Risk Factors

Fatores de Risco

Fatores de Risco

Risks Relating to Our Industry and Us

We are substantially dependent on revenues generated from the maintenance, implementation and licensing of our integrated enterprise management software and services related to them, including monthly subscription fees.

Our revenues are substantially dependent on our integrated enterprise retail management software and ongoing services related to them. The significant majority of our revenues result from the fees that we charge for implementation and maintenance services for the use of our software programs, which comprise almost all of our gross revenues from continued operations (constituting 84%, 84% and 81% of our revenues for the years ended December 31, 2016, 2015 and 2014, respectively) and from their corresponding use licenses. As a result, a reduction in revenues from this source, whether due to increased competition, adverse market conditions or a general reduction in demand for integrated enterprise management software and services or other factors, could materially adversely affect our results of operations, financial condition and liquidity.

The software industry is highly competitive, and we may be unable to compete effectively in it.

We compete with several companies that operate in the global, regional and local software industries, including providers of integrated enterprise management software, developers of free software and companies providing consulting services and outsourcing. Some of our current or potential competitors may be engaged in a greater range of businesses, have a larger installed base of customers for their existing products and services or have greater financial, technical, sales or other resources than we have. We may lose market share if our competitors introduce or acquire new products that compete with our software and related services or add new features to their products or if new entrants emerge in the market. Any of these events could cause a material adverse effect on our business, financial condition, results of operation or cash flows.

Our success depends on our ability to develop new products and services, integrate acquired products and services, improve our existing products and services and keep up with technological developments.

The market in which we operate is characterized by constant technological advances, changing hardware requirements, rapid development in software and communications infrastructure, increasingly complex customer requirements and frequent introductions of new products and improvements of existing products. If we fail to improve our products and services to accommodate such technological evolution, as well as any corresponding legislative changes, including changes to tax legislation, in a timely manner or to position and price our products and services to meet market demand, our customers may stop purchasing new software licenses and services from us and we may lose our ability to attract and retain customers.

In addition, internet and network protocols and other industry standards are subject to rapid change and we cannot guarantee that the industry standards that we adopt in developing new products will enable us to compete effectively for new business opportunities in the markets in which we operate. Any of these events could materially adversely affect our revenues and cash generation.

Our investments in research and development may not result in increased revenues.

The development of software products is expensive and often requires long-term investments for research-driven product development and expansion of our knowledge base. Additionally, products with accelerated releases or with short life cycles require high levels of spending on research and development, or R&D. We have made and expect to continue to make significant investments in R&D and related efforts to explore new product opportunities. We believe that we must continue to dedicate a significant amount of resources for R&D to maintain our competitive position. We may not receive significant revenues in proportion to our investments and may be adversely affected if these investments are not offset by increased revenue.

Insufficient demand or slower than expected growth for cloud computing could adversely affect revenue growth and our costs and expenses, while growth of cloud computing could reduce revenues from our existing software.

We have incurred expenses related to the development of technologies related to cloud computing. If the demand for such technologies does not develop or develops at a slower than expected pace, we may not be able to recover the expenses and investments that we have incurred in developing these products. In addition, the growing contribution of cloud computing to our revenues could decrease the contribution of our existing software to our sales revenue, and may cannibalize demand for our existing products as customers change their existing software to cloud computing. Any of these factors could materially adversely affect revenue growth and our levels of costs and expenses. Furthermore, demand for subscription of our cloud software may adversely affect demand for our other products and services, such as on-premise software.

Our growth depends on the continued contributions of certain key members of senior management and our ability to continue to attract and retain qualified personnel.

Our performance depends on the efforts and capabilities of certain key members of senior management who are responsible for making most of the critical decisions that guide our business, particularly regarding the implementation of our strategies and development of our operations. If we lose any of these executives, we may have problems in defining and executing our business strategy and our financial and operating results could be materially adversely affected.

