our employees may sell ADSs in the open market may be made more acute as a result of the fact that we do not anticipate paying dividends (as we have in fiscal year
23
2015 and fiscal year 2016) for the foreseeable future following completion of this offering, meaning open market sales may be our employees’ only means of generating liquidity from their ownership of our securities.
Forecasts of our market may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, there can be no assurance that our business will grow at similar rates, or at all.
Growth forecasts included in this prospectus relating to our market opportunity and the expected growth in the market for our services are subject to significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. Even if these markets meet our size estimates and experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many risks and uncertainties, including our success in implementing our business strategy. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.
Our business will suffer if we are not successful in delivering contracted services.
Our operating results are dependent on our ability to successfully deliver contracted services in a timely manner. We must consistently build, deliver and support complex projects and managed services. Failure to perform or observe any contractual obligations could damage our relationships with our clients and could result in cancellation or non-renewal of a contract. Some of the challenges we face in delivering contracted services to our clients include:
• |
maintaining high-quality control and process execution standards; |
• |
maintaining planned resource utilization rates on a consistent basis; |
• |
maintaining employee productivity and implementing necessary process improvements; |
• |
controlling costs; |
• |
maintaining close client contact and high levels of client satisfaction; |
• |
maintaining physical and data security standards required by our clients; |
• |
recruiting and retaining sufficient numbers of skilled IT professionals; and |
• |
maintaining effective client relationships. |
If we are unable to deliver on contracted services, our relationships with our clients will suffer and we may be unable to obtain new projects. In addition, it could damage our reputation, cause us to lose business, impact our margins and adversely affect our business and results of operations.
Our sales of services, operating results or profitability may experience significant variability and our past results may not be indicative of our future performance.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.
Factors that are likely to cause these variations include:
• |
the number, timing, scope and contractual terms of projects in which we are engaged; |
• |
delays in project commencement or staffing delays due to difficulty in assigning appropriately skilled or experienced professionals; |
• |
the accuracy of estimates on the resources, time and fees required to complete projects and costs incurred in the performance of each project; |
• |
inability to retain employees or maintain employee utilization levels; |
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• |
changes in pricing in response to client demand and competitive pressures; |
• |
the business decisions of our clients regarding the use of our services or spending on technology; |
• |
the ability to further grow sales of services from existing clients; |
• |
seasonal trends and the budget and work cycles of our clients; |
• |
delays or difficulties in expanding our operational facilities or infrastructure; |
• |
our ability to estimate costs under fixed price or managed service contracts; |
• |
employee wage levels and increases in compensation costs; |
• |
unanticipated contract or project terminations; |
• |
the timing of collection of accounts receivable; |
• |
our ability to manage risk through our contracts; |
• |
the continuing financial stability of our clients; |
• |
changes in our effective tax rate; |
• |
fluctuations in currency exchange rates; and |
• |
general economic conditions. |
As a result of these factors, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.
We 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.
The technology services industry 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 in our industry. Because 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. Neither our past financial performance nor the past financial performance of any other company in the technology services industry is indicative of how our company will fare financially in the future. Our future profits may vary substantially from those of other companies and those we have achieved in the past, making an investment in our company risky and speculative. If our clients’ demand for our services declines as a result of economic conditions, market factors or shifts in the technology industry, our business would suffer and our results of operations and financial condition would be adversely affected.
We have in the past experienced, and may in the future experience, a long selling and implementation cycle with respect to certain projects that require us to make significant resource commitments prior to realizing revenue for our services.
We have experienced, and may in the future experience, a long selling cycle with respect to certain projects that require significant investment of human resources and time by both our clients and us. Before committing to use our services, potential clients may require us to expend substantial time and resources educating them on the value of our services and our ability to meet their requirements. Therefore, our selling cycle is subject to many risks and delays over which we have little or no control, including our clients’ decision to choose alternatives to our services (such as other technology and IT service providers or in-house resources) and the timing of our clients’ budget cycles and approval processes. If our sales cycle unexpectedly lengthens for one or more projects, it would negatively affect the timing of our revenue and hinder our revenue growth. For certain clients, we may begin work and incur costs prior to executing the contract. A delay in our ability to obtain a signed agreement or other persuasive evidence of an arrangement, or to
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complete certain contract requirements in a particular quarter, could reduce our revenue in that quarter or render us entirely unable to collect payment for work already performed.
Implementing our services also involves a significant commitment of resources over an extended period of time from both our clients and us. Our clients may experience delays in obtaining internal approvals or delays associated with technology, thereby further delaying the implementation process. Our current and future clients may not be willing or able to invest the time and resources necessary to implement our services, and we may fail to close sales with potential clients to which we have devoted significant time and resources. Any significant failure to generate revenue or delays in recognizing revenue after incurring costs related to our sales or services process could materially adversely affect our business.
If we provide inadequate service or cause disruptions in our clients’ businesses, it could result in significant costs to us, the loss of our clients and damage to our corporate reputation.
Any defects or errors or failure to meet clients’ expectations in the performance of our contracts could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, error, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, certain liabilities, such as claims of third parties for intellectual property infringement and breaches of data protection and security requirements, for which we may be required to indemnify our clients, could be substantial. 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. In addition, a failure or inability to meet a contractual requirement could seriously damage our corporate reputation and limit our ability to attract new business.
In certain instances, we guarantee clients that we will complete a project by a scheduled date or that we will maintain certain service levels. We are generally not subject to monetary penalties for failing to complete projects by the scheduled date, but may suffer reputational harm and loss of future business if we do not meet our contractual commitments. In addition, if the project experiences a performance problem, we may not be able to recover the additional costs we will incur, which could exceed revenue realized from a project. Under our managed service contracts, we may be required to pay liquidated damages if we are unable to maintain agreed-upon service levels.
Our business depends on a strong brand and corporate reputation.
Since many of our specific client engagements involve highly tailored solutions, our corporate reputation is a significant factor in our clients’ and prospective clients’ determination of whether to engage us. We believe the Endava brand name and our reputation are important corporate assets that help distinguish our services from those of our competitors and also contribute to our efforts to recruit and retain talented IT professionals. However, our corporate reputation is susceptible to damage by actions or statements made by current or former employees or clients, competitors, vendors and adversaries in legal proceedings, as well as members of the investment community and the media. There is a risk that negative information about our company, even if based on false rumor or misunderstanding, could adversely affect our business. In particular, damage to our reputation could be difficult and time-consuming to repair, could make potential or existing clients reluctant to select us for new engagements, resulting in a loss of business, and could adversely affect our employee recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of our Endava brand name and could reduce investor confidence in us and adversely affect our operating results.
If we do not continue to innovate and remain at the forefront of emerging technologies and related market trends, we may lose clients and not remain competitive.
Our success depends on delivering innovative solutions that leverage emerging technologies and emerging market trends to drive increased revenue. Technological advances and innovation are constant in the technology services industry. As a result, we must continue to invest significant resources to stay abreast of technology developments so that we may continue to deliver solutions that our clients will wish to purchase. If we are unable to anticipate technology developments, enhance our existing services or develop and introduce new services to keep pace with such changes and meet changing client needs, we may lose clients and our revenue and results of operations could suffer. Our results
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of operation would also suffer if our employees are not responsive to the needs of our clients, not able to help clients in driving innovation and not able to help our clients in effectively bringing innovative ideas to market. Our competitors may be able to offer engineering, design and innovation services that are, or that are perceived to be, substantially similar or better than those we offer. This may force us to reduce our daily rates and to expend significant resources in order to remain competitive, which we may be unable to do profitably or at all. Because many of our clients and potential clients regularly contract with other IT service providers, these competitive pressures may be more acute than in other industries.
Our cash flows and results of operations may be adversely affected if we are unable to collect on billed and unbilled receivables from clients.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain provisions against receivables. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we may need to adjust our provisions. We may not accurately assess the creditworthiness of our clients. Macroeconomic conditions, such as a potential credit crisis in the global financial system, could also result in financial difficulties for our clients, including limited access to the credit markets, insolvency or bankruptcy. Such conditions could cause clients to delay payment, request modifications of their payment terms, or default on their payment obligations to us, all of which could increase our receivables balance. Timely collection of fees for client services also depends on our ability to complete our contractual commitments and subsequently bill for and collect our contractual service fees. If we are unable to meet our contractual obligations, we might experience delays in the collection of or be unable to collect our client balances, which would adversely affect our results of operations and could adversely affect our cash flows. In addition, if we experience an increase in the time required to bill and collect for our services, our cash flows could be adversely affected, which in turn could adversely affect our ability to make necessary investments and, therefore, our results of operations.
If we are unable to comply with our security obligations or our computer systems are or become vulnerable to security breaches, we may face reputational damage and lose clients and revenue.
The services we provide are often critical to our clients’ businesses. Certain of our client contracts require us to comply with security obligations, which could include maintaining network security and backup data, ensuring our network is virus-free, maintaining business continuity planning procedures, and verifying the integrity of employees that work with our clients by conducting background checks. Any failure in a client’s system, whether or not a result of or related to the services we provide, or breach of security relating to the services we provide to the client could damage our reputation or result in a claim for substantial damages against us. Our liability for breaches of data security requirements, for which we may be required to indemnify our clients, may be extensive. Any significant 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 services to our clients, have a negative impact on our reputation, cause us to lose clients, and adversely affect our results of operations.
In addition, we often have access to or are required to collect and store confidential client and customer data. If any person, including any of our employees or former employees, penetrates our network security, accidentally exposes our data or code, or misappropriates data or code that belongs to us, our clients, or our clients’ customers, we could be subject to significant liability from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws. Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems, systems failure, loss or theft of confidential information or intellectual property belonging to our clients or our clients’ customers, or otherwise, could damage our reputation, cause us to lose clients and revenue, and result in financial and other potential losses by us.
We may be subject to liability claims if we breach our contracts and our insurance may be inadequate to cover our losses.
We are subject to numerous obligations in our contracts with our clients. Despite the procedures, systems and internal controls we have implemented to comply with our contracts, we may breach these commitments, whether through a weakness in these procedures, systems and internal controls, negligence or the willful act of an employee or contractor. Our insurance policies, including our errors and omissions insurance, may be inadequate to compensate us
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for the potentially significant losses that may result from claims arising from breaches of our contracts, disruptions in our services, failures or disruptions to our infrastructure, catastrophic events and disasters or otherwise. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.
Regulatory, legislative or self-regulatory/standard developments regarding privacy and data security matters could adversely affect our ability to conduct our business.
