As filed with the Securities and Exchange Commission on March 28, 2024
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
OR
For the fiscal year ended
OR
For the transition period from to .
OR
Date of event requiring this shell company report
Commission file number:
(Exact Name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
Campinas - State of
+55 19 21024500
(Address of principal executive offices)
Chief Financial Officer
Phone:
Campinas – State of
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered | ||
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
The number of outstanding shares of each class of stock of CI&T Inc as of December 31, 2023 was:
113,046,717 Class B common shares, each with par value of US$0.00005
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Emerging growth company |
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 13(a) of the Exchange 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.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Unless otherwise indicated or the context otherwise requires, all references in this report to “CI&T” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to CI&T Inc, together with its subsidiaries.
The term “Brazil” refers to the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank” refers to the Brazilian Central Bank (Banco Central do Brasil). References in the report to “real,” “reais” or “R$” refer to the Brazilian real, the official currency of Brazil and references to “U.S. dollar,” “U.S. dollars” or “US$” refer to U.S. dollars, the official currency of the United States.
All references to “IFRS” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board, or “IASB”.
Financial Statements
We are a Cayman Islands-exempted company, incorporated with an indefinite term and limited liability on June 7, 2021 for purposes of carrying out our initial public offering. Until the contribution of shares of CI&T Software S.A., or CI&T Brazil, to us prior to the consummation of the initial public offering, we had not commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments. On October 4, 2021, we established, as a sole member, our subsidiary CI&T Delaware LLC, or CI&T Delaware. On November 8, 2021, all CI&T Brazil’s shares were contributed to CI&T Delaware and, subsequently the CI&T Delaware’s shares were transferred to CI&T Inc. Until this corporate reorganization, CI&T Brazil, an operating company, was the ultimate holding of our group, and it consolidated the results of all companies until that date. We accounted for the restructuring as a business combination of entities under common control, and the pre-combination carrying amounts of CI&T Brazil are included in the CI&T’s consolidated financial statements with no fair value uplift. Thus, our consolidated financial statements reflect:
| (i) | For the year ended December 31, 2021, the historical operating results of CI&T Brazil prior to the restructuring; | |
| (ii) | Our consolidated results following the restructuring; and | |
| (iii) | The number of ordinary shares issued by CI&T, as a result of the restructuring, is reflected retroactively, for purposes of calculating earnings per share for the year ended December 31, 2021; |
We maintain our books and records in Brazilian reais, the functional currency of our operations in Brazil and the presentation currency for our financial statements. Our annual consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB. Unless otherwise noted, the financial information presented herein has been derived from our audited consolidated financial statements as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021, together with the accompanying notes thereto. All references herein to “our financial statements” and “our audited consolidated financial statements” are to our consolidated financial statements included elsewhere in this annual report.
This financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.
Financial Information in U.S. dollars
Solely for the convenience of the reader, we have translated some of the real amounts included in this report from reais into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$4.8413 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2023, as reported by the Brazilian Central Bank.
Special Note Regarding Non-IFRS Financial Measures
This report presents our Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Profit, Adjusted Net Profit Margin, Net Revenue at Constant Currency and Net Revenue Increase at Constant Currency, which are non-IFRS financial measures used by management in the evaluation of our performance. A non-IFRS financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure.
We calculate Adjusted Gross Profit as Gross Profit, adjusted to exclude costs and expenses that do not relate to the direct management of our services (depreciation and amortization related to costs of services provided and share-based compensation expenses). We calculate Adjusted Gross Profit Margin by dividing Adjusted Gross Profit by the Net Revenue of the same period.
We calculate Adjusted EBITDA as Net Profit, plus net finance costs, income tax expense, depreciation and amortization and (i) share-based compensation expenses; (ii) government grants related to tax reimbursement in the Chinese subsidiary; (iii) acquisition-related expenses: fair value adjustment on accounts payable for business combination, consulting expenses, and retention packages; and (iv) business restructuring expenses, associated with severance payments made to senior employees from acquired companies. We calculate Adjusted EBITDA Margin by dividing Adjusted EBITDA by the Net Revenue of the same period. We make these adjustments to isolate our operating results in a given period, in order to verify whether we are being efficient in generating operating profits, or how much of our Net profit is being consumed by operating costs, and how much is reverting to operating profitability.