In addition, if any members of our key senior management leave our company for any reason, we may incur significant costs to attract new highly qualified professionals as replacements. There is significant competition in the global software industry for qualified professionals in the commercial, technical and other areas. As a consequence, we may be required to pay higher compensation in order to attract and maintain qualified professionals, which may adversely affect our results of operations and financial results.

We are subject to partial or total failures or interruptions in our services and software related to information technology infrastructure, which is highly complex.

We require a highly complex technology infrastructure for our operations. We are subject to partial or total failures or interruptions in our services and software that could give rise to possible actions for damages from our customers, adversely affecting our reputation among our customers and the markets in which we operate. In addition, depending on the degree of the damage caused, we may be subject to regulatory penalties, such as the loss of certain approvals to operate our software.

We may be subject to errors, delays or failures of security of our products and services.

Our software may contain errors or security flaws, especially at the launch of new products or release of new versions of existing products. The errors in our software may affect the ability of our products to work with other hardware or software, delay the development or release of new products or new versions or undermine the reputation of our products in the market. If we experience errors or delays in the launch of new products or new versions of our existing products, we may lose customers or incur opportunity costs, which may have a material adverse effect on our financial condition, cash flow and results of operations.

Additionally, errors and security flaws in our software products may expose us to liability for product performance complaints and warranty claims, as well as damage to our reputation, which could impact future sales of our products and services. Moreover, addressing problems and complaints associated with actual or alleged errors or security flaws may require a significant amount of time and attention from our management team, resulting in high costs, which may have a material adverse effect on our business, financial condition and results of operations.

We may experience difficulties in integrating acquired companies.

In recent years, we have made significant investments to acquire businesses, products, services and technologies. An active acquisition program is an important element of our overall strategy and we expect to continue to make acquisitions in the future. The risks that we may face in connection with these acquisitions include the following:

  • we may experience a disruption in our management‘s attention to our existing business;
  • we may experience difficulties in integrating the acquired company‘s human resources or other administrative systems;
  • we may lose key personnel of the acquired company;
  • we may suffer a deterioration in our or the acquired company‘s relationships with customers, partners or suppliers of technology and outsourced products;
  • an acquisition may not promote our business strategy as we expected, we may not be successful in integrating an acquired business or technology as successfully as expected or we may not receive the expected return on our investments, which could adversely affect our business or results of operations;
  • we may encounter difficulties related to the management of technologies of the acquired company or its business lines or our entry into new markets where we have limited or no direct experience or where competitors may have stronger market positions;
  • we may not realize the anticipated revenue increase from an acquisition for various reasons, including a large number of customers declining to renew software license updates and product support contracts; our inability to sell the acquired products to our customer base; or contracts of an acquired company not permitting timely revenue recognition;
  • we may have difficulty incorporating acquired technologies or products with our existing product lines, as well as maintaining uniform standards, architecture, controls, procedures and policies;
  • as a result of our acquisitions, we have multiple product lines that are offered, priced and supported in different ways, which could cause confusion among consumers and delays in supply or delivery and result in product discontinuity and a reduction in sales;
  • we may have cost overruns resulting from the continued support and development of acquired products, from general and administrative functions that support new business models or from associated regulations that prove to be more complicated than originally expected;
  • we may not receive expected approvals in a timely manner or may be subject to restrictions or other penalties imposed by unions or similar entities under applicable labor laws as a result of acquisitions, which could adversely affect our integration plans in certain jurisdictions;
  • the use of cash to finance acquisitions could limit other potential expenses, including share repurchases and dividend payments;
  • we may be subject to litigation, administrative or arbitral liabilities related to the acquired companies, and we may be obligated to pay sums for which we do not have a right to indemnification by the sellers of the respective acquired companies or for which we may be unable to receive, in whole or in part, indemnification from the sellers of the respective acquired companies; and
  • we may be subject to questioning from the tax authorities regarding the registration and amortization of goodwill for tax purposes.

The occurrence of any of these events could materially adversely affect our business, results of operations, financial condition or cash flow, especially with respect to a large acquisition or several concurrent acquisitions.