We, along with a significant number of our clients, are subject to laws, rules, regulations and industry standards related to data privacy and cyber security, and restrictions or technological requirements regarding the collection, use, storage, protection, retention or transfer of data. For example, the newly established European Union General Data Protection Regulation, or GDPR, came into force in May 2018 and contains numerous requirements and changes from existing EU law, including more robust obligations on data processors and data controllers and heavier documentation requirements for data protection compliance programs. Specifically, the GDPR introduced numerous privacy-related changes for companies operating in the EU, including greater control over personal data by data subjects (e.g., the “right to be forgotten”), increased data portability for EU consumers, data breach notification requirements and increased fines. In particular, under the GDPR, fines of up to €20 million or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of the GDPR’s requirements. The GDPR requirements apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.
We are required to comply with the GDPR as a “Data Controller” and a “Data Processor.” In 2017, we appointed a Data Protection Officer to oversee and supervise our compliance with European data protection regulations. In the United States, the rules and regulations to which we may be subject include those promulgated under the authority of the Federal Trade Commission, the Gramm Leach Bliley Act and state cybersecurity and breach notification laws, as well as regulator enforcement positions and expectations. Globally, governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, regulations, and standards covering user privacy, data security, technologies such as cookies that are used to collect, store and/or process data, marketing online, the use of data to inform marketing, the taxation of products and services, unfair and deceptive practices, and the collection (including the collection of information), use, processing, transfer, storage and/or disclosure of data associated with unique individual internet users. New regulation or legislative actions regarding data privacy and security (together with applicable industry standards) may increase the costs of doing business and could have a material adverse impact on our operations and cash flows.
While we have taken steps to mitigate the impact of the GDPR on us, the efficacy and longevity of these mechanisms remains uncertain. Potential or actual legal proceedings could lead to one or both of these mechanisms being declared invalid. Further, despite our ongoing efforts to bring practices into compliance, we may not be successful either due to various factors within our control, such as limited financial or human resources, or other factors outside our control. It is also possible that local data protection authorities may have different interpretations of the GDPR, leading to potential inconsistencies amongst various EU member states.
Any failure or perceived failure (including as a result of deficiencies in our policies, procedures, or measures relating to privacy, data protection, marketing, or client communications) by us to comply with laws, regulations, policies, legal or contractual obligations, industry standards, or regulatory guidance relating to privacy or data security, may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our clients and partners to lose trust in us, which could have an adverse effect on our reputation and business. We expect that there will continue to be new proposed laws, regulations and industry standards relating to privacy, data protection, marketing, consumer communications and information security in the United States, the European Union 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 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.
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Our client relationships, revenue, results of operations and financial condition may be adversely affected if we experience disruptions in our internet infrastructure, telecommunications or IT systems.
Disruptions in telecommunications, system failures, internet infrastructure or computer attacks could damage our reputation and harm our ability to deliver services to our clients, which could result in client dissatisfaction and a loss of business and related reduction of our revenue. We may not be able to consistently maintain active voice and data communications between our various global operations and with our clients due to disruptions in telecommunication networks and power supply, system failures or computer virus attacks. Any significant failure in our ability to communicate could result in a disruption in business, which could hinder our performance and our ability to complete projects on time. Such failure to perform on client contracts could have a material adverse effect on our revenue, business, results of operations and financial condition and the market price of our ADSs.
Our business operations and financial condition could be adversely affected by negative publicity about offshore outsourcing or anti-outsourcing legislation in the countries in which our clients operate.
Concerns that offshore outsourcing has resulted in a loss of jobs and sensitive technologies and information to foreign countries have led to negative publicity concerning outsourcing in some countries. Many organizations and public figures in the United States and Europe have publicly expressed concern about a perceived association between offshore outsourcing IT service providers and the loss of jobs in their home countries. Current or prospective clients may elect to perform services that we offer, or may be discouraged from transferring these services to offshore providers such as ourselves, 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 compete effectively with competitors that operate primarily out of facilities located in these countries could be harmed.
Legislation enacted in certain European jurisdictions and any future legislation in Europe or any other country in which we have clients that restricts the performance of services from an offshore location could also materially adversely affect our business, financial condition and results of operations. For example, legislation enacted in the United Kingdom, based on the 1977 EC Acquired Rights Directive, has been adopted in some form by many European Union countries, and provides that if a company outsources all or part of its business to an IT services provider or changes its current IT services provider, the affected employees of the company or of the previous IT services provider are entitled to become employees of the new IT services provider, generally on the same terms and conditions as their original employment. In addition, dismissals of employees who were employed by the company or the previous IT services provider immediately prior to that transfer are automatically considered unfair dismissals that entitle such employees to compensation. As a result, in order to avoid unfair dismissal claims, we may have to offer, and become liable for, voluntary redundancy payments to the employees of our clients who outsource business to us in the United Kingdom and other European Union countries who have adopted similar laws. This legislation could materially affect our ability to obtain new business from companies in the United Kingdom and European Union and to provide outsourced services to companies in the United Kingdom and European Union in a cost-effective manner.
Certain of our clients require solutions that ensure security given the nature of the content being distributed and associated applicable regulatory requirements. In particular, our U.S. healthcare industry clients may rely on our solutions to protect information in compliance with the requirements of the Health Insurance Portability and Accountability Act of 1996, the 2009 Health Information Technology for Economic and Clinical Health Act, the Final Omnibus Rule of January 25, 2013, and related regulations, which are collectively referred to as HIPAA, and which impose privacy and data security standards that protect individually identifiable health information by limiting the uses and disclosures of individually identifiable health information and requiring that certain data security standards be implemented to protect this information. As a “business associate” to “covered entities” that are subject to HIPAA, such as certain healthcare providers, health plans and healthcare clearinghouses, we also have our own compliance obligations directly under HIPAA and pursuant to the business associate agreements that we are required to enter into with our clients that are HIPAA-covered entities and any vendors we engage that access, use, transmit or store individually identifiable health information in connection with our business operations. Compliance efforts can be expensive and burdensome, and if we fail to comply with our obligations under HIPAA, our required business associate agreements or applicable state data privacy laws and regulations, we could be subject to regulatory investigations and orders, significant fines and penalties, mitigation and breach notification expenses, private litigation and contractual damages, corrective action plans and related regulatory oversight and reputational harm.
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Governments and industry organizations may also adopt new laws, regulations or requirements, or make changes to existing laws or regulations, that could impact the demand for, or value of, our services. If we are unable to adapt the solutions we deliver to our clients to changing legal and regulatory standards or other requirements in a timely manner, or if our solutions fail to allow our clients to comply with applicable laws and regulations, our clients may lose confidence in our services and could switch to services offered by our competitors, or threaten or bring legal actions against us.
We may not receive sufficient intellectual property rights from our employees and contractors to comply with our obligations to our clients and we may not be able to prevent unauthorized use of our intellectual property.
Our contracts generally require, and our clients typically expect, that we will assign to them all intellectual property rights associated with the deliverables that we create in connection with our engagements. In order to assign these rights to our clients, we must ensure that our employees and contractors validly assign to us all intellectual property rights that they have in such deliverables. Our policy is to require employees and independent contractors to sign assignment of inventions agreements with us upon commencement of employment or engagement, but there can be no assurance that we will be able to enforce our rights under such agreements. Given that we operate in a variety of jurisdictions with different and evolving legal regimes, particularly in Central Europe and Latin America, we face increased uncertainty regarding whether such agreements will be found to be valid and enforceable by competent courts and whether we will be able to avail ourselves of the remedies provided for by applicable law.
Our success also depends in part on certain methodologies, practices, tools and technical expertise our company utilizes in designing, developing, implementing and maintaining applications and other proprietary intellectual property rights. In order to protect our intellectual property rights, we rely upon a combination of nondisclosure and other contractual arrangements as well as trade secret, copyright and trademark laws. We consider proprietary trade secrets and confidential know-how to be important to our business. However, trade secrets and confidential know-how are difficult to maintain as confidential. To protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into confidentiality agreements with us. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and physical and electronic security of our information technology systems. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. We cannot guarantee that our trade secrets and other proprietary and confidential information will not be disclosed or that competitors will not otherwise gain access to our trade secrets. Current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally obtained and used trade secrets and/or confidential know-how is expensive, time consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction. Furthermore, if a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. If the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.
We have registered the “Endava” name and logo in the United Kingdom and certain other countries. We have pending applications for the “Endava” name and logo in the United States and other countries; however, we cannot assure you that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. Our trademarks may also be subject to misappropriation in jurisdictions in which they are not registered.
We may be subject to claims by third parties asserting that companies we have acquired, our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
We could be subject to claims by third parties that companies we have acquired, our employees or we have misappropriated their intellectual property. Our employees may misappropriate intellectual property from their former employers. Many of our employees were previously employed at our competitors or potential competitors. Some of these employees executed proprietary rights, non-disclosure and non-competition agreements in connection with such
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previous employment. Although we try to ensure that our employees do not use the proprietary information of others in their work for us, we may be subject to claims that we or these employees have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee's former employer. Litigation may be necessary to defend against these claims. In addition, we are subject to additional risks as a result of our recent acquisitions and any future acquisitions we may complete. The developers of the technology that we have acquired or may acquire may not have appropriately created, maintained or enforced intellectual property rights in such technology. Indemnification and other rights under acquisition documents may be limited in term and scope and may therefore provide little or no protection from these risks.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party. Even if we successfully prosecute or defend against such claims, litigation could result in substantial costs and distract management.
If we incur any liability for a violation of the intellectual property rights of others, our reputation, business, financial condition and prospects may be adversely affected.
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. 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 others things, require us to pay substantial damages, develop substitute 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 potential clients deferring or limiting their purchase or use of our services until resolution of such litigation, or could require us to indemnify our clients against infringement claims in certain instances. Any intellectual property claim or litigation, whether we ultimately win or lose, could damage our reputation and materially adversely affect our business, financial condition and results of operations.
In addition, 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 stop using our services or solutions.
Further, our current and former employees could challenge our exclusive rights to the software they have developed in the course of their employment. In certain countries in which we operate, an employer is deemed to own the copyright work created by its employees during the course, and within the scope, of their employment, but the employer may be required to satisfy additional legal requirements in order to make further use and dispose of such works. While we believe that we have complied with all such requirements, and have fulfilled all requirements necessary to acquire all rights in software developed by our independent contractors, these requirements are often ambiguously defined and enforced. As a result, we may not be successful in defending against any claim by our current or former employees or independent contractors challenging our exclusive rights over the use and transfer of works those employees or independent contractors created or requesting additional compensation for such works.