We calculate Adjusted Net Profit as Net Profit, adjusted to exclude (i) acquisition-related expenses: amortization of intangible assets from acquired companies, fair value adjustment on accounts payable for business combination, consulting expenses, and retention packages; (ii) business restructuring expenses, associated with severance payments made to senior employees from acquired companies; (iii) income tax effects on Non-IFRS adjustments. We calculate Adjusted Net Profit Margin by dividing Adjusted Net Profit by Net Revenue for the same period.
We calculate Net Revenue at Constant Currency and Net Revenue Increase at Constant Currency by translating Net revenue from entities reporting in foreign currencies into Brazilian reais using the comparable foreign currency exchange rates from the prior period. For example, the comparable rates in effect for the fiscal year ended December 31, 2022 were used to convert revenue for the fiscal year ended December 31, 2023, rather than the actual exchange rates in effect during the respective period. The Net Revenue Increase at Constant Currency considers the percentage growth in relation to the Reported Net Revenue from the previous year.
We present Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Profit, Adjusted Net Profit Margin, Net Revenue at Constant Currency and Net Revenue Increase at Constant Currency because management uses them in evaluating our performance and we believe these measures provide investors with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis.
The non-IFRS financial measures described in this report are not a substitute for the IFRS measures of earnings. Additionally, our calculations of Adjusted Gross Profit, Adjusted EBITDA and Adjusted Net Profit, may be different from the calculations used by other companies, including our competitors, and therefore, our measures may not be comparable to those of other companies. For a reconciliation of Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Profit, Adjusted Net Profit Margin and Net Revenue at Constant Currency and Net Revenue Increase at Constant Currency, each to its most directly comparable IFRS measure, see “Item 5. Operating and Financial Review and Prospects — Non-IFRS Measures.”
Market Share and Other Information
This report contains data related to economic conditions in the market in which we operate. The information contained in this report concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Market data and certain industry forecast data used in this report were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission, or SEC, website) and industry publications, including industry research reports we commissioned from International Data Corporation, or IDC.
Industry publications, governmental publications and other market sources generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. While we are not aware of any misstatements regarding the market and industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in the section entitled “Risk Factors.”
Except as disclosed in this report, none of the publications, reports or other published industry sources referred to in this report were commissioned by us or prepared at our request. Except as disclosed in this report, we have not sought or obtained the consent of any of these sources to include such market data in this report.
Rounding
We have made rounding adjustments to some of the figures included in this report for ease of presentation. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
This annual report includes statements that constitute estimates and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act, as amended, or Exchange Act. The words “believe,” “will,” “may,” “may have,” “would,” “estimate,” “continues,” “anticipates,” “intends,” “plans,” “expects,” “budget,” “scheduled,” “forecasts” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements refer only to the date when they were made, and we do not undertake any obligation to update or revise any estimate or forward-looking statement due to new information, future events or otherwise, except as required by law. Estimates and forward-looking statements involve risks and uncertainties and do not guarantee future performance, as actual results or developments may differ substantially from the expectations described in the forward-looking statements.
Forward-looking statement include, but are not limited to, statements about:
| ● | the impact of the ongoing war in Ukraine and economic sanctions imposed by Western economies over Russia, as well as the Israel and Hamas conflict, and their impact on global economy, which are highly uncertain and are difficult to predict; | |
| ● | global economic conditions including supply chain disruptions, market volatility (volatility in the global banking sector), inflation and measures to control inflations (e.g., high interest rates), lack of liquidity in the capital and financial markets, and labor challenges, among other factors; | |
| ● | 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 maintain favorable pricing, productivity levels and utilization rates; | |
| ● | our ability to adapt to technological change and innovate solutions for our clients; | |
| ● | our ability to effectively manage our international operations, including our exposure to foreign currency exchange rate fluctuations; | |
| ● | the effects of increased competition as well as innovations by new and existing competitors in our market; | |
| ● | our ability to sustain our revenue growth rate in the future; | |
| ● | our ability to successfully identify acquisition targets, consummate acquisitions and successfully integrate acquired businesses and personnel, such as relating to our recent acquisitions; | |
| ● | our expectations of future operating results of financial performance; |
| ● | our ability to attract and retain highly-skilled IT professionals at cost-effective rates; | |
| ● | our ability to retain continued services of our senior development team or other key employees, | |
| ● | our plans for growth and future operations, including our ability to manage our growth; | |
| ● | uncertainty concerning the current economic, political, and social environment in Latin America, specifically in Brazil, including changes in laws and regulations and in the interpretation thereof, and impacts of legal decisions by the Brazilian Federal Supreme Court (Supremo Tribunal Federal, or STF); and | |
| ● | the impact of pandemics, epidemics or disease outbreaks (such as the COVID-19 pandemic) and measures taken in response thereto. |
Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results and developments may be substantially different from the expectations described in the forward-looking statements for a number of reasons, many of which are not under our control, among them the activities of our competition, the future global economic situation, exchange rates, and operational and financial risks. The unexpected occurrence of one or more of the abovementioned events may significantly change the results of our operations on which we have based our estimates and forward-looking statements.