If we are unable to properly manage our growth, our results may be adversely affected.

We may fail to correctly estimate, qualitatively or quantitatively, the costs and risks associated with our expansion, and can offer no assurance that our systems, procedures, business processes and management controls are sufficient to support the rapid expansion of our operations, including expansion to new markets and verticals. If we fail to successfully manage growth, our results of operations may be adversely affected.

Certain of our financing agreements contain cross-default clauses and other restrictions on our activities.

Some of our financing agreements contain cross-default clauses or cross-acceleration clauses. Accordingly, the occurrence of an event of default under one of the contracts governing our outstanding debt could trigger an event of default on other debt or allow the creditors of our other debt to accelerate repayment to become immediately due and payable. As such, the acceleration of any of our outstanding debt could trigger the immediate maturity of other debt, which could materially adversely affect our results of operations, liquidity and the price of our shares.

Additionally, we entered into three loan agreements, one on August 12, 2008 other on February 24, 2012, and the other on October 01, 2014 in which BNDES imposed several restrictions on us, including the need for prior approval from BNDES for: (1) our or our subsidiaries‘ direct lending to individuals or entities which may or may not have shared corporate interests with us; (2) borrowing from individuals or entities that have shared corporate interests with us; (3) providing guarantees of any kind in operations with other creditors; and (4) making investments in companies in Brazil or abroad. In addition, we have granted preemptive rights to BNDES to be exercised through BNDESPAR in the event that we or our subsidiaries issue any securities convertible into shares or issue shares to third party investors. See “Management‘s Discussion and Analysis of Financial Condition and Results of Operation—Indebtedness.”

There are risks for which we do not have insurance coverage.

We are subject to risks for which we do not have adequate insurance coverage. Thus, if certain damaging events occur and we are not adequately insured against them, they may, individually or together, adversely affect our results of operations. See “Business—Insurance.”

The interests of our controlling shareholders may conflict with the interests of our investors.

Immediately following this offering, our controlling shareholders will have powers to, among others:

  • elect a majority of our directors; and
  • determine the result of decisions that require shareholder approval, including transactions with related parties, corporate reorganizations, divestitures of assets, joint ventures and distribution of dividends.

The interests of our controlling shareholders may differ from those of our other shareholders, including for entering into acquisitions, disposition of assets, partnerships, financing or similar transactions, even if adopted in the best interests of the company. As a result, we may be required to take actions that our management and other shareholders do not view as beneficial.

Upon completion of the offering, assuming the over-allotment option is exercised, we will no longer have a controlling shareholder or controlling group holding more than 50% of our common shares, which may make us susceptible to shareholder alliances, conflicts among shareholders and other events stemming from the absence of a defined group of controlling shareholders.

Upon completion of the offering, assuming the over-allotment option is exercised, we will no longer have a controlling shareholder or controlling group holding more than 50% of our common shares. In the event that a controlling group emerges and has decision-making power, we may suffer sudden and unexpected changes to our corporate policies and strategies, including by replacement of our executive officers and members of our board of directors. In addition, we may become more vulnerable to hostile attempts to acquire control and conflicts resulting therefrom. The absence of a controlling group with more than 50% of our common shares, on the other hand, could make certain decision-making processes more difficult, as the minimum quorum required by law for certain deliberations may not be reached.

We depend on suppliers of telecommunications, internet and data centers for our “software as a service,” or SaaS, cloud and on-premise infrastructure, and any fluctuation or interruption in the provision of these services may materially adversely affect our services and profitability.

Providers of telecommunications, internet and data centers are a fundamental part of our infrastructure of SaaS, cloud and on-premise software and services. We depend on them to provide such services and they constitute a key element in our business strategy and infrastructure. It is crucial that the infrastructure that we use to host our software products remains safe, does not suffer system failures and is perceived by our customers and partners to be safe and reliable. Instability or interruptions of our services due to failures by our suppliers are usually perceived by our customers as our responsibility and may adversely affect the market‘s perception of the quality of our products or services, including with respect to SaaS, cloud and on-premise software and services, which may cause some of our customers to cancel their subscriptions to our services and affect our ability to increase our sales.