We use third-party software, hardware and software-as-a-service, or SaaS, technologies from third parties that may be difficult to replace or that may cause errors or defects in, or failures of, the services or solutions we provide.
We rely on software and hardware from various third parties to deliver our services and solutions, as well as hosted SaaS applications from third parties. If any of these software, hardware or SaaS applications become unavailable due
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to extended outages, interruptions or because they are no longer available on commercially reasonable terms, it could result in 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. In addition, any errors or defects in or failures of this third-party software, hardware or SaaS applications could result in errors or defects in or failures of our services and solutions, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our clients or third-party providers that could harm our reputation and increase our operating costs.
We incorporate third-party open source software into our client deliverables and our failure to comply with the terms of the underlying open source software licenses could adversely impact our clients and create potential liability.
Our client deliverables often contain software licensed by third parties under so-called “open source” licenses, including the GNU General Public License, or GPL, the GNU Lesser General Public License, or LGPL, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. Our clients could be subject to suits by third parties claiming that what we believe to be licensed open source software infringes such third parties’ intellectual property rights, and we are generally required to indemnify our clients against such claims. Use of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms.
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. The terms of certain open source licenses may require us or our clients to release the source code of the software we develop for our clients and to make such software available under the applicable open source licenses. 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. 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 revenue, business, results of operations and financial condition and the market price of our ADSs.
Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our services, and could have a negative impact on our business.
The future success of our business depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could adversely affect the demand for our services or require us to modify our solutions in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for technology services such as ours.
In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “ransomware,” “viruses,” “worms,” “malware,” “phishing attacks,” “data breaches” and similar malicious programs, behavior, and events, and the internet has experienced a variety of outages and other
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delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these or any other issues, demand for our services and solutions could suffer.
From time to time, some of our employees spend significant amounts of time at our clients’ facilities, often in foreign jurisdictions, which expose us to certain risks.
Some of our projects require a portion of the work to be undertaken at our clients’ facilities, which are often located outside our employees’ country of residence. The ability of our employees to work in locations around the world may depend on their ability to obtain the required visas and work permits, and this process can be lengthy and difficult. Immigration laws are subject to legislative change, as well as to variations in standards of application and enforcement due to political forces and economic conditions. In addition, we may become subject to taxation in jurisdictions where we would not otherwise be so subject as a result of the amount of time that our employees spend in any such jurisdiction in any given year. While we seek to monitor the number of days that our employees spend in each country to avoid subjecting ourselves to any such taxation, there can be no assurance that we will be successful in these efforts.
We also incur risks relating to our employees and contractors working at our clients’ facilities, including, but not limited to: claims of misconduct, negligence or intentional malfeasance on the part of our employees. Some or all of these claims may lead to litigation and these matters may cause us to incur negative publicity with respect to these alleged problems. It is not possible to predict the outcome of these lawsuits or any other proceeding, and our insurance may not cover all claims that may be asserted against us.
Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism.
A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. In the event we are hindered by any of the events discussed above, our ability to provide our services to clients could be delayed.
In addition, our facilities are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster, power failure or an act of terrorism, vandalism or other misconduct could result in lengthy interruptions in provision of our services and failure to comply with our obligations to our clients. The occurrence of any of the foregoing events could damage our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, that may result from interruptions in the provision of our services to clients as a result of system failures.
All of the aforementioned risks may be exacerbated if our disaster recovery plan proves to be inadequate. To the extent that any of the above results in delayed or reduced sales or increase our cost of sales, our business, financial condition and results of operations could be adversely affected.
Our debt may affect our ability to operate our business and secure additional financing in the future.
In December 2017, we entered into a secured Multicurrency Revolving Facility Agreement, or the Facility Agreement, with HSBC Bank PLC, as arranger, HSBC Bank PLC, as security agent, certain subsidiaries party thereto and the financial institutions listed therein. The Facility Agreement provides for a £50.0 million primary revolving credit facility, $12.1 million of line of credit capacity and €9.5 million of guarantee capacity, which we collectively refer to as the Facility. The Facility Agreement also provides for an incremental facility, which may not exceed £40.0 million, which is undrawn. As of March 31, 2018, there was £2.9 million and $29.0 million outstanding under the £50.0 million primary revolving credit facility, $6.0 million was drawn of the $12.1 million line of credit facility and €9.3 million was drawn of the €9.5 million guarantee facility, respectively. We expect to repay amounts borrowed under the Facility with a portion of the proceeds of this offering.
The Facility is secured by substantially all of our assets and requires us and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:
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dispose of assets; |
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complete mergers or acquisitions; |
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incur or guarantee indebtedness; |
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sell or encumber certain assets; |
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pay dividends or make other distributions to holders of our shares; |
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make specified investments; |
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engage in different lines of business; and |
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engage in certain transactions with affiliates. |
Under the terms of the Facility Agreement, we are required to comply with net leverage ratio and interest coverage covenants. Our ability to meet these ratios and covenants can be affected by events beyond our control and we may not meet these ratios and covenants. A failure by us to comply with the ratios or covenants contained in the Facility Agreement could result in an event of default, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, including the occurrence of a material adverse change, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the Facility Agreement. If the indebtedness under our Facility were to be accelerated, our future financial condition could be materially adversely affected.
We may incur additional indebtedness in the future. The instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against any collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.
We may need additional capital, and a failure by us 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 believe that our current cash balances, cash flow from operations, credit facilities and the proceeds from this offering should be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities, draw down on our revolving credit facility or obtain another credit facility. The sale of additional equity securities could result in dilution to our shareholders. 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, and could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We have significant fixed costs related to lease facilities.
We have made and continue to make significant contractual commitments related to our leased facilities. Our operating lease expense related to land and buildings for the 2017 fiscal year was £6.4 million, and we are contractually committed to £7.6 million in such lease expenses for the 2018 fiscal year, without giving effect to our acquisition of Velocity Partners. These expenses will have a significant impact on our fixed costs, and if we are unable to grow our business and revenue proportionately, our operating results may be negatively affected.
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Our ability to expand our business and procure new contracts or enter into beneficial business arrangements could be affected to the extent we enter into agreements with clients containing non-competition clauses.
We are a party to a small number of agreements with clients that restrict our ability to perform similar services for such clients’ competitors. We may in the future enter into agreements with clients that restrict our ability to accept assignments from, or render similar services to, those clients’ customers, require us to obtain our clients’ prior written consent to provide services to their customers or restrict our ability to compete with our clients, or bid for or accept any assignment for which those clients are bidding or negotiating. These restrictions may hamper our ability to compete for and provide services to other clients in a specific industry in which we have expertise and could materially adversely affect our business, financial condition and results of operations.
If our current insurance coverage is or becomes insufficient to protect against losses incurred, our business, results of operations and financial condition may be adversely affected.
We provide technology services that are integral to our clients’ businesses. If we were to default in the provision of any contractually agreed-upon services, our clients could suffer significant damages and make claims against us for those damages. We currently carry £15.0 million in errors and omissions liability coverage for all of the services we provide, subject to lower sub-limits in certain cases. To the extent client damages are deemed recoverable against us in amounts substantially in excess of our insurance coverage, or if our claims for insurance coverage are denied by our insurance carriers for any reason, including reasons beyond our control, there could be a material adverse effect on our revenue, business, results of operations and financial condition.
Our unaudited pro forma condensed combined financial information may not be representative of our future results.
The pro forma financial information included in this prospectus is constructed from our consolidated financial statements and the historical consolidated financial statements of Velocity Partners and does not purport to be indicative of the financial information that will result from our future operations. The pro forma financial information presented in this prospectus is based, in part, on certain assumptions that we believe are reasonable; however, we cannot assure you that our assumptions will prove to be accurate over time. Accordingly, the pro forma financial information included in this prospectus does not purport to be indicative of what our results of operations and financial condition would have been had we and Velocity Partners been a combined entity during the periods presented, or what our results of operations and financial condition will be in the future.
Risks Related to Our International Operations
The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
Our principal executive offices are located in the United Kingdom. Following the vote of a majority of the eligible members of the electorate in the United Kingdom to withdraw from the European Union in a national referendum held on June 23, 2016, referred to as “BREXIT,” the United Kingdom government served notice under Article 50 of the Treaty of the European Union on March 29, 2017 to formally initiate the process of withdrawing from the European Union. The United Kingdom and the European Union have a two-year period under Article 50 to negotiate the terms of withdrawal. Any extension of the negotiation period for withdrawal will require the consent of all of the remaining 27 member states.
The referendum and withdrawal have created significant uncertainty about the future relationship between the United Kingdom and the European Union. Lack of clarity about future U.K. laws and regulations as the United Kingdom determines which EU-derived laws and regulations to replace or replicate as part of a withdrawal, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the United Kingdom, increase costs, depress economic activity and restrict our access to capital. If the United Kingdom and the European Union are unable to negotiate acceptable terms for the United Kingdom’s withdrawal from the European Union, or if other EU member states pursue withdrawal from the European Union, barrier-free access between the United Kingdom and other EU member states or across the European Economic Area overall could be diminished or eliminated. In addition, the United Kingdom could lose the benefits of global trade agreements negotiated by the
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European Union on behalf of its members. These developments, or the perception that any of them could occur, have had and may continue to have a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. These developments, or the perception that any of them could occur, may also have a significant effect on our ability to attract and retain employees, including IT professionals and other employees who are important for our business.
Fluctuations in currency exchange rates and increased inflation could materially adversely affect our financial condition and results of operations.
We have offices located in Argentina, Bulgaria, Colombia, Denmark, Germany, Macedonia, Moldova, the Netherlands, Romania, Serbia, the United Kingdom, the United States, Uruguay and Venezuela. As a result of the international scope of our operations, fluctuations in exchange rates, particularly between the British Pound, our reporting currency, and the Euro and U.S. dollar, may adversely affect us. Currency fluctuations related to the BREXIT referendum had a significant impact on our financial results for the fiscal year ended June 30, 2017. In the fiscal year ended June 30, 2017, 46.7% of our sales were denominated in the British Pound, 16.9% of our sales were denominated in U.S. dollars and 36.4% were denominated in Euros. Conversely, during the same time period, 76.6% of our expenses were denominated in Euros (or in currencies that largely follow the Euro, including the RON) or U.S. Dollars. As a result, strengthening of the Euro or U.S. dollar relative to the British Pound presents the most significant risk to us. Any significant fluctuations in currency exchange rates may have a material impact on our business.