In light of the risks and uncertainties described above, the events referred to in the estimates and forward-looking statements included in this report may or may not occur, and our business performance and results of operation may differ materially from those expressed in our estimates and forward-looking statements, due to factors that include but are not limited to those mentioned above.
These forward-looking statements are made as of the date of this annual report, and we assume no obligation to update them or revise them to reflect new events or circumstances. There can be no assurance that the forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
Not applicable.
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Not applicable.
Summary of Risk Factors
An investment in our Class A common shares is subject to a number of risks, including risks relating to our business and industry, risks relating to Brazil and risks relating to our Class A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.
Certain Risks Relating to Our Business and Industry
| ● | If any of our largest clients terminates, decreases the scope of, or fails to renew its business relationship or contract with us, our revenues, business and results of operations may be adversely affected. | |
| ● | Our clients may terminate engagements before completion or choose not to enter into new engagements with us. | |
| ● | Geopolitical tensions and the outbreak of military hostilities, including the ongoing military conflict between Russia and Ukraine and Israel and Hamas, and the economic sanctions imposed as a result of these conflicts may materially adversely affect us. | |
| ● | Pandemics, epidemics or disease outbreaks and measures taken in response thereto may impact our business, financial condition, results of operations and prospects. | |
| ● | Degradation of the quality of the solutions we offer could diminish demand for our services or cause disruptions in our clients’ businesses, adversely affecting our ability to attract and retain clients, harming our business, results of operations and corporate reputation and subjecting us to liability. | |
| ● | Our contracts could be or become unprofitable. | |
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Our business depends on a strong brand and corporate reputation. | |
| ● | We face intense competition. | |
| ● | We must attract and retain highly skilled IT professionals. Increases in our current levels of attrition may increase our operating costs and adversely affect our future business prospects. | |
| ● | Breaches of, or significant disruptions to, our information technology systems and solutions and those of our third-party service providers and subprocessors and unauthorized access to or misuse of the information and data we collect, transmit, use, store and otherwise process may cause us to lose current or future clients and our reputation and business may be harmed. |
Certain Risks Relating to Our Growth Strategy
| ● | We may not be able to sustain our revenue growth rate in the future. | |
| ● | We are focused on growing our client base internationally and may not be successful. | |
| ● | Potential future acquisitions could prove difficult to integrate, disrupt our business, dilute shareholder value and strain our resources. | |
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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. | |
| ● | We are subject to numerous risks associated with the evolving market for products with artificial intelligence (AI) capabilities, and the evolving legal and regulatory landscape applicable to AI could adversely affect our business, financial condition and results of operations. |
Certain Risks Relating to Our Organizational Structure
| ● | We have identified a material weakness in our internal control over financial reporting, which resulted in the restatement of previously issued financial statements. If we fail to maintain effective internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations and/or prevent fraud. | |
| ● | Requirements associated with being a public company in the United States demand significant company resources and management attention. | |
| ● | We are dependent on members of our senior management team and other key employees, including key executives of acquired companies. | |
| ● | We are exposed to fluctuations in foreign currency exchange rates and enter into derivatives transactions to manage our exposure to exchange rate risk. | |
| ● | Our holding company structure makes us dependent on the operations of our subsidiaries. |
Certain Compliance, Tax, Legal and Regulatory Risks
| ● | 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. | |
| ● | We and our clients may be subject to new and evolving privacy and data protection-related laws and regulations that impose obligations concerning the collection, storage, use, processing, disclosure, protection, transmission, retention and disposal of personal, sensitive, regulated or confidential data. | |
| ● | Changes in tax or labor laws, incentives or benefits, or differing interpretations of such laws may adversely affect our results of operations. |
| ● | Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares. | |
| ● | The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement and Brazil’s political and economic conditions could harm us and the price of our Class A common shares. | |
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Risks related to the global economy may affect the perception of risks in other countries, particularly in the United States, Europe and emerging markets, adversely affecting the Brazilian economy and the market price of securities of issuers with principal operations in Brazil, including our Class A common shares. |
Certain Risks Relating to Our Class A Common Shares
| ● | An active trading market for our Class A common shares may not be sustainable. If an active trading market is not maintained, investors may not be able to resell their shares and our ability to raise capital in the future may be impaired. | |
| ● | The dual class structure of our common stock has the effect of concentrating voting control with the holders of our Class B common shares (“Class B Shareholders”); this will limit or preclude your ability to influence corporate matters. | |
| ● | Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly. | |
| ● | We are a Cayman Islands-exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders of companies incorporated under and governed by the laws of U.S. jurisdictions. |
Certain Risks Relating to Our Business and Industry
If any of our largest clients terminate, decrease the scope of, or fail to renew its business relationship or contract with us, our revenues, business and results of operations may be adversely affected.