Security breaches and system failures may expose us to liabilities, harm our business and result in the loss of customers.

We retain billing data, intellectual property, personally identifiable information and other sensitive information from our customers on our networks. Our infrastructure and the third-party infrastructure we use to host our solutions may be vulnerable to hacker attacks or other problems, which may overcome the security measures we adopt. In particular, our SaaS infrastructure may be vulnerable to security breaches, computer viruses or similar problems, and these systems are also subject to telecommunications failure, power loss and other system failures. Unimpeded access to the SaaS servers is fundamental to the provision of services to our SaaS customers. Any of these occurrences, whether intentional or accidental, could lead to interruptions, delays or suspension of our SaaS data center operations and may compromise the information stored on our networks. Such an occurrence could materially adversely affect our reputation as a reliable supplier and host of such solutions and negatively affect the market perception of the safety or reliability of our products or services and, as to SaaS, may cause some of our clients to cancel their subscriptions to our SaaS applications and subject us to indemnification payments.

Any significant interruption in our network infrastructure that hosts SaaS could harm our reputation, forcing us to provide credits or refunds and may cause customers to terminate their contracts early, which may adversely affect us.

Our network infrastructure that hosts SaaS is a critical part of our business operations. Any significant interruption in our services, products or infrastructure may give rise to claims by our client, which may adversely affect our financial condition and results of operations, as well as our reputation with our clients.

We may suffer losses due to defaults by our customers.

A default by one or more recurring customers or by one or more groups of customers could have a material adverse effect on our business, results of operation, financial condition and cash flows.

Potential interruptions in payment by customers could be caused by rescission of a customer‘s merger or acquisition agreement, a customer‘s financial difficulties, expiration and nonrenewal of existing agreements or bankruptcy. In addition, a failure on our part to properly analyze the credit or financial condition of these customers may result in the failure to properly identify and make provisions for default by customers.

Potential failures or systems disruptions could generate losses for our customers.

Sales to our customers are made through systems that we have developed, and in the case of our cloud- based solutions, stored on our servers. Any interruption in the operation of these systems may result in a loss of sales from our client. Furthermore, any error in billing or in issuing the invoice or accounting products sold by our customers could result in substantial losses to them, which could materially adversely affect our results of operations, financial condition and our reputation.

The retail sector is sensitive to unfavorable economic cycles and decreases in the purchasing power of consumers.

Our activities are focused on the retail sector. Historically, the Brazilian retail sector has been prone to periods of economic downturn resulting in an overall decline in consumer spending. The success of retail sector operations depends on several factors relating to consumer spending, including the general business climate at the time, interest rates, inflation, the availability of consumer credit, taxation, consumer confidence in future economic conditions, levels of employment and wages. Unfavorable conditions in the Brazilian economy can therefore significantly reduce consumer spending, which could materially adversely affect our sales, results of operations and financial condition.

We may experience unfavorable conditions in our industry or the global economy that result in reductions in spending on information technology that could limit our ability to grow and develop our business, thereby adversely affecting our results of operations.

Our results of operations may vary according to the impact that changes in our industry or global economy have on us or our clients. Increase in revenues and profitability of our business depends on demand for our software and related services.

In addition, given that we are service providers, part of our revenue results from the number of new users of our software, which in turn is influenced by general employment levels. Insofar as unfavorable economic conditions cause our customers and potential customers to merely maintain or even reduce their demand for our services, our revenues may be adversely affected. Historically, economic downturns have resulted in overall reductions in information technology spending, as well as pressure for longer billing cycles, as occurred during the recent recession of 2008. If economic conditions deteriorate or do not improve significantly, our customers and potential customers may choose to reduce their information technology solutions, which would limit our ability to expand our business and could materially adversely affect our results of operations.

Our business and results of operations could be harmed if we are unable to protect and enforce our intellectual property rights.