In addition, economies in Central European and Latin American countries have periodically experienced high rates of inflation. Periods of higher inflation may slow economic growth in those countries. As a substantial portion of our expenses (excluding currency losses and changes in deferred tax) are denominated in Euros or in currencies that largely follow the Euro, the relative movement of inflation significantly affects our results of operations. Inflation also is likely to increase some of our costs and expenses, including wages, rents, leases and employee benefit payments, which we may not be able to pass on to our clients and, as a result, may reduce our profitability. To the extent inflation causes these costs to increase, such inflation may materially adversely affect our business. Inflationary pressures could also affect our ability to access financial markets and lead to counter-inflationary measures that may harm our financial condition, results of operations or materially adversely affect the market price of our securities.
Our revenue, margins, results of operations and financial condition may be materially adversely affected if general economic conditions in Europe, the United States or the global economy worsen.
We derive a significant portion of our revenue from clients located in Europe and the United States. The technology services industry is particularly sensitive to the economic environment, and tends to decline during general economic downturns. If the U.S. or European economies weaken or slow, pricing for our services may be depressed and our clients may reduce or postpone their technology spending significantly, which may, in turn, lower the demand for our services and negatively affect our revenue and profitability. The BREXIT referendum and the resulting economic uncertainty could adversely impact our operating results unless and until economic conditions in Europe improve and the prospect of national debt defaults in Europe decline. To the extent that these adverse economic conditions continued or worsened, they would likely have a negative effect on our business. If we are unable to successfully anticipate changing economic and political conditions affecting the markets in which we operate, we may be unable to effectively plan for or respond to those changes, and our results of operations could be adversely affected.
Our international operations involve risks that could increase our expenses, adversely affect our results of operations and require increased time and attention from our management.
As of March 31, 2018, we had 4,700 employees, approximately 53.7% of whom work in nearshore delivery centers in European Union countries. We have operations in a number of countries, including Argentina, Bulgaria, Colombia, Denmark, Germany, Macedonia, Moldova, the Netherlands, Romania, Serbia, the United Kingdom, the United States, Uruguay and Venezuela, and we serve clients across Europe and North America. As a result, we may be subject to risks inherently associated with international operations. Our global operations expose us to numerous and sometimes conflicting legal, tax and regulatory requirements, and violations or unfavorable interpretation by the respective authorities of these regulations could harm our business. Risks associated with international operations include
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difficulties in enforcing contractual rights, potential difficulties in collecting accounts receivable, the burdens of complying with a wide variety of foreign laws, repatriation of earnings or capital and the risk of asset seizures by foreign governments. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations. Such companies may have long-standing or well-established relationships with desired clients, which may put us at a competitive disadvantage. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. Our international expansion plans may not be successful and we may not be able to compete effectively in other countries. These factors could impede the success of our international expansion plans and limit our ability to compete effectively in other countries.
Our business, results of operations and financial condition may be adversely affected by the various conflicting legal and regulatory requirements imposed on us by the countries where we operate.
Since we maintain operations and provide services to clients throughout the world, we are subject to numerous, and sometimes conflicting, legal requirements on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, anti-bribery, whistle blowing, internal and disclosure control obligations, data protection and privacy and labor relations. Our failure to comply with these regulations in the conduct of our business could result in fines, penalties, criminal sanctions against us or our officers, disgorgement of profits, prohibitions on doing business, unfavorable publicity, adverse impact on our reputation and allegations by our clients that we have not performed our contractual obligations. Due to the varying degree of development of the legal systems of the countries in which we operate, local laws might be insufficient to defend us and preserve our rights.
We are also subject to risks relating to compliance with a variety of national and local laws including multiple tax regimes, labor laws, employee health safety and wages and benefits laws. We may, from time to time, be subject to litigation or administrative actions resulting from claims against us by current or former employees individually or as part of class actions, including claims of wrongful terminations, discrimination, misclassification or other violations of labor law or other alleged conduct. We may also, from time to time, be subject to litigation resulting from claims against us by third parties, including claims of breach of non-compete and confidentiality provisions of our employees’ former employment agreements with such third parties. Our failure to comply with applicable regulatory requirements could have a material adverse effect on our revenue, business, results of operations and financial condition.
Many commercial laws and regulations in Central Europe and Latin America are relatively new and have been subject to limited interpretation. As a result, their application can be unpredictable. Government authorities have a high degree of discretion in certain countries in which we have operations and at times have exercised their discretion in ways that may be perceived as selective or arbitrary, and sometimes in a manner that is seen as being influenced by political or commercial considerations. These governments also have the power, in certain circumstances, to interfere with the performance of, nullify or terminate contracts. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. In this environment, our competitors could receive preferential treatment from the government, potentially giving them a competitive advantage. Selective or arbitrary government action could materially adversely affect our business, financial condition and results of operations.
Changes and uncertainties in the tax system in the countries in which we have operations, could materially adversely affect our financial condition and results of operations.
We conduct business globally and file income tax returns in multiple jurisdictions. Our consolidated effective income tax rate could be materially adversely affected by several factors, including: changing tax laws, regulations and treaties, or the interpretation thereof; tax policy initiatives and reforms under consideration (such as those related to the Organization for Economic Co-Operation and Development’s, or OECD, Base Erosion and Profit Shifting, or BEPS, Project, the European Commission’s state aid investigations and other initiatives); the practices of tax authorities in jurisdictions in which we operate; the resolution of issues arising from tax audits or examinations and any related interest or penalties. Such changes may include (but are not limited to) the taxation of operating income, investment income, dividends received or (in the specific context of withholding tax) dividends paid.
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In particular, there have been significant changes to the taxation systems in Central European 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, VAT, corporate property tax, personal income taxes and payroll taxes.
The U.S. government has also enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected. This prospectus does not discuss any such tax legislation or the manner in which it might affect purchasers of our ADSs.
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 shareholders and increase the complexity, burden and cost of tax compliance.
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, Her Majesty’s Revenue & Customs, or HMRC, the U.S. Internal Revenue Service or another 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. Similarly, a tax authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. In particular, tax authorities in Central European countries have been aggressive in their interpretation of tax laws and their many ambiguities, as well as in their enforcement and collection activities.
For example, 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.
We do not anticipate being treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the current taxable year, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to qualify as a PFIC, this could result in adverse U.S. tax consequences to certain U.S. holders.
Generally, if, for any taxable year, at least 75% of our gross income is passive income, or on average at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, including cash, we would be characterized as a PFIC for U.S. federal income tax purposes. For purposes of these tests, passive income generally includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. Our status as a PFIC depends on the composition of our income and the composition and value of our assets (for which purpose the total value of our assets may be determined in part by the market value of our ADSs representing Class A ordinary shares, which are subject to change) from time to time. If we are characterized as a PFIC, U.S. holders of our ADSs may suffer adverse U.S. tax consequences, including having gains realized on the sale of our ADSs treated as ordinary income, rather than capital gain, the loss of the preferential
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rate applicable to dividends received on our ADSs by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of sales of ADSs.
Although PFIC status is determined on an annual basis and generally cannot be determined until the end of the taxable year, based on the nature of our current and expected income and the current and expected value and composition of our assets, we believe we were not a PFIC for our 2017 tax year and we do not expect to be a PFIC for our current taxable year. However, our status as a PFIC is a fact-intensive determination made on an annual basis, and we cannot provide any assurances regarding our PFIC status for the current, prior or future taxable years. See “Material Tax Considerations—U.S. Federal Income Taxation—Passive Foreign Investment Company Rules” for a further discussion of the PFIC rules.
Emerging markets are subject to greater risks than more developed markets, and financial turmoil in any emerging market could disrupt our business.
Central European and Latin American countries are generally considered to be emerging markets, which are subject to rapid change and greater legal, economic and political risks than more established markets. Financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Central Europe and Latin America and adversely affect the economy of the region. Political instability could result in a worsening overall economic situation, including capital flight and slowdown of investment and business activity. Current and future changes in governments of the countries in which we have or develop operations, as well as major policy shifts or lack of consensus between various branches of the government and powerful economic groups, could lead to political instability and disrupt or reverse political, economic and regulatory reforms, which could materially adversely affect our business and operations in those countries. In addition, political and economic relations between certain of the countries in which we operate are complex, and recent conflicts have arisen between certain of their governments. Political, ethnic, religious, historical and other differences have, on occasion, given rise to tensions and, in certain cases, military conflicts among Central European or Latin American countries which can halt normal economic activity and disrupt the economies of neighboring regions. The emergence of new or escalated tensions in Central European or Latin American countries could further exacerbate tensions between such countries and the United Kingdom, the United States and the European Union, which may have a negative effect on their economy, our ability to develop or maintain our operations in those countries and our ability to attract and retain employees, any of which could materially adversely affect our business and operations.
In addition, banking and other financial systems in certain countries in which we have operations are less developed and regulated than in some more developed markets, and legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Banks in these regions often do not meet the banking standards of more developed markets, and the transparency of the banking sector lags behind international standards. Furthermore, in certain countries in which we operate, bank deposits made by corporate entities generally either are not insured or are insured only to specified limits. As a result, the banking sector remains subject to periodic instability. Another banking 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 certain countries in which we have operations, which could materially adversely affect our business and financial condition.
Wage inflation and other compensation expense for our IT professionals could adversely affect our financial results.
Wage costs for IT professionals in Central European and Latin American countries are lower than comparable wage costs in more developed countries. However, wage costs in the technology services industry in these countries may increase at a faster rate than in the past and wage inflation for the IT industry may be higher than overall wage inflation within these countries. We may need to increase the levels of employee compensation more rapidly than in the past to remain competitive, and we may not be able to pass on these increased costs to our clients. Unless we are able to continue to increase the efficiency and productivity of our employees as well as the prices we can charge for our services, wage inflation may materially adversely affect our financial condition and results of operations.
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We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, import and customs laws, trade and economic sanctions laws and other laws governing our operations.
Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or the Bribery Act, the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. §201, the U.S. Travel Act, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, the FCPA and these other laws generally prohibit us and our employees and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper or prohibited payments, or anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage. Under the Bribery Act, we may also be liable for failing to prevent a person associated with us from committing a bribery offense. We operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions and embargoes on certain countries and persons, anti-money laundering laws, import and customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws. We may not be completely effective in ensuring our compliance with all such applicable laws, which could result in our 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 United Kingdom, United States or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.