We generate a significant portion of our revenues from our ten largest clients. During the year ended December 31, 2023, our largest client based on revenues accounted for 8% of our Net revenue, and our ten largest clients together accounted for 40% of our Net revenue. During the year ended December 31, 2022, our largest client based on revenues accounted for 15% of our Net revenue, and our ten largest clients together accounted for 49% of our Net revenue.
Our ability to maintain close relationships with these and other major clients is essential to the growth and profitability of our business. The volume of work we perform for each client may vary from year to year, and as a result, a major client in one year may not provide the same level of revenues for us in any subsequent year. The technology services we provide to our clients, and the revenues associated with those services, may decline or vary as the type and quantity of technology services we provide change over time. In addition, our reliance on any individual client for a significant portion of our revenues may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of service.
Our clients may terminate engagements before completion or choose not to enter into new engagements with us.
A substantial part of our revenue is for software development and maintenance services and is typically generated from clients who also contributed to our revenue during the prior year. We constantly seek to obtain new engagements, and maintain relationships with existing clients when our current engagements are successfully completed or are terminated. Notwithstanding our efforts, our contracts provide that our clients can terminate many of our master services agreements and work orders with or without cause.
Our clients may terminate or reduce their use of our services for several reasons, including if they are not satisfied with our services, the value proposition of our services or our ability to meet their needs and expectations. Even if we successfully deliver on contracted services and maintain close relationships with our clients, many 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 our clients, 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 our clients; | |
| ● | mergers, acquisitions or significant corporate restructurings involving one of our clients; and | |
| ● | a decision by that client to move work in-house or to one or several of our competitors. |
The ability of our clients to terminate their engagement with us at any time makes our future revenue uncertain. We may not be able to replace any client that chooses to terminate or not renew its contract with us, which could materially adversely affect our revenue and, thus, our results of operations. Furthermore, terminations in engagements may make it difficult to plan our project resource requirements. If a significant number of clients cease using or reduce their usage of our services, we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from clients. Such additional sales and marketing expenditures could adversely affect our business, results of operations and financial condition.
Geopolitical tensions and the outbreak of military hostilities and the economic sanctions imposed as a result of these conflicts may materially adversely affect us
Our business is subject to risks and uncertainties related to our global operations. The U.S. and global markets have experienced and may continue to experience volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine. Although the length and impact of the ongoing military conflict involving Russia and Ukraine and the economic sanctions imposed by the United States, the European Union and other countries are highly unpredictable, the conflict and resulting sanctions may significantly affect prices, disrupt supply chains, cause turmoil in the global financial system and lead to market disruptions, including significant volatility in credit and capital markets. These factors could materially affect our business and financial condition, along with our operating and development costs, and may impact the demand for our services and our ability to execute our growth plans. The war in Ukraine may also increase geopolitical tensions, further affecting the world economy. Further escalation of the conflict in Ukraine or in other locations, and the related imposition of sanctions or other trade barriers, could disrupt the global markets in ways that cannot yet be anticipated and we cannot predict the impact on our business, financial position or results of operations.
On October 7, 2023, Hamas, a group in control of Gaza, carried out a surprise attack on Israeli cities and towns near the Gaza Strip. Following this attack, Israel declared war on Hamas and other organizations in Gaza. The military conflict is ongoing, and its length and outcome are highly unpredictable. Further escalation of this conflict could lead to significant market and other disruptions, which could have a material adverse effect on our business, financial position or results of operations.