Measures we have taken to protect our intellectual property may be inadequate to prevent misappropriation, resulting in the misuse of our products and forcing us to protect our intellectual property through legal or administrative proceedings. The misuse of our products or the measures we are required to take to protect our intellectual property rights could result in substantial costs to us and divert the resources and attention of our management and technical team, which could materially adversely affect our business, competitive position, financial condition, results of operations and cash flow.

We are subject to the risk of lawsuits based on our alleged breach of intellectual property rights of third parties, due in part to the recent increase in the number of patents and copyrights by technology companies.

We may be required to change, in whole or in part, certain of our products that have allegedly infringed upon the intellectual property rights of third parties and may be required to pay significant amounts of penalties, royalties or licensing fees for the use of others‘ patents or copyrighted materials. Any changes to our products or to revenues attributable to any of our products that is in violation of others‘ intellectual property rights may materially adversely affect our reputation and the demand for our products. In addition, such changes may require attention from our management, cause us to incur additional legal expenses, or, in some cases, require us to record reserves, all of which may adversely affect our results.

We benefit from government tax incentive programs, which may be terminated or reduced in the future.

We benefit from certain tax incentives related to research and development and technological innovation, established by Law 11,196 of November 21, 2005, or the Lei do Bem, and regulated by Decree 5798 of June 7, 2006. Among our tax incentives for technological innovation, we benefit specifically from (1) a deduction from net income equivalent to the sum of expenditures made in research and development and technological innovation during the period, and (2) accelerated depreciation, by deducting as a cost or operating expense the expenditures for the purchase of intangibles related to research, technological development and technological innovation. Our ability to benefit from these incentives depends on our compliance with certain obligations.

Failure on our part to comply with certain obligations in accordance with the applicable rules or to provide the documentation required to substantiate such tax credits could result in the loss of such incentives that have not yet been used and claims by the tax authorities of the amount corresponding to taxes not paid as a result of the incentives already used, in addition to penalties and interest under the tax laws. If any of our tax benefits expires, terminates or is cancelled, we may not be successful in obtaining new tax benefits that are equally favorable, which may materially adversely affect us.

Our business automation software and electronic invoice (NF-e) services are provided pursuant to approvals by the finance secretaries (Secretaria da Fazenda), or Sefaz of each Brazilian state.

We offer business automation software and electronic invoices customized to meet the requirements of the tax laws of different states. Such business automation solutions must be approved by the tax authorities of each Brazilian state to certify regulatory adherence. If we do not receive or are at any point denied any of these approvals, we will be prevented from continuing our business automation software and electronic invoice (NF-e) activities in the state where approval has been denied, which could have a material adverse effect on our results of operations.

We and our management could be accused of facilitating tax evasion by our customers, in which case we could be held responsible, along with the customer, for back taxes due to Brazilian authorities.

In Brazil, enterprise management systems are required to be structured so as not to allow for tax evasion. However, we cannot guarantee that our systems are not susceptible to security breaches that could enable tax evasion by a customer.

If such an event were to occur, Brazilian tax authorities could conclude that our software allows our customers to avoid compliance with their tax obligations and that we had acted in bad faith. Any such conclusion may require us to pay the unpaid taxes of our customers, plus interest and penalties, as well as subject us and our management to civil and criminal liabilities, depending on the magnitude of the tax evasion committed by our customer; which could materially adversely affect our results of operations.

The simplification of Brazilian tax rules would reduce the barriers to entry of international competitors.

The complexities of Brazilian tax rules largely discourage entry of international competitors into the Brazilian retail market for the software industry, as a strong familiarization of the applicable tax laws of each state and of the federal government is required to function in the sector. The Brazilian government has indicated that it may simplify the tax rules, which would remove an important entry barrier to our foreign competitors and could result in increased competition and materially adversely affect our financial results.

We may experience difficulties in expanding our products to foreign markets.