Risks Related to Our ADSs and this Offering
Our share price may be volatile, and you may lose some or all of your investment.
The initial public offering price for our ADSs has been determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our ADSs following this offering. The market price of our ADSs may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways, including:
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actual or anticipated fluctuations in our financial condition and operating results; |
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variance in our financial performance from expectations of securities analysts; |
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changes in the prices of our services; |
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changes in our projected operating and actual financial results; |
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changes in laws or regulations applicable to our business; |
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announcements by us or our competitors of significant business developments, acquisitions or new offerings; |
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our involvement in any litigation; |
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our sale of our ADSs or other securities in the future; |
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changes in senior management or key personnel; |
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the trading volume of our ADSs; |
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changes in the anticipated future size and growth rate of our market; and |
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general economic, regulatory and market conditions. |
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Stock markets frequently experience price and volume fluctuations that affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our ADSs. If the market price of our ADSs after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.
No public market for our ADSs currently exists, and an active public trading market may not develop or be sustained following this offering.
No public market for our ADSs currently exists. An active public trading market for our ADSs may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your ADSs at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your ADSs. An inactive market may also impair our ability to raise capital to continue to fund operations by selling ADSs and may impair our ability to acquire other companies or technologies by using our ADSs as consideration.
We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.
We anticipate that the net proceeds from this offering will be used for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used effectively. The net proceeds may be invested with a view towards long-term benefits for our shareholders and this may not increase our operating results or market value. The failure by our management to apply these funds effectively may adversely affect the return on your investment.
You will experience immediate and substantial dilution in the net tangible book value of the ADSs you purchase in this offering.
The initial public offering price of our ADSs will be substantially higher than the as adjusted net tangible book value per ordinary share immediately after this offering. If you purchase our ADSs in this offering, you will suffer immediate dilution of $17.35 per ADS, representing the difference between our as adjusted net tangible book value per ordinary share after giving effect to the sale of ADSs in this offering and the assumed public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. See “Dilution.” If outstanding options or warrants to purchase our ordinary shares are exercised in the future, you will experience additional dilution.
Future sales of our ADSs in the public market could cause the market price of our ADSs to decline.
Sales of a substantial number of our ADSs in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our ADSs and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our ADSs.
Our executive officers, directors and holders of substantially all of our outstanding ordinary shares (including all of the selling shareholders) are subject to lock-up agreements that restrict their ability to transfer our ADSs or the underlying Class A ordinary shares for 180 days from the date of this prospectus. In addition, a corporate business partner of ours has indicated an interest in purchasing up to $10.0 million of our ADSs in this offering at the public offering price. If such investor elects to purchase any or all of such ADSs and the underwriters elect to sell any or all of such ADSs to that investor, of which there can be no assurance, the investor is expected to execute a similar 180-day lock-up agreement with the underwriters. Accordingly, subject to certain limitations, 4,703,980 Class A ordinary shares (including in the form of ADSs) will become eligible for sale upon expiration of the 180 day lock-up period if
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the above referenced investor does not purchase ADSs in this offering (or 5,259,536 Class A ordinary shares (including in the form of ADSs) if the above referenced investor purchases $10.0 million of our ADSs in this offering at an assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus). Morgan Stanley & Co. LLC may, in its sole discretion, permit our shareholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements. In addition, our articles of association provide that (i) each holder of Class B ordinary shares may not dispose of (a) more than 25% of the Class B ordinary shares held by such holder as of the date of this prospectus in the 18-month period following the date of this prospectus (including by conversion to Class A ordinary shares), (b) more than 40% of the Class B ordinary shares held by such holder as of the date of this prospectus in the three-year period following the date of this prospectus (including by conversion to Class A ordinary shares) and (c) more than 60% of the Class B ordinary shares held by such holder as of the date of this prospectus in the five-year period following the date of this prospectus (including by conversion to Class A ordinary shares) and (ii) each holder of Class C ordinary shares may not dispose of more than 25% of the Class C ordinary shares held by such holder as of the date of this prospectus in the 18-month period following the date of this prospectus (including by conversion to Class A ordinary shares). Further, at any time between twelve and eighteen months following the completion of this offering, we intend to cause the Endava Limited Guernsey Employee Benefit Trust to sell up to 500,000 Class A ordinary shares, which may be in the form of ADSs.
In addition, as of March 31, 2018 there were outstanding 4,873,210 Class A ordinary shares subject to share options. We intend to register all of the Class A ordinary shares issuable upon exercise of outstanding options, and upon exercise of settlement of any options or other equity incentives we may grant in the future, for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the above-referenced lock-up agreements.
Shareholder protections found in provisions under the U.K. City Code on Takeovers and Mergers, or the Takeover Code, will not apply if our place of management and control is considered to change to outside the United Kingdom.
On July 6, 2018, we re-registered as a public limited company incorporated in England and Wales. Our place of central management and control is, and is expected to continue to be, in the United Kingdom. Accordingly, we are currently subject to the Takeover Code and, as a result, our shareholders are entitled to the benefit of certain takeover offer protections provided under the Takeover Code. The Takeover Code provides a framework within which takeovers of companies are regulated and conducted. If, at the time of a takeover offer, the Panel on Takeovers and Mergers, or the Takeover Panel, determines that we do not have our place of central management and control in the United Kingdom, then the Takeover Code would not apply to us and our shareholders would not be entitled to the benefit of the various protections that the Takeover Code affords. In particular, we would not be subject to the rules regarding mandatory takeover bids. The following is a brief summary of some of the most important rules of the Takeover Code:
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When any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares already held by that person and an interest in shares held or acquired by persons acting in concert with him or her) carry 30% or more of the voting rights of a company that is subject to the Takeover Code, that person is generally required to make a mandatory offer to all the holders of any class of equity share capital or other class of transferable securities carrying voting rights in that company to acquire the balance of their interests in the company. |
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When any person who, together with persons acting in concert with him or her, hold an interest in shares representing not less than 30% and not more than 50% of the voting rights of a company that is subject to the Takeover Code, and such person, or any person acting in concert with him or her, acquires an additional interest in shares which increases the percentage of shares carrying voting rights in which he or she is interested, then such person is generally required to make a mandatory offer to all the holders of any class of equity share capital or other class of transferable securities carrying voting rights of that company to acquire the balance of their interests in the company. |
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A mandatory offer under the Takeover Code must be in cash (or be accompanied by a cash alternative) and at not less than the highest price paid within the preceding 12 months to acquire any interest in shares in the company by the person required to make the offer or any person acting in concert with him or her. |
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When interests in shares representing 10% or more of the shares of a class have been acquired for cash by an offeror (i.e., a bidder) and any person acting in concert with it in the offer period and the previous 12 months, the offer must be in cash or include a cash alternative for all shareholders of that class at the highest price paid for any interest in shares of that class by the offeror and by any person acting in concert with it in that period. Further, if an offeror acquires for cash any interest in shares during the offer period, a cash alternative must be made available at a price at least equal to the highest price paid for any interest in the shares of that class. |
• |
If the offeror or any person acting in concert with it acquires an interest in shares in an offeree company (i.e., a target) at a price higher than the value of the offer, the offer must be increased to not less than the highest price paid for the interest in shares so acquired. |
• |
The offeree company must obtain competent advice as to whether the terms of any offer are fair and reaosnable and the substance of such advice must be made known to all the shareholders, together with the opinion of the board of directors of the offeree company. |
• |
Favorable deals for selected shareholders are banned. |
• |
All shareholders must be given the same information. |
• |
Those issuing takeover circulars must include statements by the relevant directors taking responsibility for the contents thereof. |
• |
Profit forecasts, quantified financial benefits statements and asset valuations must be made to specified standards and must be reported on by professional advisers. |
• |
Misleading, inaccurate or unsubstantiated statements made in documents or to the media must be publicly corrected immediately. |
• |
Actions during the course of an offer by the offeree company, which might frustrate the offer, are generally prohibited unless shareholders approve these plans. |
• |
Stringent requirements are laid down for the disclosure of dealings in relevant securities during an offer. |
Employee representatives or employees of both the offeror and the offeree company and the trustees of the offeree company’s pension scheme must be informed about an offer. In addition, the offeree company’s employee representatives and pension scheme trustees have the right to have a separate opinion on the effects of the offer on employment and pension scheme(s), respectively, appended to the offeree board of directors’ circular or published on a website.
The three class structure of our ordinary shares has the effect of concentrating voting control for the foreseeable future, which will limit your ability to influence corporate matters.
Our Class B ordinary shares have ten votes per share, and our Class A ordinary shares, which are the shares underlying the ADSs that we are offering in this offering, and Class C ordinary shares each have one vote per share. Given the greater number of votes per share attributed to our Class B ordinary shares, our existing shareholders will collectively beneficially hold shares representing approximately 92.2% of the voting rights of our outstanding share capital assuming the issuance by us of 2,890,000 ADSs in this offering and the sale by the selling shareholders of 2,710,000 ADSs in this offering (or 91.7% of the voting rights of our outstanding share capital if the underwriters exercise their over-allotment option in full). Further, John Cotterell, our Chief Executive Officer, will beneficially hold Class B ordinary shares representing approximately 32.8% of the voting rights of our outstanding share capital assuming the issuance by us of 2,890,000 ADSs in this offering and the sale by the selling shareholders of 2,710,000 ADSs in this offering. Consequently, Mr. Cotterell will continue to be able to have a significant influence on corporate matters submitted to a vote of shareholders. Notwithstanding this concentration of control, we do not expect that we will qualify as a “controlled company” under New York Stock Exchange listing rules.
This concentrated control will limit your ability to influence corporate matters for the foreseeable future. This concentrated control could also discourage a potential investor from acquiring our ADSs due to the limited voting power of the Class A ordinary shares underlying the ADSs relative to the Class B ordinary shares and might harm the
43
market price of our ADSs. In addition, Mr. Cotterell has the ability to control the management and major strategic investments of our company as a result of his position as our Chief Executive Officer. As a member of our board of directors, Mr. Cotterell owes statutory and fiduciary duties to us and must act in good faith and in a manner that he considers would be most likely to promote the success of our company for the benefit of our shareholders as a whole. As a shareholder, Mr. Cotterell is entitled to vote his shares in his own interests, which may not always be in the interests of our shareholders generally. For a description of our three class structure, see “Description of Share Capital and Articles of Association.”