Pandemics, epidemics or disease outbreaks, and measures taken in response thereto may impact our business, financial condition, results of operations and prospects
Pandemics, epidemics or disease outbreaks (such as the COVID-19 pandemic) and related restrictions could limit our clients’ ability to continue to operate, obtain inventory, generate sales, invest in digital solutions or make timely payments to us. It could disrupt or delay the ability of employees to work because they become sick or are required to care for those who become sick, or for dependents for whom external care is unavailable. It could cause delays or disruptions in services provided by key suppliers and vendors, make us and our service providers more vulnerable to security breaches, denial of service attacks or other hacking or phishing attacks, or have other unpredictable effects.
To the extent there is a sustained general economic downturn and our solutions are perceived by clients and potential clients as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected. Our revenue may also be disproportionately affected by delays or reductions in general information technology spending. Competitors may also respond to market conditions by lowering prices and attempting to lure away our clients. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry.
With COVID-19 sufficiently controlled, we may also generally experience decreases or decreased growth rates in sales of digital transformation solutions to clients, as our prospective and existing clients may be less dependent on digital solutions, which would negatively affect our business, financial condition and operating results.
Degradation of the quality of the solutions we offer could diminish demand for our services or cause disruptions in our clients’ businesses, adversely affecting our ability to attract and retain clients, harming our business, results of operations and corporate reputation and subjecting us to liability.
Our clients expect a consistent level of quality in the provision of our solutions and services. Our clients use our products for important aspects of their businesses, and any errors, defects, security vulnerabilities, service interruptions or disruptions to our products and any other performance problems with our products could disrupt and cause damage to our clients’ businesses. Although we regularly update our products, they may contain undetected errors, failures, vulnerabilities and errors, faults or flaws in our computer program or hardware system (bugs) when first introduced or released. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of, or delay in, market acceptance of our solutions, loss of competitive position, lower client retention or claims by clients for losses sustained by them. In such events, we may be required, or may choose, for client relations or other reasons, to expend additional resources to help correct the problem, which may result in increased costs to us. Any failure to maintain the high quality of our products and services, or a market perception that we do not maintain a high-quality service, could erode client trust and adversely affect our reputation, business, results of operations and financial condition.
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, there can be no assurance that these contractual provisions will be enforceable or adequate or will otherwise protect us from liability for damages if we are subject to any client claims. In addition, certain liabilities, such as claims of third parties for intellectual property infringement, breaches of data protection and security requirements, or breaches of confidentiality obligations, 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, a claim brought against us by any of our clients would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions and services. A client could also share information about bad experiences on social media or other publicly available sources, which could result in damage to our reputation and loss of future revenue. 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 to 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 the revenue realized from a project.
Our contracts could be or become unprofitable.
Most of the services performed by our employees are usually charged at monthly rates agreed upon at the time we enter into the contracts. The rates and other pricing terms negotiated with our clients are highly dependent on the internal forecasts of our operating costs and predictions of increases in those costs influenced by marketplace factors, as well as the proposed scope of work. Typically, we do not have the ability to increase the rates established at the outset of a client service agreement, other than on an annual basis and are often subject to caps. Independent of our right to increase our rates annually, client expectations regarding the anticipated cost of our services may limit our practical ability to increase our rates for ongoing work.
In addition, a small proportion of the contracts are priced by project, which is highly dependent on our assumptions and forecasts about the costs we expect to incur to complete the related services, which are based on limited data and could 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 contract on time and on budget, or any unexpected increase in the cost of our employees assigned to a client account, office space or materials could expose us to risks associated with cost overruns and could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, any unexpected changes in economic conditions that affect any of the previous assumptions and predictions could render contracts that would have been favorable to us when signed, subsequently unfavorable.
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 CI&T 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. Successfully maintaining our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide reliable and useful solutions to meet the needs of our clients at competitive prices, our ability to maintain our clients’ trust, our ability to continue to develop new functionalities and solutions, and our ability to successfully differentiate our solutions and services from competitive products and services. Additionally, our business partners’ performance may affect our brand and reputation if clients do not have a positive experience. Our efforts to build and maintain our brand have involved and will continue to involve significant expenses and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. Brand promotion activities may not generate client awareness or yield increased revenue. Even if they do, any increased revenue may not offset the expenses we incurred in building our brand. We strive to establish and maintain our brand in part by obtaining, maintaining and protecting our trademark rights. However, if our trademark rights are not adequately obtained, maintained or protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed. If we fail to successfully promote, protect and maintain our brand, we may fail to attract enough new clients or retain our existing clients to realize a sufficient return on our brand-building efforts, and our business could suffer.