Currently, we have customers in markets other than Brazil (representing less than 1.0% of our net revenues), and our long-term strategies include further expansion in these and other markets. We may experience the following difficulties related to the foreign markets in which we currently operate or will operate in the future, among others:

  • unanticipated regulatory changes;
  • an inability to attract staff and manage operations outside of Brazil;
  • changes in tax laws;
  • changes in the policies and regulations of trade and investment;
  • difficulties in the registration and protection of trademarks and software;
  • the adoption of protective measures, subsidies and other forms of government favoritism from competitors originating in such foreign markets; and
  • cultural and linguistic barriers.

Should one or more of these risks materialize, and we are not able to overcome these difficulties, we may be unable to implement our international expansion strategy.

Risks Related to Our Common Shares and the Offering

Our common shares have never been traded on a stock exchange and an active and liquid market for our common shares may not develop.

There is not, as of the date of this offering memorandum, an active or liquid market for our common shares, and it is not possible to predict to what extent investor interest will cause a market for the trading of our common shares on the BM&FBOVESPA to develop, and how liquid such a market is likely to be. See “—Risks Related to Brazil—The relative volatility and illiquidity of the Brazilian securities markets may substantially limit the ability of investors to sell our common shares at the price and time desired.”

Our shareholders may not receive dividends or interest on equity.

In accordance with Brazilian Corporate Law and our bylaws that will enter into effect as of the date of the completion of this offering, our shareholders are entitled to a minimum dividend of 25% of adjusted annual net profit. We may not have sufficient cash resulting from such net profit. Despite the mandatory dividend requirement, Brazilian Corporate Law allows for a general shareholders‘ meeting to choose not to pay dividends to its shareholders in any given year if the board of directors determines that such distributions would be inadvisable in view of the company‘s financial condition. We are a public company registered with the CVM, so we may choose not to pay dividends to our shareholders in any given year if our board of directors determines that such distributions would be inadvisable in view of our financial condition at such time.

Substantial sales of our common shares, or the perception of substantial sales of our common shares, after the offering may cause a reduction in the price of our common shares.

After the lock-up period in respect of our common shares has expired, we will be permitted to issue new common shares for sale, and all of our common shares will be available for sale in the market. The occurrence of sales or a perception of a possible sale of a substantial number of our common shares by shareholders who have not signed lock-up letters or shareholders who signed such instruments after the expiration of the restrictions therein may adversely affect the market value of our common shares.

Investors who purchase common shares in this offering are likely to suffer immediate dilution of the book value of their investment in our common shares.

We expect that the price per common share of the common shares offered in this offering will exceed the book value per share of the common shares. After the sale of the common shares in this offering, considering the midpoint of the indicative range of the price per common share, and after deducting commissions and expenses payable by us in relation to the offering, the value of our shareholders‘ equity as of September 30, 2012, adjusted to account for the stock split that occurred on January 16, 2013 at a ratio of 2.5 new common shares for every existing share, would be R$497.8 million, or R$11.10 per share. This represents an immediate dilution in the net asset value per share of R$13.90 to new investors who acquire common shares at the offering price. Therefore, investors in this offering will pay a price per common share greater than our total assets, minus our total liabilities, divided by the total number of our common shares, resulting in immediate and substantial dilution of the equity invested in us.

We may require additional capital in the future. If we raise additional funds through the issuance of common shares or convertible securities, or through a merger or acquisition, we could dilute the equity interest of our investors.

We may need to raise additional funds in the future through public or private debt financings or by issuing additional common shares. The raising of additional funds through public offering of common shares or convertible securities may, pursuant to Brazilian Corporate Law, be made without offering a preemptive right to existing shareholders, including investors who acquire common shares in this offering, and may therefore dilute the equity interests of our shareholders. Furthermore, any additional financing that we may need may not be available or may not be available on favorable terms, which may materially adversely affect us.

Certain total return swap and hedge transactions entered into by third parties may influence the demand and price of our common shares.

The bookrunners and their affiliates may enter into hedge transactions with third parties having our common shares as reference (including total return swap transactions). Those transactions, if entered into, may impact the demand for, and therefore the price, of our common shares.