Future transfers by other holders of Class B ordinary shares and Class C ordinary shares will generally result in those shares converting on a one-to-one basis to Class A ordinary shares, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of our Class B ordinary shares into Class A ordinary shares will have the effect, over time, of increasing the relative voting power of those holders of Class B ordinary shares who retain their shares in the long-term.
We cannot predict the impact our three class share structure may have on our ADS price or our business.
We cannot predict whether our three class share structure, combined with the concentrated control of our shareholders who held our ordinary shares prior to the completion of this offering, including our executive officers, employees and directors and their affiliates, will result in a lower or more volatile market price of our ADSs or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. In July 2017, FTSE Russell announced that it plans to require new constituents of its indexes to have greater than 5% of the company's voting rights in the hands of public shareholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indexes. Because of our three class structure, we will likely be excluded from these indexes and we cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our ADSs less attractive to other investors. As a result, the market price of our ADSs could be adversely affected.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under English law. The rights of holders of ordinary shares and, therefore, certain of the rights of holders of our ADSs, are governed by English law, including the provisions of the Companies Act 2006, or the Companies Act, and by our Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. See “Description of Share Capital and Articles of Association — Differences in Corporate Law” in this prospectus for a description of the principal differences between the provisions of the Companies Act applicable to us and, for example, the Delaware General Corporation Law relating to shareholders' rights and protections.
Holders of our ADSs have fewer rights than our shareholders and must act through the depositary to exercise their rights.
Holders of our ADSs do not have the same rights as our shareholders and may only exercise their voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Holders of the ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the Class A ordinary shares represented by the ADSs. When a general meeting is convened, if you hold ADSs, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the Class A ordinary shares underlying your ADSs to allow you to vote directly with respect to any specific matter. We will make all commercially reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Furthermore, the depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting. See “Description of American Depositary Shares.”
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Holders of our ADSs may face limitations on transfer and withdrawal of underlying Class A ordinary shares.
Our ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying Class A ordinary shares. Temporary delays in the cancellation of your ADSs and withdrawal of the underlying Class A ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our Class A ordinary shares. In addition, you may not be able to cancel your ADSs and withdraw the underlying Class A ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of Class A ordinary shares or other deposited securities. See “Description of American Depositary Shares.”
ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including in respect of claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal court, which have non-exclusive jurisdiction over matters arising under the deposit agreement, applying such law. In determining whether to enforce a jury trial waiver provision, New York courts and federal courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor's negligence in failing to liquidate collateral upon a guarantor's demand, or in the case of an intentional tort claim (as opposed to a contract dispute), none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with such matters, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.
Claims of U.S. civil liabilities may not be enforceable against us.
We are incorporated under English law. Substantially all of our assets are located outside the United States. The majority of our senior management and board of directors reside outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce judgments obtained in U.S. courts against them or us, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
The United States and the United Kingdom do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment
45
given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in the United Kingdom. In addition, uncertainty exists as to whether U.K. courts would entertain original actions brought in the United Kingdom against us or our directors or senior management predicated upon the securities laws of the United States or any state in the United States. Any final and conclusive monetary judgment for a definite sum obtained against us in U.S. courts would be treated by the courts of the United Kingdom as a cause of action in itself and sued upon as a debt at common law so that no retrial of the issues would be necessary, provided that certain requirements are met. Whether these requirements are met in respect of a judgment based upon the civil liability provisions of the U.S. securities laws, including whether the award of monetary damages under such laws would constitute a penalty, is an issue for the court making such decision. If an English court gives judgment for the sum payable under a U.S. judgment, the English judgment will be enforceable by methods generally available for this purpose. These methods generally permit the English court discretion to prescribe the manner of enforcement.
As a result, U.S. investors may not be able to enforce against us or our senior management, board of directors or certain experts named herein who are residents of the United Kingdom or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. public companies.
We are a “foreign private issuer,” as defined in the SEC rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Further, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.
As a foreign private issuer, we will file an annual report on Form 20-F within four months of the close of each fiscal year ended June 30 and reports on Form 6-K relating to certain material events promptly after we publicly announce these events. However, because of the above exemptions for foreign private issuers, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
While we are a foreign private issuer, we are not subject to certain New York Stock Exchange corporate governance listing standards applicable to U.S. listed companies.
We are entitled to rely on a provision in the New York Stock Exchange’s corporate governance listing standards that allows us to follow English corporate law and the Companies Act with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the New York Stock Exchange.
For example, we are exempt from New York Stock Exchange regulations that require a listed U.S. company to (1) have a majority of the board of directors consist of independent directors, (2) require regularly scheduled executive sessions with only independent directors each year and (3) have a remuneration committee or a nominations or corporate governance committee consisting entirely of independent directors.
In accordance with our New York Stock Exchange listing, our audit committee is required to comply with the provisions of Section 301 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and Rule 10A-3 of the Exchange Act, both of which are also applicable to New York Stock Exchange-listed U.S. companies. Because we are a foreign private issuer, however, our audit committee is not subject to additional New York Stock Exchange requirements applicable to listed U.S. companies, including an affirmative determination that all members of the audit committee are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer.
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Furthermore, the New York Stock Exchange’s corporate governance listing standards require listed U.S. companies to, among other things, seek shareholder approval for the implementation of certain equity compensation plans and issuances of ordinary shares, which we are not required to follow as a foreign private issuer.
We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act's domestic reporting regime and cause us to incur significant legal, accounting and other expenses.
As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. We may no longer be a foreign private issuer as of December 31, 2018 (the end of our second fiscal quarter in the fiscal year after this offering), which would require us to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers as of January 1, 2019. In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(1) a majority of our executive officers or directors cannot be U.S. citizens or residents, (2) more than 50 percent of our assets must be located outside the United States and (3) our business must be administered principally outside the United States. If we lose our status as a foreign private issuer, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers and will require that we prepare our financial statements in accordance with U.S. Generally Accepted Accounting Principles. We may also be required to make changes in our corporate governance practices in accordance with various SEC and rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer will be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly.
We are an “emerging growth company” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our ADSs less attractive to investors.
We are an “emerging growth company,” as defined in 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, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and, to the extent that we no longer qualify as a foreign private issuer pursuant to which standards we are not required to provide detailed compensation disclosures or file proxy statements, 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. We cannot predict if investors will find our ADSs less attractive if we choose to rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our ADSs.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose significant changes made in our disclosure controls or internal control procedures on a quarterly basis.
We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We will need to hire additional
47
accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our ADSs could decline, and we could be subject to sanctions or investigations by the New York Stock Exchange, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital market.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our ADSs will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts or the content that they publish about us. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our ADSs or change their opinion of our ADSs, our ADS price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our ADS price or trading volume to decline.
We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our ADSs.
We currently intend to retain any future earnings to finance the growth and development of the business and, therefore, we do not anticipate that we will pay any cash dividends on our ordinary shares, including on the Class A ordinary shares underlying our ADSs, in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations and capital requirements, general business conditions and other relevant factors as determined by our board of directors. Accordingly, investors must rely on sales of their ADSs after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “potential” and “should,” among others.
Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief, or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to substantial risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various important factors, including, but not limited to, those identified under “Risk Factors.” In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a guarantee by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
Forward-looking statements include, but are not limited to, statements about:
• |
our ability to sustain our revenue growth rate in the future; |
• |
our ability to retain existing clients and attract new clients, including our ability to increase revenue from existing clients and diversify our revenue concentration; |
• |
our ability to attract and retain highly-skilled IT professionals at cost-effective rates; |
• |
our ability to penetrate new industry verticals and geographies and grow our revenue in current industry verticals and geographies; |
• |
our ability to maintain favorable pricing and utilization rates; |
• |
our ability to successfully identify acquisition targets, consummate acquisitions and successfully integrate acquired businesses and personnel; |
• |
the effects of increased competition as well as innovations by new and existing competitors in our market; |
• |
the size of our addressable market and market trends; |
• |
our ability to adapt to technological change and innovate solutions for our clients; |
• |
our plans for growth and future operations, including our ability to manage our growth; |
• |
our expectations of future operating results or financial performance; |
• |
our ability to effectively manage our international operations, including our exposure to foreign currency exchange rate fluctuations; and |
• |
our future financial performance, including trends in revenue, cost of sales, gross profit, selling, general and administrative expenses, finance income and expense and taxes. |
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
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MARKET AND INDUSTRY DATA
Certain industry data and market data included in this prospectus were obtained from independent third-party surveys, market research, publicly available information, reports of governmental agencies, and industry publications and surveys. All of the market data used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications and surveys included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
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EXCHANGE RATE INFORMATION
The following table presents information on the exchange rates between the British Pound and the U.S. dollar for the periods indicated. Average rates are computed by using the noon buying rate of the Federal Reserve Bank of New York for the U.S. dollar on the last business day of each month during the relevant period indicated. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of British Pounds at the dates indicated.
Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
||||||
High |
1.6275 |
1.7105 |
1.7165 |
1.5731 |
1.3429 |
1.4264 |
|||||
Low |
1.4877 |
1.4837 |
1.4648 |
1.3217 |
1.2118 |
1.2787 |
|||||
Rate at end of period |
1.5210 |
1.7105 |
1.5727 |
1.3242 |
1.2995 |
1.4027 |
|||||
Average rate per period |
1.5688 |
1.6372 |
1.5714 |
1.4686 |
1.2736 |
1.3535 |
The following table sets forth, for each of the last six months, the low and high exchange rates for British Pounds expressed in U.S. dollars and the exchange rate at the end of the month based on the noon buying rate as described above.
January
2018
|
February
2018
|
March
2018
|
April
2018
|
May
2018
|
June
2018
|
||||||
High |
1.4264 |
1.4247 |
1.4236 |
1.4332 |
1.3611 |
1.3429 |
|||||
Low |
1.3513 |
1.3794 |
1.3755 |
1.3751 |
1.3258 |
1.3095 |
|||||
Rate at end of period |
1.4190 |
1.3794 |
1.4027 |
1.3751 |
1.3289 |
1.3197 |
On July 6, 2018, the noon buying rate of the Federal Reserve Bank of New York for the British Pound was £1.00 = $1.3262.
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USE OF PROCEEDS
We estimate that the net proceeds from the offering will be approximately $40.6 million (£28.9 million), assuming an initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.
Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per ADS would increase or decrease the net proceeds to us from this offering by approximately $2.7 million (£1.9 million), assuming that the number of ADSs offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of ADSs we are offering. Each increase or decrease of 1,000,000 ADSs in the number of ADSs offered by us would increase or decrease the net proceeds to us from this offering by approximately $16.7 million (£11.9 million), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our ADSs. We intend to use the net proceeds we receive from this offering to repay in full amounts outstanding under our revolving credit facility with HSBC Bank PLC, which has a maturity date of December 19, 2020 and bears interest, at our option, at a rate equal to either the LIBOR rate or the EURIBOR rate, plus an applicable margin ranging from 0.8% to 1.4% per annum, based upon the net leverage ratio. As of March 31, 2018, there was £2.9 million and $29.0 million outstanding under the £50.0 million primary revolving credit facility, $6.0 million was drawn of the $12.1 million line of credit facility and €9.3 million was drawn of the €9.5 million guarantee facility, respectively. We used the proceeds borrowed under our revolving credit facility principally to fund our acquisition of Velocity Partners, LLC. We also intend to use the net proceeds from this offering for general corporate purposes, including working capital, selling, general and administrative expenses and capital expenditures. We also may use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time.
The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have broad discretion over the uses of the net proceeds from this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities and government securities.
53
DIVIDEND POLICY
Our dividends are declared at the discretion of our board of directors. We declared an aggregate of £7.5 million and £18.2 million in dividends during the fiscal years ended June 30, 2015 and 2016. We did not pay any dividends in the fiscal year ended June 30, 2017 and do not anticipate paying any dividends for the foreseeable future. We intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors in compliance with applicable legal requirements and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant. In addition, our revolving credit facility with HSBC Bank PLC limits our ability to pay dividends, with certain exceptions. See “Risk Factors — We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our ADSs.”
54
CORPORATE REORGANIZATION
Endava plc is a public limited company, originally incorporated in England and Wales on February 27, 2006 as a private company with limited liability called Endava Limited. We have completed a corporate reorganization, pursuant to which all shareholders of Endava Limited were given the choice to elect to accept redesignation of all existing ordinary shares in the capital of Endava Limited held by them into the same number of either (i) Class B ordinary shares of Endava Limited, where each Class B ordinary share is entitled to 10 votes per share and is subject to certain restrictions on transfer for a period of five years following the date of this prospectus or (ii) Class C ordinary shares of Endava Limited, where each Class C ordinary share is entitled to one vote per share and is subject to certain restrictions on transfer for a period of 18 months following the date of this prospectus, and with each Class B ordinary share and each Class C ordinary share being capable of conversion into one Class A ordinary share; provided, that the Endava Limited Guernsey Employee Benefit Trust was required to redesignate all of the existing ordinary shares held by it into the same number of Class A ordinary shares, each entitled to one vote per share.
On July 6, 2018, Endava Limited re-registered as a public limited company and changed its name to Endava plc. Such re-registration required the passing of special resolutions to approve the re-registration as a public limited company, the name change to Endava plc and the adoption of new articles of association for Endava plc. See “Description of Share Capital and Articles of Association.”
55
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2018:
• |
on an actual basis; and |
• |
on an as adjusted basis to give further effect to (i) the redesignation of our outstanding ordinary shares as of March 31, 2018 into Class A ordinary shares, Class B ordinary shares and Class C ordinary shares, (ii) the issuance and sale by us of 2,890,000 ADSs in this offering at an assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated unpaid offering expenses payable by us and (iii) our repayment of £23.6 million of principal and accrued interest outstanding under our revolving credit facility with HSBC Bank PLC, representing all of our outstanding obligations thereunder. As of March 31, 2018, approximately £2.5 million of our aggregate estimated offering expenses of £5.6 million had been paid or accrued on the balance sheet. |
You should read the information in this “Capitalization” section together with “Selected Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.
As of March 31, 2018 |
|||||||
(in thousands, except share
and per share data)
|
|||||||
Actual |
As Adjusted(1)
|
||||||
Cash and cash equivalents |
£ |
9,462 |
£ |
17,247 |
|||
Long term debt, including current portion |
23,646 |
34 |
|||||
Shareholders’ equity: |
|||||||
Ordinary shares, nominal value £0.02 per share; 49,804,145 shares issued and outstanding, actual; no shares issued or outstanding, as adjusted |
996 |
— |
|||||
Class A ordinary shares, nominal value £0.02 per share; no shares issued and outstanding, actual; 10,303,980 shares issued and outstanding, as adjusted |
— |
206 |
|||||
Class B ordinary shares, nominal value £0.02 per share; no shares issued and outstanding, actual; 28,500,125 shares issued and outstanding, as adjusted |
— |
570 |
|||||
Class C ordinary shares, nominal value £0.02 per share; no shares issued and outstanding, actual; 13,890,040 shares issued and outstanding, as adjusted |
— |
278 |
|||||
Share premium |
2,678 |
36,835 |
|||||
Retained earnings |
52,959 |
50,141 |
|||||
Reserves |
8,137 |
8,137 |
|||||
Investment in own shares |
(2,275 |
) |
(2,275 |
) |
|||
Total shareholders’ equity |
62,495 |
93,892 |
|||||
Total capitalization |
£ |
86,141 |
£ |
93,926 |
(1) |
The as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease each of as adjusted cash and cash equivalents, share premium, total shareholders’ equity and total capitalization by approximately £1.9 million ($2.7 million), assuming that the number of ADSs offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of ADSs we are offering. Each 1,000,000 ADS increase or decrease in the number of ADSs offered by us would increase or decrease each of as adjusted cash and cash equivalents, share premium, total shareholders’ equity and total capitalization by approximately £11.9 million ($16.7 million). |
56
The outstanding share information in the table above excludes:
• |
669,230 Class A ordinary shares issuable upon the exercise of share options outstanding as of March 31, 2018, at a weighted average exercise price of £0.22 per share, with the balance of the total number of 4,873,210 Class A ordinary shares subject to share options outstanding as of March 31, 2018 being currently issued and outstanding and held by the Endava Limited Guernsey Employee Benefit Trust; |
• |
1,125,035 Class A ordinary shares that will be issued, following the completion of this offering, in connection with our acquisition of Velocity Partners LLC, or Velocity Partners; |
• |
360,340 Class A ordinary shares that we will be required to issue to certain continuing employees of Velocity Partners over a period of three years following the completion of this offering; |
• |
5,530,000 Class A ordinary shares reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and which number of reserved shares includes up to 936,667 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering; and |
• |
2,675,000 Class A ordinary shares reserved for future issuance pursuant to the Endava plc 2018 Sharesave Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and which number of reserved shares includes 1,189,040 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering. |
57
DILUTION
If you invest in our ADSs, your ownership interest will be diluted to the extent of the difference between the initial public offering price per ADS paid by purchasers and the as adjusted net tangible book value per ordinary share after this offering. Our net tangible book value as of March 31, 2018 was £(6.8 million) (or $(9.6 million)), or £(0.14) (or $(0.19)) per ordinary share. Net tangible book value per share is determined by dividing (1) our total tangible assets less our total liabilities by (2) the number of ordinary shares outstanding as of March 31, 2018, or 49,804,145 ordinary shares.
After giving effect to (1) our sale of 2,890,000 ADSs in this offering at an assumed initial public offering price of $18.00 per ADS, the midpoint of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) our repayment of £23.6 million of principal and accrued interest outstanding under our revolving credit facility with HSBC Bank PLC, representing all of our outstanding obligations thereunder, our as adjusted net tangible book value as of March 31, 2018 would have been $34.5 million (£24.6 million), or $0.65 (£0.47) per ordinary share. This amount represents an immediate increase in net tangible book value of $0.85 (£0.61) per ordinary share to our existing shareholders and an immediate dilution in net tangible book value of $17.35 (£12.36) per ordinary share/ADS to new investors. The following table illustrates this dilution on a per ADS basis:
Assumed initial public offering price per ADS |
$ |
18.00 |
|||||
Historical net tangible book value per ordinary share as of March 31, 2018 |
$ |
(0.19 |
) |
||||
Increase in net tangible book value per ordinary share/ADS attributable to new investors in this offering |
0.85 |
||||||
As adjusted net tangible book value per ordinary share after this offering |
0.65 |
||||||
Dilution per ADS to new investors in this offering |
$ |
17.35 |
Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per ADS, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the as adjusted net tangible book value per ordinary share by $0.05 (£0.04), and dilution to new investors by $0.05 (£0.04) per ordinary share/ADS, assuming the number of ADSs offered by us, as set forth on the cover of this prospectus, remains the same. A 1,000,000 ADS increase in the number of ADSs offered by us would increase as adjusted net tangible book value by $16.7 million (£11.9 million), or $0.30 (£0.21) per ordinary share, and the dilution to new investors participating in this offering would be $17.05 (£12.15) per ordinary share/ADS, assuming that the assumed public offering price remains the same. A 1,000,000 ADS decrease in the number of ADSs offered by us would decrease as adjusted net tangible book value by $16.7 million (£11.9 million), or $0.31 (£0.23) per ordinary share, and the dilution to new investors participating in this offering would be $17.66 (£12.59) per ordinary share/ADS, assuming that the assumed public offering price remains the same.
The following table presents information as of March 31, 2018 with respect to consideration paid to us in cash for ordinary shares, including Class A ordinary shares in the form of ADSs, purchased from us by our existing shareholders and by new investors, based on an assumed initial public offering price of $18.00 per ADS, the midpoint of the range set forth on the cover of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Ordinary Shares Purchased(1)
|
Total Consideration |
Average
Price
Per Share
|
||||||||||||||
Number |
Percent |
Amount |
Percent |
|||||||||||||
Existing Investors |
49,804,145 |
94.5 |
% |
£ |
3,674,000 |
9.0 |
% |
£ |
0.07 |
|||||||
New Investors |
2,890,000 |
5.5 |
% |
37,072,406 |
91.0 |
% |
£ |
12.83 |
||||||||
Total |
52,694,145 |
100.0 |
% |
£ |
40,746,406 |
100.0 |
% |
________________
(1) |
Including Class A ordinary shares in the form of ADSs. |
58
The foregoing table does not give effect to the sales by existing shareholders in this offering. Sales by the selling shareholders in this offering will reduce the number of shares held by existing shareholders to 47,094,145 shares, or 89% of the total number of ordinary shares outstanding after this offering (including in the form of ADSs), and will increase the number of shares (including in the form of ADSs) held by new investors to 5,600,000 shares, or 11% of the total number of ordinary shares (including in the form of ADSs) outstanding after this offering.
If the underwriters exercise their over-allotment option in full, the percentage of shares held by existing shareholders will decrease to 88% of the total number of shares (including in the form of ADSs) outstanding after this offering, and the percentage of shares held by new investors will increase 12% of the total number of shares (including in the form of ADSs) outstanding after this offering.
The tables and calculations above are based on an aggregate of 49,804,145 Class A ordinary shares, Class B ordinary shares and Class C ordinary shares outstanding as of March 31, 2018, and excludes:
• |
669,230 Class A ordinary shares issuable upon the exercise of share options outstanding as of March 31, 2018, at a weighted average exercise price of £0.22 per share, with the balance of the total number of 4,873,210 Class A ordinary shares subject to share options outstanding as of March 31, 2018 being currently issued and outstanding and held by the Endava Limited Guernsey Employee Benefit Trust; |
• |
1,125,035 Class A ordinary shares that will be issued, following the completion of this offering, in connection with our acquisition of Velocity Partners LLC, or Velocity Partners; |
• |
360,340 Class A ordinary shares that we will be required to issue to certain continuing employees of Velocity Partners over a period of three years following the completion of this offering; |
• |
5,530,000 Class A ordinary shares reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and which number of reserved shares includes up to 936,667 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering; and |
• |
2,675,000 Class A ordinary shares reserved for future issuance pursuant to the Endava plc 2018 Sharesave Plan, which will become effective prior to the completion of this offering and includes provisions that automatically increase the number of Class A ordinary shares reserved for issuance thereunder each year, and which number of reserved shares includes 1,189,040 Class A ordinary shares that will underlie awards that we plan to issue to certain of our employees promptly following the completion of this offering. |
59
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth our selected consolidated financial data for the periods indicated. We have derived the consolidated statement of comprehensive income for the fiscal years ended June 30, 2016 and 2017 and the consolidated balance sheet data as of June 30, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. In order to provide additional historical financial information, we have included supplemental unaudited consolidated statements of operation data for the fiscal year ended June 30, 2015 and the consolidated balance sheet data as of June 30, 2015, which is derived from the consolidated statement of comprehensive income for the fiscal year ended June 30, 2015 and the consolidated balance sheet data as of June 30, 2015 from our unaudited financial statements, which are not included elsewhere in this prospectus. We derived the consolidated statement of comprehensive income for the nine months ended March 31, 2017 and 2018 and the consolidated balance sheet as of March 31, 2018 from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited financial statements reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected for any future period, and our results for the nine months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year. You should read the following summary consolidated financial data together with the audited consolidated financial statements included elsewhere in this prospectus and the sections titled “Exchange Rate Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We maintain our books and records in British Pounds, and we prepare our financial statements in accordance with IFRS as issued by the IASB. We report our financial results in British Pounds.
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||||||||||
2015 (£) |
2016 (£) |
2017 (£) |
2017 ($)(1)
|
2017 (£) |
2018 (£) |
2018 ($)(1)
|
|||||||||||||||||||||
(in thousands, except for share and per share amounts) |
|||||||||||||||||||||||||||
Consolidated Statements of Operations Data: |
|||||||||||||||||||||||||||
Revenue |
£ |
84,107 |
£ |
115,432 |
£ |
159,368 |
$ |
223,625 |
£ |
116,322 |
£ |
156,140 |
$ |
219,096 |
|||||||||||||
Cost of sales: |
|||||||||||||||||||||||||||
Direct cost of sales(2)
|
(49,717 |
) |
(68,517 |
) |
(98,853 |
) |
(138,711 |
) |
(72,692 |
) |
(96,104 |
) |
(134,853 |
) |
|||||||||||||
Allocated cost of sales |
(3,674 |
) |
(6,529 |
) |
(9,907 |
) |
(13,902 |
) |
(6,943 |
) |
(9,281 |
) |
(13,023 |
) |
|||||||||||||
Total cost of sales |
(53,391 |
) |
(75,046 |
) |
(108,760 |
) |
(152,613 |
) |
(79,635 |
) |
(105,385 |
) |
(147,876 |
) |
|||||||||||||
Gross profit |
30,716 |
40,386 |
50,608 |
71,012 |
36,687 |
50,755 |
71,220 |
||||||||||||||||||||
Selling, general and administrative expenses(2)
|
(13,729 |
) |
(20,453 |
) |
(27,551 |
) |
(38,660 |
) |
(19,993 |
) |
(31,755 |
) |
(44,559 |
) |
|||||||||||||
Operating profit |
16,987 |
19,933 |
23,057 |
32,352 |
16,694 |
19,000 |
26,661 |
||||||||||||||||||||
Net finance (costs)/income |
(1,781 |
) |
898 |
(1,357 |
) |
(1,904 |
) |
(515 |
) |
(1,030 |
) |
(1,445 |
) |
||||||||||||||
Profit before tax |
15,206 |
20,831 |
21,700 |
30,448 |
16,179 |
17,970 |
25,216 |
||||||||||||||||||||
Tax on profit on ordinary activities |
(1,659 |
) |
(4,125 |
) |
(4,868 |
) |
(6,831 |
) |
(3,629 |
) |
(3,893 |
) |
(5,463 |
) |
|||||||||||||
Net profit |
£ |
13,547 |
£ |
16,706 |
£ |
16,832 |
$ |
23,617 |
£ |
12,550 |
£ |
14,077 |
$ |
19,753 |
|||||||||||||
Earnings per share, basic |
£ |
0.35 |
£ |
0.37 |
£ |
0.37 |
$ |
0.52 |
£ |
0.28 |
£ |
0.31 |
$ |
0.44 |
|||||||||||||
Earnings per share, diluted |
£ |
0.29 |
£ |
0.34 |
£ |
0.34 |
$ |
0.48 |
£ |
0.25 |
£ |
0.28 |
$ |
0.40 |
|||||||||||||
Weighted average number of shares outstanding, basic |
38,482,460 |
45,389,210 |
45,258,750 |
45,258,750 |
45,300,500 |
45,100,165 |
45,100,165 |
||||||||||||||||||||
Weighted average number of shares outstanding, diluted |
46,150,255 |
49,318,045 |
49,292,520 |
49,292,520 |
49,374,805 |
49,557,130 |
49,557,130 |
||||||||||||||||||||
Other Financial Data: |
|||||||||||||||||||||||||||
Revenue period-over-period growth rate |
31.6 |
% |
37.2 |
% |
38.1 |
% |
39.4 |
% |
34.2 |
% |
|||||||||||||||||
Profit before tax margin |
18.1% |
18.0% |
13.6% |
13.9% |
11.5% |
||||||||||||||||||||||
Net cash provided by (used in) operating activities |
£11,107 |
£10,897 |
£14,740 |
£3,788 |
£20,374 |
60
________________
(1) |
Translated solely for convenience into dollars at the rate of £1.00 = $1.4032. |
(2) |
Includes share-based compensation expenses as follows: |
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
|||||||||||||||
(in thousands) |
|||||||||||||||||||
Direct cost of sales |
£ |
115 |
£ |
587 |
£ |
560 |
£ |
448 |
£ |
686 |
|||||||||
Selling, general and administrative expenses |
65 |
181 |
294 |
228 |
340 |
||||||||||||||
Total |
£ |
180 |
£ |
768 |
£ |
854 |
£ |
676 |
£ |
1,026 |
As of June 30, |
As of March 31, |
||||||||||||||
2015 |
2016 |
2017 |
2018 |
||||||||||||
(in thousands) |
|||||||||||||||
Consolidated Balance Sheet Data: |
|||||||||||||||
Cash and cash equivalents |
£ |
13,362 |
£ |
12,947 |
£ |
23,571 |
£ |
9,462 |
|||||||
Working capital (1)
|
12,038 |
3,180 |
11,028 |
(5,197 |
) |
||||||||||
Total assets |
57,000 |
72,897 |
106,382 |
138,303 |
|||||||||||
Total liabilities |
31,014 |
43,104 |
57,662 |
75,808 |
|||||||||||
Total shareholders’ equity |
25,986 |
29,793 |
48,720 |
62,495 |
(1) |
Working capital is defined as total current assets minus total current liabilities. |
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends on June 30.
Overview
We are a leading next-generation technology services provider and help accelerate disruption by delivering rapid evolution to enterprises. We aid our clients in finding new ways to interact with their customers and users, enabling them to become more engaging, responsive and efficient. Using Distributed Enterprise Agile at scale, we collaborate with our clients, seamlessly integrating with their teams, catalyzing ideation and delivering robust solutions. Our approach to ideation comprises an empathy for user needs, curiosity, creativity and a deep understanding of technologies. From proof of concept, to prototype, to production, we use our engineering expertise to deliver enterprise platforms capable of handling millions of transactions per day. Our people, whom we call Endavans, synthesize creativity, technology and delivery at scale in multi-disciplinary teams, enabling us to support our clients from ideation to production.
Since our founding in 2000, we have expanded from a single office serving clients principally located in the city of London to a global enterprise serving clients across Europe and North America from nearshore delivery centers located in Central Europe and Latin America. We provide services from our nearshore delivery centers, located in two European Union countries – Romania and Bulgaria, three other Central European countries – Macedonia, Moldova and Serbia, and four countries in Latin America – Argentina, Colombia, Uruguay and Venezuela. We have close-to-client offices in four Western European countries – Denmark, Germany, the Netherlands and the United Kingdom, as well as in the United States. As of March 31, 2018, we had 4,700 employees, approximately 53.7% of whom work in nearshore delivery centers in European Union countries. As of December 31, 2017, we had 4,580 employees. As of June 30, 2015, 2016 and 2017, we had 2,205, 2,795 and 3,744 employees, respectively. The breakdown of our employees by geography is as follows for the periods presented:
Employees by geography |
Fiscal Year Ended June 30, |
Nine Months Ended March 31, |
||||||||||||
2015 |
2016 |
2017 |
2017 |
2018 |
||||||||||
Western Europe |
240 |
237 |
233 |
238 |
244 |
|||||||||
Central Europe - EU Countries |
1,282 |
1,572 |
2,314 |
2,221 |
2,523 |
|||||||||
Sub-total: EU Countries (Western & Central Europe) |
1,522 |
1,809 |
2,547 |
2,459 |
2,767 |
|||||||||
Central Europe - Non-EU Countries |
678 |
928 |
1,073 |
1,049 |
1,233 |
|||||||||
Latin America(1)
|
— |
— |